-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MEr7Z4kCq6vvE/tmHt+yJ6COK0wfKRTlrpRhCyYTTFXH9TsJWa7TIwsDgoq/Y2cL 7kM8+jSG2A85tLx//xBD6w== 0001005477-97-001006.txt : 19970407 0001005477-97-001006.hdr.sgml : 19970407 ACCESSION NUMBER: 0001005477-97-001006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970404 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO WAREHOUSE INC CENTRAL INDEX KEY: 0000892872 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 061192793 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20730 FILM NUMBER: 97574572 BUSINESS ADDRESS: STREET 1: 535 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2038994000 MAIL ADDRESS: STREET 1: 535 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-20730 ------------------------ MICRO WAREHOUSE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 06-1192793 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 535 CONNECTICUT AVENUE, NORWALK, CONNECTICUT 06854 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ------------------------ (203) 899-4000 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE ------------------------ 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) ------------------------ Page 1 of Exhibit Index on Page 20 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject of such filing requirements for the past 90 days. Yes |X| No |_|. Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. |X| The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing sales price as reported on the Nasdaq Stock Market on March 17, 1997 was approximately $222,594,417. In determining the market value of the voting stock held by non-affiliates, shares of Common Stock beneficially owned by each executive officer, director and holder of more than 10% of the outstanding shares of Common Stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Common Stock outstanding as of March 17, 1997: 34,366,046 DOCUMENTS INCORPORATED BY REFERENCE: Pursuant to General Instruction G(2) to this form, the information required by Part I (Item 3) and Part II (Items 5, 6, 7 and 8) hereof is incorporated by reference from the registrant's Annual Report to Stockholders for the Fiscal Year ended December 31, 1996. Pursuant to General Instruction G(3) to this form, the information required by Part III (Items 10, 11, 12, and 13) hereof is incorporated by reference from the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 4, 1997. - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PAGE ---- PART I Item 1. Business....................................................... 4 Item 2. Properties..................................................... 12 Item 3. Legal Matters.................................................. 13 Item 4. Submission of Matters to a Vote of Security Holders............ 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................... 13 Item 6. Selected Financial Data........................................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 13 Item 8. Financial Statements and Supplementary Data.................... 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 14 PART III Item 10. Directors and Executive Officers of the Registrant............. 14 Item 11. Executive Compensation......................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management. 14 Item 13. Certain Relationships and Related Transactions................. 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 Signatures..................................................... 19 3 PART I ITEM 1. BUSINESS Micro Warehouse, Inc. (the "Company" or "Micro Warehouse") is a specialty catalog retailer and direct marketer of brand name personal computers, computer software, accessories, peripheral and networking products to commercial and consumer customers. The Company markets its products through frequent mailings of its distinctive, colorful catalogs, Internet catalog sites on the worldwide web and dedicated telemarketing account managers who focus on corporate, education and government accounts. The Company offers brand name hardware and software from leading vendors such as Adobe, Apple, Compaq, Hewlett Packard, IBM, Iomega, Microsoft, Motorola, 3Com, and Toshiba. Through its three core catalogs, MicroWarehouse, MacWarehouse and Data Comm Warehouse, various specialty catalogs and its Internet sites, the Company offers a broad assortment of more than 25,000 computer products at competitive prices. With colorful illustrations, concise product descriptions and relevant technical information, each catalog title focuses on a specific segment of the computer market. The catalogs are recognized as a leading source for computer hardware, software and other products. During the year ended December 31, 1996, the Company distributed approximately 123 million catalogs worldwide, and as of December 31, 1996, the Company had approximately 2.3 million customers who had purchased products within the last 12 months (excluding customers of USA Flex, which was acquired in October). International operations, particularly in Europe and Canada, have become a significant part of the Company's business. In 1991, the Company established full-service, direct marketing operations in the United Kingdom. In late 1992, the Company began operations in France and Germany and, in 1993 and 1994, acquired companies or initiated operations in Sweden, Denmark, Norway, the Netherlands, Belgium, Finland, and France. In this same timeframe, the Company also expanded into the non-European markets of Japan, Canada and Mexico. In 1995, the Company acquired businesses in the United Kingdom, Germany, Australia and Switzerland. In 1996 the Company discontinued its "Macintosh only" operations in Belgium and Switzerland. The Company currently publishes catalogs in 12 countries outside the US and distributed approximately 41 million catalogs internationally in the year ended December 31, 1996. See Note 15 to Notes to Consolidated Financial Statements for information regarding the Company's operations in different geographic areas. On January 25, 1996, the Company acquired Santa Clara, California-based Inmac Corp. ("Inmac") through the issuance by the Company of 3,033,682 shares of its common stock. Inmac is a leading international direct-response marketer of a wide range of personal computer and networking products. Inmac operates in the United States, Canada, France, Germany, the Netherlands, Sweden and the UK. International sales by Inmac accounted for 73% of net sales in its fiscal year ended July 29, 1995. For accounting purposes, the Inmac merger has been treated as a pooling of interests. 4 Throughout 1996 the Company integrated the operations of Micro Warehouse and Inmac on a worldwide basis. In the US, Inmac's corporate offices in Santa Clara and its manufacturing operations in Sunnyvale, California were closed. Inmac's Dallas, Texas telemarketing facility was closed and telemarketing operations were moved to Micro Warehouse's Gibbsboro, New Jersey facility. Inmac's warehouse in Louisville, Kentucky was closed and all activity was moved to the Micro Warehouse fulfillment facility in Wilmington, Ohio. Internationally, facilities were closed in the UK, France, Germany, the Netherlands, Sweden and Canada. In September 1996 the Company acquired the Helsinki, Finland based Business Forum and a related company. In November the Company completed the acquisition of the business of USA Flex, a Bloomingdale, Illinois direct marketer of IBM PC-compatible personal computer products. This company has been successful in acquiring customers and building its business from advertisements placed in US computer publications, particularly Computer Shopper. The operating results of these entities from dates of acquisition were not significant. The Company maintains a full-service distribution center in Wilmington, Ohio, totaling approximately 365,000 square feet and telemarketing centers in Lakewood and Gibbsboro, New Jersey, South Norwalk, Connecticut, and Bloomingdale, Illinois. The Company operates 24 hours a day, seven days a week in the US. The Company also operates telemarketing and distribution facilities in the United Kingdom, France, Germany, Denmark, Sweden, Norway, Finland, the Netherlands, Japan, Australia, Mexico, and Canada. The Company's international operations generally use the same distribution and processing computer systems and are able to exchange data with US operations. The Company began operations in 1987 as a Connecticut corporation and was reincorporated in Delaware on October 2, 1992. Catalog Publication The Company currently publishes three main catalogs in the US: MacWarehouse for the Macintosh market, MicroWarehouse for the IBM PC-compatible market and DataCommWarehouse, for the data communications and networking market. The Company published 14 editions of MacWarehouse and 12 editions each of MicroWarehouse and Data CommWarehouse in the US in 1996. The Company also published 7 editions of the Inmac catalog in the US in 1996. Additional specialty catalogs are produced at various intervals. Domestically, active customers (customers who have placed orders within the past 12 months) receive a catalog at least monthly and all customers receive a catalog with every order shipped. The Company also mails targeted versions of its catalogs to its corporate, education and government customers. Internationally, catalogs are published under the MicroWarehouse, MacWarehouse, Inmac, Lan Warehouse and several other titles at various frequencies. The numbers of catalogs distributed during the last three years were 123 million in 1996, 103 million in 1995 and 87 million in 1994. 5 Each catalog is printed with full-color photographs and detailed product descriptions. The catalogs are generally created and produced in-house by the Company's designers and production artists on a computer-based desktop publishing system. The in-house preparation of most portions of the catalog streamlines the production process, provides for greater flexibility and creativity in catalog production and results in significant cost savings. Marketing and Sales Micro Warehouse services commercial and consumer customers but the focus of the business has moved towards the commercial segment. As of December 31, 1996, commercial customers represented one-third of the total domestic customer base but accounted for approximately two-thirds of total domestic sales. The Company's various marketing programs are designed to attract new customers and to stimulate additional purchases from existing customers. The Company continuously attracts new customers by selectively mailing catalogs to prospective customers as well as through advertising in major computer magazines and on the Internet. In addition, the Company obtains the names of prospective customers through the use of selected mailing lists from various sources, including manufacturers, suppliers, software publishers and computer magazine publishers. Worldwide active customers in 1996 were 2.3 million and were 2.1 million and 1.8 million in 1995 and 1994, respectively. Inbound Telemarketing. The Company employs telemarketing representatives who assist customers in purchasing decisions, process product orders and respond to customer inquiries on order status, product pricing and availability. The Company processes approximately 43,000 domestic calls per day. The Company offers toll-free numbers for all of its domestic customers. In addition, it receives orders by fax, mail and the Internet. Through the Company's integrated computer systems, a sales representative can quickly access a customer's record which details past purchases as well as billing information. To provide more targeted service, the Company has separate inbound sales groups for the consumer, corporate and government/education segments. Managed Commercial Telemarketing. In addition to its inbound telemarketers, the Company has dedicated telemarketing account managers who are assigned to manage and oversee various corporate, government and education accounts. The Company's commercial sales program combines account management and catalog mailing to penetrate these accounts. The Company's sales staff, through frequent contact, seeks to build long-term relationships with the Company's commercial customers. The Company has approximately 231,000 domestic commercial accounts that are managed by its commercial telemarketing operations. Customer Service and Technical Support. The Company believes that its ability to provide prompt and efficient customer service has been critical to its success. The Company's dedicated customer service representatives are trained to respond to frequently asked questions such as the 6 status of an order or the Company's return policy. The Company also has a technical support staff to assist customers with the selection, installation and operation of their products. The Company offers a toll-free number for customer service and technical support from 8:00 a.m. to midnight, eastern time, Monday through Friday and from 10:00 a.m. to 6:00 p.m. on Saturday and Sunday. Customer Return Policy. The Company provides a 30-day guarantee against defects with respect to all of its products. The Company works closely with customers and vendors to assure that all vendor warranties and return privileges are fully honored. For the year ended December 31, 1996, the Company had a return rate of approximately 7.3% of gross sales. Returns are received and processed as a segregated activity to maintain control over the returned product, to initiate the refund process and to obtain appropriate credit from suppliers. Return experience is closely monitored at the stock-keeping-unit ("SKU") level to identify trends in product offerings, enhance customer satisfaction and reduce overall returns. Micro Warehouse on the Internet. In July 1995, the Company launched an internet catalog on the worldwide web. Product descriptions and prices of more than 20,000 products are provided on-line, with full information and on screen images available for 10,000 items. Browsers can download demonstration software to "try before they buy". Selected corporate clients can gain access to their own exclusive on-line catalog, complete with unique product selections at customized pricing. In 1996, some of the Company's overseas subsidiaries launched their own web sites. Seasonality. Customer response rates are subject to variations. The first and last quarters of the year generally have higher response rates while the two middle quarters typically have lower response rates. The slower quarters are impacted by the summer months, particularly in Europe. Products and Merchandising The Company offers over 25,000 microcomputer hardware, software and peripheral products to Macintosh and PC users. For the year ended December 31, 1996, sales of products for Apple Macintosh computers represented approximately 48.5% of the Company's net sales, while sales for IBM PC-compatible personal computers represented approximately 51.5% of net sales. The Company's product evaluation teams for the various product categories constantly monitor the market for new products from new and existing vendors. As product areas decline in importance, the amount of catalog exposure is reduced in favor of "hotter" new products and the inventory levels and numbers of SKU's are adjusted downward. For the year ended December 31, 1996, no single product accounted for more than 2.5% of the Company's domestic net sales. Hardware. The Company offers a large selection of hardware items. This category includes personal computers, servers, printers, modems, monitors, data storage devices, add-on circuit boards, connectivity products and certain business machines. Brands sold in this category 7 include Apple, Compaq, Epson, 3Com, Cisco, Hayes, Hewlett Packard, IBM, Intel, Texas Instruments and Toshiba. Hardware sales constituted approximately 74% of the Company's domestic net sales in 1996. Software. The Company sells a wide variety of computer software packages in the business and personal productivity, connectivity, utility, language, education and entertainment categories. The Company offers products from the larger, well known vendors as well as numerous specialty products from new and emerging vendors. Brands offered by the Company include Adobe, Claris, Connectix, Insignia Solutions, Macromedia, Microdyne, Microsoft, Novell, Quark, and Symantec. Software sales represented approximately 19% of the Company's domestic net sales in 1996. Supplies and Accessories. The Company currently sells various supplies such as media, toner cartridges, desk and computer accessories and computer furniture through its catalogs. Sales of these products constituted approximately 7% of the Company's domestic net sales in 1996. Private Label Brands. Under its private label brands, Power User, USA Flex and NuData, the Company sells products such as microcomputers, hard drives, server switches, memory chips, CD-Roms, cables, and accessories. Sales of these products constituted approximately 10% of the Company's domestic net sales in 1996. Purchasing Domestically, the Company purchases products from approximately 1,700 vendors and purchases approximately 72% of its products directly from manufacturers with the balance from distributors. The Company's largest domestic vendors include Adobe, Apple, Hayes, Hewlett Packard, IBM, Iomega, Microsoft, Motorola, 3Com and Toshiba. In 1996 the leading 100 products sold by the Company accounted for approximately 27% of its net sales. Purchases of products from Apple, the Company's largest vendor, constituted approximately 16% of the Company's product purchases. The Company believes that its volume purchases enable it to obtain favorable product pricing. Many of the Company's suppliers make funds available to the Company in the form of advertising allowances and incentives to promote and increase sales of their products. Generally, the Company has been able to return unsold or obsolete inventory to its vendors through written agreements with, or unwritten policies of, such vendors. In addition, the Company typically receives price protection should a vendor subsequently lower its price. Internationally, vendors price protection and return privileges are more limited. 8 Distribution Centers All of the Company's U.S. distribution operations are conducted at the Wilmington, Ohio warehouse/distribution center, which consists of approximately 365,000 square feet located in four facilities adjacent to the main distribution facility of Airborne Express. Domestic orders accepted by midnight, eastern time, are generally shipped for delivery the following day via Airborne Express for a charge based on weight. Upon request, orders may also be shipped by alternate means. The Company also operates distribution facilities in the United Kingdom, France, Germany, Denmark, Norway, Sweden, Finland, the Netherlands, Japan, Canada, Mexico, Australia. Domestic orders are placed at the Company's Lakewood and Gibbsboro, New Jersey, South Norwalk, Connecticut, and Bloomingdale, Illinois, facilities which include telemarketing, customer service, training, management information systems, accounting and administration. When an order is entered into the system, a computer credit check or credit card verification is performed and, if approved, the order is electronically transmitted to the warehouse in Wilmington, Ohio and a packing slip is printed for order fulfillment. Inventory shrinkage has been nominal. Management Information Systems The Company has committed significant resources to the development of an integrated computer system which is used to manage all aspects of its business. The main computer system is principally comprised of Hewlett Packard hardware and licensed and internally-developed software. This system supports telemarketing, marketing, purchasing, accounting, customer service, warehousing and distribution. The system allows the Company, among other things, to monitor sales trends, make informed purchasing decisions, provide product availability and order status information. In addition to the main system, the Company has a system of networked personal computers which provide numerous additional management control, planning, and exception reporting which facilitates data sharing and provides an automated office environment. During 1996, the Company made installations and upgrades to its computer systems in both its domestic and international operations, at an approximate cost of $5 million. The Company's international operations generally use the same system and are able to exchange data with the Company's United States operations. Routine capacity enhancements are made periodically, as the Company deems necessary. 9 Competition The computer products business is highly competitive. The Company competes with consumer electronic and computer retail stores, including superstores, corporate resellers, value-added resellers, other direct marketers of software and computer related products and various "on-line" vendors and other resellers of computer products. Some of those competitors provide superior product support, configuration, and installation services. Several hardware and software vendors sell their products directly to end users. Certain competitors of the Company have financial and other resources greater than those of the Company. There can be no assurance that the Company can continue to compete effectively against existing competitors or new competitors that may enter the market. Price is an important competitive factor in the personal computer software and hardware market and there can be no assurance that the Company will not be subject to increased price competition. Employees As of December 31, 1996, the Company employed 3,481 persons, of whom 733 were in management, support services and administration; 1,079 in sales, technical support and customer service; 466 in warehouse/distribution and 1,203 employed at international locations. The Company's domestic employees are not represented by a labor union and it has experienced no work stoppages. The Company believes that its employee relations are good. Sales Tax The Company presently collects sales tax on sales of products to residents in the states of New Jersey, Connecticut, Ohio and Illinois. Various states have tried to impose on direct marketers the burden of collecting sales taxes on the sale of products shipped to state residents. The United States Supreme Court affirmed its position that it is unlawful for a state to impose sales tax collection obligations on an out-of-state mail order company whose only contacts with the state are the distribution of catalogs and other advertising materials through the mail and subsequent delivery of purchased goods by parcel post and interstate common carriers. In the event legislation is passed to overturn the United States Supreme Court's decision or if the Court changes its position, the imposition of a sales tax collection obligation on the Company in states to which it ships products would result in additional administrative expenses to the Company and could result in price increases to the customer. 10 Trademarks The Company conducts its business under the trademarks and service marks "MacWAREHOUSE," "MacSHOPPER," "MicroWAREHOUSE," "Upgrade Warehouse," "Windows Warehouse," "Power User," "Data CommWAREHOUSE," "CD-Rom WAREHOUSE," "Micro SystemsWAREHOUSE," "Mac Systems WAREHOUSE," "Home ComputerWAREHOUSE," "LanWAREHOUSE," "WAREHOUSE-On-Line," "Academic WAREHOUSE," "Developer's WAREHOUSE," "The Mac Superstore," "NU DATA,", "Workstation EXPRESS," "PC Select," "USA Flex," "Inmac," "MacSelect," "The Inmac Advantage," "Good Impressions," "Black Pearl," and "Datamaster." The Company intends to use and protect these or related marks, as necessary, in the United States and in various foreign countries. The Company believes its trademarks and service marks have significant value and are an important factor in the marketing of its products. The Company's trademarks and servicemarks have an indefinite term as long as they are used in connection with the Company's business activities. The Company intends to take all appropriate steps to maintain use of its marks and to renew registrations for its marks. Regulation The direct response business as conducted by the Company is subject to the Mail and Telephone Order Merchandise Rule and 1996 Telemarketing Sales Rule and related regulations promulgated by the Federal Trade Commission and comparable state agencies. The Company believes it is in compliance with such rules and regulations and has implemented programs and systems to assure ongoing compliance. 11 ITEM 2. PROPERTIES The Company's principal facilities, all of which are leased, are as follows:
Approx. Expiration of Facility Location Sq. Ft. Leases - ---------------------------------------------------------------------------------------------- Telemarketing, technical support, management information systems and customer service center................Lakewood, NJ 52,109 1999 Telemarketing, technical support, management information systems and customer service center................Lakewood, NJ 41,514 2000 Manufacturing, sales and distribution.....Lakewood, NJ 30,360 2001 Telemarketing, technical support, management information systems and customer service center................Gibbsboro, NJ 82,000 2002 Telemarketing.............................Bloomingdale, IL 21,939 1999 - ------------------------------------------------------------------------------------------ Warehouse and distribution center.........Wilmington, OH 102,400 1998 Warehouse and distribution center.........Wilmington, OH 102,400 1999 Warehouse and distribution center.........Wilmington, OH 102,400 1997 Warehouse and distribution center.........Wilmington, OH 12,800 1997 Warehouse and distribution center.........Wilmington, OH 44,800 1999 Headquarters and Administrative offices...Norwalk, CT 83,000 2001 Corporate Sales...........................South Norwalk, CT 31,515 1997 European Headquarters and offices.........Bracknell, England 11,000 2011 - ------------------------------------------------------------------------------------------ Offices and distribution center...........Watford, London, 37,500 2004 England Warehouse and distribution center Runcorn, England 69,000 2015 Offices...................................Kingsbury, Wembly, 10,550 1996 England Offices...................................Suresnes, France 9,900 2002 Offices and warehouse.....................Mitry-Mory, France 60,000 1999 Offices and distribution center...........Florsheim, Germany 70,000 1998 Offices and distribution center...........Amsterdam, Netherlands 28,000 1999 - ------------------------------------------------------------------------------------------ Offices and distribution center...........Ega, Denmark 3,735 1996 Offices and distribution center...........Oslo, Norway 8,217 1996 Offices and distribution center...........Stockholm, Sweden 11,475 1998 Offices and distribution center...........Helsinki, Finland 4,410 1996 Retail and offices .......................Helsinki, Finland 11,150 1997 - ------------------------------------------------------------------------------------------ Offices and distribution center...........Kanagawa, Japan 1,500 1996 Offices and distribution center...........Mexico City, Mexico 1,800 1996 Retail and offices........................Toronto, Ontario, 6,800 1997 Canada
12 Warehouse.................................Toronto, Ontario, 2,500 1998 Canada Offices and warehouse.....................Mississauga, Ontario, 23,800 2001 Canada Retail, offices and warehouse.............North York, Ontario, 1,800 1998 Canada Offices and distribution center...........Brisbane, Australia 7,500 2001
The Company believes that its facilities are adequate for its current needs and that suitable additional space will be available as needed. ITEM 3. LEGAL MATTERS The information required by this item appears on page 1 of the Company's Annual Report to Stockholders under the caption "Restatement of Financial Statements" and in Note 17 to Notes to Consolidated Financial Statements on page 36 of the Company's Annual Report to Stockholders, all of which information is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded in the over-the-counter market and is quoted on the Nasdaq Stock Market. The information appearing on page 37 of the Company's Annual Report to Stockholders under the caption 'Common Stock' is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears on page 17 of the Company's Annual Report to Stockholders under the caption 'Selected Financial Information' which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing on pages 18 through 21 of the Company's Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information appearing on pages 22 through 36 of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears in the Company's definitive Proxy Statement for its Annual meeting of Stockholders scheduled to be held on June 4, 1997 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 4, 1997 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 4, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 4, 1997 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements: 14 The following consolidated financial statements are incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1996: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1996 and 1995. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Stockholders Equity as of and for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. (a)(2) Consolidated Financial Statement Schedule: The following Consolidated Financial Statement Schedule of the Company as set forth below is filed with this report on Form 10-K. Independent Auditors' Report on Consolidated Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts Consolidated Financial Statement Schedules other than the one listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (a)(3) Exhibits See Exhibit Index on Pages 20 through 21 for exhibits filed with this report on Form 10-K. (b) Reports on Form 8-K 1) The Company filed a Form 8-K pursuant to Item 5 on October 1, 1996 to report that the Company may restate its 1994 and 1995 financial results. 2) The Company filed a Form 8-K pursuant to Item 5 on October 3, 1996 to report that Linwood A. Lacy, Jr. was appointed President and Chief Executive Officer of the Company effective as of October 1, 1996. 15 3) The Company filed a Form 8-K pursuant to Item 5 on October 3, 1996 to report that a class action complaint dated October 1, 1996 had been filed against the Company in the U.S. District Court in Bridgeport, Connecticut captioned Bruce Payne, et als v. Micro Warehouse, Inc., et als bearing docket no. 396CV01920 claiming a possible violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. 4) The Company filed a Form 8-K pursuant to Item 5 on October 16, 1996 to report that it continues to oversee a review of previously reported errors in its accounting procedures and confirmed that it will restate 1994 and 1995 and first quarter 1996 financial results and it may restate 1993 financial results. 5) The Company filed a Form 8-K pursuant to Item 5 on November 21, 1996 to announce a significant reorganization to include several immediate resignations in its Finance Department and the future resignation of its Chief Operating Officer. 6) The Company filed a Form 8-K pursuant to Item 5 on December 19, 1996 to report that fourth quarter earnings were likely to be significantly lower than expected. 16 SCHEDULE II MICRO WAREHOUSE, INC. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
Balance at Additions Deductions Balance at Beginning of Charged from End Year to Operations Reserves of Year ---- ------------- -------- ------- Allowance for doubtful accounts Year ended: December 31, 1994 $5,345 $ 3,980 ($ 3,649) 5,676 December 31, 1995 5,676 7,099 (4,967) 7,808 December 31, 1996 7,808 8,195 (5,127) 10,876 Reserve for obsolete inventory Year ended: December 31, 1994 6,801 3,917 (4,385) 6,333 December 31, 1995 6,333 6,388 (4,385) 8,336 December 31, 1996 8,336 5,601 (3,416) 10,521 Reserve for refunds Year ended: December 31, 1994 461 5,880 (5,774) 567 December 31, 1995 567 11,275 (11,183) 659 December 31, 1996 659 7,745 (7,640) 764
17 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders of MICRO WAREHOUSE, INC.: Under date of February 10, 1997, we reported on the consolidated balance sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996, as contained in the annual report to stockholders for 1996 and incorpoated by reference in the Company's Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed under (a)(2). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Stamford, Connecticut February 10, 1997 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICRO WAREHOUSE, INC. By /s/ LINWOOD A. LACY, JR. ----------------------------- LINWOOD A. LACY, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Peter Godfrey and Linwood A. Lacy, Jr., or either of them, his attorneys-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K for the year ended December 31, 1996, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K for the year ended December 31, 1996 has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Peter Godfrey Chairman of the Board March 27, 1997 - ----------------------- Peter Godfrey /s/ Linwood A. Lacy, Jr. President, Chief Executive March 27, 1997 - ----------------------- Officer, Chief Financial Linwood A. Lacy, Jr. Officer, and Director (Principal Executive Officer) (Principal Financial Officer) (Principal Accounting Officer) /s/ Felix Dennis Director March 27, 1997 - ----------------------- Felix Dennis /s/ Frederick H. Fruitman Director March 27, 1997 - ----------------------- Frederick H. Fruitman /s/ Melvin Seiler Executive Vice President, Chief March 27, 1997 - ----------------------- Operating Officer and Director Melvin Seiler /s/ Joseph M. Walsh Director March 27, 1997 - ----------------------- Joseph M. Walsh 19 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - -------------------------------------------------------------------------------- 3.1 -- Certificate of Incorporation of Registrant as Amended .......... 3.2 -- By-Laws of Registrant, as Amended .............................. 10.1 -- Amendment No. 1 to 1992 Stock Option Plan ...................... 10.2 -- Amendment No. 1 to 1994 Stock Option Plan ...................... 10.3* -- Amendment No. 2 to 1992 and 1994 Stock Option Plans ............ 10.4 -- Lease Agreements between C.P. Lakewood, L.P. and the Registrant relating to the Lakewood, New Jersey facilities ... 10.5 -- Lease Agreement between Miller-Valentine Partners and the Registrant relating to the Wilmington, Ohio facility ......... 10.6 -- Lease Agreement between Peter Godfrey and the Registrant relating to the South Norwalk, Connecticut facility .......... 10.6(a) -- Lease Agreement between Hialet Associates and the Registrant relating to a South Norwalk, Connecticut facility (53 Water Street) ............................................ 10.6(b) -- Lease Agreement between Hialet Associates and the Registrant relating to a South Norwalk, Connecticut facility (29 Haviland Street) ......................................... 10.7 -- Lease Agreement between 50 Water Street Associates and the Registrant relating to the South Norwalk, Connecticut facility ..................................................... 10.8 -- Lease between Union Square Assoc. Ltd. Part. and the Registrant relating to the South Norwalk, Connecticut facility ..................................................... 10.9 -- Lease Agreement between South Norwalk Redevelopment Partnership and the Registrant relating to the South Norwalk, Connecticut facility ................................ 10.10 -- Lease Agreement between Unigate (UK) Limited and the Registrant relating to the Barnet, England facility .......... 10.11 -- Second Amendment to Lease Agreement between Peter Godfrey and the Registrant relating to the South Norwalk, Connecticut facility (47 Water Street) ....................... 10.12 -- Second Amendment to Lease Agreement between Hialet Associates and the Registrant relating to the South Norwalk, Connecticut facility (53 Water Street) ....................... 10.13 -- Lease Agreement between Misco, Sofibus and the Registrant relating to the Bonneuil Sur Marne, France facility .......... 10.14 -- Lease Agreement between Miller-Valentine Partners and the Registrant relating to the Wilmington, Ohio facility ......... 10.15 -- Lease Agreement between BBS Norwalk One Inc. and the Registrant relating to the Norwalk, Connecticut facility ..... 10.16 -- Lease Agreement between J & W Computer GNBTT and the Registrant relating to Kelkheim, Germany facility ............ 10.17* -- Sublease Agreement between Comark, Inc. and the Registrant ................................................... 10.18 -- Employment Agreement between Peter Godfrey and the Registrant ................................................... 10.19 -- Employment Agreement between Melvin Seiler and the Registrant ................................................... 10.20 -- Employment Agreement between Steven Purcell and the Registrant ................................................... 10.21 -- Employment Agreement between Stephen England and the Registrant ................................................... 10.22 -- Employment Agreement between Adam W. Shaffer and the Registrant ................................................... 10.23 -- Amendment to Employment Agreement between Adam W. Shaffer and the Registrant ........................................... 10.24 -- Employment Agreement between Linwood A. Lacy, Jr. and the Registrant ................................................... 10.25 -- Amendment to Employment Agreement between Linwood A. Lacy, Jr. and the Registrant............................................ 10.26 -- Employment Agreement between Bruce L. Lev and the Registrant ................................................... 10.27 -- Consulting Agreement between Felix Dennis and the Registrant, as amended ....................................... 10.28 -- Form of Indemnification Agreement with Officers and Directors .................................................... 10.29 -- Commercial Revolving Loan and Security Agreement between State Street Bank and Trust Company and the Registrant dated July 1, 1991 ................................................. 20 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - -------------------------------------------------------------------------------- 10.30 -- Amendment Agreement between State Street Bank and Trust Company and the Registrant dated November 20, 1991 ........... 10.31 -- Second Amendment Agreement between State Street Bank and Trust Company and the Registrant dated July 10, 1992 ......... 10.32 -- Third Amendment Agreement between State Street Bank and Trust Company and the Registrant dated October 1, 1992 ....... 10.33 --Credit Agreement among the Registrant, the Subsidiaries of the Registrant, and The Chase Manhattan Bank (National Association) dated July 25, 1995 ............................. 10.34 --First Amendment Agreement among the Registrant, the Subsidiaries of the Registrant, and The Chase Manhattan Bank (National Association) dated January 1, 1996 ................. 10.35 --Second Amendment Agreement among the Registrant, the Subsidiaries of the Registrant, and The Chase Manhattan Bank (National Association) dated January 15, 1996 ................ 10.36 --Third Amendment Agreement among the Registrant, the Subsidiaries of the Registrant, and The Chase Manhattan Bank (National Association) dated May 10, 1996 .................... 10.37* --Resignation Agreement by and between Eric Furman and the Registrant dated November 20, 1996 ........................... 10.38* --Resignation Agreement by and between Steven Purcell and the Registrant dated November 20, 1996 ....................... 10.39* --Resignation Agreement by and between Melvin R. Seiler and the Registrant dated January 20, 1997 ........................ 11* --Statement Re Computation of Per Share Earnings .................. 13.1* --Annual Report to Stockholders for the fiscal year ended December 31, 1996 (such Annual Report, except for those portions thereof which are expressly incorporated by reference in this filing, is furnished solely for the information of the Commission and is not to be deemed 'filed' as part of this filing.) ............................. 21.1* -- Subsidiaries of the Registrant ................................. 23.1* -- Consent of Independent Auditors ................................ 24.1* -- Power of Attorney (included on signature page) ................. 27* -- Financial Data Schedule......................................... - ------------ *Filed herewith. All other exhibits have been previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1996, Annual Report on Form 10-K for Fiscal Year 1995 or the Registration Statements on Form S-1 (File Nos. 33-53100 and 33-66066) or amendments thereto and are incorporated by reference herein. 21 EX-10.3 2 AMENDMENT NO. 2 TO STOCK OPTION PLANS EXHIBIT 10.3 MICRO WAREHOUSE, INC. AMENDMENT NO. 2 TO 1992 AND 1994 STOCK OPTION PLANS DATED AS OF DECEMBER 18, 1996 WHEREAS, the 1992 Stock Option Plan was approved by the Board of Directors on October 1, 1992 and by the Stockholders on June 15, 1992; and WHEREAS, the 1994 Stock Option Plan was approved by the Board of Directors on October 1, 1994 and by the Stockholders on June 15, 1994; and WHEREAS, this Amendment No. 2 was approved by the Board of Directors at the December 18, 1996 Board Meeting and is subject to approval by the stockholders at their Annual Meeting of Micro Warehouse, Inc. on June 4, 1997; and WHEREAS, this Amendment is intended to comply with certain amendments to Section 162(m) of the Internal Revenue Code. NOW, THEREFORE, The undersigned Secretary of the Corporation certifies the following is Amendment No. 2 to the 1992 Stock Option Plan and the 1994 Stock Option Plan subject to Stockholder approval on June 4, 1997: Paragraph 4 of the Micro Warehouse, Inc. 1992 Stock Option Plan captioned "Administration" shall be amended so that the same shall read as follows: "The 1992 Plan shall at all times be administered in accordance with the regulations of Rule 16b-3 of the Securities and Exchange Act of 1934 as amended by the Securities and Exchange Commission Release No. 34-37260. The 1992 Plan may be administered by the Board of Directors or by a Committee of two or more "non-employee directors". The Board or the Committee shall determine and designate, from time to time, the employees, directors and consultants to whom options shall be granted and the number of shares to be covered by each option, the option price, the period of each option, and the time or times at which options may be exercised. Subject to the provisions of the 1992 Plan, the Board or the Committee may, from time to time, adopt rules and regulation relating to administration of the 1992 Plan and make all other determinations in the judgment of the Board or the Committee necessary or desirable for the administration of the 1992 Plan. The interpretation and construction of the provisions of the 1992 Plan and stock option agreements implemented thereunder by the Board or the Committee shall be final and conclusive. The Board or the Committee may correct any defect or supply any omission or reconcile any inconsistency in the 1992 Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the 1992 Plan into effect and it shall be the sole and final judge or such expediency." Paragraph 7 of the Micro Warehouse, Inc. 1992 Stock Option Plan captioned "Nontransferability" shall be amended so that the same shall read as follows: "(a) Options. Each option granted under the 1992 Plan by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except that options may be assigned or transferred as follows to: members of the optionee's immediate family intended to include parents, spouse, children or grandchildren; or trusts, family partnerships, or other like entities provided that all of the beneficiaries of the same are members of said immediate family, or to any person or entity by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death. In all events, the transferrees' rights with respect to any such option shall be subject to and fully governed by the provisions of the Plan and any provisions which would have affected any transferred options had the same not been transferred shall, pari passu, govern said options. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under this 1992 Plan or of any right or privilege conferred hereby or hereunder contrary to the provisions hereof, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby or hereunder, such option relating thereto shall thereupon terminate and become null and void. In all events, each such option by its terms shall be exercisable by either the optionees or transferrees permitted hereinabove. (b) Stock. Stock issued upon exercise of an option may have, in addition to restrictions on transfer imposed by law, such restrictions on transfer as may be determined by the Board or the Committee." The Corporation is desirous of amending its 1994 Stock Option Plan to increase the number of shares available for issue upon exercise of options from 1,000,000 to 3,000,000 in the aggregate. Pursuant to the Securities and Exchange Commission Release No. 34-37260 dated May 21, 1996, new rules were adopted with respect to Section 16 of the Securities and Exchange Act of 1934 and the Corporation is desirous of complying with said new rules and amending its 1994 Stock Option Plan in furtherance of the same. Said 1994 Stock Option Plan is hereby amended in the following particulars: Subject to stockholder approval with respect to the proposed share increase from 1,000,000 to 3,000,000 common shares, Paragraph 2 of the Micro Warehouse, Inc. 1994 Stock Option Plan captioned "Shares Subject to the 1994 Plan" shall be amended so that the same shall read as follows: "Subject to adjustment, as provided in Paragraph 10, the stock to be offered under the 1994 Plan shall consist of shares of the Company's Common Stock ("Stock") and the number of shares of Stock that may be issued upon exercise of all options granted under the 1994 Plan shall not exceed in the aggregate 3,000,000 shares; however, the maximum number of shares underlying an option grant shall not exceed 100,000 in any one year to any individual. Such shares may be authorized and unissued shares or may be treasury shares. If an option granted under the 1994 Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available under the 1994 Plan. Stock issued under the 1994 Plan may be subject to such restrictions on transfer, repurchase rights or other restrictions as shall be determined by the Board of Directors of the Company (the "Board)" or a Committee of the Board (the "Committee") as determined under Paragraph 4 hereinbelow Paragraph 4 of the Micro Warehouse, Inc. 1994 Stock Option Plan captioned "Administration" shall be amended so that the same shall read as follows: "The 1994 Plan shall at all times be administered in accordance with the regulations of Rule 16b-3 of the Securities and Exchange Act of 1934 as amended by the Securities and Exchange Commission Release No. 34-37260. The 1994 Plan may be administered by the Board of Directors or by a Committee of two or more "non-employee directors". The Board or the Committee shall determine and designate, from time to time, the employees, directors and consultants to whom options shall be granted and the number of shares to be covered by each option, the option price, the period of each option, and the time or times at which options may be exercised. Subject to the provisions of the 1994 Plan, the Board or the Committee may, from time to time, adopt rules and regulation relating to administration of the 1994 Plan and make all other determinations in the judgment of the Board or the Committee necessary or desirable for the administration of the 1994 Plan. The interpretation and construction of the provisions of the 1994 Plan and stock option agreements implemented thereunder by the Board or the Committee shall be final and conclusive. The Board or the Committee may correct any defect or supply any omission or reconcile any inconsistency in the 1994 Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the 1994 Plan into effect and it shall be the sole and final judge or such expediency." Paragraph 7 of the Micro Warehouse, Inc. 1994 Stock Option Plan captioned "Nontransferability" shall be amended so that the same shall read as follows: "(a) Options. Each option granted under the 1994 Plan by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except that options may be assigned or transferred as follows to: members of the optionee's immediate family intended to include parents, spouse, children or grandchildren; or trusts, family partnerships, or other like entities provided that all of the beneficiaries of the same are members of said immediate family, or to any person or entity by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death. In all events, the transferrees' rights with respect to any such option shall be subject to and fully governed by the provisions of the Plan and any provisions which would have affected any transferred options had the same not been transferred shall, pari passu, govern said options. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under this 1994 Plan or of any right or privilege conferred hereby or hereunder contrary to the provisions hereof, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby or hereunder, such option relating thereto shall thereupon terminate and become null and void. In all events, each such option by its terms shall be exercisable by either the optionees or transferrees permitted hereinabove. (b) Stock. Stock issued upon exercise of an option may have, in addition to restrictions on transfer imposed by law, such restrictions on transfer as may be determined by the Board or the Committee." Except as amended herein, the Micro Warehouse, Inc. 1992 and 1994 Stock Option Plans remain in full force and effect. The undersigned certifies this Amendment in his capacity as Secretary of Micro Warehouse, Inc. ______________________________________ Bruce L. Lev Secretary of the Corporation EX-10.17 3 SUBLEASE SUBLEASE THIS SUBLEASE is made and entered into this ____ day of March, 1997, by and between COMARK, INC., an Illinois corporation, having an address at 444 Scott Drive, Bloomingdale, Illinois 60108 ("Sublessor") and MICROWAREHOUSE, INC., a Delaware corporation, having an address at 535 Connecticut Avenue, Norwalk, Connecticut 06854 ("Sublessee"). I. RECITALS A. Sublessor is the lessee under that certain Lease dated March 29, 1991 (the "Underlying Lease"), made by and between Sublessor, as tenant, and American National Bank and Trust Company of Chicago, not individually but solely as Trustee under Trust Agreement dated March 29, 1991 and known as Trust Number 113698-08 ("Lessor"), as landlord, relating to certain premises commonly known as 471 Brighton Drive and 472 Fox Court, Bloomingdale, DuPage County, Illinois (the "Leased Premises") and situated in the Covington Corporate Center (the "Center"). The Underlying Lease was amended by a First Amendment to Lease dated as of November 18, 1991, made by and between Sublessor, as tenant, and Lessor, as landlord (the "First Amendment"). The Underlying Lease and the First Amendment are hereinafter sometimes collectively referred to as the "Lease". A true and complete copy of the Lease is attached hereto as Exhibit A. B. Sublessee has requested that Sublessor sublease to Sublessee a portion of the Leased Premises comprised of 21,939 square feet of office space commonly known as 471 Brighton Drive, as more particularly identified on Exhibit B attached hereto (the "Sublease Space"). Sublessor has agreed to lease the Sublease Space to Sublessee on the terms and conditions set forth herein. II. SUBLEASE (a) Sublessor hereby sublets to Sublessee, and Sublessee hereby subleases from Sublessor, the Sublease Space. Sublessee shall have the right to use in common with Sublessor the hallways and other access ways to the Sublease Space. Sublessee shall accept the Sublease Space in the condition existing on the date of this Sublease. All capitalized terms used in this Sublease and not otherwise defined herein shall have the meanings ascribed to such terms in the Lease. (b) Sublessee shall use the Sublease Space for general office purposes only. (c) Sublessee shall also be given use of all modular furniture currently in the Sublease Space, provided that Sublessee shall acquire no interest in said modular furniture and said modular furniture shall be returned to Sublessor in good condition (ordinary wear and tear excepted) upon the expiration or earlier termination of this Sublease. III. TERMS The terms of this Sublease shall be as follows: A. Fixed Rent. The rental for the Sublease Space shall be THIRTEEN AND NO/100 DOLLARS ($13.00) per square foot or TWO HUNDRED EIGHTY FIVE THOUSAND TWO HUNDRED SEVEN AND NO/100 DOLLARS ($285,207) per annum ("Base Rent"). The Base Rent for the period commencing on March 14, 1997 and expiring March 31, 1997 shall be NINE THOUSAND FOUR HUNDRED THIRTY FIVE AND/NO 100 DOLLARS (($9435.00). The Base Rent shall increase by 40/100 Dollars ($.40) per square foot on January 1, 1998 and again on January 1, 1999. During the first ten (10) months of the term of this Sublease, the Base Rent shall be reduced to ONE HUNDRED NINETY FIVE AND NO/100 DOLLARS ($195,000), as follows: Lease Year Annual Rent Monthly Rent ---------- ----------- ------------ 4/1/97 - 12/31/97 $195,000.00 $16,250.00 1/1/98 - 12/31/98 $293,982.60 $24,498.55 1/1/99 - 11/17/99 $302,758.20 $25,229.85 The Base Rent shall be payable in monthly installments, in advance, as set forth above, on or before the first day of each month of the term of this Sublease, payable to Sublessor at Comark, Inc., 444 Scott Drive, Bloomingdale, Illinois 60108, Attention: David Keilman, or at such other place as Sublessor may from time to time designate by written notice to Sublessee. B. Additional Rent. In addition to the Base Rent payable by Sublessee under this Sublease, Sublessee shall also pay the following expenses under the Lease: (i) fifty percent (50%) of the cost of all summer landscaping; (ii) fifty percent (50%) of the cost of lawn irrigation maintenance; (iii) all water bills levied against the Leased Premises, except when lawn irrigation is underway, in which case Sublessee shall pay fifty percent (50%) of the water bills; (iv) all electricity expenses over and above the sum of SEVEN HUNDRED AND NO/100 DOLLARS ($700.00) incurred on a monthly basis; (v) seventy-five percent (75%) of all gas expenses on a monthly basis; (vi) the cost of preventative maintenance for all heating and air-conditioning units in the Sublease Space; and (vii) all other maintenance and operational costs and expenses chargeable to Sublessor, as tenant, under the Lease and attributable to the Sublease Space (collectively, the "Additional Rent"). Sublessor shall submit -2- written invoices to Sublessee requesting payment of all or any portion of the Additional Rent. Sublessee shall pay all Additional Rent within ten (10) days from the effective date of Sublessor's invoice for the same. In the event that Sublessor receives any refund of Additional Rent under the Lease or otherwise, with respect to amounts paid by Sublessee for the Sublease Space, as provided herein, then Sublessor shall promptly remit all such refunds to Sublessee. In the event the remainder of the Leased Premises (excluding the Sublease Space) is sublet to a third party, Sublessor and Sublessee agree to amend this Additional Rent provision to reflect the presence of another sublessee. C. Payment of Rent. All Base Rent and Additional Rent shall be paid by Sublessee, in lawful money of the United States of America, without any set-off or deduction whatsoever. All Base Rent and Additional Rent not paid when due shall bear interest from the date due until paid at the default rate set forth in Section 3.4 of the Lease. D. Taxes. Included in the Base Rent of THIRTEEN AND NO/100 DOLLARS per square foot ($13.00) is the sum of THREE AND NO/100 DOLLARS ($3.00) per square foot ("Tax Rent") for all taxes, as "Taxes" is defined in Article VI of the Lease, which Taxes are allocable to the Sublease Space ("Sublease Taxes"). In the event the Tax Rent is insufficient to pay the Sublease Taxes or, in the alternative, the Tax Rent collected is in excess of the Sublease Taxes, the parties shall adjust the Tax Rent accordingly based on the real estate tax bill issued for the immediately preceding year. E. Term of Sublease. The term of this Sublease shall commence on March 14, 1997 and shall expire November 17, 1999, unless sooner terminated or as otherwise provided herein. F. Services. All services to which Sublessor is entitled under the Lease, with respect to the Sublease Space, shall in turn be furnished to Sublessee by Sublessor, but only to the extent such services are actually furnished by Lessor to Sublessor. Sublessee shall pay to Sublessor all costs described in Section 8.1 of the Lease. If Lessor fails to provide any services to the Sublease Space which Lessor is required to furnish to such space, as provided by the terms of the Lease, then, upon written notice by Sublessee to Sublessor of such failure, Sublessor shall, at Sublessee's expense (and using attorneys provided by Sublessee), exercise its rights and remedies against the Lessor as provided in the Lease or, to the extent such rights and remedies are not set forth in the Lease, such rights and remedies as are otherwise available against Lessor in equity or at law. -3- IV. NO ASSIGNMENT Sublessee shall not sublet or assign this Sublease in whole or in part without the prior written consent of Sublessor and Lessor. V. NO ALTERATIONS Except as otherwise expressly provided in this Section V, Sublessee shall not alter, remodel or change the Sublease Space without the prior written consent of Sublessor which consent shall not be unreasonably withheld or delayed. Notwithstanding anything in the preceding sentence to the contrary, Sublessee shall be permitted, without obtaining Sublessor's consent, to (i) paint and recarpet the Sublease Space, hang art work and shelving on the walls thereof (provided that Sublessee shall at its expense repair all damage to such walls caused by the removal of any such items), and to otherwise decorate the Sublease Space, and (ii) install cabling and wiring in the Sublease Space; provided however, that in no event shall Sublessee undertake any actions pursuant to clause (i) or clause (ii) above in violation of Article XX of the Lease. Any alterations so made by Sublessee shall, at the option of Sublessor, remain at the end of the term of this Sublease and become the property of Sublessor or Lessor, as the case may be, or be removed by Sublessee at the expense of Sublessee so as to restore the Sublease Space to the condition required by Section VII of this Sublease. VI. WAIVER AND INDEMNITY. A. Except as otherwise set forth herein, Sublessor and its partners, affiliates, officers, directors, agents, servants and employees shall not be liable for any damage either to person, property or business or resulting from the loss of use thereof sustained by Sublessee or by other persons as a result of or in any way related to (i) the condition (structural or otherwise) of the Center or any part thereof; (ii) the occurrence of any accident or event in or about the Center, including the Sublease Space; or (iii) the act or neglect of Lessor, or of any tenant or occupant of the Center or of any other person, unless caused by (y) the negligence or wilful misconduct of Sublessor or its agents, employees or contractors or (z) the breach of this Sublease by Sublessor. This provision shall apply particularly, but not exclusively, to damage caused by gas, electricity, snow, ice, frost, steam, sewage, sewer gas or odors, fire, water or by the bursting or leaking of pipes, faucets, sprinklers, plumbing fixtures and windows, and, except as provided above, shall apply without distinction as to the person whose act or neglect was responsible for the damage and shall apply whether the damage was due to any of the causes specifically enumerated above or to some other cause of an entirely different kind. Sublessee further agrees that all -4- personal property upon the Sublease Space, or upon loading docks, receiving and holding areas, or freight elevators of the Center, shall be at the risk of Sublessee only, and that Sublessor shall not be liable for any loss or damage thereto or theft thereof, unless caused by the negligence or wilful acts of Sublessor, its agents, contractors or employees or by Sublessor's breach of this Sublease. Without limitation of any other provisions hereof, but subject to the provisions of Section XIII hereof, Sublessee agrees to defend, protect, indemnify and save harmless Sublessor and its partners, affiliates, officers, agents, servants and employees from and against all liability to third parties arising out of Sublessee's use of the Sublease Space, this Sublease or the acts or omissions of Sublessee or its servants, agents or employees. Sublessor shall indemnify and hold harmless Sublessee from and against all liability to third parties arising out of events described in subsection (y) or (z) of the immediately preceding paragraph. B. The indemnity contained in this Section VI shall survive the expiration or termination of this Sublease. VII. SUBLEASE SPACE AND SURRENDER OF SUBLEASE SPACE. Sublessee shall maintain the Sublease Space, during the term of this Sublease, in good condition and repair, ordinary wear and fire and other casualty (including acts of God) insured against by Sublessor excepted, failing which Sublessor may restore the Sublease Space to such condition and Sublessee shall pay Sublessor the cost thereof; provided that nothing contained in the preceding clause shall be construed to require Sublessee to (i) remove any fixtures, alterations or other improvements contained in the Sublease Space on the date of this Sublease, or (ii) repair any damage to or violation of the Sublease Space which exists on the date of this Sublease. Upon the expiration or termination of this Sublease or termination of Sublessee's right of possession of the Sublease Space, Sublessee shall return the Sublease Space to Sublessor in the condition existing as of the commencement of this Sublease, provided, however, that if Sublessee is not then in default, Sublessee may remove personal property installed by Sublessee. Such removals shall be done in a good and workmanlike manner and Sublessee shall restore the Sublease Space to a tenantable condition. In the event possession of the Sublease Space is not promptly delivered to Sublessor, or if Sublessee shall fail to remove all of Sublessee's personal property, as aforesaid, Sublessor may remove any of such property therefrom without any liability to Sublessee. All such property which may be removed from the Sublease Space by Sublessor shall be conclusively presumed to have been abandoned by Sublessee and title thereto shall pass to Sublessor without any cost or credit therefor and Sublessor may, -5- at its option and at Sublessee's expense, store or dispose of such property. If Sublessee retains possession of the Sublease Space, or any part thereof, after the expiration or termination of this Sublease (whether by lapse of time or otherwise), Sublessee shall pay to Sublessor, during each month or portion thereof for which Sublessee shall retain possession of the Sublease Space or any part thereof, an amount as Rent equal to 150% of one-twelfth of the Base Rent and 100% of one-twelfth of the Additional Rent paid by Sublessee during the previous year herein provided. The provisions of this Section VII shall not be deemed to limit or constitute a waiver of any other rights or remedies of Sublessor provided herein or at law. VIII. DUTIES OF SUBLESSEE A. Sublessee acknowledges that this Sublease, in all terms and respects, is subject to the provisions of the Lease; unless otherwise expressly modified herein. B. By executing this Sublease and to the extent applicable to the Sublease Space and the Term of this Sublease, Sublessee agrees to be bound by the same obligations and duties as govern Sublessor's conduct, as tenant, under the Lease (unless such obligations and duties have been expressly modified by the terms of this Sublease), Sublessee shall have the same rights and remedies available to Sublessor, as tenant, under the Lease, and Sublessee agrees to perform all of the covenants and honor all of the restrictions imposed on Sublessor, as tenant, under the Lease. C. By executing this Sublease, to the extent applicable to the Sublease Space and the Term of this Sublease, Sublessor agrees to be bound by the same obligations and duties as govern Lessor's conduct, as Landlord, under the Lease, Sublessor shall have the same rights and remedies available to Lessor under the Lease (including without limitation rights and remedies in the event of a default under this Sublease or the Lease), and, subject to any limitations expressly set forth in this Sublease, Sublessor agrees to perform all of the covenants and honor all of the restrictions imposed on Lessor, as Landlord, under the Lease. D. The provisions of the Lease are by this reference incorporated into and made a part of this Sublease as if reproduced in full herein, except that (i) the following provisions of the Underlying Lease shall not be applicable with respect to this Sublease: Articles I, II, III, V, VI, VII, XVI, XXIII, XXIV, XXV, together with Section 8.2 and Exhibit A, and (ii) the following provisions of the First Amendment shall not be applicable with respect to this Sublease: Sections 3, 4 and 5. -6- E. Sublessee covenants and warrants that Sublessee shall do no act which would be a violation of the Lease and agrees to hold harmless, indemnify and, at Sublessor's election, defend Sublessor (with counsel reasonably acceptable to Sublessor) against all liability (including, without limitation, attorneys' fees and costs) for any such act performed by Sublessee or Sublessee's agents, employees or invitees or for any tortious or negligent act on the part of Sublessee or Sublessee's agents, employees or invitees. IX. NOTICE Any notice to be given hereunder shall be deemed given and delivered when given personally or on the second day from the date of mailing in a properly addressed envelope, with postage prepaid, by United States certified mail. Notices to the parties shall be addressed as follows: Sublessor: Comark, Inc. 444 Scott Drive Bloomingdale, Illinois 60108 Attention: David Keilman with a copy to: Kenneth G. Kolmin Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606 Sublessee: Microwarehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 Attention: Bruce Lev X. SUBLESSOR'S REPRESENTATIONS AND COVENANTS Sublessor hereby represents and warrants to Sublessee that the Lease is in full force and effect without default on the part of Sublessor. Sublessor covenants and warrants to Sublessee that Sublessor (i) will comply in all material respects with all of the terms and provisions of the Lease, and (ii) will not default in any obligation of Sublessor under the terms of the Lease during the term of this Sublease. Sublessor further covenants and warrants to Sublessee that Sublessor will not voluntarily enter into any agreement with the Lessor which would result in the termination of the Lease prior to the termination of this Sublease. Sublessor acknowledges and agrees that, notwithstanding any other provisions contained in the Lease or in this Sublease, Sublessee shall not have any liability with respect to any matter for the period prior to the date possession of the Sublease Space is tendered to Sublessee, including, without limitation, (i) the condition of the Sublease Space (including any damage thereto and all latent defects), and (ii) -7- any acts or omissions of Sublessor, including the failure by Sublessor to perform any of its covenants and agreements contained in the Lease. XI. UNTENANTABILITY AND EMINENT DOMAIN Sublessee shall have the right to terminate this Sublease following the occurrence of a fire or casualty or condemnation only to the extent that Sublessor would have the right to terminate the Lease under Articles XIV and XV thereof. Sublessee will give Sublessor prompt written notice of any termination of this Sublease pursuant to the rights granted to Sublessee in this Paragraph XI. XII. BROKERS Sublessee represents that Sublessee has not dealt with any broker, in connection with this Sublease, and that insofar as Sublessee knows, no brokers (other than Sublessor's broker disclosed below) negotiated this Lease or are entitled to any commissions in connection therewith. Sublessee agrees to indemnify, defend and hold Sublessor and its employees, agents, their officers and partners, harmless from and against any claims, costs or liabilities arising out of Sublessee's breach of this representation. Sublessor represents that Sublessor has dealt with (and only with) Grubb & Ellis, as Sublessee's sole broker, in connection with this Sublease, and that insofar as Sublessor knows, no other brokers (other than Sublessee's broker disclosed above) negotiated this Sublease or are entitled to any commissions in connection therewith. Sublessor shall pay to such named brokers any commissions which may be due in connection with this Sublease pursuant to separate agreements with such brokers. Sublessor agrees to indemnify, defend and hold Sublessee and its partners, employees, agents, their officers and partners, harmless from and against any claims, costs or liabilities arising out of Sublessor's breach of this representation. The indemnities contained in this Paragraph XII shall survive the termination of this Sublease. XIII. SUBLESSEE'S INSURANCE. Sublessee shall maintain at all times during the Term, fire and extended coverage insurance insuring the leasehold improvements installed in the Sublease Space, at Sublessee's sole cost and expense, and Sublessee's office furniture, equipment and supplies. Sublessee shall also maintain, at all times during the Term, commercial general liability insurance, insuring Sublessee against any loss, liability or damage on, about, or relating to the Sublease Space, or any portion thereof, and -8- naming Sublessor as an additional insured, with limits of not less than $1,000,000 for any single incident and not less than $3,000,000 in the aggregate. Said policy of general liability insurance may not be terminated or amended without thirty days prior written notice to Sublessor. Within ten days of execution of this Sublease, Sublessee shall deliver to Sublessor certificates evidencing its compliance with the insurance requirements set forth in this Section XIII. XIV. SECURITY DEPOSIT. As additional security for the full and prompt performance by Sublessee of all of its obligations hereunder, Sublessee shall pay to Sublessor upon Sublessee's execution of this Sublease, a security deposit in the amount of $25,229.85, which sum may be applied by Sublessor for the purpose of curing any default or defaults of Sublessee under this Sublease. Sublessee shall pay to Sublessor as security, on request by Sublessor, any amounts so used by Sublessor. Sublessor shall not pay any interest on the security deposit and the security deposit may be commingled by Sublessor or other funds of Sublessor. If Sublessee has not defaulted hereunder or if Sublessor has not applied said sum to said default, then said security deposit or any portion thereof not so applied by Sublessor shall be paid to Sublessee within forty-five (45) days after the expiration of this Sublease and the vacation of the Sublease Space by Sublessee (unless Sublessee continues to occupy the Sublease Space pursuant to Section XVIII hereof). The security deposit shall not be deemed an advance payment of Base Rent or measure of damages for any default by Sublessee under this Sublease, nor shall it be a bar or defense to any action which Sublessor may at any time institute against Sublessee. XV. STANDARDS FOR CONSENT AND APPROVAL. The parties to this Sublease each agree that where the consent or approval (whether written or otherwise) of a party hereto is required in connection with any matter set forth herein, then such consent or approval shall not be unreasonably withheld, conditioned or delayed; provided, however, that the provisions of this Section XV shall not apply to the provisions of Section IV hereof. XVI. LANDLORD'S CONSENT. Sublessor and Sublessee mutually agree and acknowledge that the consent of Lessor to this Sublease is required and that this Sublease shall not commence or be in full force and effect until such consent is obtained. XVII. SIGNAGE. -9- Sublessee may install signage on or about the Sublease Space, subject to the provisions of the Lease and further subject to all applicable laws. XVIII. RENEWAL OPTION. Article XXIII of the Underlying Lease grants Sublessor, as tenant, the option to extend the Term of the Lease, subject to and on the conditions set forth in said Article XXIII (the "Renewal Option"). Sublessor hereby grants to Sublessee an option to cause Sublessor to exercise the Renewal Option, subject to the following: (a) Sublessee shall give Sublessor written notice of its intent to cause Sublessor to exercise the Renewal Option no later than thirteen (13) months prior to the expiration of the original Term or the First Renewal Term, as applicable; (b) Sublessee shall be in full compliance with this Sublease and with the Lease, as it may apply to the Sublease Space; (c) Sublessee shall agree to amend the definition of "Sublease Space" to include the Leased Premises, in its entirety, and this Sublease shall be amended so that all costs and expenses (including, without limitation, all rent due and owning under the Lease), imposed on Sublessor, as tenant, under the Lease, shall become the sole responsibility and obligation of Sublessee; (d) Sublessee shall deliver to Sublessor an irrevocable stand-by letter of credit for the discounted value of the Lease for the First Renewal Term and the Second Renewal Term; and (e) The option granted herein is subject to the terms of Article XXIII of the Underlying Lease. XVIV. PARKING. The Sublessee shall have access to 125 parking spaces, 76 of which shall be to the immediate south-southeast of the Sublease Space and 49 of which shall be in the northwest parking lot, all as indicated on Exhibit C attached hereto. XVV. SUBLESSOR'S WORK. Sublessor covenants and agrees to (a) steam clean the carpeting on the west side of the Sublease Space, at Sublessor's sole cost and expense; (b) paint the west side of the Sublease Space, at a cost to borne equally by Sublessor and Sublessee; -10- (c) assist Sublessee in its application for various permits, provided that Sublessor shall not incur any expense in so assisting Sublessee and further provided that Sublessor makes no representations or warranties of any kind in connection with such assistance. -11- IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of March __, 1997. SUBLESSOR: COMARK, INC. By ____________________________ Its: ____________________ SUBLESSEE: MICROWAREHOUSE, INC. By ____________________________ Its: ____________________ Agreed to, consented to and acknowledged by the undersigned as of the _____ day of __________, 1997. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Trustee, under Trust Agreement dated 3/29/91 and known as Trust Number 113698-08 By_________________________ Its:__________________ 2/6/97 -12- EXHIBIT A THE LEASE EXHIBIT B THE SUBLEASE SPACE EXHIBIT C PARKING EX-10.37 4 AGREEMENT November 20, 1996 Mr. Eric Furman 60 Riverside Drive Ridgefield, CT 06877 Dear Eric: This agreement will serve to confirm the terms and conditions under which we are accepting your resignation as Corporate Controller and Chief Accounting Officer. 1. Resignations. Effective immediately you are resigning as Corporate Controller and Chief Accounting Officer and any other officerships or directorships of Micro Warehouse, Inc. or any of its affiliates, sister companies or subsidiaries (hereinafter "the Company"). You are not resigning your employment with the Company, which shall continue, subject to the provisions of this agreement, until June 30, 1997 (hereinafter "the Termination Date"). 2. Employment Agreement. Any employment agreement with the Company, whether written or oral, except for the agreement set forth herein is terminated. Through June 30, 1997 you shall be paid your current salary and receive all benefits generally provided to all employees of the Company. All of the Company's employment policies will be applicable to you. You shall not be eligible to receive any 1996 or 1997 bonus notwithstanding the possibility that other comparably compensated employees might receive bonuses attributable to either of said years. 3. Duties. Your duties shall include support of any task force or related efforts in connection with the preparation of the Company's restated financial information and support of the Company's preparation and filing of its Form 10-K, Annual Report, Proxy and related materials and you shall report to Chip Lacy, President and Chief Executive Officer. You shall additionally perform such other duties as he shall require of you from time to 2 time. It is not anticipated that you shall be required to perform these duties on any Micro Warehouse, Inc. premises; however, it may be necessary from time to time for you to meet with Micro Warehouse employees or advisors and you shall make yourself available to do so during normal business hours. 4. Stock Options. Schedule B-1 sets forth, inter alia, stock options already granted to you and which have already vested which may be exercised by you on or prior to December 31, 1997. Schedule B-1 also sets forth stock options granted to you which as of November 20, 1996 have not yet vested. We confirm that we will not forfeit these options but will deem these options vested as of June 30, 1997 and they may be exercised by you on or prior to December 31, 1997. Said Schedule B-1 also describes all other stock options granted to you which will be deemed forfeited and of no further force and effect. You will not be eligible to receive any further stock options or otherwise participate in any deferred compensation programs notwithstanding the possibility that the Company might provide the same participation to other comparably compensated employees. 5. Indemnification. We confirm that , as our former Corporate Controller and Chief Accounting Officer, you shall continue to be entitled to indemnification pursuant to our Articles of Incorporation and By Laws currently in effect. If requested by us in connection with any advance made pursuant to your indemnification right, you shall undertake in a manner satisfactory to us to repay any amounts advanced if it shall ultimately be determined by a final order of court that you are not entitled to be indemnified by us pursuant to applicable law. 6. Release. (a) As consideration for the Company to enter into this agreement and as consideration for the covenants contained herein, subject to the immediately following sentence, you irrevocably and unconditionally release, remit, acquit and forever discharge the Company, its officers, directors, shareholders, 3 agents, employees, representatives, attorneys, parents, divisions, subsidiaries, affiliates, related companies or entities, successors and assigns and the officers, executives, directors, shareholders, agents and employees of any and all of the Company's parents, divisions, subsidiaries, affiliates, related companies or entities, successors or entities (separately or collectively, the "Released Parties"), jointly and individually, from any and all claims, charges, complaints, expenses and causes of action of any nature or kind whatsoever, known or unknown, which you, your heirs, successors or assigns have or may have against the Released Parties based upon, related to or arising out of your employment with the Company through the date hereof, including, but not limited to, claims, charges, complaints, liabilities, losses, obligations, demands, damages, costs, expenses and causes of action relating to the terms, conditions, commencement, duration or termination of your employment, or claims of discrimination under any federal, state or local law, rule, regulation or common law, whether such claims are past or present, whether they arise from equity, common law or statute, and whether they arise from labor laws or discrimination laws, such as the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal Pay Act, as amended, the Americans with Disabilities Act, or any other federal, state or local law, rule or regulation. This release is intended to cover all possible relief, including, but not limited to, reinstatement, wages, back pay, front pay, vacation pay, bonuses or incentive compensation, supplemental or other retirement benefits, perquisites, compensatory damages, punitive damages, damages for pain or suffering, and attorneys' fees, provided, however, that nothing in this agreement will limit or otherwise affect any right you may have to indemnification under the Company's Articles of Incorporation, By Laws or any insurance policy in effect as of the termination of your employment with the Company. In addition, if the Company complies with its obligations hereunder, you agree you will not be entitled to any benefit from any claim or proceeding filed by you or on your behalf with any agency or court which is within the scope of this agreement or which goes to the validity of any provision of this agreement. 4 (b) Effective as of the Termination Date, the releases provided for in Paragraph 6(a) will, without further action, be automatically extended to cover all acts, failures to act and other events (other than any breach of this agreement by the Company) occurring between the date hereof and such date. (c) The releases under this Paragraph 6 are intended to cover all possible rights, obligations and liabilities, including any such rights, obligations or liabilities based upon, relating to or arising from any claim which goes to the validity of any provision of this agreement, other than a claim for any breach of this agreement. (d) You acknowledge that you have been given a period of at least 21 days to review and consider this agreement before signing it, and that you understand that you may use as much of the 21-day period as you wish prior to signing. 7. Covenant Not to Compete. In consideration for the Company's undertakings described in this agreement, you hereby covenant and agree that for a period of nine (9) months subsequent to the Termination Date (the "Non-Compete Period"), you shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); provided, however, that the foregoing shall not prevent you from (a) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if your services are restricted to employment in such other lines of business; or (b) acquiring the securities of or an 5 interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than one percent (1%) of any class or type of securities of, or interest in, such Business. The term "Competitive Business" shall mean and include any business or activity that sells to end users (whether commercial or consumer) by any direct response method or technique including but not limited to catalog mailings, outbound telemarketing and space advertising personal computers, software, accessories, peripherals and other related products regardless of where such Competitive Business is located. The businesses or activities included within this definition shall be those conducted by the Company at any time on or prior to the Termination Date. 8. Confidential Information. You acknowledge that the Company would be damaged if your knowledge with respect to the business of the Company was disclosed to or utilized by parties other than the Company. Accordingly, you covenant and agree that you will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by you and relates to such matters as budget and forecasts, customer mailing lists, data base management techniques, pricing and credit techniques, marketing techniques, research and development activities, sources of product, and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by 6 the Company or others, information required by law to be disclosed or information learned by you from third parties without restrictions on disclosure. 9. Assignment. This agreement is not assignable, except that the Company may assign it to any successor of substantially all of the Company's business or assets. This agreement will be binding upon, and inure to the benefit of, the parties and their successors and assigns. 10. Partial Invalidity. If any provision of this agreement is held to be invalid, void or unenforceable, the remaining provisions shall continue in full force without being impaired or invalidated in any way. 11. Governing Law. This agreement will be governed by the laws of the State of Connecticut, without giving effect to the conflict of laws principles thereof. 12. Entire Agreement. This agreement reflects the complete agreement between the parties with respect to the subject matter hereof, and there are no written or oral understandings, promises or agreements directly or indirectly related to this letter agreement or the subject matter hereof that are not incorporated herein. 13. Revocation Period. For a period of seven (7) calendar days following your execution of this agreement, you may revoke this agreement. This agreement will not become effective or enforceable to release any claims or rights which you may have under the Age Discrimination in Employment Act until this revocation period has expired. This agreement also will not become effective or enforceable with respect to any obligations that the Company may have hereunder until this revocation period has expired. You acknowledge and agree that if the Company satisfies any obligations hereunder that otherwise would have arisen during this revocation period as soon as practicable after the revocation period has expired, such action will constitute 7 timely satisfaction of such obligations hereunder. You also acknowledge and agree that the benefits to you of the covenants contained herein, including, but not limited to, payments hereunder, are provided to you in exchange for the promises in this agreement, are not normally available under Company policy or practice to employees whose employment is terminated and provide for the payments of amounts to which you would not otherwise be entitled. 8 14. Confidentiality and Intent to be Bound. The terms and conditions of this agreement are confidential and must not be disclosed to any person other than those who must perform tasks to effect the agreement. Notwithstanding the foregoing, the Company and you may disclose any term of this agreement to comply with applicable law. In addition, nothing contained herein shall be construed to prohibit either party from disclosing the terms and conditions of this agreement to its attorneys, accountants or bookkeepers or to any other person with whom a fiduciary relationship has been established. Both parties have read this agreement, have had the opportunity to consult with counsel, fully understand the agreement's terms and conditions, and enter this agreement freely, voluntarily and intending to be legally bound hereby. 15. Enforcement of Agreement; Liquidated Damages. You hereby acknowledge and agree that your obligations under Paragraph 7 are a material part of the consideration for this agreement and for the payments from the Company to you under Paragraph 2, that your failure to satisfy any of such obligations could cause irreparable harm to the Company and that the damages caused by such failure would be uncertain and difficult to measure. You further acknowledge and agree that the Company may seek injunctive relief to prevent your failure or further failure to satisfy any of such obligations, in addition to all other rights, remedies and claims that it may have under this agreement, at law or in equity. You also acknowledge and agree that, if you fail to satisfy any of your obligations under Paragraph 7, the Company will be entitled to receive as liquidated damages for such failure recovery of any amounts paid to you under this agreement after such failure, any amounts that you may have earned or received as a result of or in connection with such failure, and all costs and expenses, including fees and disbursements of counsel and other costs thereof, incurred by the Company in connection with the enforcement of such obligations. 16. No Waiver. No failure on the part of either party at any time to require the performance by the other party of any term 9 hereof shall be taken or held to be a waiver of such term or in any way affect such party's right to enforce such term, and no waiver on the part of either party of any term hereof shall be taken or held to be a waiver of any other term hereof or the breach thereof. 17. COBRA Benefits. You acknowledge that the Company will have no obligation to pay directly or reimburse you for any COBRA payments due subsequent to the Termination Date. If you agree to and accept the terms and conditions of this agreement, please sign both copies hereof in the space provided below, retain one copy for your records and return the other copy to the undersigned. Very truly yours, MICRO WAREHOUSE, INC. By: __________________________________ Name: Linwood A. Lacy, Jr. Title: President & Chief Executive Officer Agreed to and accepted on the date first above written: _________________________________ Eric Furman Date Signed: November __, 1996 10 SCHEDULE B-1 TO LETTER AGREEMENT WITH ERIC FURMAN DATED AS OF NOVEMBER 20, 1996 Stock options already granted to you and already vested which may be exercised pursuant to Paragraph 4 on or prior to December 31, 1997: 1. 1,250 options @ $9.00 granted 12/10/92 per agreement dated 1/30/93 (copy attached). 2. 2,250 options @ $9.78 granted 1/13/93 per agreement dated 1/30/93 (copy attached). 3. 1,200 options @ $11.38 granted 6/21/93 per agreement dated 8/2/93 (copy attached). 4. 5,000 options @ $31.00 granted 10/25/94 per agreement dated 1/10/95 (copy attached). 5. 3,399 options @ $30.125 granted 1/19/95 per agreement dated 2/10/95 (copy attached). 6. 1,250 options @ $44.50 granted 10/31/95 per agreement dated 11/6/95 (copy attached). Stock options already granted to you, not vested as of 11/20/96, which shall be deemed vested as of June 30, 1997 and available for exercise pursuant to Paragraph 4 on or prior to December 31, 1997: 1. 1,250 options @ $9.00 granted 12/10/92 per agreement dated 1/30/93. 2. 2,250 options @ $9.78 granted 1/13/93 per agreement dated 1/30/93. 3. 1,500 options @ $11.38 granted 6/21/93 per agreement dated 11 8/2/93. 4. 1,500 options @ $32.00 granted 1/19/96 per agreement dated 2/9/96 (copy attached). (continued on next page) 12 Schedule B-1 to Letter Agreement with Eric Furman Dated as of November 20, 1996 Page 2 Stock options deemed forfeited and of no further force and effect subject to Paragraph 4: 1. 1,800 options @ $11.38 granted 6/21/93 per agreement dated 8/2/93. 2. 5,000 options @ $31.00 granted 10/25/94 per agreement dated 1/10/95. 3. 3,750 options @ $44.50 granted 10/31/95 per agreement dated 11/6/95. 4. 1,500 options @ $32.00 granted 1/19/96 per agreement dated 2/9/96. 13 EX-10.38 5 AGREEMENT November 20, 1996 Mr. Steven Purcell 62 Fern Circle Trumbull, CT 06611 Dear Steve: This agreement will serve to confirm the terms and conditions under which we will be accepting your resignation as Vice President - Finance and Chief Financial Officer and Treasurer. 1. Resignations. Effective immediately, you are resigning as Vice President - Finance and Chief Financial Officer and Treasurer and any other officerships or directorships of Micro Warehouse, Inc. or any of its affiliates, sister companies or subsidiaries (hereinafter "the Company"). You are not resigning your employment with the Company, which shall continue, subject to the provisions of this agreement, until September 30, 1997 (hereinafter "the Termination Date"). 2. Employment Agreement. Your Employment Agreement dated as of January 1, 1995 is terminated. Through September 30, 1997 you shall be paid your current salary and receive all benefits provided by your Employment Agreement (except that there shall be no vacation benefits). All of the Company's employment policies will be applicable to you. You shall not be eligible to receive any 1996 or 1997 bonus notwithstanding the possibility that other comparably compensated employees might receive bonuses attributable to either of said years. 3. Duties. Your duties shall include support of any task force or related efforts in connection with the preparation of the Company's restated financial information and support of the Company's preparation and filing of its Form 10-K, Annual Report, Proxy and related materials and you shall report to Chip Lacy, President and Chief Executive Officer. You shall additionally perform such other duties as he shall require of you from time to time. It is not anticipated that you shall be required to perform these duties on any Micro Warehouse, Inc. premises; however, it may be necessary from time to time for you to meet with Micro Warehouse employees or advisors and you shall make yourself available to do so during normal business hours. 4. Stock Options. Schedule B-1 sets forth, inter alia, stock options already granted to you which may be exercised by you on or prior to December 31, 1997. Subsequent to November 20, 1996 you shall not be bound by the Company's trading window policies although you are still subject to the rules and regulations of the Securities and Exchange Commission or any state securities regulatory agencies. Schedule B-1 also sets forth all other stock options granted to you which as of the date of this agreement have not yet vested. We confirm that we will not forfeit these options and deem these options vested as of the date indicated on Schedule B-1 and that they may be exercised by you on or prior to December 31, 1997. Said Schedule B-1 also sets forth other stock options granted to you which are deemed forfeited and of no further force and effect. You will not be eligible to receive any further stock options or otherwise participate in any deferred compensation programs notwithstanding the possibility that the Company might provide the same participation to other comparably compensated employees. 5. Repayment of Incentive Compensation. You acknowledge that you have received incentive compensation attributable to the 1995 year in the gross amount of $490,000.00. You shall be required to repay to us the amount of $316,572.00 (representing the net amount paid to you after withholding of requisite taxes from the same) on or prior to December 31, 1996. Your failure to do so shall constitute a breach of your obligations under this agreement in which event we reserve all rights and remedies whether at law or equity arising from the same. Notwithstanding any other rights and/or remedies available to us in this instance, 2 the failure to make this repayment shall cause a forfeiture of your right to exercise certain stock options separately identified on Schedule B-1. 6. Indemnification. We confirm that the Indemnification Agreement between you and the Company dated as of January 25, 1994 is in full force and effect. 7. Release. (a) As consideration for the Company to enter into this agreement and as consideration for the covenants contained herein, subject to the immediately following sentence, you irrevocably and unconditionally release, remit, acquit and forever discharge the Company, its officers, directors, shareholders, agents, employees, representatives, attorneys, parents, divisions, subsidiaries, affiliates, related companies or entities, successors and assigns and the officers, executives, directors, shareholders, agents and employees of any and all of the Company's parents, divisions, subsidiaries, affiliates, related companies or entities, successors or entities (separately or collectively, the "Released Parties"), jointly and individually, from any and all claims, charges, complaints, expenses and causes of action of any nature or kind whatsoever, known or unknown, which you, your heirs, successors or assigns have or may have against the Released Parties based upon, related to or arising out of your employment with the Company through the date hereof, including, but not limited to, claims, charges, complaints, liabilities, losses, obligations, demands, damages, costs, expenses and causes of action relating to the terms, conditions, commencement, duration or termination of your employment, or claims of discrimination under any federal, state or local law, rule, regulation or common law, whether such claims are past or present, whether they arise from equity, common law or statute, and whether they arise from labor laws or discrimination laws, such as the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal Pay Act, as amended, the Americans with Disabilities Act, or any other federal, state or 3 local law, rule or regulation. This release is intended to cover all possible relief, including, but not limited to, reinstatement, wages, back pay, front pay, vacation pay, bonuses or incentive compensation, supplemental or other retirement benefits, perquisites, compensatory damages, punitive damages, damages for pain or suffering, and attorneys' fees, provided, however, that nothing in this agreement will limit or otherwise affect any right you may have to indemnification under the Company's Articles of Incorporation, By Laws or any insurance policy in effect as of the termination of your employment with the Company or pursuant to Article 6 hereof. In addition, if the Company complies with its obligations hereunder, you agree you will not be entitled to any benefit from any claim or proceeding filed by you or on your behalf with any agency or court which is within the scope of this agreement or which goes to the validity of any provision of this agreement. (b) Effective as of the Termination Date, the releases provided for in Paragraph 7(a) will, without further action, be automatically extended to cover all acts, failures to act and other events (other than any breach of this agreement by the Company) occurring between the date hereof and such date. (c) The releases under this Paragraph 7 are intended to cover all possible rights, obligations and liabilities, including any such rights, obligations or liabilities based upon, relating to or arising from any claim which goes to the validity of any provision of this agreement, other than a claim for any breach of this agreement. (d) You acknowledge that you have been given a period of at least 21 days to review and consider this agreement before signing it, and that you understand that you may use as much of the 21-day period as you wish prior to signing. 8. Covenant Not to Compete. In consideration for the Company's undertakings described in this agreement, you hereby 4 covenant and agree that through the Termination Date (the "Non-Compete Period"), you shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); provided, however, that the foregoing shall not prevent you from (a) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if your services are restricted to employment in such other lines of business; or (b) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than one percent (1%) of any class or type of securities of, or interest in, such Business. The term "Competitive Business" shall mean and include any business or activity that is substantially the same as, or related to any business or activity conducted by the Company, regardless of where such Competitive Business is located. 9. Confidential Information. You acknowledge that the Company would be damaged if your knowledge with respect to the business of the Company was disclosed to or utilized by parties other than the Company. Accordingly, you covenant and agree that you will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which 5 is currently known to or hereafter acquired by you and relates to such matters as budget and forecasts, customer mailing lists, data base management techniques, pricing and credit techniques, marketing techniques, research and development activities, sources of product, and other confidential or restricted information which 6 is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by you from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. 10. Covenant Not to Solicit. Unless you receive the prior written consent of the Company you hereby covenant and agree that, from the date hereof until the expiration on the Non-Compete Period, you shall not, for or on behalf of a Competitive Business, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent, creditor or otherwise, attempt to solicit or in any other way disturb or service any person, firm or corporation that has been a customer account of the Company at any time or times prior to the termination of the Period of Employment, whether or not you at any time had any direct or indirect account responsibility for, or contact with, such customer account. 11. Assignment. This agreement is not assignable, except that the Company may assign it to any successor of substantially all of the Company's business or assets. This agreement will be binding upon, and inure to the benefit of, the parties and their successors and assigns. 12. Partial Invalidity. If any provision of this agreement is held to be invalid, void or unenforceable, the remaining provisions shall continue in full force without being impaired or invalidated in any way. 13. Governing Law. This agreement will be governed by the laws of the State of Connecticut, without giving effect to the conflict of laws principles thereof. 14. Entire Agreement. This agreement reflects the complete agreement between the parties with respect to the subject matter hereof, and there are no written or oral understandings, promises 7 or agreements directly or indirectly related to this letter agreement or the subject matter hereof that are not incorporated herein. 15. Revocation Period. For a period of seven (7) calendar days following your execution of this agreement, you may revoke this agreement. This agreement will not become effective or enforceable to release any claims or rights which you may have under the Age Discrimination in Employment Act until this revocation period has expired. This agreement also will not become effective or enforceable with respect to any obligations that the Company may have hereunder until this revocation period has expired. You acknowledge and agree that if the Company satisfies any obligations hereunder that otherwise would have arisen during this revocation period as soon as practicable after the revocation period has expired, such action will constitute timely satisfaction of such obligations hereunder. You also acknowledge and agree that the benefits to you of the covenants contained herein, including, but not limited to, payments hereunder, are provided to you in exchange for the promises in this agreement, are not normally available under Company policy or practice to employees whose employment is terminated and provide for the payments of amounts to which you would not otherwise be entitled. 16. Confidentiality and Intent to be Bound. The terms and conditions of this agreement are confidential and must not be disclosed to any person other than those who must perform tasks to effect the agreement. Notwithstanding the foregoing, the Company and you may disclose any term of this agreement to comply with applicable law. In addition, nothing contained herein shall be construed to prohibit either party from disclosing the terms and conditions of this agreement to its attorneys, accountants or bookkeepers or to any other person with whom a fiduciary relationship has been established. Both parties have read this agreement, have had the opportunity to consult with counsel, fully understand the agreement's terms and conditions, and enter this agreement freely, voluntarily and intending to be legally bound 8 hereby. 17. Enforcement of Agreement; Liquidated Damages. You hereby acknowledge and agree that your obligations under Paragraphs 8, 9 and 10 are a material part of the consideration for this agreement and for the payments from the Company to you under Paragraph 2, that your failure to satisfy any of such obligations could cause irreparable harm to the Company and that the damages caused by such failure would be uncertain and difficult to measure. You further acknowledge and agree that the Company may seek injunctive relief to prevent your failure or further failure to satisfy any of such obligations, in addition to all other rights, remedies and claims that it may have under this agreement, at law or in equity. You also acknowledge and agree that, if you fail to satisfy any of your obligations under Paragraphs 8, 9 and 10, the Company will be entitled to receive as liquidated damages for such failure recovery of any amounts paid to you under this agreement after such failure, any amounts that you may have earned or received as a result of or in connection with such failure, and all costs and expenses, including fees and disbursements of counsel and other costs thereof, incurred by the Company in connection with the enforcement of such obligations. 18. No Waiver. No failure on the part of either party at any time to require the performance by the other party of any term hereof shall be taken or held to be a waiver of such term or in any way affect such party's right to enforce such term, and no waiver on the part of either party of any term hereof shall be taken or held to be a waiver of any other term hereof or the breach thereof. 19. COBRA Benefits. You acknowledge that the Company will have no obligation to pay directly or reimburse you for any COBRA payments due subsequent to the Termination Date. If you agree to and accept the terms and conditions of this agreement, please sign both copies hereof in the space provided 9 below, retain one copy for your records and return the other copy to the undersigned. Very truly yours, MICRO WAREHOUSE, INC. By: _________________________________ Name: Linwood A. Lacy, Jr. Title: President & Chief Executive Officer Agreed to and accepted on the date first above written: _________________________________ Steven Purcell Date Signed: December __, 1996 10 EX-10.39 6 AGREEMENT January 20, 1997 Mr. Melvin R. Seiler 2 East Meadow Road Wilton, CT 06897 Dear Mel: This agreement will serve to confirm the terms and conditions under which we will be accepting your resignation as Executive Vice President and Chief Operating Officer. 1. Resignations. Effective June 30, 1997 or such earlier date as shall be mutually agreed (hereinafter the "Termination Date") you will be resigning as Executive Vice President and Chief Operating Officer and member of the Board and any other officerships or directorships of Micro Warehouse, Inc. or any of its affiliates, sister companies or subsidiaries (hereinafter "the Company"). 2. Employment Agreement. Your Employment Agreement dated as of January 1, 1995 will be deemed terminated as of the Termination Date. You shall be eligible to receive any 1996 or, on a pro-rata basis through the Termination Date, any 1997 bonus available to you pursuant to your Employment Agreement or otherwise. Through the Termination Date you shall be paid your current salary and receive all benefits provided by your Employment Agreement. All of the Company's employment policies will be applicable to you. We acknowledge that you are an employee of Micro Warehouse, Inc. of Ohio and we shall continue through the Termination Date to reimburse you for the difference between the taxes withheld from your salary and the amount which would have been withheld had you been paid as an employee of Micro Warehouse, Inc. 3. Benefits. For a period of twelve (12) months subsequent to the Termination Date you shall continue to receive all benefits provided to you as of said date including but not limited to payment of the premiums attributable to the cost of your current life and disability insurance policies. Subsequent to the Termination Date you shall not be reimbursed for any Blue Cross/Blue Shield premiums currently being paid by the Company. 4. Duties. In addition to your regular duties as Executive Vice President and Chief Operating Officer you shall also assist in the transition arising out of the Company's hiring of any person to assume all or any portion of your responsibilities. You shall continue to report to Chip Lacy, President and Chief Executive Officer. 5. Stock Options. Schedule B-1 sets forth, inter alia, stock options already granted to you which may be exercised by you on or prior to December 31, 1998. Schedule B-1 also sets forth stock options granted to you which as of the date of this agreement have not yet vested. We confirm that we will not forfeit these options and deem these options vested as of the date indicated on Schedule B-1 and that they may be exercised by you on or prior to December 31, 1998. Said Schedule B-1 also sets forth other stock options granted to you which are deemed forfeited and of no further force and effect. You will not be eligible to receive any further stock options or otherwise participate in any deferred compensation programs notwithstanding the possibility that the Company might provide the same participation to other comparably compensated employees. 6. Repayment of Incentive Compensation. You acknowledge that you have received incentive compensation attributable to the 1995 year in the gross amount of $612,000.00. You shall be required to repay to us the amount of $398,535.68 (representing the net amount paid to you after withholding of requisite taxes from the same) on or prior to December 31, 1996. It is agreed that you shall be permitted to repay the same by delivering to the Company a full recourse promissory note in the form of Exhibit A. 7. Indemnification. We confirm that the Indemnification 2 Agreement between you and the Company dated as of January 25, 1994 is in full force and effect. 8. Release. (a) As consideration for the Company to enter into this agreement and as consideration for the covenants contained herein, subject to the immediately following sentence, you irrevocably and unconditionally release, remit, acquit and forever discharge the Company, its officers, directors, shareholders, agents, employees, representatives, attorneys, parents, divisions, subsidiaries, affiliates, related companies or entities, successors and assigns and the officers, executives, directors, shareholders, agents and employees of any and all of the Company's parents, divisions, subsidiaries, affiliates, related companies or entities, successors or entities (separately or collectively, the "Released Parties"), jointly and individually, from any and all claims, charges, complaints, expenses and causes of action of any nature or kind whatsoever, known or unknown, which you, your heirs, successors or assigns have or may have against the Released Parties based upon, related to or arising out of your employment with the Company through the date hereof, including, but not limited to, claims, charges, complaints, liabilities, losses, obligations, demands, damages, costs, expenses and causes of action relating to the terms, conditions, commencement, duration or termination of your employment, or claims of discrimination under any federal, state or local law, rule, regulation or common law, whether such claims are past or present, whether they arise from equity, common law or statute, and whether they arise from labor laws or discrimination laws, such as the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal Pay Act, as amended, the Americans with Disabilities Act, or any other federal, state or local law, rule or regulation. This release is intended to cover all possible relief, including, but not limited to, reinstatement, wages, back pay, front pay, vacation pay, bonuses or incentive compensation, supplemental or other retirement benefits, perquisites, compensatory damages, punitive damages, damages for 3 pain or suffering, and attorneys' fees, provided, however, that nothing in this agreement will limit or otherwise affect any right you may have to indemnification under the Company's Articles of Incorporation, By Laws or any insurance policy in effect as of the termination of your employment with the Company or pursuant to Article 6 hereof. In addition, if the Company complies with its obligations hereunder, you agree you will not be entitled to any benefit from any claim or proceeding filed by you or on your behalf with any agency or court which is within the scope of this agreement or which goes to the validity of any provision of this agreement. (b) Effective as of the Termination Date, the releases provided for in Paragraph 8(a) will, without further action, be automatically extended to the Termination Date (except the same will not cover any breach of this agreement by the Company). (c) The releases under this Paragraph 8 are intended to cover all possible rights, obligations and liabilities, including any such rights, obligations or liabilities based upon, relating to or arising from any claim which goes to the validity of any provision of this agreement, other than a claim for any breach of this agreement. (d) You acknowledge that you have been given a period of at least 21 days to review and consider this agreement before signing it, and that you understand that you may use as much of the 21-day period as you wish prior to signing. 9. Covenant Not to Compete. (a) In consideration for the Company's undertakings described in this agreement and the payments set forth in sub-paragraph (b) hereinbelow, you hereby covenant and agree that for a period of eighteen (18) months subsequent to the Termination Date (the "Non-Compete Period"), you shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become 4 associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); provided, however, that the foregoing shall not prevent you from (i) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if your services are restricted to employment in such other lines of business; or (ii) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than one percent (1%) of any class or type of securities of, or interest in, such Business. The term "Competitive Business" shall mean and include any business or activity that is substantially the same as, or related to any business or activity conducted by the Company, regardless of where such Competitive Business is located. (b) In partial consideration for the Covenant not to Compete in sub-paragraph 9(a) hereinabove the Company shall pay you the gross amount of Twenty Thousand Dollars ($20,000) per month for eighteen (18) months (less any taxes required to be withheld), which amount shall be paid on or about the fifteenth (15th) of each month. 10. Confidential Information. You acknowledge that the Company would be damaged if your knowledge with respect to the business of the Company was disclosed to or utilized by parties other than the Company. Accordingly, you covenant and agree that you will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by you and relates to such matters as budget and forecasts, customer mailing lists, data base management techniques, pricing and credit techniques, 5 marketing techniques, research and development activities, sources of product, and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by you from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. 11. Covenant Not to Solicit. Unless you receive the prior written consent of the Company you hereby covenant and agree that, from the date hereof until the expiration on the Non-Compete Period, you shall not, for or on behalf of a Competitive Business, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent, creditor or otherwise, attempt to solicit or in any other way disturb or service any person, firm or corporation that has been a customer account of the Company at any time or times prior to the termination of the Period of Employment, whether or not you at any time had any direct or indirect account responsibility for, or contact with, such customer account. 12. Assignment. This agreement is not assignable, except that the Company may assign it to any successor of substantially all of the Company's business or assets. This agreement will be binding upon, and inure to the benefit of, the parties and their successors and assigns. 13. Partial Invalidity. If any provision of this agreement is held to be invalid, void or unenforceable, the remaining provisions shall continue in full force without being impaired or invalidated in any way. 14. Governing Law. This agreement will be governed by the laws of the State of Connecticut, without giving effect to the conflict of laws principles thereof. 15. Entire Agreement. This agreement reflects the complete 6 agreement between the parties with respect to the subject matter hereof, and there are no written or oral understandings, promises or agreements directly or indirectly related to this letter agreement or the subject matter hereof that are not incorporated herein. 16. Revocation Period. For a period of seven (7) calendar days following your execution of this agreement, you may revoke this agreement. This agreement will not become effective or enforceable to release any claims or rights which you may have under the Age Discrimination in Employment Act until this revocation period has expired. This agreement also will not become effective or enforceable with respect to any obligations that the Company may have hereunder until this revocation period has expired. You acknowledge and agree that if the Company satisfies any obligations hereunder that otherwise would have arisen during this revocation period as soon as practicable after the revocation period has expired, such action will constitute timely satisfaction of such obligations hereunder. You also acknowledge and agree that the benefits to you of the covenants contained herein, including, but not limited to, payments hereunder, are provided to you in exchange for the promises in this agreement, are not normally available under Company policy or practice to employees whose employment is terminated and provide for the payments of amounts to which you would not otherwise be entitled. 17. Confidentiality and Intent to be Bound. The terms and conditions of this agreement are confidential and must not be disclosed to any person other than those who must perform tasks to effect the agreement. Notwithstanding the foregoing, the Company and you may disclose any term of this agreement to comply with applicable law. In addition, nothing contained herein shall be construed to prohibit either party from disclosing the terms and conditions of this agreement to its attorneys, accountants or bookkeepers or to any other person with whom a fiduciary relationship has been established. Both parties have read this agreement, have had the opportunity to consult with counsel, fully 7 understand the agreement's terms and conditions, and enter this agreement freely, voluntarily and intending to be legally bound hereby. 18. Enforcement of Agreement; Liquidated Damages. You hereby acknowledge and agree that your obligations under Paragraphs 9, 10 and 11 are a material part of the consideration for this agreement and for the payments from the Company to you under Paragraph 9(b), that your failure to satisfy any of such obligations could cause irreparable harm to the Company and that the damages caused by such failure would be uncertain and difficult to measure. You further acknowledge and agree that the Company may seek injunctive relief to prevent your failure or further failure to satisfy any of such obligations, in addition to all other rights, remedies and claims that it may have under this agreement, at law or in equity. You also acknowledge and agree that, if you fail to satisfy any of your obligations under Paragraphs 9, 10 and 11, the Company will be entitled to receive as liquidated damages for such failure recovery of any amounts paid to you under this agreement after such failure, any amounts that you may have earned or received as a result of or in connection with such failure, and all costs and expenses, including fees and disbursements of counsel and other costs thereof, incurred by the Company in connection with the enforcement of such obligations. 18. No Waiver. No failure on the part of either party at any time to require the performance by the other party of any term hereof shall be taken or held to be a waiver of such term or in any way affect such party's right to enforce such term, and no waiver on the part of either party of any term hereof shall be taken or held to be a waiver of any other term hereof or the breach thereof. 19. COBRA Benefits. You acknowledge that the Company will have no obligation to pay directly or reimburse you for any COBRA payments due after 12 months subsequent to the Termination Date. 8 If you agree to and accept the terms and conditions of this agreement, please sign both copies hereof in the space provided below, retain one copy for your records and return the other copy to the undersigned. Very truly yours, MICRO WAREHOUSE, INC. By: ________________________________ Name: Linwood A. Lacy, Jr. Title: President & Chief Executive Officer Agreed to and accepted on the date first above written: ______________________________ Melvin R. Seiler Date Signed: January 20, 1997 9 SCHEDULE B-1 TO LETTER AGREEMENT WITH MELVIN R. SEILER DATED AS OF JANUARY 20, 1997 Stock options already granted to you and already vested which may be exercised pursuant to Paragraph 5 on or prior to December 31, 1998: 1. 18,000 options @ $11.38 granted on 6/21/93 per agreement dated November 12, 1993 (copy attached). 2. 10,729 options @ $30.125 granted on 1/19/95 per agreement dated February 6, 1995 (copy attached). Stock options already granted to you, not vested as of 12/13/96, which shall be deemed vested as of the dates indicated and available for exercise pursuant to Paragraph 5 on or prior to December 31, 1998: 1. 17,500 options @ $32.00 granted 1/19/96 per agreement dated February 8, 1996 vesting January 19, 1997 (copy attached). 2. 10,000 options @ $11.38 granted on 6/21/93 per agreement dated November 12, 1993 vesting June 21, 1997. Stock Options deemed forfeited pursuant to Paragraph 5: 1. 17,500 options @ $32.000 granted 1/19/96 per agreement dated February 8, 1996 vesting January 19, 1998. 2. 12,000 options @ $11.38 granted on 6/21/93 per agreement dated November 12, 1993 vesting June 21, 1998. 10 EX-11 7 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 Micro Warehouse, Inc. and Subsidiaries Statement Re Computation of Per Share Earnings (in thousands, except per share data) PRIMARY ----------------------------------- YEAR ENDED ----------------------------------- December December December 31, 1996 31, 1995 31, 1994 -------- -------- -------- Net Income Income before extraordinary charge $16,882 $35,244 $24,556 Extraordinary loss on early extinguishment of debt 1,584 -- -- ------- ------- ------- Net income $15,298 $35,244 $24,556 ======= ======= ======= Shares Weighted average common shares outstanding 34,310 32,579 29,847 Common equivalent shares 483 1,026 713 ------- ------- ------- Weighted average common and common equivalent shares outstanding 34,793 33,605 30,560 ======= ======= ======= Per Share Income before extraordinary charge $ 0.49 $ 1.05 $ 0.80 Extraordinary loss on early extinguishment of debt 0.05 -- -- ------- ------- ------- Net income $ 0.44 $ 1.05 $ 0.80 ======= ======= ======= FULLY DILUTED ----------------------------------- YEAR ENDED ----------------------------------- December December December 31, 1996 31, 1995 31, 1994 -------- -------- -------- Net Income Income before extraordinary charge $16,882 $35,244 $24,556 Extraordinary loss on early extinguishment of debt 1,584 -- -- ------- ------- ------- Net income $15,298 $35,244 $24,556 ======= ======= ======= Shares Weighted average common shares outstanding 34,310 32,579 29,847 Common equivalent shares 481 1,053 745 ------- ------- ------- Weighted average common and common equivalent shares outstanding 34,791 33,632 30,592 ======= ======= ======= Per share Income before extraordinary charge $ 0.49 $ 1.05 $ 0.80 Extraordinary loss on early extinguishment of debt $ 0.05 -- -- ------- ------- ------- Net income $ 0.44 $ 1.05 $ 0.80 ======= ======= ======= EX-13.1 8 ANNUAL REPORT Business Description Micro Warehouse, Inc. Micro Warehouse is a specialty catalog retailer and direct marketer of brand name personal computers, computer software, accessories, peripheral and networking products to commercial and consumer customers. The Company markets its products through frequent mailings of its distinctive, colorful catalogs, Internet catalog sites on the World Wide Web and dedicated telemarketing account managers who focus on corporate, education and government accounts. Through its three core catalogs - MicroWarehouse, MacWarehouse and Data Comm Warehouse - various specialty catalogs, and its Internet sites, the Company offers a broad assortment of more than 25,000 computer products at competitive prices. With colorful illustrations, concise product descriptions and relevant technical information, each catalog title focuses on a specific segment of the computer market. Micro Warehouse employs approximately 3,500 people worldwide and publishes catalogs in 13 countries. The Company's common stock is traded on The Nasdaq Stock Market under the symbol "MWHS." Mission To be the leading worldwide direct marketing reseller of micro computer products with industry leading skills in database marketing, business and institution selling, efficient logistics, and in providing excellent customer service. Micro Warehouse will be guided by an unyielding commitment to providing employees with growth and development opportunities. Contents This is Micro Warehouse (foldout) Financial Highlights page 1 Letter to Shareholders page 2 Expertise in Database Management page 6 Strong Commercial Sales Focus page 8 Broad Product Assortment page 10 Developing Systems and Logistics page 12 International Operations page 14 Micro Warehouse Operating Results page 16 Selected Financial Information page 17 Corporate Information page 37 Officers and Directors page 37 [Inside Front Cover depicting products, personnel, catalogs and related captions] Financial Highlights Micro Warehouse, Inc.
% Increase For the years ended December 31 (Decrease) (in thousands, except per share data) 1996 1995(1) 1996 over 1995 1994(1) - --------------------------------------------------------------------------------------------------- Income Statement Data: Net sales $1,916,244 $1,684,627 13.7% $1,130,796 Restructuring costs, merger costs, and goodwill write-off 32,161 -- -- -- Income from operations before interest, income taxes and extraordinary charge 33,093 57,715 (42.7%) 41,063 Income before income taxes and extraordinary charge 36,601 57,903 (36.8%) 40,877 Extraordinary charge, net of taxes 1,584 -- -- -- Net income $ 15,298 $ 35,244 (56.6%) $ 24,556 Net income per share $ 0.44 $ 1.05 (58.1%) $ 0.80 Weighted average number of shares outstanding 34,793 33,605 3.5% 30,560 Balance Sheet Data: Total assets $ 607,842 $ 554,546 9.6% $ 411,876 Long-term obligations excluding current portion 376 20,458 (98.2%) 1,497 Stockholders' equity 384,168 364,669 5.3% 270,862 - --------------------------------------------------------------------------------------------------- Supplemental Data Net income before unusual charges (2) $ 40,913 $ 35,244 16.1% $ 24,556 Income per share before unusual charges(2) $ 1.18 $ 1.05 12.4% $ 0.80
(1) Restated to reflect the acquisition of Inmac Corp. as a pooling of interests. (See note 2 to Notes to Consolidated Financial Statements). (2) Amounts exclude the effect of unusual charges comprised of restructuring costs, merger costs, goodwill write-off and extraordinary charge. - -------------------------------------------------------------------------------- Restatement of Financial Statements In late September 1996, an internal review led to the discovery of certain errors in Micro Warehouse's accounting records. A Task Force comprised of Company representatives and members of its outside accounting firm, KPMG Peat Marwick LLP, was immediately organized to determine the extent, causes and implications of these errors and appropriate corrective action. Simultaneously, the Audit Committee of the Board of Directors engaged outside counsel and independent auditing advisors to examine these matters. Over the course of the next several months, the Task Force and Audit Committee examined these issues in detail. Ultimately, the Company determined that the errors primarily impacted accrued inventory liabilities and trade payables since 1992. Inaccuracies in these accounts totaled approximately $47.3 million before tax. The 1992 through 1995 restated financial statements reflect aggregate net pre-tax adjustments of $41.9 million, net of the recovery of $2.2 million of incentive bonus payments for 1995 made to certain senior executives. The balance of $3.2 million in pre-tax adjustments were made to the Company's first quarter 1996 results and were reflected in its Form 10-Q for the third quarter ending September 30, 1996. On February 10, 1997, the Company filed Forms 10-K/A with the Securities and Exchange Commission (SEC) reflecting restated financial statements for the years and quarters 1992, 1993, 1994 and 1995. Additionally, the Board of Directors is taking steps to strengthen the Company's internal controls. As a consequence of the disclosure of these accounting errors, the following lawsuits and administrative proceeding have been initiated. During October, November and December 1996, the Company and certain of its directors and officers were named as defendants in 11 lawsuits brought in the United States District Court for the District of Connecticut by parties which seek to represent classes of stockholders who purchased shares of the Company's common stock during different periods between January 1994 and September 1996, or exchanged shares in a merger transaction completed in January 1996. These lawsuits advance claims under various provisions of the federal securities laws and the common law and assert that various misleading disclosures were made concerning the Company's financial performance and position and other related circumstances during the periods described. The lawsuits followed and are predicated upon the Company's announcements in September and October 1996 that it intended to restate certain prior financial statements. These matters have been consolidated into a single proceeding. In November 1996, a shareholder derivative action was filed in the United States District Court for the District of Connecticut, purportedly on behalf of, and for recovery by, the Company, which is named as a nominal defendant. The complaint charges certain directors and officers with violation of fiduciary duties in selling Company stock while in possession of non-public information and in causing or permitting the exposure of the Company to damage, such as through the class litigation described above, attributable to the same circumstances that are the subject of the class litigation. The Company and the individual defendants have filed a Motion to Dismiss the Complaint which is pending before the Court. In December 1996 and January 1997, the Company and certain of its directors and officers were named as defendants in two largely identical lawsuits brought in the Superior Court of Santa Clara County, San Jose, California. These lawsuits have now been consolidated. The lawsuits arise out of the stock merger between the Company and Inmac Corp. on January 25, 1996. The claims are generally similar to those being asserted in the consolidated class action described above. All of the above referenced lawsuits are at a preliminary stage. The plaintiffs in these lawsuits seek unspecified compensatory damages, other relief, legal fees and litigation costs. The Company is unable to predict the outcome or the potential financial impact of this litigation, and accordingly, has made no provision therefor in the consolidated financial statements. Finally, the SEC has commenced a formal investigation into the events underlying the restatement. The Company has been cooperating with this investigation and will continue to do so. The Company has assembled a group of experienced outside advisors to work with the Company's Executive Committee and Board to manage and defend these claims. We are hopeful that, notwithstanding the complexities of these issues, they will be resolved efficiently and in the best interests of the Company, all of its shareholders, customers and employees. - -------------------------------------------------------------------------------- CAPITALIZING ON OUR FIVE STRENGTHS 1 Letter To Shareholders Nineteen ninety-six has been a year of enormous challenge and change for Micro Warehouse. We saw continued robust growth in our IBM PC-compatible business, but the weakness of Apple Computer's Macintosh business significantly impacted us throughout the year. During the first nine months of 1996, much of the Company's operational energy was devoted to the merger with Inmac, a leading international direct-response marketer of personal computer and networking products. In late September, we announced that we had discovered financial errors that have required us to restate our financial reports since 1992. These errors and the actions the Company is taking to address them are described on page one. In October, we welcomed our new President and Chief Executive Officer, Chip Lacy. Chip brings a wealth of talent and experience, including building and running the largest and most successful micro computer products distributor in the world. His expertise will be invaluable in bringing us to the next level of accomplishment. [Photograph] Peter Godfrey Chairman of the Board Linwood A. "Chip" Lacy, Jr. President and Chief Executive Officer During the year, we distributed 123 million catalogs to customers and prospective customers worldwide. We began to realize the benefits from the development of our Micro Warehouse MicroTrax Customer Database System. We extended our range of personal computer products that now includes more than 25,000 SKUs and expanded our commercial sales business which now accounts for approximately two-thirds of our total domestic sales. With the acquisition of Inmac, our international net sales now represent approximately one-third of our global net sales. 2 CAPITALIZING ON OUR FIVE STRENGTHS We continued our efforts to diversify our customer base and reduce our dependence on users of the Macintosh platform. In the fourth quarter of the year, sales of Macintosh products worldwide declined to 45% of total sales. Key Acquisitions Strengthen IBM PC-Compatible Business Acquisitions played an important part in our diversification strategy. In January, we completed the acquisition of Inmac Corp., a leading international direct-response marketer of personal computer products with 73% of its fiscal 1995 sales in Europe. Inmac's product assortment includes a wide range of personal computer and networking products that Micro Warehouse did not formerly offer. We spent much of 1996 merging the Micro Warehouse and Inmac businesses, closing facilities and eliminating staff in every country in which the companies operate together. For expenses associated with the merger and restructuring, we took a one-time charge of $26.2 million. The Inmac acquisition has greatly strengthened our operations in Europe, particularly in the datacomm market. Inmac also has reduced our dependence on our Macintosh business in Europe. In October, we completed the acquisition of the business of USA Flex, based in Bloomingdale, Illinois. This company has been successful in acquiring customers and building its business from advertisements in U.S. computer publications, particularly Computer Shopper. The USA Flex acquisition should strengthen our IBM PC-compatible business in the United States. In September, we acquired the Helsinki, Finland-based firm, Business Forum and a related company with the object of increasing our IBM PC-compatible business to commercial accounts in the Finnish market. - -------------------------------------------------------------------------------- Chip Lacy Hired as President and CEO Linwood A. "Chip" Lacy, Jr. joined Micro Warehouse in October 1996 as President, Chief Executive Officer and member of the Board of Directors. From 1985 to May 1996, Mr. Lacy was CEO of Ingram Micro and its predecessor company Micro D, the leading distributor of micro computer products. From 1993 to 1996, Mr. Lacy, served as President, and for a part of that time, as CEO of Ingram Industries, Ingram Micro's parent company. Prior to his service at Ingram Micro, Mr. Lacy spent nearly ten years at Best Products, a catalog showroom retailer, with his last duties as Senior Vice President of Marketing. Mr. Lacy brings to the Company 26 years of experience and skills in the retail, catalog and computer industries which make him uniquely qualified to lead the Company into the 21st Century. - -------------------------------------------------------------------------------- CAPITALIZING ON OUR FIVE STRENGTHS 3 [The following table was represented by a bar graph in the printed material.] Net Sales, Worldwide (in millions) 94 95 96 ---- ---- ---- $1,131 $1,685 $1,916 Consolidated worldwide sales grew 14% in 1996 to $1,916 million. [The following table was represented by a bar graph in the printed material.] Net Income Per Share 94 95 96 96(1) ---- ---- ---- ---- $0.80 $1.05 $0.44 $1.18 (1) 1996 net income per share was $0.44. Excluding the effect of restructuring costs, merger costs and extraordinary expenses, net income per share reflects growth over 1995 of 12% to $1.18. Shift in Our Source of Revenue Our core domestic IBM PC-compatible business (excluding Inmac) grew by more than 45% during 1996. Particularly significant in this growth were the sales of notebook computers and the continued growth of our Data Comm Warehouse business. The uncertainties of the Apple Macintosh marketplace had a significant bearing on the Company throughout 1996. In the first quarter of 1996, our domestic Mac business grew 50% over the previous year. By the final quarter we saw a 13% decline in business over the previous year. Reflecting the uncertainty of the Mac market, in the June quarter we took a one-time charge of $6 million to write off the value of the goodwill held on our books for those overseas subsidiaries that serviced the Mac market only. We have subsequently closed our "Mac only" operations in Switzerland and Belgium. The future of the Macintosh business continues to be uncertain in 1997. Internet Becomes Important Sales Tool In 1996, the Internet continued to grow in importance as a means of offering our product assortment, communicating efficiently with our customers and building our customer base. We continued to develop our general Internet catalog and catalogs for specific corporate customers with unique corporate pricing and commercial capabilities. We believe that the various Internet initiatives that we plan to introduce in 1997 will further enhance our business in the United States and abroad. - -------------------------------------------------------------------------------- 10 Years of Growth 1987 Micro Warehouse, Inc. commences operations as a direct marketer of computer software and peripherals for users of Apple Macintosh and IBM PC-compatible personal computers. Direct response advertisements first appear in the June issue of MacUser magazine. 1988 The first edition of the Mac Warehouse catalog of products for Macintosh users is launched in January. The picture of telemarketing supervisor Kerry appears on the front cover and is ultimately adopted as the Company trademark. First advertisement for Micro Warehouse IBM PC-compatible products appears in October. 1989 The dedicated telemarketing Account Manager program commences in April. First Micro Warehouse "Electronic Mall" store is established on CompuServe Information Services in May. Midnight Express Service commences in October- enables customers to place orders until 12:00 A.M. (EST) for overnight delivery. 1990 First Micro Warehouse catalog for IBM PC-compatible products ships in January. FaxFacts Interactive fax information service is introduced in April. Own brand is established in June with introduction of Power User hard drives and modems. 1991 Computer system conversion to current S.G.A. system is completed in January. "Type on Call" Center for "over the phone" unlocking of Adobe "type" software from a CD-ROM introduced in March. Full service direct marketing operations commence in the U.K. in spring. - -------------------------------------------------------------------------------- 4 CAPITALIZING ON OUR FIVE STRENGTHS [The following table was represented by a bar graph in the printed material.] Income Before Taxes, Worldwide (in millions) 94 95 96 96(1) ---- ---- ---- ---- $40.9 $57.9 $36.6 $68.8 (1) Net income before income taxes, restructuring costs, merger costs and extraordinary expense grew 19% to $68.8 million. [The following table was represented by a bar graph in the printed material.] Stockholders' Equity (in millions) 94 95 96 ---- ---- ---- $271 $365 $384 Stockholders' equity grew $19 million in 1996 to $384 million. Employees Are Paramount to Long-Term Success We are most grateful for the effort and dedication of the Micro Warehouse employees worldwide. We welcome for the first time our many new Inmac, USA Flex and Business Forum partners. At this important juncture in the history of the Company, we have introduced a broad-based stock option program as incentive for our employees. Our goal is to focus the efforts of every employee on building the success of Micro Warehouse and the value of the Company to its shareholders. We also have introduced programs to drive accountability down to every level within the Company and we are increasing our commitment to employee training to achieve our goals. There have been a number of recent changes in our executive staff. Mel Seiler, Executive Vice President and Chief Operating Officer, will be leaving the Company in the summer. Mel has been instrumental in guiding the day-to-day operations of the Company over the last nine years. Many fundamental steps forward in our business have come from Mel's leadership. We will miss his significant contributions and want to thank him for his deep commitment to the Company and its employees. In February, the Company announced that two key senior management positions had been filled. Kris Rogers was appointed Executive Vice President and General Manager of US Operations and Wayne Garten was appointed Senior Vice President and Chief Financial Officer. Kris has a diverse background in Sales, Management Information Systems, Product Marketing and Operations. Kris comes to the Company from Merisel, Inc., a leading distributor of computer products, where she held several key positions and was a member of the Office of the President. Her last position at Merisel was Senior Vice President of Product and Inventory. Wayne brings a unique blend of strong finance and accounting skills plus an in-depth understanding of the direct response business. Wayne previously held the position of Executive Vice President and Chief Financial Officer of Hanover Direct, Inc. This has been a year of challenge and change for the Company. We would like to thank our many shareholders for their continued support during a difficult period. Nineteen ninety-seven is the tenth anniversary of Micro Warehouse and we are excited about its future. We believe the critical building blocks for the future are being set into place. Sincerely, /s/ Peter Godfrey Peter Godfrey Chairman of the Board /s/ Linwood A. Lacy, Jr. Linwood A. Lacy, Jr. President and Chief Executive Officer March 28, 1997 - -------------------------------------------------------------------------------- 1992 International operations are extended to France and Germany. Upgrade Warehouse is launched for easy availability of upgrade software. Micro Warehouse introduces biodegradable packaging material in March. The Company completes an initial public offering in December. 1993 The Data Comm Warehouse catalog of networking products is launched in February. The distribution center is moved from Lakewood, New Jersey to Wilmington, Ohio, adjacent to the Airborne Express hub facility. International operations are commenced in Scandinavia in December. 1994 IBM authorizes Micro Warehouse to sell selected CPUs. The Company's product assortment begins significant expansion to include a broad range of major branded CPU models. International operations are started or acquired in Australia, Canada, the Netherlands, Japan and Mexico. 1995 Worldwide sales (excluding Inmac) exceed $1 billion for the first time. The Company launches its first Internet site at http://www.warehouse.com in July. Governor Christine Todd Whitman opens new 82,000 square foot telemarketing facility in Gibbsboro, New Jersey. 1996 The Company acquires Inmac Corp., a leading international direct response marketer of computer products, in January. In September, the Company announces discovery of accounting errors and forms Task Force to investigate. Chip Lacy joins as President and Chief Executive Officer in October. USA Flex is acquired in November. CAPITALIZING ON OUR FIVE STRENGTHS 5 1. Expertise in Database Management and Direct Response Marketing Mailing catalogs with pinpoint accuracy is a critical component of Micro Warehouse's business. In 1996, we distributed 123 million catalogs to our customers and potential new customers worldwide. During the year, we began to realize the benefits of a new customer transactional database system, MicroTrax. The Micro Warehouse MicroTrax Customer Database System provides the capability to project customer value by predicting future performance from customer type and initial purchasing activity. We can then focus our catalog promotion plans on those customers most likely to make repeat purchases. Initially developed in the United States, MicroTrax is being extended to our operations in Europe in 1997. MicroTrax enables us to store and analyze the complete purchasing history of more than two million active customers - what they buy, how much they spend and how often they purchase. Individual commercial customer performance at the department level can be combined for improved understanding of each account. Business data overlays are applied to enhance analysis and identify high-potential markets. Product trends are also examined, including attachment rates and product category trends by customer. Immediate access to the information allows us to analyze and rank customers by wide ranging attributes such as product purchasing history, average order size, customer type and even initial purchasing methods. Hundreds of attributes can be used to support traditional regression modeling. The desktop application allows quick turnaround time for most queries, providing timely data for making fast but reliable marketing decisions. In 1996, the Internet began to significantly affect our direct response marketing strategy, both as a means of extending our customer base and improving our ability to communicate. Micro Warehouse is gathering Internet addresses from both our telephone customers as well as visitors to our Internet web sites. As we develop these contacts and automate our Internet communications technology, we aim to significantly improve customer service and our ability to market to these customers. Our main Internet web site can be found at http://www.warehouse.com. Our overall customer mailing and communications strategy is continuing to benefit from advances in technology. [The following table was represented by a bar graph in the printed material.] Active Customers (in millions) 94 95 96 ---- ---- ---- 1.8 2.1 2.3 The number of active customers grew to 2.3 million in 1996, up 10% over 1995. [The following table was represented by a bar graph in the printed material.] Catalogs Distributed (in millions) 94 95 96 ---- ---- ---- 87 103 123 The total number of catalogs distributed in 1996 was 123 million, up 19% over the prior year. 6 CAPITALIZING ON OUR FIVE STRENGTHS "Our expertise in database management allows us to target our customers and prospective customers with pinpoint accuracy." Geoffrey Boytos, Vice President Database Marketing [Photograph] [Photograph] [Photograph] [Photograph] Catalogs Information Commercial Target Systems Sales Forces Customers Micro Managing Corporate Business- Warehouse 2.3 million customers To-Business and 25,000 SKUs Education Micro Major Systems MicroTrax Government Accounts Warehouse Customer Database Key Mac System Accounts Warehouse Inbound State Mac Commercial Government Systems Sales Warehouse Local Inbound Government Inmac Consumer Sales Higher Data Comm Education Warehouse SGA Sales K-12 Work Station System Education Express USA Flex Micro Warehouse employs catalogs and print advertising to generate puchases from existing and prospective customers. High potential commercial customers are identified by inbound sales personnel and assigned to the commercial sales force for development. 2. Strong Commercial Sales Focus Micro Warehouse services commercial and consumer customers, but the focus of our business has moved progressively towards the commercial segments. Today, domestic commercial customers represent one-third of our total domestic customer base, but account for over two-thirds of our total domestic sales. The commercial segment is divided into Government (Federal, State and Local), Education (K-12 and Higher Education) and the various segments of Corporate Accounts. These are Key Accounts (the D&B 1-1,000), Major Accounts (the D&B 1,001-10,000) and smaller businesses, referred to as the "Business-to-Business" segment. The Company's unique combination of catalog marketing and dedicated telemarketing Account Managers is particularly effective at servicing the small and medium sized business community which cannot be efficiently reached through in-person calls. In all of these segments, the key sales interface to the customer is the dedicated telemarketing Account Manager who maintains the business relationship with the customer. At year-end, Micro Warehouse had 240 such Account Managers in the United States. In Europe and the rest of the world there were 80 Account Managers. The Company intends to expand the number of dedicated Account Managers in 1997. The Company's catalog mailing program and print advertisements are designed to encourage commercial customers to call. Then, a combination of Account Managers and targeted, repeat mailings seeks to expand the relationship with each commercial customer. The commercial customer has numerous competitive purchasing choices. In many cases, responding to a printed catalog or an advertisement is not the primary purchasing mechanism. The customer may have selected the product that he or she wants from many sources and then called the reseller to check for availability and price. Micro Warehouse is instituting a number of systems and processes to enhance the management of such customers. The product assortment is being enlarged to encourage "one-stop" shopping; and, a more business oriented, quarterly commercial catalog, "The Computer Products Source Book," has been introduced. 8 CAPITALIZING ON OUR FIVE STRENGTHS "Our strength in the commercial marketplace is built on our team of dedicated Account Managers." Mike Skolozdra, Group Sales Director [Photograph] CAPITALIZING ON OUR FIVE STRENGTHS 9 3. Broad Product Assortment Micro Warehouse's goal is to be the "one-stop shop" for micro computer products for the commercial and consumer markets. Through our various catalog brands and Internet web sites, we provide up-to-date product information and pricing for over 25,000 items. In 1996, we continued to broaden our product range to encompass an expanding variety of technical products. The product assortment management process has multiple phases at Micro Warehouse. The Product Evaluation Teams for the various product categories constantly monitor the market for new products from new and existing vendors. Products selected can be placed immediately into the next catalog cycle and onto the web sites. Once added to the assortment, the purchasing staff utilizes the purchasing tracking and planning system to carefully track product stock levels. Periodic marketing reviews examine all category sales. As product areas decline in importance, the amount of catalog exposure is reduced in favor of "hotter" new products and the inventory levels and number of SKUs are adjusted downward. The Company has made several acquisitions in the past few years which have broadened its product assortment. The Inmac acquisition provided significant expansion in specialty computer products such as custom wiring, peripheral sharing products, printer supplies and accessories and a range of testers and tools. In 1997, the Company plans to launch a specialty catalog based upon tool products called ToolKit Warehouse targeting electronics technicians, testing engineers and cable and network installers. Similarly, the USA Flex acquisition provided the USA Flex brand of personal computers, along with the capability to offer component configuration to meet specialized customer requirements. The acquisition of NuData, Inc. in early 1996 provided NuData brand workstation equipment that operates in a UNIX operating system environment. Over the years, the Company has built a well regarded line of Power User brand computer peripherals and accessories offered through Mac Warehouse which are manufactured by third-party suppliers to our specifications. [The following table was represented by a pie graph in the printed material.] 1996 Domestic Net Sales Supplies and Accessories 7% Software 19% Hardware 74% Hardware comprised nearly three-quarters of net sales in 1996. In 1996, several product categories grew significantly. Our desktop and notebook computer business continued to develop with the addition of new manufacturers like Fujitsu, Hitachi and Olivetti. We were authorized to sell new models of desktop systems such as IBM Aptiva and HP Vectra. Increased demand for refurbished computers and authorization from Toshiba for its popular Encore program provided customers the opportunity to purchase name brand computers at significantly reduced prices. Micro Warehouse intends to serve its customers with "first to market products" and broad product assortment. 10 CAPITALIZING ON OUR FIVE STRENGTHS Micro Warehouse expects to be the 'one-stop shop' for microcomputer products in the commercial and consumer marketplaces." Chip Lacy, President and Chief Executive Officer CAPITALIZING ON OUR FIVE STRENGTHS 11 4. Developing Systems and Logistics The primary focus in the area of systems and logistics for 1996 was the consolidation of the newly acquired Inmac operations with those of Micro Warehouse to realize increased operating efficiencies. In the United States, Inmac's central warehouse in Louisville, Kentucky was closed in August, and all activity was combined into the Micro Warehouse logistics hub in Wilmington, Ohio. In Europe, various Micro Warehouse warehousing facilities were closed. In the UK we combined with the Inmac operation in the north of England. In France, Germany and the Netherlands, the Micro Warehouse operations and facilities were similarly combined with Inmac. The domestic Inmac business operations were converted over to the Micro Warehouse computer system in May, and in July, the UK computer system conversion was completed. Conversion to an upgraded Micro Warehouse system is planned for France and Germany in the summer of 1997. Micro Warehouse has begun an important step forward in servicing its customers and simplifying its business. In the past, separate inventory/customer database systems were maintained to manage the distinct MicroWarehouse, MacWarehouse and Data Comm Warehouse businesses. As the customers and products have merged and as the Company focuses upon "cross platform" commercial customers, integrating the information systems has become critical. In all markets, the present separate inventory/customer systems will be integrated into a common system. The initial conversion to this new "Alpha" system occurred in the United States in March 1997 and will be followed by conversions in Europe and Canada later in the year. In the United States, Micro Warehouse's principal air delivery supplier, Airborne Express, completed a $128 million expansion of its facilities in Wilmington, Ohio which will improve Airborne's market reach and reliability of service. Micro Warehouse should directly benefit from this investment. Over the next two years, the Company intends to streamline its distribution operations. Today, Micro Warehouse distributes from four separate buildings in the immediate vicinity of the Airborne Express hub. A long-term logistics and distribution evaluation has begun with the object of completing the design for a new warehouse and configuration center to support the Company's needs over the next several years. 12 CAPITALIZING ON OUR FIVE STRENGTHS "To more effectively serve our customers, we are committed to continuously upgrade our information systems and processes at every stage of our supply chain." Melvin Seiler, Executive Vice President and Chief Operating Officer CAPITALIZING ON OUR FIVE STRENGTHS 13 5. International Operations Throughout 1996, we continued the strategic development of our overseas operations. Micro Warehouse currently operates subsidiaries in 12 countries worldwide. International sales increased 6% to $635 million and represent almost one-third of our consolidated revenues. The integration of the Inmac business represents a quantum leap forward for our combined international businesses. Significant critical mass throughout Europe was effectively established. Inmac has a long and well-established presence in Canada, France, Germany, the Netherlands, Sweden and the UK with combined 1995 international sales of approximately $286 million. The uncertainties in the Apple Macintosh business impacted us more in Europe than in the United States. The 1996 net sales of our Macintosh business in Europe decreased by 10 percent from $181 million to $164 million. As a result, during the second quarter we re-evaluated our Macintosh-only subsidiaries in Australia, Denmark, Mexico and Switzerland, writing off the goodwill associated with these subsidiaries in its entirety and recording a charge of $6 million. Shortly thereafter, the Company discontinued its "Macintosh only" operations in Belgium and Switzerland. In addition to the Inmac acquisition, during 1996 and early 1997, we have acquired a number of businesses internationally that have expanded our IBM PC-compatible business and reduced our dependence on the Macintosh platform. In September, we acquired Helsinki-based Business Forum Oy Ltd. and a related business. Business Forum has an impressive customer base of major corporations in the Finnish market. In February 1997, we acquired The Notebook Store, a Toronto, Canada based, single-store retailer and direct marketer of IBM PC-compatible computer products. We also acquired CommsWare Australia Pty Ltd., a Brisbane, Australia-based direct marketer of data communication products. [The following table was represented by a bar graph in the printed material.] International Sales (in millions) 94 95 96 ---- ---- ---- $381 $597 $635 Consolidated international sales grew 6% to $635 million. Our international businesses frequently depend on models, marketing and sales techniques that differ from those used to drive our U.S. operations. In recognition of the many complexities and opportunities overseas, we announced, in late 1996, a significant Company-wide reorganization, converting to a geographically oriented model. This reorganization will permit the utilization of our newly acquired, enhanced and expanded resources within the European market to manage our European businesses locally from a strengthened UK-based European headquarters. We also will provide for strengthened management of the remaining international markets - Canada, Australia, Japan and Mexico. 14 CAPITALIZING ON OUR FIVE STRENGTHS "The reorganization of our businesses in October of 1996 will greatly strengthen our management in Europe. We look forward to the challenge in 1997." Jeffrey Sheahan, Vice President and General Manager of European Operations [Map] Norway Sweden Canada Finland Denmark England Mexico Germany France Netherlands Micro Warehouse Operating Results [The following table was represented by a bar graph in the printed material.] Working Capital (in thousands) 94 95 96 -------- -------- -------- $210,278 $298,843 $271,530 [The following table was represented by a bar graph in the printed material.] Total Assets (in thousands) 94 95 96 -------- -------- -------- $411,876 $554,546 $607,842 [The following table was represented by a bar graph in the printed material.] Stockholders' Equity (in thousands) 94 95 96 -------- -------- -------- $270,862 $364,669 $384,168 [The following table was represented by a bar graph in the printed material.] Gross Margin as a percentage of net sales 94 95 96 -------- -------- -------- 21.8% 19.2% 17.9% [The following table was represented by a bar graph in the printed material.] Selling General and Administrative Expenses as a percentage of net sales 94 95 96 -------- -------- -------- 18.2% 15.8% 14.5% [The following table was represented by a bar graph in the printed material.] Net Income as a percentage of net sales 94 95 96 -------- -------- -------- 2.2% 2.1% 0.8% 16 CAPITALIZING ON OUR FIVE STRENGTHS Financial Contents Selected Financial Information page 17 Management's Discussion and Analysis of Financial Condition and Results of Operations page 18 Responsibility for Financial Statements page 22 Independent Auditors' Report page 22 Consolidated Balance Sheets page 23 Consolidated Statements of Income page 24 Consolidated Statements of Stockholders' Equity page 25 Consolidated Statements of Cash Flows page 26 Notes to Consolidated Financial Statements page 27 CAPITALIZING ON OUR FIVE STRENGTHS 17 Selected Financial Information Micro Warehouse, Inc.
For the Years Ended December 31, (In thousands except per share data and ratios) 1996 1995(A) 1994(A) 1993(A) 1992(A)(B) - ---------------------------------------------------------------------------------------------------------------------- Income Statement Data - ---------------------------------------------------------------------------------------------------------------------- Net sales $1,916,244 $1,684,627 $1,130,796 $789,971 $598,851 Gross profit 342,446 323,991 246,678 210,818 196,364 Restructuring, merger costs, goodwill write-off 32,161 -- -- 16,546 -- Income from operations before interest, income taxes and extraordinary charge 33,093 57,715 41,063 10,858 19,380 Income before income taxes and extraordinary charge 36,601 57,903 40,877 10,255 16,203 Extraordinary charge, net of taxes 1,584 -- -- -- -- ====================================================================================================================== Net income $ 15,298 $ 35,244 $ 24,556 $ 4,519 $ 7,500 ====================================================================================================================== Net income per share(C) $ 0.44 $ 1.05 $ 0.80 $ 0.17 $ 0.37 Weighted average number of shares outstanding(C) 34,793 33,605 30,560 26,423 20,463 ====================================================================================================================== Operating Data: - ---------------------------------------------------------------------------------------------------------------------- Gross margin 17.9% 19.2% 21.8% 26.7% 32.8% Operating margin 1.7% 3.4% 3.6% 1.4% 3.2% Current ratio 2.2:1 2.8:1 2.5:1 1.8:1 1.4:1 Balance Sheet Data (at December 31): - ---------------------------------------------------------------------------------------------------------------------- Working capital $ 271,530 $ 298,843 $ 210,278 $101,804 $ 87,115 Total assets 607,842 554,546 411,876 261,314 200,399 Long-term obligations, excluding current portion 376 20,458 1,497 940 2,261 ====================================================================================================================== Supplementary Data: - ---------------------------------------------------------------------------------------------------------------------- Net income excluding unusual charges(D) $ 40,913 $ 35,244 $ 24,556 $ 15,084 $ 7,500 Net income per share excluding unusual charges(C)(D) $ 1.18 $ 1.05 $ 0.80 $ 0.57 $ 0.37 Operating margin (D) 3.4% 3.4% 3.6% 3.5% 3.2%
(A) Restated to reflect the acquisition of Inmac Corp. as a pooling of interests. (See Note 2 to Notes to Consolidated Financial Statements). (B) Pro forma adjustments made to reflect the elimination of special incentive compensation and additional income taxes as if the Company's tax status was a "C" corporation for the entire year. (C) Years prior to 1994 are adjusted to reflect a two-for-one stock split effective April 4, 1994. (D) Amounts exclude the effect of unusual charges comprised of restructuring costs, merger costs, goodwill write-off and extraordinary charge. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations Micro Warehouse, Inc. Business Micro Warehouse, Inc. (the "Company" or "Micro Warehouse") is a specialty catalog retailer and direct marketer of brand name personal computers, computer software, accessories, peripheral and networking products to commercial and consumer customers. The Company markets its products through frequent mailings of its distinctive, colorful catalogs, Internet catalog sites on the worldwide web and dedicated telemarketing account managers who focus on corporate, education and government accounts. The Company offers brand name hardware and software from leading vendors such as Adobe, Apple, Compaq, Hewlett Packard, IBM, Iomega, Microsoft, Motorola, 3Com, and Toshiba. Through its three core catalogs, MicroWarehouse, MacWarehouse and Data Comm Warehouse, various specialty catalogs and its Internet sites, the Company offers a broad assortment of more than 25,000 computer products at competitive prices. With colorful illustrations, concise product descriptions and relevant technical information, each catalog title focuses on a specific segment of the computer market. The catalogs are recognized as a leading source for computer hardware, software and other products. During the year ended December 31, 1996, the Company distributed approximately 123 million catalogs worldwide, and as of December 31, 1996, the Company had approximately 2.3 million customers who had purchased products within the last 12 months (excluding customers of USA Flex, which was acquired in October). International operations, particularly in Europe and Canada, have become a significant part of the Company's business. In 1991, the Company established full-service, direct marketing operations in the United Kingdom. In late 1992, the Company began operations in France and Germany and, in 1993 and 1994, acquired companies or initiated operations in Sweden, Denmark, Norway, the Netherlands, Belgium, Finland, and France. In this same timeframe the Company also expanded into the non-European markets of Japan, Canada and Mexico. In 1995, the Company acquired businesses in the United Kingdom, Germany, Australia and Switzerland. In 1996 the Company discontinued its "Macintosh only" operations in Belgium and Switzerland. The Company currently publishes catalogs in 12 countries outside the US and distributed approximately 41 million catalogs internationally in the year ended December 31, 1996. See Note 15 to Notes to the Consolidated Financial Statements for information regarding the Company's operations in different geographic areas. On January 25, 1996, the Company acquired Santa Clara, California-based Inmac Corp. ("Inmac") through the issuance by the Company of 3,033,682 shares of its common stock. Inmac is a leading international direct-response marketer of a wide range of personal computer and networking products. Inmac operates in the United States, Canada, France, Germany, the Netherlands, Sweden and the UK. International sales by Inmac accounted for 73% of net sales in its fiscal year ended July 29, 1995. For accounting purposes, the Inmac merger has been treated as a pooling of interests. Throughout 1996 the Company integrated the operations of Micro Warehouse and Inmac on a worldwide basis. In September 1996 the Company acquired the Helsinki, Finland based Business Forum and a related company. In November the Company completed the acquisition of the business of USA Flex, a Bloomingdale Illinois direct marketer of IBM PC-compatible personal computer products. This company has been successful in acquiring customers and building its business from advertisements in U.S. computer publications, particularly Computer Shopper. The operating results of these entities from dates of acquisition were not significant. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations Micro Warehouse, Inc. The Company maintains a full-service distribution center in Wilmington, Ohio, totaling approximately 365,000 square feet and telemarketing centers in Lakewood and Gibbsboro, New Jersey, South Norwalk, Connecticut, and Bloomingdale, Illinois. The Company operates 24 hours a day, seven days a week in the US. The Company also operates telemarketing and distribution facilities in the United Kingdom, France, Germany, Denmark, Sweden, Norway, Finland, the Netherlands, Japan, Australia, Mexico, and Canada. The Company's international operations generally use the same distribution and processing computer systems and are able to exchange data with US operations. Results of Operations The Company acquired Inmac in a transaction accounted for as a pooling of interests. Accordingly, all historical financial information has been adjusted to include Inmac. The table below sets forth certain items expressed as a percent of net sales for each of the years in the three-year period ended December 31, 1996. Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 82.1 80.8 78.2 - -------------------------------------------------------------------------------- Gross profit 17.9 19.2 21.8 Selling, general and administrative expenses 14.5 15.8 18.2 Restructuring costs, goodwill write-off and merger costs 1.7 -- - -------------------------------------------------------------------------------- Income from operations before interest, income taxes and extraordinary charge 1.7 3.4 3.6 Interest income (expense), net .2 -- -- Income before income taxes and extraordinary charge 1.9% 3.4% 3.6% ================================================================================ Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net sales increased $231.6 million or 13.7% to $1.9 billion from $1.7 billion in the prior year. IBM PC-compatible and Data Comm (collectively "Wintel") sales increased $187.1 million or 23.4% compared to 1995, while Macintosh related sales increased $44.5 million or 5.0%. Wintel sales in 1996 increased in both the domestic and international markets while the Macintosh business experienced domestic growth, but decreased in the international market compared to 1995. Overall, domestic sales increased 17.8% over 1995 and international sales increased 6.3%. Management believes that the increase in sales is in part due to the increase in the number of catalogs distributed worldwide which increased 19.4% to 122.5 million catalogs and the resultant increased response in 1996. Additionally, the continued shift in product mix to hardware resulted in an average order size of $464 in 1996, an increase of 12.2% compared to 1995. Gross profit dollars increased to $342.4 million in 1996 from $324.0 million in 1995, but decreased as a percentage of net sales to 17.9% in 1996 from 19.2% in 1995. Gross margins declined primarily due to heightened competitive pressures and change of product mix in the Inmac portion of the Wintel business and increased competitive pressures in the Macintosh business. Additionally, across all businesses there was a continuation of product mix shift towards hardware with typically lower margins. The Company expects continued pressure on gross margins in 1997 due to the continued shift in product mix and industry-wide pricing pressures. Selling, general and administrative expenses decreased as a percentage of net sales to 14.5% from 15.8% in 1995, primarily reflecting the integration of the Inmac business. Income from operations for 1996 was $33.1 million or 1.7% of net sales compared to $57.7 million or 3.4% of net sales in 1995. The 1996 results include one time costs associated with the Inmac restructuring and merger charges of $20.1 million and $6.1 million, respectively, and a write-off of $6.0 million for international Macintosh related goodwill. Operating income for 1996 excluding such one-time costs would have been $65.3 million or 3.4% of net sales. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations Micro Warehouse, Inc. Net interest income totaled $3.5 million in 1996 compared to $0.2 million in 1995. The 1996 results included interest income of $1.4 million on anticipated federal and state tax refunds as a result of the restatement announced in September 1996. Because the domestic pooled businesses are profitable, the Company has reevaluated certain federal net operating loss carry forwards available from Inmac. Accordingly, the 1995 effective tax rate for the consolidated entity has been adjusted to reflect the tax benefit of $1.8 million resulting from expected utilization of the 1995 operating losses. There is no anticipated effect on earnings in 1996 or beyond, unless valuation allowances are adjusted. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Net sales increased by $553.8 million or 49.0% to $1.7 billion up from $1.1 billion in 1994. Wintel sales increased $217.3 million or 37.3% compared to 1994 and the Macintosh related sales increased $336.5 million or 61.4%. Wintel and Macintosh related sales increased in both the domestic and international markets. Total domestic sales increased 45.0% in 1995 compared to 1994 and international sales increased 56.8%. Worldwide catalogs distributed were 102.6 million in 1995, an increase of 17.5% over 1994, and average order size, excluding Inmac, increased 35.2% compared to 1994. Gross profit increased $77.3 million, however, as a percentage of net sales decreased to 19.2% in 1995 from 21.8% in 1994. This reflects a shift in the product mix from higher margin software to lower margin hardware. Selling, general and administrative expenses increased $60.7 million in 1995 compared to 1994 but decreased as a percentage of net sales from 18.2% in 1994 to 15.8% in 1995. The dollar increase was related to the increase in order volume. Income from operations in 1995 was $57.7 million or 3.4% of net sales compared to $41.1 million or 3.6% of sales in 1994. Interest income in 1995 was flat compared to 1994. The tax benefit of certain net operating losses available from Inmac was $1.5 million in 1994. Liquidity and Capital Resources Cash and marketable securities were $52.3 million at December 31, 1996 compared to $102.2 million at December 31, 1995. The decline of $49.9 million was due primarily to the acquisition of three businesses totaling $34.2 million. In addition, the Company paid in cash $24.6 million for one-time restructuring and merger costs and extraordinary charge. The 1995 balance reflects net proceeds of $50.9 million from the Company's Common Stock offering completed in October 1995. Inventory increased $57.2 million to $201.1 million at year end 1996 from $143.9 million at year end 1995 as a result of increased sales and changes to the Company's stock balancing practices. Accounts receivable increased $31.4 million or 18.2% from year end 1995 to year end 1996 on a 13.7% increase in sales, reflecting the shift to more commercial open account customers. Overall, working capital decreased $27.3 million from year end 1995 to year end 1996 primarily due to the early redemption of Inmac notes payable. Capital expenditures for 1996 and 1995 were $11.2 million and $13.8 million, respectively, primarily for computer equipment and leasehold improvements. The Company's primary capital need will be to fund its working capital requirements for expected sales growth. The Company anticipates that future growth will also require continued expansion of its computer systems and distribution capacity. The Company anticipates that 1997 capital expenditures will be approximately $18.0 million. At December 31, 1996, the Company had an unused line of credit in the United States, which provided for unsecured borrowing of up to $10.0 million for working capital purposes. The Company also has a multi-currency credit facility for $75.0 million with Chase Manhattan Bank and State Street Bank. The purpose of the facility is to provide working capital financing for its foreign subsidiaries through financing in local currency to limit its exposure to foreign currency exchange fluctuations. Total borrowings at December 31, 1996 under this multi-currency agreement were $40.5 million. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations Micro Warehouse, Inc. The Company believes that its existing cash reserves, expected cash flow from operations and existing credit facilities will be sufficient to satisfy its operating cash needs for at least the next 12 months without consideration of uncertainties surrounding pending litigation against the Company. See Note 17 to Notes to Consolidated Financial Statements. Impact of Inflation and Seasonality Customer response rates are subject to variations. The first and last quarters of the year generally have higher response rates while the two middle quarters typically have lower response rates. The slower quarters are impacted by the summer months, particularly in Europe. The Company does not believe that inflation has had a material effect on the Company's sales during recent years. Accounting Pronouncements In 1996 the Company adopted the Financial Accounting Standards, Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The impact of the adoption of SFAS No. 121 was immaterial. In October 1995, the FASB issued SFAS No. 123 - "Accounting for Stock-Based Compensation". As allowed by SFAS No. 123, the Company has not recognized compensation cost for stock-based employee compensation arrangements, but has disclosed the impact on net income and net income per share as if the fair value based compensation cost had been recognized in Note 14 of Notes to Consolidated Financial Statements. Outlook The Company expects that the installed base of personal computers will continue to expand but at slower rates than experienced in the past. Apple Computer continues to experience difficulties and has announced plans to significantly downsize its operations. Such actions are expected to affect the Company's Macintosh-related sales both domestically and in Europe. In addition, Apple Computer has licensed the Macintosh operating system to other manufacturers. These "clones" are generally entering the market at lower prices than Apple's products, which has led to increased price competition and may result in reduced margins. In Europe, the Company anticipates increased competitive pressures and uneven market demand depending on the business cycles of individual countries. Information Concerning Forward-Looking Statements With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties including but not limited to economic, competitive, governmental, technological and litigation factors outside of the control of the Company. These factors more specifically include: uncertainties surrounding the demand for and supply of products manufactured by and compatible with those of Apple Computer; success of the Company's diversification away from its Apple products; competition from other catalog, retail store, on-line and other resellers of computer products and the ultimate outcome of the legal proceedings brought against the Company in connection with its reported accounting errors. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. CAPITALIZING ON OUR FIVE STRENGTHS 21 Responsibility for Financial Statements and Independent Auditors' Report Micro Warehouse, Inc. Management Responsibility for Financial Statements The financial data in this report, including the audited financial statements, have been prepared by management using the best available information and applying judgement. Accounting principles used in preparing the financial statements are those that are generally accepted in the United States. In meeting our responsibility for the integrity of the financial statements, we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and that the accounting records provide a reliable basis for the preparation of the financial statements. Management has also established a formal Business Code of Ethics which is distributed throughout the Company. We acknowledge our responsibility to establish and preserve an environment in which all employees properly understand the fundamental importance of high ethical standards in the conduct of our business. Our independent auditors are engaged to audit and to render an opinion on the fairness in all material respects of our consolidated financial statements presented in conformity with generally accepted accounting principles. In performing their audit in accordance with generally accepted auditing standards, they evaluate the effectiveness of our internal accounting control systems, review selected transactions and carry out other auditing procedures to the extent they consider necessary in expressing their opinion on our financial statements. The Audit Committee of the Board of Directors meets with management and our independent auditors to review accounting, auditing and financial matters. Our Audit Committee is composed of only outside directors. This committee and the independent auditors have free access to each other with or without management being present. Peter Godfrey Linwood A. Lacy Jr. Chairman of the Board President, Chief Executive Officer and Chief Financial Officer Independent Auditors' Report KPMG Peat Marwick LLP The Board of Directors and Stockholders of Micro Warehouse, Inc.: We have audited the accompanying consolidated balance sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Micro Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Stamford, CT February 10, 1997 22 Consolidated Balance Sheets Micro Warehouse, Inc.
December 31, (In thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 32,234 $ 81,614 Marketable securities at market value 20,022 20,580 Accounts receivable, net of allowance for doubtful accounts ($10,876 and $7,808 at December 31, 1996 and 1995, respectively) 203,687 172,275 Inventories 201,119 143,941 Prepaid expenses and other current assets 17,886 28,960 Tax refunds 16,433 12,723 Deferred taxes 3,447 8,169 - ---------------------------------------------------------------------------------------------------------- Total current assets 494,828 468,262 - ---------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 29,712 32,175 Goodwill, net 66,291 44,644 Non-current deferred taxes 14,443 5,332 Other assets 2,568 4,133 - ---------------------------------------------------------------------------------------------------------- Total assets $ 607,842 $ 554,546 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable - trade $ 127,723 $ 109,907 Accrued expenses 52,445 36,022 Deferred revenue 2,327 4,602 Loans payable, bank 40,505 18,504 Equipment obligations 298 384 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 223,298 169,419 Notes payable -- 19,790 Equipment obligations 376 668 - ---------------------------------------------------------------------------------------------------------- Total liabilities 223,674 189,877 - ---------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value: Authorized - 100 shares; none issued -- -- Common stock, $.01 par value: Authorized - 50,000 shares; issued and outstanding; 34,359 and 33,944 shares at December 31, 1996 and 1995, respectively 343 339 Additional paid-in capital 271,183 263,636 Loan to officer (1,400) -- Retained earnings 117,071 101,773 Cumulative translation adjustment (3,047) (1,033) Valuation adjustment for marketable securities 18 (46) - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 384,168 364,669 - ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 607,842 $ 554,546 ==========================================================================================================
See accompanying notes to consolidated financial statements. 23 Consolidated Statements of Income Micro Warehouse, Inc.
Years Ended December 31, (In thousands, except per share data) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Net sales $1,916,244 $1,684,627 $ 1,130,796 Costs of goods sold 1,573,798 1,360,636 884,118 - ---------------------------------------------------------------------------------------------------- Gross profit 342,446 323,991 246,678 Selling, general and administrative expenses 277,192 266,276 205,615 Write-off of goodwill 5,977 -- -- Restructuring costs 20,071 -- -- Merger costs 6,113 -- -- - ---------------------------------------------------------------------------------------------------- Income from operations before interest, income taxes and extraordinary charge 33,093 57,715 41,063 Interest income (expense), net 3,508 188 (186) - ---------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary charge 36,601 57,903 40,877 Income taxes 19,719 22,659 16,321 - ---------------------------------------------------------------------------------------------------- Income before extraordinary charge 16,882 35,244 24,556 Extraordinary charge, net of taxes of $1,078 1,584 -- -- - ---------------------------------------------------------------------------------------------------- Net income $ 15,298 $ 35,244 $ 24,556 ==================================================================================================== Income per share before extraordinary charge $ 0.49 $ 1.05 $ 0.80 Net income per share $ 0.44 $ 1.05 $ 0.80 - ---------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 34,793 33,605 30,560 - ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 24 Consolidated Statements of Stockholders' Equity Micro Warehouse, Inc.
Valuation Additional Loan Cumulative Adjustment Common Stock Paid-in to Retained Translation Marketable (In thousands) Shares Amount Capital Officer Earnings Adjustment Securities Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1993 27,688 $277 $ 92,516 -- $ 41,973(A) $(6,093) $ -- $ 128,673 ==================================================================================================================================== Net income -- -- -- -- 24,556 -- -- 24,556 Common stock offerings 4,100 41 102,052 -- -- -- -- 102,093 Common stock issued pursuant to stock options exercised 94 1 1,393 -- -- -- -- 1,394 Common stock issued pursuant to acquisitions 535 5 12,047 -- -- -- -- 12,052 Foreign currency translation adjustment -- -- -- -- -- 2,544 -- 2,544 Valuation adjustment for marketable securities -- -- -- -- -- -- (450) (450) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 32,417 324 208,008 -- 66,529 (3,549) (450) 270,862 ==================================================================================================================================== Net income -- -- -- -- 35,244 -- -- 35,244 Common stock offering 1,200 12 50,799 -- -- -- -- 50,811 Common stock issued pursuant to stock options exercised 315 3 4,148 -- -- -- -- 4,151 Common stock issued pursuant to acquisitions 26 -- 1,150 -- -- -- -- 1,150 Retirement of treasury shares (14) -- (469) -- -- -- -- (469) Foreign currency translation adjustment -- -- -- -- -- 2,516 -- 2,516 Valuation adjustment for marketable securities -- -- -- -- -- -- 404 404 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 33,944 339 263,636 -- 101,773 (1,033) (46) 364,669 ==================================================================================================================================== Net income -- -- -- -- 15,298 -- -- 15,298 Common stock issued pursuant to stock awards, stock options and warrants exercised 415 4 7,207 -- -- -- -- 7,211 Loan to officer -- -- -- (1,400) -- -- -- (1,400) Deferred compensation and filing fees -- -- 340 -- -- -- -- 340 Foreign currency translation adjustment -- -- -- -- -- (2,014) -- (2,014) Valuation adjustment for marketable securities -- -- -- -- -- -- 64 64 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 34,359 $343 $ 271,183 $(1,400) $117,071 $(3,047) $ 18 $ 384,168 ====================================================================================================================================
(A) Includes an adjustment of $4,992 for the recognition of Inmac Corp.'s net operating tax loss carryforwards that the combined entity can utilize (see Note 2). See accompanying notes to consolidated financial statements. 25 Consolidated Statements of Cash Flows Representing Increases (Decreases) in Cash and Cash Equivalents Micro Warehouse, Inc.
Years Ended December 31, (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 15,298 $ 35,244 $ 24,556 - ------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash (used) by operating activities: Depreciation and amortization 12,340 12,191 9,350 Restructuring cost - non-cash portion 3,457 -- -- Loss on disposal of fixed assets 127 199 565 Write-off of goodwill 5,977 -- -- Write-off of deferred financing costs 762 -- -- Non-cash compensation 421 -- -- Deferred taxes (4,389) (3,973) (2,625) Extraordinary charge 1,900 -- -- Changes in assets and liabilities: Accounts receivable, net (24,662) (33,508) (31,605) Inventories (55,530) (28,048) (26,079) Prepaid expenses and other current assets 10,781 (7,830) (5,645) Tax refunds (3,710) (11,993) 205 Due from affiliates -- -- 385 Other assets 1,119 (469) (509) Accounts payable - trade 14,085 29,514 5,968 Accrued expenses 14,677 2,352 118 Deferred revenue (2,249) 148 873 - ------------------------------------------------------------------------------------------------------------ Total adjustments (24,894) (41,417) (48,999) - ------------------------------------------------------------------------------------------------------------ Net cash (used) by operating activities (9,596) (6,173) (24,443) - ------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Sales (purchases) of marketable securities, net 622 24,028 (16,469) Purchases of businesses, represented by: Goodwill (28,986) (20,327) (10,042) Net assets (5,836) (4,954) (3,873) Proceeds from sale of equipment 576 162 403 Acquisition of property, plant and equipment (11,172) (13,774) (18,522) - ------------------------------------------------------------------------------------------------------------ Net cash (used) by investing activities (44,796) (14,865) (48,503) - ------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net proceeds from issuance of common stock 5,811 54,962 103,487 Purchase of treasury stock -- (469) -- Borrowings under lines of credit, net 22,118 (7,708) (4,385) Borrowing (repayment) of notes payable (21,900) 20,000 -- Public filing fees (81) -- -- Principal payments of obligations under capital leases (378) (942) (194) - ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 5,570 65,843 98,908 - ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash (558) 802 1,345 - ------------------------------------------------------------------------------------------------------------ Net change in cash (49,380) 45,607 27,307 Cash and cash equivalents: Beginning of year 81,614 36,007 8,700 - ------------------------------------------------------------------------------------------------------------ End of year $ 32,234 $ 81,614 $ 36,007 ============================================================================================================
See accompanying notes to consolidated financial statements. 26 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include Micro Warehouse, Inc. ("MWI") and its subsidiaries, which are all wholly owned (collectively, the "Company"). All significant inter-company accounts and transactions are eliminated in consolidation. The consolidated financial statements as of and for the years ended prior to December 31, 1996, have been restated to reflect the acquisition of Inmac Corp. ("Inmac") as a pooling of interests (see note 2). In addition, certain reclassifications have been made to conform prior years to the 1996 presentation. Cash Equivalents All repurchase agreements, money market funds and highly liquid investments with initial maturities of three months or less are considered cash equivalents. Marketable Securities Marketable securities consist primarily of highly liquid tax exempt municipal bonds. All investments are classified as available-for-sale and are reported at market value, with net unrealized gains and losses included in equity. For all investment securities, unrealized losses that are other than temporary are charged to operations. Inventories Inventories (substantially all finished goods) consist of hardware, software packages and peripheral equipment, and are stated at cost (determined under the first-in, first-out method) or market, whichever is lower. Prepaid Catalog Costs and Deferred Revenue The costs of producing and distributing catalogs are deferred and charged to expense over the period that each catalog remains the most current selling vehicle (generally one to two months). Vendors have the ability to place advertisements in the catalogs for which the Company receives advertising allowances and incentives. These revenues are recognized on the same basis as the catalog costs. Property, Plant and Equipment Property, plant and equipment (including equipment acquired under capital leases) are stated at cost and are depreciated using accelerated and straight-line methods over the estimated useful lives of the assets, as follows: Computer equipment 5 years Furniture and fixtures 7 years Leasehold improvements Lesser of life of lease or 7 years Machinery and equipment 7 years Intangible Assets Intangible assets are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets, as follows: Trademarks 5 years Goodwill 40 years Income Taxes Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. A valuation allowance is used to reduce the carrying amount of deferred tax assets which may not be realized. Revenue Recognition Revenue on product sales is recognized at the time of shipment. A reserve for product returns is established based upon historical trends. 27 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date or at historical rates, as applicable. Revenue and expenses are translated at average rates in effect during the period. The resultant translation adjustment is reflected as a separate component of stockholders' equity. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates. Net Income Per Share Net income per share has been computed using the weighted average number of common and common equivalent shares outstanding. Net income per share includes the effect of dilutive common stock options for all periods. The difference between primary and fully diluted earnings per share is not material for any of the periods presented. Long-Lived Assets In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The impact of the adoption of SFAS No. 121 was immaterial. The Company periodically evaluates the carrying value of intangibles and the periods of amortization to determine whether events and circumstances warrant revised estimates of asset value or useful lives. The Company annually assesses the recoverability of goodwill by determining whether the amortization of the balance over its remaining life can be recovered through projected undiscounted future operating cash flows. Evaluations of asset value as well as periods of amortization are performed on a disaggregated basis by distinct geographic market. Stock-Based Compensation Prior to January 1, 1996, the Company accounted for its stock-based compensation in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock issued to Employees," and related interpretations. As such, compensation expense would be recorded when the current market price of the underlying stock exceeded the excise price at the date of grant. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," and elected thereunder to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123 (see note 14). Unaudited Condensed Quarterly Data In the opinion of management, the unaudited condensed quarterly financial data in note 16 reflect all adjustments which are necessary for a fair statement of the results of operations for the periods presented. NOTE 2. BUSINESS COMBINATIONS Inmac Corp. On January 25, 1996, MWI acquired Inmac through an exchange of 3,034 of its shares for all of Inmac's 10,817 shares in a transaction accounted for as a pooling of interests. Inmac, a leading international direct-response marketer of multi-vendor products for the personal computer and networking industries, has operations in the United States, United Kingdom, Canada, France, Germany, the Netherlands and Sweden. Under pooling of interests accounting, all of the Company's consolidated financial statements as of and for periods prior to the acquisition of Inmac have been restated as though the merger took place at the beginning of the earliest period presented. In connection therewith, the Company recorded (i) $20,071 of restructuring charges, primarily for personnel and facilities matters; (ii) $6,113 for merger costs; and (iii) an extraordinary charge of $1,584 (net of tax benefit of $1,078) related to a mandatory prepayment to extinguish certain Inmac indebtedness. 28 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) The 1995 and 1994 combined amounts presented below differ from amounts previously presented. The adjustment impacting net income was the recognition of Inmac's net operating tax loss carryforwards that the combined company could utilize. Prior to the pooling, Inmac's fiscal year ended in July. Subsequent to the pooling, Inmac changed its year end to December 31, to conform with that of MWI. Accordingly, Inmac's financial information has been converted to a calendar basis for all periods presented. The following is a reconciliation of net sales and net income (loss) previously reported by MWI with combined amounts: Years ended December 31, 1995 1994 - -------------------------------------------------------------------------------- Net sales: Micro Warehouse $1,308,009 $ 776,377 Inmac 376,618 354,419 - -------------------------------------------------------------------------------- Combined $1,684,627 $1,130,796 ================================================================================ Net income: Micro Warehouse $ 31,094 $ 20,223 Inmac 2,391 2,848 Adjustment 1,759 1,485 - -------------------------------------------------------------------------------- Combined $ 35,244 $ 24,556 ================================================================================ Net income per share: Micro Warehouse $ 0.93 $ 0.66 Inmac 0.07 0.09 Adjustment 0.05 0.05 - -------------------------------------------------------------------------------- Combined $ 1.05 $ 0.80 ================================================================================ Other On October 25, 1996, the Company acquired USA Flex in a business combination accounted for as a purchase. USA Flex directly markets IBM PC-compatible computers and peripherals. The results of operations of USA Flex are included in the accompanying financial statements since the date of the acquisition. The total cost of the acquisition was $26,762, which exceeded the fair value of the net assets of USA Flex by $22,053. The excess is being amortized on a straight line basis over 40 years. During 1996, the Company also acquired two businesses with operations in Finland and the U.S. The aggregate purchase price and goodwill were $7,411 and $6,284, respectively. In addition, the Company recorded goodwill of $649 relating to 1995 acquisitions. During 1995, the Company acquired eight businesses with operations in the United Kingdom, Australia, Germany, Switzerland and the U.S. The aggregate purchase price was comprised of approximately $24,229 in cash and 26 common shares with an average market value of approximately $44.00 per share. The aggregate goodwill was $20,425. In addition, the Company recorded goodwill of $1,052 relating to 1994 acquisitions. During 1994, the Company acquired eight businesses with operations in Holland, Belgium, Finland, Norway, Sweden, France, Mexico and Canada. The aggregate purchase price was comprised of approximately $13,915 in cash and 335 common shares with an average market value of approximately $22.50 per share. The aggregate goodwill was $17,580. NOTE 3. RESTRUCTURING During 1996, the Company initiated a restructuring plan to reduce costs and increase future operating efficiencies by eliminating excess operations and facilities acquired in the Inmac acquisition. The closing of the facilities should be completed during the first half of 1997. As a result of the restructuring plan, the Company recorded restructuring expense of $20,071. In connection with the restructuring plan, approximately 493 employees have been or will be terminated. These employees are or have been associated with the facilities closed or closing. Estimated employee termination costs of $10,886 have been accrued in 1996. Of the total number of employees affected, approximately 415 have been terminated in 1996 at a cost of $10,403. 29 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) In addition to the cost of terminating employees, the principal costs of the restructuring included the write-off of fixed assets and lease terminations. Estimated charges of $2,983 for asset write downs, $3,952 for lease terminations and $2,250 of other costs were accrued in 1996. As of December 31, 1996, costs of $7,325 associated with these components of the restructuring have been paid or written off. NOTE 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of: 1996 1995 - -------------------------------------------------------------------------------- Computer equipment $40,123 $36,858 Furniture and fixtures 11,730 9,152 Leasehold improvements 8,408 9,190 Machinery and equipment 8,933 9,596 - -------------------------------------------------------------------------------- 69,194 64,796 Less accumulated depreciation and amortization 39,482 32,621 - -------------------------------------------------------------------------------- $29,712 $32,175 ================================================================================ NOTE 5. BORROWING ARRANGEMENTS Lines of Credit The Company has a $75,000 unsecured multi-currency borrowing facility, expiring in 1998, permitting borrowing by its subsidiaries in local currencies. The balance outstanding was $40,505 and $13,214 at December 31, 1996 and 1995, respectively. The facility provides for borrowings which bear interest at various floating rates, the highest of which varies from LIBOR plus 0.50%-1.25%, based on the ratio of debt to earnings before interest and taxes. The average interest rate was approximately 5.5% and 6.0% for 1996 and 1995, respectively. Commitment fees were immaterial. At December 31, 1996 and 1995, the Company had a $10,000 and $15,000, respectively, unused line of credit in the United States. The maximum amount of borrowings under this credit facility was $15,000 and $12,000 for 1996 and 1995, respectively. The line of credit, expiring in 1998, provides for unsecured borrowing with interest at the bank's prime rate plus 1.50% or LIBOR plus 1.0%. The average interest rates for 1996 and 1995 were approximately 9.75% and 8.0%, respectively. Commitment fees for 1996 and 1995 were immaterial. At December 31, 1996 and 1995, the Company also had (pound)1,800 and (pound)125, respectively, unused lines of credit in the United Kingdom. The lines, expiring in 1997, also provides for unsecured borrowing with interest at the bank's base rate plus 1.5%. The average interest rate for 1996 and 1995 was approximately 6.0%. Commitment fees for 1996 and 1995 were immaterial. Inmac Borrowings During 1996, as a result of the merger, all Inmac borrowings were repaid and canceled. An extraordinary charge of $1,584 after tax ($2,662 pretax) was recorded for fees, penalties and the write-off of deferred financing costs arising from the mandatory early extinguishment of certain Inmac borrowings. In addition, at the effective date of the merger the Inmac warrants (described below) were converted in a non-cash transaction into approximately 19 shares of the Company. Inmac borrowings consisted of the following: During 1995, Inmac issued notes for $13,000, and NLG 10,919, (US $6,790 at December 31, 1995 currency exchange rate) evidencing unsecured senior debt in a private placement (the "Notes"). The lender also received 175 warrants which could be converted into a like amount of Inmac common stock at an exercise price of $6.756 per share. Inmac entered into a currency swap agreement with a major international financial institution to hedge currency risk on interest and principal payments on $7,000 of the Notes. The swap agreement effectively converted $7,000 of the Notes into Deutsche Mark debt with a fixed interest rate of 10.02%. Also during 1995, Inmac entered into a $30,000, unsecured multi-currency revolving credit facility at LIBOR plus 1.15% with a syndicate of banks (the "Facility"). As of December 31, 1995, borrowings under the Facility were $5,290 and commitment fees were immaterial. 30 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) Equipment Obligations The Company is obligated under capital leases for computer equipment expiring in the year 1998. Interest on these notes is approximately 6%. As of December 31, 1996, future minimum lease payments are as follows: 1997 $372 1998 353 - -------------------------------------------------------------------------------- Total minimum lease payments 725 Less amounts representing interest 51 - -------------------------------------------------------------------------------- Present value of net minimum lease payments 674 Less current maturities 298 - -------------------------------------------------------------------------------- Long-term portion $376 ================================================================================ NOTE 6. GOODWILL AND OTHER ASSETS Amounts consist of: 1996 1995 - -------------------------------------------------------------------------------- Goodwill $68,961 $46,047 Less amortization 2,670 1,403 - -------------------------------------------------------------------------------- $66,291 $44,644 ================================================================================ Trademarks $ 2,220 $ 1,941 Less amortization 1,187 764 - -------------------------------------------------------------------------------- 1,033 1,177 Deposits 514 527 Other assets 1,021 2,429 ================================================================================ $ 2,568 $ 4,133 ================================================================================ Due to the uncertainties in the Apple Macintosh marketplace, the Company reevaluated the carrying value of goodwill in its Macintosh-only subsidiaries in Australia, Denmark, Mexico and Switzerland. As a result of that evaluation, the Company recorded a charge of $5,977 in 1996, which represented all the goodwill on these subsidiaries' balance sheets. NOTE 7. ACCRUED EXPENSES Accrued expenses at December 31, 1996 and 1995 include approximately $11,882 and $7,171 respectively, of accrued catalog costs. NOTE 8. PUBLIC OFFERINGS On April 18, 1994, the Company issued 2,000 shares of common stock at $21.25 per share. The proceeds to the Company, net of the underwriting discount of $2,020 and other direct expenses of $301 were $40,179. On October 21, 1994, the Company issued 2,100 shares of common stock at $31.00 per share. The proceeds to the Company, net of the underwriting discount of $2,940 and other direct expenses of $302 were $61,858 including $56 recorded in 1995. On October 2, 1995, the Company issued 1,200 shares of common stock at $44.50 per share. The proceeds to the Company, net of the underwriting discount of $2,328 and other direct expenses of $205 were $50,867. NOTE 9. COMMITMENTS Leases The Company rents some of its office facilities from affiliates and also occupies office and warehouse space under various operating leases with independent parties which provide for minimum annual rentals and escalations based on increases in real estate taxes and other operating expenses. 31 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) Future minimum annual rentals at December 31, 1996 were as follows: Related Total Party - -------------------------------------------------------------------------------- 1997 $ 9,198 $312 1998 7,416 -- 1999 4,384 -- 2000 3,555 -- 2001 and after 13,900 -- - -------------------------------------------------------------------------------- Total $38,453 $312 ================================================================================ Rent expense was as follows: Related Total Party - -------------------------------------------------------------------------------- Year ended December 31, 1996 $ 8,774 $312 Year ended December 31, 1995 12,593 354 Year ended December 31, 1994 12,042 312 ================================================================================ The Company had an agreement with a shareholder/consultant through December 1996 for an annual fee of $100. 401(k) Savings Plans The Company sponsors 401(k) savings plans which cover substantially all full-time employees who meet the plan's eligibility requirements. Participants may make tax deferred contributions of up to 15% of annual compensation (subject to other limitations specified by the Internal Revenue Code) and the Company will make a 25% matching contribution for amounts which do not exceed 6% of participant's annual compensation. The Company may also make discretionary profit sharing contributions to the plans. During 1996, 1995 and 1994, the Company incurred approximately $556, $466, and $426, respectively, of expense related to the 401(k) matching component of this plan. NOTE 10. INCOME TAXES The provisions for income taxes were as follows: Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Current Federal $ 23,012 $ 18,005 $ 11,966 State 1,920 2,086 1,719 Foreign (1,902) 6,541 5,261 - -------------------------------------------------------------------------------- 23,030 26,632 18,946 Deferred Federal (1,537) (2,473) (2,957) State (202) 181 (131) Foreign (2,650) (1,681) 463 - -------------------------------------------------------------------------------- (4,389) (3,973) (2,625) - -------------------------------------------------------------------------------- Total $ 18,641 $ 22,659 $ 16,321 ================================================================================ The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to income before taxes. Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 3.3 2.5 2.5 Tax-exempt interest income (0.7) (0.6) (1.6) Non-deductible merger costs 6.3 -- -- Goodwill amortization and write-off 7.9 0.5 0.1 Foreign rate difference and unused foreign losses 4.4 3.5 5.1 Other, net (1.3) (1.8) (1.2) - -------------------------------------------------------------------------------- Effective tax rate 54.9% 39.1% 39.9% ================================================================================ 32 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) The U.S. and foreign components of income before income taxes were as follows: U.S. Foreign - -------------------------------------------------------------------------------- Year ended December 31, 1996 $ 52,255 $(18,316) Year ended December 31, 1995 49,494 8,409 Year ended December 31, 1994 30,452 10,425 Income taxes have not been provided for undistributed earnings of foreign subsidiaries since MWI presently intends to continue to reinvest these earnings. Components of the net deferred tax asset relate to: December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Deferred tax assets: Accounts receivable reserve $ 2,091 $ 1,564 $ 1,004 Inventory reserve 2,002 1,394 850 Refunds payable 312 197 211 Investments -- -- 370 Medical insurance 526 609 338 Accounts payable reserve 2,820 -- -- Inventory capitalization 1,066 431 473 Other 2,361 1,696 356 Alternative minimum tax credits carryforward 648 648 648 Tax loss carryforwards 18,970 16,752 13,182 - -------------------------------------------------------------------------------- 30,796 23,291 17,432 Valuation allowance for tax loss carryforwards (12,906) (9,164) (7,353) - -------------------------------------------------------------------------------- Total deferred tax asset 17,890 14,127 10,079 Deferred tax liability: Property, plant and equipment -- (626) (551) - -------------------------------------------------------------------------------- Net deferred tax asset $ 17,890 $ 13,501 $ 9,528 ================================================================================ The Company has $21,105 in unutilized foreign tax loss carryforwards and $30,865 in unutilized U.S. federal tax loss carryforwards. Of these loss carryforwards, $12,954 have no expiration dates, $35,901 expire beginning 2005 through 2010, and $3,115 expire beginning 1999 through 2004. In addition, the Company has $648 of unutilized alternative minimum tax credits that can be carried forward indefinitely. U.S. tax law imposes a limitation on the amount of the U.S. tax loss carryforwards which can be utilized each year where there is a change in the stock ownership of the Company which incurred the losses. The U.S. tax losses of Inmac are subject to this rule. Based on the Company's historical and expected taxable earnings, management believes it is more likely than not that the Company will realize the benefit of the existing deferred tax asset at December 31, 1996. NOTE 11. MARKETABLE SECURITIES The following is a summary of marketable securities December 31, 1996 and 1995: Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value - ------------------------------------------------------------------------------- Securities available-for-sale: Governmental obligations: December 31, 1996 $20,004 $ 18 $ -- $20,022 December 31, 1995 $20,626 $ 1 $ 47 $20,580 At December 31, 1996, marketable securities mature as follows: Within 1 year 1-5 years 5-10 years After 10 years - -------------------------------------------------------------------------------- Government obligations $3,223 $3,000 -- $13,799 Certain of these obligations provide for the resetting of interest rates at specified dates. The expected impact of resettting the interest rates is to adjust the market value to the face amount. NOTE 12. INTEREST INCOME (EXPENSE), NET For the years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Interest income $ 5,292 $ 4,348 $ 2,421 Interest expense (1,784) (4,160) (2,607) - -------------------------------------------------------------------------------- Interest income (expense), net $ 3,508 $ 188 $ (186) ================================================================================ NOTE 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 1996 1995 1994 - -------------------------------------------------------------------------------- Cash paid during the period for: Interest $ 1,805 $ 4,088 $ 2,627 Income taxes 27,297 32,956 19,848 Non-cash investing and financing activities: Loan to officer for purchase of stock 1,400 -- -- Net assets acquired and goodwill established through issuance of common stock -- 1,150 12,052 Equipment acquired under capital lease obligations -- -- 1,021 33 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) NOTE 14. STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25 and related interpretations in accounting for stock-based compensation. Accordingly, no compensation cost has been recognized for stock options issued at market value. Had compensation cost been determined on a fair value basis consistent with SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: 1996 1995 - -------------------------------------------------------------------------------- Net income As reported $15,298 $35,244 Pro forma $10,994 $33,650 Net income per share As reported $ 0.44 $ 1.05 Pro forma $ 0.32 $ 1.00 The fair value of each option grant included in the pro forma amounts above was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.2 percent and 7.4 percent; dividend yield of zero for both years; expected lives of 5 years for both years; and volatility of 42.5 percent and 43.3 percent. A summary of the status of stock options outstanding as of December 31, 1996, 1995 and 1994 and changes during the years ended on those dates is presented below:
1996 1995 1994 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------ Shares under option: Outstanding at beginning of year 1,328 $17.18 1,346 $13.79 1,326 $12.38 Granted 836 27.50 338 27.63 234 22.35 Exercised (346) 16.79 (315) 13.18 (94) 14.83 Forfeited (108) 23.23 (41) 17.45 (120) 17.02 - ------------------------------------------------------------------------------------------------------------ Outstanding at end of year 1,710 $22.28 1,328 $17.18 1,346 $13.79 ============================================================================================================ Options exercisable at year end 407 $15.56 420 $13.99 342 $12.36 - ------------------------------------------------------------------------------------------------------------ Weighted average fair value per share of options granted during 1996, 1995, and 1994 $12.64 $13.30 $10.96
1992 and 1994 Stock Option Plans The 1992 and 1994 Stock Option Plans (the "Plans") provide for the grant of stock options to officers, directors and key employees of, and consultants to, the Company and its subsidiaries. Under the Plans, the Company may grant options that are intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or options not intended to qualify as Incentive Stock Options ("Non-statutory Stock Options"). A total of 2,000 shares of common stock have been reserved for issuance upon the exercise of options granted under the Plans. The Plans are administered by the Compensation and Stock Option Committee of the Board of Directors. Subject to the provisions of the Plans, the Committee has the authority to select the employees, directors and consultants to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock covered by the option, (ii) when the option becomes exercisable, (iii) the option exercise price, which must be at least 100%, with respect to Incentive Stock Options, and at least 85%, with respect to Non-statutory Stock Options, of the fair market value of the common stock as of the date of grant, and (iv) the duration of the option (which may not exceed ten years). Inmac Stock Option Plan In connection with the Inmac merger, all outstanding Inmac stock options were exchanged for the equivalent number of the Company's options. Stock Options Issued Outside 1992 and 1994 Plans During 1996, the Company granted to Mr. Lacy, who became the Chief Executive Officer on October 1, 1996, options to purchase 500 shares of common stock at $25.00 per share, vesting at the rate of 25% per year commencing October 1, 1997. 34 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) The following activity includes the grant made outside of the 1992 and 1994 Stock Option Plans. Stock options outstanding at December 31, 1996, are summarized as follows:
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 - --------------------------------------------------------------------------------------------------------- $ 9.00 - $13.13 491 6.3 years $ 10.81 257 $ 9.72 $15.63 - $19.93 106 7.5 years 16.70 52 11.58 $21.00 - $28.99 634 9.3 years 24.56 48 19.97 $31.13 - $32.00 441 8.7 years 31.38 40 30.57 $39.00 - $46.69 38 8.7 years 42.34 10 42.54 - --------------------------------------------------------------------------------------------------------- $ 9.00 - $46.69 1,710 8.1 years $ 22.28 407 $ 15.56 =========================================================================================================
NOTE 15. OPERATIONS BY GEOGRAPHIC AREAS The Company operates primarily in one industry segment, the distribution of computer hardware, software, supplies and accessories. Information about the Company's operations in different geographic areas for the years ended December 31, 1996, 1995 and 1994 are presented below. Asia/ Year Ended December 31, 1996 North America Europe Pacific Consolidated - -------------------------------------------------------------------------------- Net sales $1,330,601 $ 570,388 $ 15,255 $1,916,244 Income (loss) from operations before interest income, taxes and extraordinary charge 37,062 (2,847) (1,122) 33,093 Identifiable assets 422,967 182,298 2,577 607,842 Asia/ Year Ended December 31, 1995 North America Europe Pacific Consolidated - -------------------------------------------------------------------------------- Net sales $1,130,292 $546,559 $7,776 $1,684,627 Income from operations before interest and income taxes 40,290 17,354 71 57,715 Identifiable assets 370,573 179,798 4,175 554,546 Asia/ Year Ended December 31, 1994 North America Europe Pacific Consolidated - -------------------------------------------------------------------------------- Net sales $ 761,219 $ 369,577 -- $1,130,796 Income from operations before interest and income taxes 34,175 6,888 -- 41,063 Identifiable assets 263,048 148,828 -- 411,876 NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended December 31, 1996, 1995 and 1994: First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1996 Net sales $ 514,391 $437,175 $437,981 $526,697 Gross profit 98,542 84,987 78,692 80,225 Income (loss) before extraordinary charge (5,101) 5,410 10,725 5,848 Net income (loss) (6,685) 5,410 10,725 5,848 Income (loss) per share before extraordinary charge $ (0.15) $ 0.16 $ 0.31 $ 0.17 Net income (loss) per share $ (0.20) $ 0.16 $ 0.31 $ 0.17 Weighted average number of shares outstanding 33,996 34,701 34,630 34,657 1995 Net sales $ 380,323 $378,574 $423,460 $502,270 Gross profit 79,774 73,726 78,976 91,515 Net income 10,183 7,184 9,689 8,188 Net income per share $ 0.31 $ 0.22 $ 0.29 $ 0.24 Weighted average number of shares outstanding 33,021 33,214 33,451 34,663 35 Notes to Consolidated Financial Statements Micro Warehouse, Inc. (Amounts in thousands, except per share data) NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED) CONTINUED First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1994 Net sales $257,048 $253,310 $280,241 $340,197 Gross profit 60,678 56,319 58,358 71,323 Net income 6,761 6,209 5,305 6,281 Net income per share $ 0.24 $ 0.21 $ 0.17 $ 0.19 Weighted average number of shares outstanding 28,485 30,162 30,742 32,547 The quarterly amounts of net income per share for 1995 and 1994 do not equal amounts for the year due to rounding. NOTE 17. LEGAL PROCEEDINGS During October, November and December 1996, the Company and certain of its directors and officers were named as defendants in eleven lawsuits brought in the United States District Court for the District of Connecticut by parties which seek to represent classes of stockholders who purchased shares of the Company's common stock during different periods between January 1994 and September 1996, or exchanged shares in a merger transaction completed in January 1996. These lawsuits advance claims under various provisions of the federal securities laws and the common law and assert that various misleading disclosures were made concerning the Company's financial performance and position and other related circumstances during the periods described. The lawsuits followed and are predicated upon the Company's announcements in September and October 1996 that it intended to restate certain prior financial statements. On February 10, 1997, the Company filed Forms 10-K/A with the Securities and Exchange Commission (the "SEC") reflecting restated financial statements for the years 1992 through 1995. These matters have been consolidated into a single proceeding. In November 1996, a shareholder derivative action was filed in the United States District Court for the District of Connecticut, purportedly on behalf of, and for recovery by, the Company, which is named as a nominal defendant. The complaint charges certain directors and officers with violation of fiduciary duties in selling Company stock while in possession of non-public information and in causing or permitting the exposure of the Company to damage, such as through the class litigation described above, attributable to the same circumstances that are the subject of the class litigation. The Company and the individual defendants have filed a Motion to Dismiss the Complaint which is pending before the Court. In December 1996 and January 1997, the Company and certain of its directors and officers were named as defendants in two largely identical lawsuits brought in the Superior Court of Santa Clara County, San Jose, California. These lawsuits have now been consolidated. The lawsuits arise out of the stock merger between the Company and Inmac on January 25, 1996. The claims are generally similar to those being asserted in the consolidated class action described above. All of the above referenced lawsuits are at a preliminary stage. The plaintiffs in these lawsuits seek unspecified compensatory damages, other relief, legal fees and litigation costs. The Company is unable to predict the outcome or the potential financial impact of this litigation, and accordingly, has made no provision therefor in the consolidated financial statements. In addition, the staff of the SEC is conducting a formal investigation into the events that underlie the Company's restatement of certain prior period financial statements. The Company is cooperating with the staff in its investigation. 36 Board of Directors [Photograph] Peter Godfrey Chairman Micro Warehouse, Inc. [Photograph] Linwood A. Lacy, Jr. President and Chief Executive Officer Micro Warehouse, Inc. [Photograph] Felix Dennis Chairman Dennis Publishing Ltd. (Publishing) [Photograph] Melvin Seiler Executive Vice President and Chief Operating Officer Micro Warehouse, Inc. [Photograph] Frederick H. Fruitman Managing Director Loeb Partners Corporation (Investment Banking) [Photograph] Joseph M. Walsh Chairman and Chief Executive Officer Curtis Circulation Company (Magazine Distribution) Corporate Officers Deborah Cooper Vice President Mac Marketing Stephen F. England Vice President Worldwide Advertising Wayne P. Garten Senior Vice President and Chief Financial Officer Michael J. Kurtz Vice President Human Resources Bruce L. Lev Vice President, General Counsel and Secretary Kris Rogers Executive Vice President and General Manager of U.S. Operations Bruce Schellinkhout Vice President Distribution Adam Shaffer Senior Vice President Product and Marketing Jeffrey Sheahan Vice President and General Manager of European Operations Corporate Information Transfer Agent Boston EquiServe L.P., 150 Royall Street, Canton, MA 02021 (800) 426-5523 Independent Certified Public Accountants KPMG Peat Marwick LLP, 3001 Summer Street, Stamford, CT 06905 Annual Meeting The 1997 Annual Meeting will be held on Wednesday, June 4, 1997 at 10:00 A.M. at The Ramada Inn and Suites, 2373 Route 9, Toms River, New Jersey Common Stock Micro Warehouse, Inc.'s Common Stock is traded on The Nasdaq Stock Market under the symbol MWHS. Stockholders As of December 31, 1996, Micro Warehouse, Inc. had approximately 272 stockholders of record. Dividend Policy The Company has never paid and has no present plans to pay any cash dividends on its capital stock. The Company intends to retain its earnings to finance the growth and development of its business. Form 10-K A copy of the Company's Form 10-K is available without charge upon request to: Corporate Communications Dept., Micro Warehouse, Inc., 535 Connecticut Avenue, Norwalk, CT 06854. Investor Relations For further information about Micro Warehouse, Inc., contact Melinda LeVino, Director of Corporate Communications (203) 899-4672. Quarterly Stock Price Range High Low Fiscal 1996 First Quarter $51.75 $31.25 Second Quarter 45.25 18.38 Third Quarter 32.75 14.00 Fourth Quarter 27.25 10.75 Fiscal 1995 First Quarter $35.75 $26.75 Second Quarter 48.25 30.00 Third Quarter 56.88 41.25 Fourth Quarter 54.50 36.75 Fiscal 1994 First Quarter $28.00 $19.25 Second Quarter 28.00 17.75 Third Quarter 33.00 17.75 Fourth Quarter 36.25 27.00 Fiscal 1993 First Quarter $11.88 $9.63 Second Quarter 12.50 11.25 Third Quarter 15.63 10.88 Fourth Quarter 21.38 17.50 *Stock prices are adjusted to reflect a two-for-one stock split effective April 4, 1994. CORPORATE OFFICES Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, CT 06854 (203) 899-4000 SUBSIDIARIES Micro Warehouse, Inc. of New Jersey 1720 Oak Street, Lakewood, NJ 08701 55 United States Avenue, Gibbsboro, NJ 08026 Micro Warehouse, Inc. of Ohio 2841 Old State Road, Wilmington, OH 45200 Micro Warehouse Limited Westerly Point, Market Street Bracknell, Berkshire RG12 1EW England Micro Warehouse France SARL Z.I. Mitry-Compans 2 Rue Charles Coulomb B.P. 103 77293 Mitry-Mory Cedex France Micro Warehouse (Deutschland) GmbH Boettgerstrasse 2-14 65438 Floersheim Germany Micro Warehouse, Sweden AB Midskogsgrand 1-3 S-115 43 Stockholm Sweden Micro Warehouse, Denmark APS Gaseagervej #12 DK-8250 Ega Denmark Micro Warehouse, Norway AS Waldemar Thranesgate 98B N-0175 Oslo Norway Micro Warehouse, Finland OY Kaisaniemenkatu 13 00100 Helsinki Finland Micro Warehouse B.V. Kelenbergweg 30 1101 GB Amsterdam The Netherlands Micro Warehouse, Japan KK Mitsuhashi No. 2 Bldg. 2F 1-13-27 Okada, Atsugi-shi Kanagawa 243 Japan Micro Warehouse Canada Limited 151 Caterpillar Road Mississauga, Ontario L4X 226 Canada Benton Sistemas S.A. de C.V. Circuito Novelistos 129 Ciudad Satelite Mexico City, Mexico 53100 Micro Warehouse (Australia) Pty Ltd. 2/11 Artisan Road Private Bag 1 Unit 2 Seven Hill NSW 2147 Australia 26 Edmundstone Road 6 Bowen Hills, Queensland 4006 Australia Micro Warehouse 535 Connecticut Avenue, Norwalk, CT 06854, 203-899-4000 http://www.warehouse.com EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES The following is a list of subsidiaries of the Company as of March 17, 1996: PLACE OF NAME ORGANIZATION - -------------------------------------------------------------------------------- Subsidiaries of Micro Warehouse, Inc. (Delaware) Micro Warehouse, Inc. of New Jersey....................... United States Micro Warehouse, Inc. of Ohio............................. United States Micro Warehouse Catalogues, Inc. of Connecticut........... United States Micro Warehouse Canada Limited............................ Canada Micro Warehouse Denmark APS............................... Denmark Micro Warehouse Finland OY................................ Finland Micro Warehouse International, Inc. ...................... United States Micro Warehouse Norway AS................................. Norway Micro Warehouse Sweden AB................................. Sweden Micro Warehouse AG........................................ Switzerland TD 2 S.A.................................................. France Innosoft S.A.R.L.......................................... France Kelar S.A.R.L............................................. France Micro Warehouse Australia Pty. Ltd........................ Australia Benton Sistemas S.A. de C.V............................... Mexico Inmac Inc................................................. Canada Subsidiaries of Micro Warehouse Finland Oy: Business Forum Oy......................................... Finland Subsidiaries of Micro Warehouse International, Inc.: Micro Warehouse (Deutschland) GmbH........................ Germany Micro Warehouse Holding B.V............................... The Netherlands Micro Warehouse Japan KK.................................. Japan Subsidiaries of Micro Warehouse Holding B.V.: Micro Warehouse B.V....................................... The Netherlands Inmac AB.................................................. Sweden TD S.A.................................................... France Micro Warehouse Ltd....................................... United Kingdom Micro Warehouse S.A.R.L................................... France Subsidiaries of Inmac AB: Micro Warehouse Sweden AB................................. Sweden MacKatalogen AB........................................... Sweden Subsidiaries of Micro Warehouse Ltd: Technomatic Ltd........................................... United Kingdom Inmac Ltd................................................. United Kingdom Micro Warehouse (1996) Ltd................................ United Kingdom 22 EX-23.1 10 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors MICRO WAREHOUSE, INC.: We consent to incorporation by reference in the registration statements (Nos.33-71868 and 33-31098) on Form S-8 of Micro Warehouse, Inc. of our reports dated February 10, 1997, relating to the consolidated balance sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 1996, which reports are included or incorporated by reference in the December 31, 1996 annual report on Form 10-K of Micro Warehouse, Inc. Stamford, Connecticut March 27, 1997 EX-27 11 FDS
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 32,234 20,022 203,687 10,876 201,119 494,828 29,712 39,482 607,842 223,298 376 0 0 343 114,042 607,842 1,916,244 1,916,244 1,573,798 1,573,798 0 0 0 36,601 19,719 15,298 0 1,584 0 15,298 0.44 0.44
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