-----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, UCFxTN1zWr+6y9Hqi4aT+tPAbrnNueTbYzWwFYPKVhl4s7Ic1B9sHloU5GPPHcBg jBSqBelwi1QyQuKXIRUiGg== 0001047469-99-012811.txt : 19990402 0001047469-99-012811.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012811 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 000-20730 FILM NUMBER: 99581623 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-K405 1 FORM 10-K405 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, 1998 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) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject of such filing requirements for the past 90 days. Yes |x| No |_| Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. |x| The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing sales price as reported on the Nasdaq Stock Market on March 25, 1999 was approximately $353,871,004. In determining the market value of the voting stock held by non-affiliates, shares of Common Stock beneficially owned by each executive officer, director and holder of more than 10% of the outstanding shares of Common Stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Common Stock outstanding as of March 25, 1999: 35,685,577 DOCUMENTS INCORPORATED BY REFERENCE: Pursuant to General Instruction G(3) to this form, the information required by Part III (Items 10, 11, 12, and 13) hereof is incorporated by reference from the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 3, 1999. TABLE OF CONTENTS Page ---- PART I Item 1. Business.............................................................3 Item 2. Properties..........................................................13 Item 3. Legal Proceedings...................................................14 Item 4. Submission of Matters to a Vote of Security Holders.................14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................................15 Item 6. Selected Financial Data.............................................16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................17 Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........27 Item 8. Financial Statements and Supplementary Data.........................28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................28 PART III Item 10. Directors and Executive Officers of the Registrant..................29 Item 11. Executive Compensation..............................................29 Item 12. Security Ownership of Certain Beneficial Owners and Management......29 Item 13. Certain Relationships and Related Transactions......................29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....29 Signatures..........................................................31 2 PART 1 ITEM 1. BUSINESS OVERVIEW We are a $2.2 billion specialty catalog and online retailer and direct marketer of brand name personal computers, computer software, accessories, peripheral and networking products to commercial and consumer customers. We market our products through frequent mailings of our distinctive, colorful catalogs and our Internet catalog, discount retail and auction sites. Additionally, we employ telemarketing account managers who focus on building relationships with corporate, education and government accounts. We offer brand name hardware and software from leading vendors such as Adobe, Apple, 3Com, Compaq, Hewlett-Packard, IBM, Iomega, Microsoft and Toshiba. Through our four core catalogs, Micro Warehouse, Mac Warehouse, Data Comm Warehouse and Inmac, various specialty catalogs and our Internet sites we offer a broad assortment of computer products at competitive prices. With colorful illustrations, concise product descriptions and relevant technical information, each catalog focuses on a specific segment of the computer market. The catalogs are recognized as a leading source for computer hardware, software and other products. During 1998, we distributed approximately 121 million catalogs worldwide and 2.0 million customers placed orders with us. During 1997, we distributed approximately 124 million catalogs worldwide and 2.2 million customers placed orders with us. We maintain a full-service distribution center in Wilmington, Ohio, totaling approximately 288,000 square feet and telemarketing centers in Lakewood and Gibbsboro, New Jersey and South Norwalk, Connecticut. We operate 24 hours a day, seven days a week in the United States. We also operate telemarketing and distribution facilities in the United Kingdom, France, Germany, Sweden, the Netherlands, Canada and Mexico. We began operations in 1987 as a Connecticut corporation and were reincorporated in Delaware on October 2, 1992. Our principal executive offices are located at 535 Connecticut Avenue, Norwalk, Connecticut 06854 and our telephone number there is (203) 899-4000. INTERNET OPERATIONS. In July 1995 we launched our Internet catalog on the World Wide Web at Warehouse.com. Product descriptions and prices for more than 20,000 products are displayed in an online catalog with full information and on-screen images available for more than 7,000 products. Selected corporate clients can gain access to their own online catalog, complete with unique product selections and customized pricing. Our European subsidiaries also have web sites. In November 1997 we opened a live Internet auction site at Webauction.com. The auction site offers a selection of personal computers and home electronic products including first-run merchandise, refurbished and end-of-life items. Auctions are conducted 24 hours a day, 7 days a week. Our Internet sites received approximately 72,000 daily visitors in December 1998. In February 1999 we launched an Internet discount retailer at Computersbynet.com. Computersbynet.com offers computer products to customers who are prepared to purchase through the Internet using a credit card without the need for extensive telephone based customer support. INTERNATIONAL OPERATIONS. International operations represented 28% of our sales in 1998 and 30% in 1997. We have full-service, direct marketing operations and publish catalogs in each country in which we operate. We distributed approximately 20 million catalogs internationally in 1998 and 25 million in 1997. You can find more information regarding our operations in different geographic areas in Note 12 of our financial statements contained herein. 3 1997 RESTRUCTURING. In December, 1997 we announced a major restructuring of our operations. The restructuring objectives were to simplify our business worldwide, reduce our cost structure, eliminate unprofitable businesses in Norway, Denmark, Finland, Japan and Australia and concentrate efforts on the productivity of the sales force and the continued growth of the Wintel business. In connection with this restructuring, we discontinued our Macintosh-dependent operations in Australia and Japan and completed the sale of three small Macintosh-dependent operations in Denmark, Norway and Finland. In the United States, we consolidated our under-performing businesses, USA Flex and Online Interactive, into our existing New Jersey and Connecticut facilities. In addition, we reorganized our domestic sales force. These measures involved eliminating approximately 600 positions or 14% of our workforce. These restructuring activities were completed in 1998. OUR CATALOGS We currently publish four primary catalogs for the domestic market:
CATALOG NAME DESCRIPTION # 1998 ISSUES - ------------ ----------- ------------- Mac Warehouse a full product line catalog for the Macintosh market 14 Micro Warehouse a full product line catalog for the Wintel market 12 Data Comm Warehouse a specialty catalog featuring products used in the data communications and networking market 12 Inmac a supplies-focused catalog for the Wintel market 6
We publish additional specialty catalogs from time to time. Each catalog is printed with full-color photographs and detailed product descriptions. The catalogs are generally created and produced by our in-house designers and production artists on a computer-based desktop publishing system. We distributed 121 million catalogs worldwide in 1998, 124 million in 1997 and 121 million in 1996. Generally each domestic customer who has placed orders within the past 12 months receives a catalog at least monthly. In addition, we mail a catalog with each order shipped. We also mail targeted versions of catalogs to our corporate, education and government customers. Internationally, we publish our catalogs in several languages and under a variety of titles including Micro Warehouse, Mac Warehouse, Data Comm Warehouse, Inmac, Technomatic and Lan Warehouse at various frequencies. OUR INTERNET BUSINESS In addition to our catalogs, we market our products through our four Internet sites on the World Wide Web: O Warehouse.com O Webauction.com O Computersbynet.com O Readerswarehouse.com In 1998 we experienced significant growth in our Internet business. Internet-related sales in 1998 were $186.6 million, an increase of 277% from $49.5 million in 1997. Our websites received 72,000 daily visitors in December 1998. To date, substantially all of our Internet revenues have been generated from our domestic websites, although all of our European businesses also operate websites. We acquire customers for our Internet business through a variety of means, including: o advertisements appearing in our print catalogs 4 o online advertisements o e-mail marketing programs o links from our vendors' websites o print advertisements WAREHOUSE.COM. Our core e-commerce website, Warehouse.com, is an online catalog with descriptions, prices and pictures of a wide variety of personal computer products. This is one of the leading e-commerce sites for computer products with 1998 sales of $153 million, including fourth quarter 1998 sales of $59 million, up 42% sequentially from the third quarter. The website is promoted in our core catalogs and attracts both corporate and consumer customers because of its competitive pricing, customer service and attractive and easy-to-use design. Customers can take advantage of our online store format by shopping at their convenience and purchasing brand name products at value prices. In 1999 we have expanded our product category offering with the addition of a book commerce site, Readerswarehouse.com, that offers approximately 2,000 best selling titles at discount prices. SAVEBYNET.COM, INC. In early 1999 we announced the formation of a new subsidiary -- Savebynet.com, Inc. This subsidiary operates our existing Internet auction business Webauction.com and our new Internet discount retailer Computersbynet.com. Through interactive auctions on our Webauction.com website, we offer a wide variety of merchandise, such as excess, refurbished, close-out, discounted or end-of-life computer products. Although our primary offerings are in computers and computer-related products, we also offer a wide variety of other merchandise, including: o consumer electronics o sports memorabilia o jewelry o housewares o sports and fitness equipment o vacation packages Since its launch in November 1997 Webauction.com has provided us with the means to test new product categories and liquidate aged inventory and refurbished or end of life items. Webauction.com's 1998 sales were $33.7 million, up from 1997 sales of $2.5 million. Webauction.com attracted 24,000 daily visitors in December 1998 and had 150,000 registered bidders as of December 31, 1998. Launched in February 1999, Computersbynet.com is an Internet-only discount reseller targeted at the growing number of online consumers who are prepared to purchase computer products by credit card without the need for extensive telephone based customer support. Much like Warehouse.com, the Computersbynet.com website offers full descriptions and pricing information on a wide variety of products and online ordering capability. The introduction of the Computersbynet.com brand and site provides an opportunity to leverage our marketing capabilities and existing infrastructure to compete effectively on a low-cost basis as an Internet discount retailer. By taking only online orders and limiting the amount of customer service offered to consumers, our transaction cost should be lower in business generated by Computersbynet.com than in our traditional business, thus allowing us to sell at lower gross margins. We intend to maintain our "full service" Warehouse.com brand with its separate pricing strategy to enable us to offer full sales and service support for customers who prefer a higher level of service. MARKETING AND SALES We serve both the commercial and consumer markets. For the year ended December 31, 1998, commercial customers represented 5 approximately 46% of our domestic customer base and accounted for approximately 79% of domestic sales. Our marketing programs are designed to attract new customers and to stimulate additional purchases from existing customers. We continuously attract new customers by selectively mailing catalogs to prospective customers as well as through advertising in major computer magazines and on the Internet. We obtain the names of prospective customers through the use of selected mailing lists from various sources, including manufacturers, suppliers, software publishers and computer magazine publishers. Worldwide we had 2.0 million customers who placed orders with us in 1998, 2.2 million in 1997 and 2.3 million in 1996. In addition to traditional means of marketing, we attract new customers through e-mail programs, catalog advertisements, online advertising, links from our vendors' websites and sweepstakes. SALESFORCE. Our domestic salesforce, located in our Lakewood and Gibbsboro, New Jersey and South Norwalk, Connecticut facilities, consists of sales representatives who are responsible for: o servicing inbound telephone orders and responding to customer inquiries we receive in response to our catalogs, advertising or Internet sites o making outbound prospecting and account management sales calls to generate sales from commercial, education and government accounts. As our sales continue to shift towards the commercial segment, our future success depends, in part, on our ability to improve the skills, effectiveness and productivity of our salesforce. To this end, in early 1998 we reorganized our domestic salesforce to attempt to streamline and improve the productivity of sales operations. As a result, approximately 230 inbound sales positions were eliminated. To accelerate the growth of our business, during the third quarter of 1998 we formed our Business Development Unit to focus on developing commercial accounts. During the fourth quarter of 1998 we hired a new senior sales management team and began an aggressive recruiting program to expand our domestic outbound telemarketing sales force. As of March 19, 1999 the total domestic sales force numbered 721 associates, up from 602 as of October 1, 1998 when we began this effort. We are in the process of implementing new compensation, training and sales activity measurement programs designed to improve the effectiveness of our outbound sales force. CUSTOMER SERVICE/TECHNICAL SUPPORT. We believe that our ability to provide prompt and efficient customer service has been critical to our success. Our dedicated customer service representatives are trained to respond to frequently asked questions such as the status of an order or our return policy. We also have a technical support staff to assist customers with the selection, installation and operation of their products. We offer a toll-free number for customer service and technical support from 8:00 a.m. to midnight, eastern time, Monday through Friday and from 10:00 a.m. to 6:00 p.m. on Saturday and Sunday. CUSTOMER RETURN POLICY. We provide a 30-day guarantee against defects with respect to most of our products. We work closely with customers and vendors to assure that all vendor warranties and return privileges are honored. During 1998 we had a return rate of approximately 6% of gross sales. Returns are received and processed as a segregated activity to maintain control over the returned product, to initiate the refund process and to obtain appropriate credit from suppliers. Return experience is closely monitored at the stock-keeping-unit level to identify trends in product offerings, enhance customer satisfaction and reduce overall returns. SEASONALITY. Response rates to catalog mailings are subject to seasonal variations. The first and last quarters of the year generally have higher response rates while the two middle quarters typically have lower response rates. Given this fact, we mail fewer catalogs during the second and third quarters. The slower quarters are impacted by the summer months, particularly in Europe. PRODUCTS AND MERCHANDISING 6 We offer more than 30,000 microcomputer hardware, software and peripheral products and supplies. During 1998 sales of Wintel computers and related products represented approximately 66% of our net sales while sales for Macintosh computers and related products represented approximately 34% of net sales. Our product evaluation teams for the various product categories constantly monitor the market for new products from new and existing vendors. As product areas decline in importance, the amount of catalog exposure is reduced in favor of more sought-after new products and the inventory levels and numbers of stock-keeping-units are adjusted. During 1998 no single product accounted for more than 2% of our net sales. HARDWARE. We offer a large selection of hardware items. This category includes personal computers, servers, printers, modems, monitors, data storage devices, add-on circuit boards, connectivity products and certain business machines. Brands sold in this category include American Power Conversion, Apple, 3Com, Compaq, Epson, Hewlett-Packard, IBM, Iomega, Texas Instruments and Toshiba. Hardware sales constituted approximately 71% of our net sales in 1998. SOFTWARE. We sell a wide variety of computer software packages in the business and personal productivity, connectivity, utility, language, education and entertainment categories. We offer products from the larger, well known vendors as well as numerous specialty products from new and emerging vendors. Brands offered include Adobe, Claris, Connectix, Corel, Intuit, Macromedia, Microsoft, Novell, Quark, and Symantec. Software sales constituted approximately 16% of our net sales in 1998. SUPPLIES AND ACCESSORIES. We currently sell various supplies such as media, toner cartridges, desk and computer accessories and computer furniture. Sales of these products constituted approximately 13% of our net sales in 1998. PRIVATE LABEL BRANDS. Under our private label brands, Power User, Inmac, USA Flex and Nu Data, we sell products such as microcomputers, hard drives, server switches, memory chips, CD-Roms, cables, and accessories. Sales of these products accounted for approximately 5% of our net sales in 1998. These sales have also been included in the product categories listed above. PURCHASING We purchase products from approximately 1,000 vendors and purchase approximately 53% of our products directly from manufacturers with the balance from distributors. Our largest domestic vendors include Adobe, Apple, 3Com, Compaq, Hewlett-Packard, IBM, Ingram Micro, Iomega, Microsoft and Toshiba. In 1998 the leading 100 products accounted for approximately 24% of domestic net sales. Purchases of products from Ingram Micro, our largest vendor, constituted approximately 23% of our product purchases on a worldwide basis in 1998. Purchases of products from Apple, our second largest vendor, constituted approximately 9% of our product purchases on a worldwide basis in 1998. We believe that our volume purchases enable us to obtain favorable product pricing. Many of our suppliers make funds available to us in the form of advertising allowances and incentives to promote and increase sales of their products. Generally, we have been able to return unsold or obsolete inventory to our vendors through written agreements with, or unwritten policies of, such vendors. In addition, we typically receive price protection should a vendor subsequently lower its price. Recently, however, vendors have been reducing periods for which inventory is price protected and limiting the quantity of product they will accept for returns. There can be no assurance that we will continue to receive any price protection or return privileges in the future (see "Outlook" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"). ORDER FULFILLMENT Orders are placed via telephone, fax, Internet or mail. When an order is entered into our computer system, a credit check or credit card verification is performed and, if approved, the order is electronically transmitted to the warehouse and a packing slip is printed for order fulfillment. Domestic 7 orders accepted by midnight eastern time are generally shipped for delivery the following day via Airborne Express. Upon request, orders may also be shipped by alternate means. Our international operations generally use the same distribution and order processing computer systems and are able to exchange data with United States operations. We conduct our United States distribution operations at our Wilmington, Ohio warehouse/distribution center. The warehouse/distribution center consists of approximately 288,000 square feet located in three facilities adjacent to the main distribution facility of Airborne Express. Construction of our new 230,000 sq. ft. warehouse facility at the Airborne Express hub in Wilmington, Ohio will be completed in the second quarter of 1999. Installation of equipment and systems will begin in the second quarter and we expect the facility to be operational in the fall of 1999. This will permit us to consolidate our fulfillment center functions in a single highly automated building instead of the three facilities that we currently occupy and should enable us to reduce overall distribution costs. We also operate distribution facilities in the United Kingdom, France, Germany, Sweden, the Netherlands, Canada and Mexico. MANAGEMENT INFORMATION SYSTEMS We have committed significant resources to the development of an integrated computer system which is used to manage all aspects of our business. The main computer system is principally comprised of Hewlett-Packard hardware and licensed and internally-developed software. This system supports telemarketing, marketing, purchasing, accounting, order entry, financial reporting, customer service, warehousing and distribution. The system allows us, among other things, to monitor sales trends, make informed purchasing decisions, provide product availability and order status information. In addition to the main system, we have a system of networked personal computers which provides numerous additional management control, planning and exception reporting which facilitates data sharing and provides an automated office environment. We remain committed to invest in systems and facilities to improve the efficiency of our business. In 1998 we made installations and upgrades to our computer systems in both our domestic and international operations, at an approximate cost of $10.4 million. During 1998, we converted our domestic financial systems to Peoplesoft Inc. application software and continued our program to upgrade our primary operating systems worldwide by the end of the second quarter of 1999. In addition, during the first half of 1999 we will convert our domestic human resources information system to PeopleSoft application software. These systems enhancements are intended to create efficiencies in many business areas, including sales, warehousing, distribution, human resources and financial management. In addition to the efficiencies discussed above, the implementation of these new systems will address Year 2000 issues. In 1998 we continued to address our Year 2000 remediation issues and incurred costs of approximately $1.4 million after-tax or $0.04 per share. Additionally, in 1999 we expect to invest approximately $18 million in capital expenditures to complete the upgrade of our computer systems. For a description of management information system issues facing us related to the Year 2000, see "Year 2000 Compliant Information Systems" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". COMPETITION The direct marketing industry and the computer products retail business are highly competitive and are becoming more competitive as a result of numerous factors including the increase in direct selling of computers and peripherals by computer hardware manufacturers and the increase in the number of electronic commerce competitors. We expect competition to continue to increase in the future. We compete with a variety of other resellers, both traditional and Internet-related, depending on the type of merchandise and sales format they offer. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, customer support, technical and other resources. As a result, they may be able to respond 8 more quickly to changes in customer preferences or devote greater resources to the development, promotion and sale of their merchandise. We may not be able to compete successfully against current and future competitors. Any inability to do so could materially and adversely affect our business, financial condition and results of operations. Our principal competitors include: o Computer products direct marketers -- companies with substantial customer bases in the computer and peripherals catalog business, including CDW Computer Centers, Inc., Creative Computers, Inc., Insight Enterprises, Inc., Multiple Zones International, Inc. and PC Connection, Inc. o Personal computer manufacturers -- companies such as Apple Computer Inc., Compaq Computer Corp., Dell Computers Corporation and Gateway, Inc. that are selling their products directly. o Consumer electronic and computer retail stores, including superstores such as Best Buy Co., Inc., Circuit City Stores, Inc. and CompUSA Inc. o Value added resellers of computer products, such as Entex Corporation and Inacom, that sell computers to corporate clients for whom they provide networking, systems integration and other related services. o Internet direct marketers of computer products -- companies that sell and distribute computer-related products via the Internet, including Beyond.com Corporation, Buy.com, Inc., Cyberian Outpost, Inc., NECX Corp., ONSALE Inc. and ValueAmerica.com, Inc. o Internet auction houses such as ONSALE Inc., Surplus Auction (the auction site for Egghead.com, Inc.) and Ubid Inc. o Internet content providers or portals such as, America Online Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc., Microsoft Corporation and Yahoo! Inc. that engage in electronic commerce and may offer or provide means for others to offer competitive products. o Internationally, our competition includes direct vendors, direct marketers, retailers, corporate resellers, value added resellers and internet resellers. Some of our competitors include: Action Computer (United Kingdom), Computacenter plc (France and the United Kingdom), Computer Company (the Netherlands), Dustin (Sweden), MISCO (France and Germany), Global Direct Mail (United Kingdom), Info Products (the Netherlands), Multiple Zones International, Inc. (Germany) and PC Express (Sweden). We believe the principal competitive factors affecting our market are: o price o product availability o speed and accuracy of fulfillment o size and productivity of an outbound sales force o ability to purchase merchandise at satisfactory prices o brand recognition o ability to attract customers at favorable customer acquisition costs o speed, reliability, accessibility and ease of use of Websites o effectiveness of customer service Price is an important competitive factor in the personal computer hardware and software market. We expect increased competition on the basis of price. That could result in reduced operating margins, loss of market share and diminished brand loyalty, any one of which factors could materially and adversely affect our business, financial condition and results of operations. In addition, new technologies and the expansion of existing technologies on the Internet, such as price comparison programs, may direct end-users to retailers that compete with us. EMPLOYEES 9 As of December 31, 1998, we employed 3,595 people, down from 4,133 as of December 31, 1997. 1,292 were in management, support services and administration; 1,618 in sales, technical support and customer service and 685 in warehouse/distribution. Of the total number of employees, 1,248 were employed internationally. Our domestic employees are not represented by a labor union and we have experienced no work stoppages. We believe that our employee relations are good. SALES TAX Presently, we collect state sales tax, or other similar tax, only on sales of products to residents of New Jersey, Connecticut and Ohio. Various states have tried to impose on direct marketers the burden of collecting state sales taxes on the sale of products shipped to state residents. The U.S. Supreme Court has held that it is unlawful for a state to impose these sales tax collection obligations on an out-of-state mail order company whose only contacts with the state are the distribution of catalogs and other advertising materials through the mail and subsequent delivery of purchased goods by parcel post and interstate common carriers. It is possible, however, that legislation may be passed to overturn such decision or the Supreme Court may change its position. Additionally, it is currently uncertain whether electronic commerce, which includes our various Internet sales activities, will be subject to state sales tax. The imposition of new state sales tax collection obligations increases our administrative expenses and may impact our ability to compete effectively on the basis of price. In October 1998 Congress passed the Internet Tax Freedom Act. The stated purpose of the ITFA is to provide neutral tax treatment of economic activity, electronic or otherwise. Towards this end, the ITFA prohibits state and local taxes that discriminate against or single out the Internet. As part of the Act, Congress created the Advisory Committee on Electronic Commerce, charged to conduct an 18-month study of whether use of or sales on the Internet should be taxed, and if so, how taxes could be applied without subjecting the Internet and electronic commerce to special, discriminatory or multiple taxation. Although it is not an issue specific to the Internet, one of the agenda items for the Advisory Committee is a review of the sales tax "nexus" issue as it relates to all direct marketers. We cannot assure you that the Advisory Committee's report to Congress will not ultimately result in a modification by legislation of the Supreme Court's favorable rulings regarding sales and use taxation on out of state direct marketers. TRADEMARKS We conduct our business under many trademarks, service marks and Internet domain names in the U.S. and internationally including Micro Warehouse, Mac Warehouse, Data Comm Warehouse, Inmac, USA Flex, Nu Data, Power User, Lan Warehouse, Warehouse.com, Auction Warehouse, Webauction, Webauction.com, Computersbynet.com, Reader's Warehouse, Savebynet.com and a variety of other marks and domain names that appear in the our catalogs, Internet sites, advertisements and on our private label products. 10 We intend to use and protect these or related marks and domain names, as necessary and appropriate, in the U.S and in various foreign countries. We believe our trademarks, service marks and domain names have significant value and are an important factor in the marketing of our products. Our trademarks, service marks and domain names have an indefinite term as long as they are used in connection with our business activities. We intend to take steps to maintain use of our marks and domain names as appropriate and to renew registrations as necessary. REGULATIONS The direct response business is subject to the Mail and Telephone Order Merchandise Rule and 1996 Telemarketing Sales Rule and related regulations promulgated by the Federal Trade Commission and comparable state agencies. In addition, U.S. and foreign laws regulate certain users of customer information and the development and sale of mailing lists. We believe we are in compliance with all rules and regulations governing our marketing practices and have implemented programs and systems to assure ongoing compliance. However, new restrictions may arise in this area that could have an adverse effect on our business, financial condition and results of operations. 11 Due to the increasing popularity and use of the Internet and other commercial online services, it is possible that additional laws and regulations may be adopted with respect to electronic commerce. These laws may cover issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. For example, the states of Virginia, Nevada, Washington and California have passed legislation intended to deter fraudulent or other unfair practices in direct marketing via commercial e-mail practices commonly known as "spamming". At least seventeen other states and the federal government are currently considering similar legislation. We believe we are in compliance with all laws governing direct marketing through e-mail. However, we cannot predict whether any new legislation will result in further restrictions on legitimate e-mail marketing efforts or that such restrictions will make our efforts to market through commercial e-mail more costly or less effective in the future. Moreover, the applicability to the Internet and other commercial online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any new legislation or regulation, or the application of existing laws and regulations to the Internet, could have the effect of decreasing the growth of electronic commerce or increasing our cost of doing business on the Internet and could have a material adverse effect on our business, financial condition and results of operations. 12 ITEM 2. PROPERTIES Our principal facilities, all of which except for the warehouse and distribution center facility in Runcorn, England are leased, are as follows:
Expir. of Approx. Current Location Sq. Ft. Lease Term -------- ------- ---------- Telemarketing, technical support, management information systems and customer service center ....................... Lakewood, NJ 52,109 2009 Telemarketing, technical support, management information systems and customer service center ................................... Lakewood, NJ 41,514 2005 Manufacturing, sales and distribution ................................. Lakewood, NJ 30,360 2001 Telemarketing, technical support, management information systems and customer service center .................................. Gibbsboro, NJ 82,000 2002 Warehouse and distribution center ................................... Wilmington, OH 102,400 1999 Warehouse and distribution center* .................................. Wilmington, OH 83,200 2003 Warehouse and distribution center* .................................. Wilmington, OH 32,000 2003 Warehouse and distribution center* .................................. Wilmington, OH 70,400 2001 Warehouse and distribution center** ................................. Wilmington, OH 230,000 2009 Headquarters and Administrative offices ................................ Norwalk, CT 83,000 2001 Corporate Sales .................................................. South Norwalk, CT 26,500 1999 European Coordination Center and offices ........................ Bracknell, England 11,000 2011 Offices and distribution center ........................... Watford, London, England 37,500 2004 Warehouse and distribution center ................................. Runcorn, England 69,000 N/A Offices ....................................................... Borehamwood, England 48,300 2003 Offices and warehouse ........................................... Mitry-Mory, France 63,900 2002 Offices .......................................................... Ginsheim, Germany 37,542 2001 Offices and distribution center .............................. Mainz-Kastel, Germany 27,653 2008 Distribution center .......................................... Neu-Isenburg, Germany 7,209 2000 Offices and distribution center ............................. Amsterdam, Netherlands 10,000 1999 Offices and distribution center .................................. Stockholm, Sweden 11,475 1999
13 Offices .......................................................... Stockholm, Sweden 12,000 2000 Offices and distribution center ................................ Mexico City, Mexico 4,600 1999 Retail and offices ........................................ Toronto, Ontario, Canada 7,500 2001 Offices and warehouse ..................................Mississauga, Ontario, Canada 56,517 2004 Retail, offices and warehouse .......................... North York, Ontario, Canada 3,500 1999
We believe that our facilities are adequate for our current needs and that suitable additional space will be available as needed. * We intend to sub-lease these properties once our new warehouse/distribution center is completed. ** We expect the lease of the new warehouse/distribution center to commence during the second quarter of 1999. ITEM 3. LEGAL PROCEEDINGS. During 1998 we settled all remaining litigation, with the exception of the ongoing formal investigation by the Commission, arising out of our announcements in September and October, 1996 that we intended to restate our financial statements covering the 1992 through 1995 fiscal years. During the second quarter of 1998 we recorded a pre-tax charge of $14 million for the settlement of the lawsuit brought by holders of approximately 1.3 million shares of our common stock and which arose out of our 1996 stock merger with Inmac Corp. This settlement, consummated on July 30, 1998, provided for a total payment of $19 million, $6 million of which was in the form of our common stock. The pre-tax charge was based on the total amount of the settlement, net of a $5 million contribution from a non-affiliated source. In addition, we consummated a settlement with the State Board of Administration of Florida, which had earlier elected not to participate in the class action settlement, by making a $150,000 cash payment. In September 1997, we settled the consolidated securities class action lawsuit relating to the restatement of our financial statements. In September 1998 we consummated the Court-approved settlement and paid $30 million in cash to the class plaintiffs. The staff of the Commission is conducting a formal investigation into the events underlying the restatement. We are cooperating with the Commission in its investigation. We cannot predict the outcome of this investigation. We are and may in the future be involved in other litigation relating to claims arising out of our operations in the normal course of business. We do not expect any pending litigation to have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year covered by this report. 14 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol MWHS. As of December 31, 1998, the Common Stock was held by approximately 182 holders of record. The table below sets forth the reported quarterly high and low sales prices for the Common Stock on the Nasdaq Stock Market for Fiscal Year 1998 and 1997. FISCAL 1998 HIGH LOW First Quarter $17.38 $10.25 Second Quarter 18.75 13.25 Third Quarter 27.63 14.63 Fourth Quarter 36.38 11.25 FISCAL 1997 First Quarter $16.50 $ 9.75 Second Quarter 18.63 12.88 Third Quarter 30.00 13.00 Fourth Quarter 24.75 9.88 The Company has never declared nor paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings, if any, for future growth and does not anticipate paying any cash dividends in the foreseeable future. 15 ITEM 6. SELECTED FINANCIAL DATA For the Years Ended December 31,
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: - ----------------------------------------------------------------------------------------------------------------------------- Net sales $2,220,018 $2,125,698 $1,916,244 $1,684,627 $1,130,796 Gross profit 359,935 351,976 342,446 323,991 246,678 Restructuring, merger costs and goodwill write-off -- 67,828 32,161 -- -- Litigation settlements 14,000 20,700 -- -- -- Income (loss) from operations before interest, income taxes and extraordinary charge 52,528 (42,455) 33,093 57,715 41,063 Income (loss) before income taxes and extraordinary charge 61,578 (37,816) 36,601 57,903 40,877 Extraordinary charge, net of taxes -- -- 1,584 -- -- ============================================================================================================================= Net income (loss) $30,178 ($36,681) $15,298 $35,244 $24,556 ============================================================================================================================= Basic net income (loss) per share $0.87 ($1.06) $0.45 $1.07 $0.82 Diluted net income (loss) per share $0.85 ($1.06) $0.44 $1.05 $0.80 Shares used in per share calculation - Basic 34,803 34,475 34,310 32,940 29,847 Diluted 35,349 34,475 34,793 33,605 30,560 ============================================================================================================================= OPERATING DATA: - ----------------------------------------------------------------------------------------------------------------------------- Gross profit percentage 16.2% 16.6% 17.9% 19.2% 21.8% Operating profit (loss) percentage 2.4% (2.0%) 1.7% 3.4% 3.6% Current ratio 2.2:1 2.0:1 2.2:1 2.8:1 2.5:1 BALANCE SHEET DATA (AT DECEMBER 31): - ----------------------------------------------------------------------------------------------------------------------------- Working capital $312,128 $262,449 $271,530 $298,843 $210,278 Total assets 666,530 619,344 607,842 554,546 411,876 Long - term obligations -- -- 376 20,458 1,497 Short-term debt obligations -- 12,570 40,803 18,888 25,461 Stockholders' equity 398,543 348,789 384,168 364,669 270,862 =============================================================================================================================
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The table below sets forth certain items expressed as a percent of net sales for each of the years in the three-year period ended December 31, 1998.
Years Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of sales 83.8 83.4 82.1 - ----------------------------------------------------------------------------------------------------------------- Gross profit 16.2 16.6 17.9 Selling, general and administrative expenses 13.2 14.4 14.5 Restructuring costs, merger costs and goodwill write-off -- 3.2 1.7 Litigation settlements 0.6 1.0 -- - ----------------------------------------------------------------------------------------------------------------- Income (loss) from operations before interest, income taxes and extraordinary charge 2.4 (2.0) 1.7 Interest income, net 0.4 0.2 0.2 - ----------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary charge 2.8% (1.8%) 1.9% =================================================================================================================
1998 COMPARED TO 1997 WORLDWIDE SALES o Net sales increased $94.3 million or 4.4% to $2.220 billion from $2.126 billion in the prior year. In 1998 we continued to focus on expanding our IBM PC-compatible ("Wintel") business. This focus resulted in an approximate 16.4% increase in our worldwide Wintel sales. Our worldwide Mac sales declined approximately 13.6%. Overall, our Mac business represented approximately 34% of our total business in 1998, down from approximately 41% in 1997. o Sales growth for the year was impacted by the disposal of our small-Mac dependent Norwegian, Finnish, Danish, Japanese and Australian businesses in December of 1997 and early in 1998. The sales growth excluding these businesses was $153.3 million or 7.4% over 1997. Wintel sales grew approximately 19.1% and Mac sales declined approximately 10.4%. o Our average order value was $523 in 1998, an increase of 4.0% compared to 1997, while our number of orders shipped remained relatively flat year over year. o As of December 31, 1998 we had 2.0 million customers who had placed orders with us in the last twelve months, down 9.1% from 2.2 million at the end of 1997. This decrease was principally due to a decline in the number of active Mac customers. DOMESTIC SALES o Domestic sales grew $120.8 million or 8.2% to $1.603 billion from $1.483 billion in 1997. o Domestic Wintel sales increased approximately 24.2% from 1997, while domestic Mac sales declined approximately 11.2% from the prior year. o Wintel desktop computer sales increased 121% over 1997 and unit volume increased 221%. 17 o Macintosh OS computer sales decreased 2%, while units increased 5%. Sales of Apple branded computers, including the new iMac, increased 42% in revenue and 72% in units, partially offsetting the elimination of Macintosh clones from the marketplace. o Overall, our domestic average selling price for computers declined 20% from 1997. o Our domestic average order value increased 7.9% to $556 from $515 in 1997 despite a higher percentage of Internet orders which typically have lower average order values. INTERNATIONAL SALES o International sales decreased $26.5 million or 4.1% to $616.7 million from $643.2 million in 1997. On a currency-adjusted basis, international sales declined 2.7%. o Excluding the results of the businesses disposed of in December of 1997 and early 1998, international sales increased 5.6% and increased 7.1% on a currency-adjusted basis. o International Wintel sales increased approximately 3.0% from 1997. o International Mac sales declined approximately 22.5% from 1997. WORLDWIDE INTERNET SALES o Our Internet business continued to grow substantially in 1998. Internet sales increased $137.1 million or 277% to $186.6 million from $49.5 million in 1997. o Sales from our Warehouse.com core business Internet site increased $105.9 million or 225% to $152.9 million from $47.0 million in 1997. We have begun a significant upgrade of this site, adding many new features and services. We have also expanded our product category offering with the addition of a book commerce site, Readerswarehouse.com. o Sales for our auction website Webauction.com were $33.7 million during 1998 compared to $2.5 million in 1997. Webauction.com began operations in November 1997. o In February 1999 we announced the formation of an Internet-only subsidiary, Savebynet.com Inc. which includes Webauction.com and Computersbynet.com, our new Internet discount retailer website. GROSS PROFIT o Gross profit increased to $359.9 million in 1998 from $352.0 million in 1997 but decreased as a percentage of net sales to 16.2% in 1998 from 16.6% in 1997. o The gross profit percentage decline was due to lower domestic margins. International margins were relatively flat. o Our domestic margins were lower as a result of increased competitive pricing pressures and the impact of a greater percentage of low-margin Internet sales. o Our international margins were flat due to increased competitive pressure in the UK, offset by the disposal of our lower margin businesses in Norway, Denmark, Finland, Japan and Australia in December of 1997 and early 1998. We expect to experience continued reduction in gross profit margins in 1999 due to continued industry-wide pricing pressures. Also, some manufacturers and distributors provide us with incentives in the form of price protection and rebates. No assurance can be given that we will continue to receive such incentives in the future. In addition, our gross margin as a percentage of sales may vary based on product mix, pricing strategies, market conditions and other factors. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18 o Selling, general and administrative expenses decreased as a percentage of net sales to 13.2% from 14.4% in 1997. o This decrease was due to several factors including our net advertising costs, which decreased as a percentage of sales to 0.9% from 1.3% in 1997, lower overall operating costs and savings from the disposal and restructuring of our international businesses. These savings were partially offset by $2.3 million of Year 2000 readiness costs and higher compensation and recruiting and training expenses for our domestic sales force. LITIGATION SETTLEMENTS, GOODWILL WRITE-OFFS AND RESTRUCTURING CHARGES o Our 1998 results include a pre-tax charge of $14.0 million for the settlement of the Inmac shareholder litigation. o Our 1997 results include pre-tax charges of $67.8 million relating to the write-off of goodwill ($41.9 million) and restructuring costs ($25.9 million) announced in December of 1997. o Included in our 1997 results is a pre-tax charge of $20.7 million relating to the settlements of the consolidated class action and derivative lawsuits arising out of the restatement of our financial statements for the years 1992 through 1995. INCOME (LOSS) FROM OPERATIONS o Income from operations for 1998 was $52.5 million or 2.4% of net sales compared to a loss from operations of $42.5 million or 2.0% of net sales in 1997. o Excluding the 1998 charge for the Inmac shareholder litigation settlement, income from operations would have been $66.5 million or 3.0% of net sales. o The 1997 income from operations was impacted by pre-tax restructuring charges and goodwill write-offs of $67.8 million. o The 1997 income from operations was also impacted by a pre-tax charge of $20.7 million for the settlement of the shareholder and derivative litigation. o Excluding the charges related to the restructuring, goodwill write-off and litigation settlements, income from operations would have been $46.1 million or 2.2% of net sales in 1997. INTEREST INCOME, NET o Net interest income totaled $9.1 million in 1998 compared to $4.6 million in 1997. o The principal reason for this increase was the higher level of cash and cash equivalents on hand during 1998. INCOME TAXES o Our effective income tax rate for 1998 was 51.0% compared to a benefit of 3.0% in 1997. o The 1998 income tax rate was unfavorably impacted by the Inmac shareholder litigation settlement which is not deductible for tax purposes. The $14 million pre-tax charge for the settlement of this litigation was recorded net of a $5 million contribution from a non-affiliated source. o The 1997 income tax rate was impacted by valuation allowances recorded on the tax benefits of restructuring costs and the write-off of goodwill. o Excluding the impact of the 1998 after-tax charge of $15.8 million relating to the litigation settlement and the 1997 valuation allowances recorded on the tax benefits of restructuring costs our effective 19 income tax rate was 39.1% in 1998 compared to 47.2% in 1997. The lower rate is principally due to the recognition of tax benefits on certain foreign net operating losses. NET INCOME (LOSS) o Net income for 1998 was $30.2 million or $0.85 per share compared to a net loss of $36.7 million or $1.06 per share in 1997. o Our 1998 results were impacted by a $15.8 million or $0.45 per share charge for the settlement of the Inmac shareholder litigation. Our 1997 results include charges of $12.7 million or $0.37 per share for the settlement of the shareholder and derivative litigation, and $52.5 million or $1.52 per share in restructuring costs and goodwill write-offs. o If you exclude these charges, our net income for 1998 was $46.0 million or $1.30 per share compared to net income of $28.5 million or $0.83 per share in 1997. 1997 COMPARED TO 1996 SALES o Our net sales increased $209.5 million or 10.9% to $2.126 billion from $1.916 billion in the prior year. o Wintel sales increased approximately $268 million or 27.2% compared to 1996, while Macintosh-related sales decreased approximately $59 million or 6.3%. Wintel sales in 1997 increased in both the domestic and international markets while the Macintosh business decreased in both markets compared to 1996. o The continued shift in product mix to hardware resulted in an average order value of $503 in 1997, an increase of 8.4% compared to 1996. o Overall, domestic sales increased 15.7% over 1996 and international sales increased 1.3%. o Our increase in sales was in part due to the increase in the number of catalogs distributed worldwide which increased 3.0% to 124.1 million catalogs and a 2.4% increase in the number of orders. GROSS PROFIT o Gross profit increased to $352.0 million in 1997 from $342.4 million in 1996 but decreased as a percentage of net sales to 16.6% in 1997 from 17.9% in 1996. o The gross profit percentage declined primarily due to lower margins in our European operations resulting from a higher proportion of hardware sales and on a worldwide basis due to the shift in product mix to the Wintel business which had lower margins than the Macintosh business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES o Selling, general and administrative expenses decreased as a percentage of net sales to 14.4% from 14.5% in 1996, primarily reflecting a 0.9% decrease in net advertising costs to 1.3% of net sales from 2.2% of net sales in 1996. o This decrease was partially offset by increases in headcount during the year. LITIGATION SETTLEMENTS, GOODWILL WRITE-OFFS AND RESTRUCTURING CHARGES o Our 1997 results include pre-tax charges of $67.8 million relating to the write-off of goodwill ($41.9 million) and restructuring costs ($25.9 million). 20 o These charges were incurred in connection with the closing of our businesses in Australia and Japan and the sale of our operations in Norway, Denmark and Finland and the write-off of goodwill in our German business. In addition, we closed our European headquarters in the United Kingdom reducing certain functions and transferring others to the United Kingdom, other European business units and the United States. o In the United States, we consolidated our USA Flex business from the facility in Bloomingdale, Illinois and our Online Interactive, Inc. business from the facility in Seattle, Washington into our existing New Jersey and Connecticut facilities and wrote-off the remaining goodwill of these businesses. We also reorganized our domestic sales force. o These measures involved eliminating approximately 600 positions. All of these actions were completed in 1998. o Our 1997 results also include a pre-tax charge of $20.7 million relating to the proposed settlements of the consolidated class action and derivative lawsuit that arose out of the facts underlying our announcements in September and October, 1996 that we intended to restate our financial statements covering years 1992 through 1995. INCOME (LOSS) FROM OPERATIONS o Our loss from operations for 1997 was $42.5 million or 2.0% of net sales compared to income from operations of $33.1 million or 1.7% of net sales in 1996. o Excluding the charges related to the restructuring, goodwill write-off and the Litigation Settlements, 1997 income from operations would have been $46.1 million or 2.2% of net sales. o The 1996 results include pre-tax charges of $32.2 million relating to the write-off of goodwill and restructuring and merger costs relating to the 1996 Inmac merger. Income from operations for 1996 excluding these charges would have been $65.3 million or 3.4% of net sales. INTEREST INCOME, NET o Net interest income totaled $4.6 million in 1997 compared to $3.5 million in 1996. INCOME TAXES o The effective income tax rate for 1997 was a benefit of 3.0% compared to a provision of 54.9% in 1996 including the extraordinary charge. o The 1997 income tax rate was impacted by valuation allowances recorded on the tax benefits of restructuring costs and the write-off of goodwill. o Excluding these items the effective tax rate was 47.2%, as compared to 40.7% in 1996, excluding certain restructuring and merger costs and goodwill write-offs incurred in 1996. The higher rate is principally due to the absence of a tax benefit on certain foreign losses. NET INCOME (LOSS) o Our net loss for 1997 was $36.7 million or $1.06 per share compared to net income of $15.3 million or $0.44 per share in 1996. o Excluding the charges related to the restructuring, goodwill write-offs, litigation settlements, merger costs and extraordinary charge, net income for 1997 was $28.5 million or $0.83 per share as compared to $40.9 million or $1.18 per share in 1996. 21 LIQUIDITY AND CAPITAL RESOURCES ASSET MANAGEMENT o Cash and marketable securities were $188.6 million at December 31, 1998 compared to $78.9 million at December 31, 1997. The increase of $109.7 million was due primarily to improved inventory and accounts payable management offset by payments of $12.6 million in short-term borrowings and $33.4 million in connection with the shareholder and derivative litigation settlements. o Inventory decreased $40.7 million to $129.9 million at year end 1998 from $170.5 million at year end 1997. Inventory turns for the year ended December 31, 1998 were 15 compared to 11 in 1997. o Accounts payable increased $39.4 million to $208.3 million from $168.9 million, primarily resulting from improvements in vendor terms. o Overall, working capital increased $49.7 million from 1997 to 1998. o We believe that our existing cash reserves and expected cash flow from operations will be sufficient to satisfy our operating cash needs for at least the next 12 months. CAPITAL EXPENDITURES o Capital expenditures were $22.2 million in 1998 and $16.5 million in 1997. Major expenditures for 1998 were primarily related to the implementation of new domestic financial systems, the upgrade of our websites and telephone systems and other computer and hardware purchases. In 1997, our expenditures were primarily related to purchases of computer equipment and leasehold improvements. o During the year, construction began on our new 230,000 sq. ft. warehouse facility at the Airborne Express hub facility in Wilmington, Ohio. We anticipate spending approximately $16 million for equipment, fixtures and computer systems for the new warehouse during the next nine months. We have executed a 10-year lease of this facility to commence upon completion of construction, which will occur during the second quarter of 1999. o We currently anticipate investing approximately $18 million over the course of 1999 for the upgrade of our computer systems. This investment is intended to improve and create efficiencies in many businesses including sales, warehouse, inventory and financial management. In addition to these expected improvements, the implementation of these upgrades will address "Year 2000 readiness" issues. o The upgrade of our primary domestic operating system has begun and new domestic financial systems were successfully installed in 1998. o These investments in systems and the expenditures related to the new warehouse will be funded from existing cash and operating cash flows. LINES OF CREDIT o We have a multi-currency revolving credit facility of $55.0 million. This facility expires on June 30, 1999. The facility is used for general corporate and working capital purposes. As of December 31, 1998 this facility was not being used. o At December 31, 1998 we had unused lines of credit in the United Kingdom and France which provide for unsecured borrowings up to 2.0 million British pounds ($3.3 million at December 31, 1998 exchange rate) and 45 million French francs ($8.0 million at December 31, 1998 exchange rate), for working capital purposes. 22 FORWARD EXCHANGE CONTRACTS o We use forward exchange contracts to manage exposure to foreign currency risk related to intercompany loans and investments in our foreign subsidiaries. Outstanding agreements involve the exchange of one currency for another at a fixed rate. Our credit exposure is limited to the replacement cost, if any, of the instruments and we only enter into such agreements with highly-rated counterparties. We match the term and notional amount of the contracts to the underlying intercompany loans or investments and do not enter into forward exchange contracts for trading or speculative purposes. o At December 31, 1998 we had outstanding forward exchange contracts with notional amounts of $13.0 million which mature in six months or less. The single largest currency represented was the French franc. IMPACT OF INFLATION AND SEASONALITY o Response rates to catalog mailings are subject to seasonal variations. The first and last quarters of the year generally have higher response rates while the two middle quarters typically have lower response rates. Given this fact, we mail fewer catalogs during the second and third quarters. The slower quarters are impacted by the summer months, particularly in Europe. o We do not believe that inflation has had a material effect on our sales during recent years. ACCOUNTING PRONOUNCEMENTS o In June 1997 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. We adopted SFAS No. 130 effective January 1, 1998. o Also, in June 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. We adopted SFAS No. 131 in 1998. o In 1998, the FASB issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters beginning after June 15, 1999. We do not expect the adoption of this statement to be material to our business, financial position or results of operations. o In 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We do not expect the adoption of SOP 98-1 to be material to our business, financial condition or results of operations. o Also in 1998 the AICPA issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up Activities." This Statement of Position requires the expensing of certain costs such as pre-operating expenses and any organizational costs associated with start-up activities, and is effective for fiscal years beginning after December 15, 1998. The effect of adoption is required to be accounted for as a cumulative effect of change in accounting principle. We do not expect the impact of SOP 98-5 to be material to our business, financial condition or results of operations. YEAR 2000 READINESS 23 We use a significant number of computer software programs and operating systems in our internal operations including applications used in financial business systems and various administrative functions that will be affected by the Year 2000 problem common to most businesses. If these systems are unable to properly recognize date sensitive information related to Year 2000 they could generate erroneous data or fail to operate. This in turn may cause disruptions of our operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. YEAR 2000 READINESS PROGRAMS. To reduce the possibility of significant interruptions in normal operations we have initiated a worldwide Year 2000 readiness program. We are using both internal and external resources in our Year 2000 program. As part of our readiness program, we have named a Year 2000 Director, established a project office and formed a cross-functional task force to coordinate this program on a worldwide basis. In 1998 we performed a comprehensive review of our existing information systems to determine which of our computer equipment and software might not function properly with respect to dates referencing the Year 2000 and thereafter. This review included systems commonly thought of as information technology ("IT") systems, including accounting, data processing and other miscellaneous systems, as well as systems not commonly thought of as IT systems such as alarm systems, fax machines and other similar systems. We are in the process of modifying or replacing systems that were identified as not being Year 2000 ready. In addition to the planned upgrades described in Liquidity and Capital Resources, above, we identified the need for and have begun making modifications to our worldwide systems in connection with the Year 2000 program. We estimate that we were 45% complete at December 31, 1998 with respect to the modification or replacement of our worldwide systems and remain on target for completion by June 30, 1999. Final integration testing for these systems is scheduled to occur in the third quarter of 1999. Significant milestones in this project include: o We have substantially completed our worldwide hardware upgrades. o We have successfully inventoried and evaluated our desktop/server software on a worldwide basis. The implementation of compliant versions of the software for these platforms is on schedule. o We have identified as needing replacement or upgrading our domestic operating and human resource systems. These replacement or upgrade projects have been staffed and are proceeding in accordance with our plan. Our European core systems identified as needing upgrading have already been remediated, are in the testing phase and are on schedule for completion in accordance with our plan. o We have converted our domestic financial systems to Peoplesoft Inc. application software. During the second quarter of 1998 we began a program for determining the Year 2000 readiness of our business partners, including our vendors, service providers and major customers and the compatibility of system interfaces for electronic business transactions. First we identified our business partners and categorized them according to their significance to our operations. Then we wrote to each business partner to determine its Year 2000 readiness status. Based on these communications, we believe that most of our significant business partners and our interfaces with their systems will be Year 2000 ready. However, it is too early to determine whether any of our other business partners will be Year 2000 ready. During the first quarter of 1999, we began to escalate our correspondence to those business 24 partners that have not responded to our initial communications or whose response identified an issue requiring further clarification. During the next six months, we intend to complete our readiness analysis, work with our business partners to clarify any outstanding issues and, where appropriate, develop contingency plans including securing alternative vendors and service providers. COST OF YEAR 2000 READINESS PROGRAMS. After-tax charges related to the identification, assessment, remediation and testing efforts related to the Year 2000 program are expected to be approximately $4.7 million. We expect that remaining after-tax Year 2000 expenses during the first nine months of 1999 will be approximately $3.3 million which will negatively impact earnings by approximately $0.04 per share in each of the first two quarters of 1999 and $0.02 per share in the third quarter of 1999. This amount is not included in the $18 million we expect to invest in the planned upgrade of our worldwide computer systems during the next twelve months. As of December 31, 1998, we had incurred after-tax costs of approximately $1.4 million primarily for outside consulting fees related to the planning and analysis activities of the Year 2000 program, including incurred costs of approximately $0.6 million or $0.02 per share during the fourth quarter of 1998. RISKS ASSOCIATED WITH YEAR 2000 ISSUES. If we or our significant business partners fail to address Year 2000 issues in an adequate and timely manner, our ability to process transactions could be impeded. In addition, the failure of common carriers or other means of shipping products to be able to transport shipments of our products to customers in a timely basis during the first days or weeks of the new millennium could cause the loss of material amount of revenue some of which may be permanent. This may result in a direct and material impact on our ability to generate revenue and to attract and retain customers in the future. This in turn could have a material impact on our business, financial condition and results of operations. Among the factors that could cause our Year 2000 efforts to be less than fully effective are the novelty and complexity of these issues and their solutions and our dependence on the technical skills of employees and independent contractors and on the representations and preparedness of third parties. Moreover, Year 2000 issues present a number of risks that are beyond our control. These include the failure of vendors or common carriers to deliver merchandise to us or our customers, the failure of utility companies to deliver electricity, the failure of telecommunications companies to provide voice and data services, the failure of financial institutions to process transactions and transfer funds and the collateral effects on us of the effects of Year 2000 issues on the economy in general or on our business partners and customers in particular. In addition, variability of definitions of "compliance with Year 2000" and the variety of computer products we sell that may themselves contain a Year 2000 problem may lead to claims against us, including those arising out of the failure of such products to be "compliant". Through our Year 2000 compliance office we have received over 12,000 third party requests for documentation of internal compliance and product compliance. We rely upon the warranties of the product manufacturers in case of any such claims but we have not received assurance that such warranties will be sufficient to cover the costs and expenses of any successful claims. Assuming that governmental services, the banking system, common carriers, telecommunications and utilities are operational and no material adverse impact on the market for our products or the economy in general occurs prior to or immediately following the new millennium, we believe that the reasonably likely worst case scenario would be the requirement to incur additional expense and resources needed to repair or replace additional systems or subsystems, the potential loss or delay of customer orders, direct and material impact on our ability to generate revenue and to attract and retain customers in the future and a higher than anticipated influx of customer returns and claims relating to products sold by us that were not Year 2000 ready. Any of these things could have a material adverse effect on our business, financial condition and results of operations. 25 CONTINGENCY PLANS. We are in the process of developing contingency plans to mitigate to the extent possible any significant identified Year 2000 risks. We have begun a comprehensive analysis of the nature and extent of operational problems that would be reasonably likely to result from our failure or the failure of our business partners to complete their Year 2000 readiness efforts. This analysis will provide the information necessary to develop a contingency plan for dealing with the most likely worst case scenario. We currently expect to complete such analysis and contingency planning during the second quarter of 1999. EUROPEAN MONETARY UNION On January 1, 1999 eleven member countries of the European Community established the euro, a new common currency, by fixing exchange rates between their national currencies and the euro. Of these eleven member countries, we have operations in France, Germany and the Netherlands. On January 1, 2002 euro coins and notes are scheduled to be introduced while national currency coins and notes are scheduled to be withdrawn from circulation by July 1, 2002. During this three year transition period goods and services may be purchased with the euro or national currency. After the transition period transactions in both the wholesale and retail marketplace are expected to be conducted in the euro. The immediate impact of the common currency on our European businesses was the requirement to process customer orders in both national currencies and the euro. We have performed an analysis to determine the requirements to upgrade various computer systems to manage our business in a dual currency environment. These upgrades are currently being implemented and are expected to be complete by the end of the first quarter in 1999. Until these upgrades are complete, we will manually process transactions for those customers who require us to transact business in the euro. We do not expect these manual processes to result in any significant disruption to our European businesses. The cost of the computer systems upgrade is not material. Our existing multi-currency revolving credit agreement contemplates borrowing in the euro. Our foreign exchange exposures are not expected to be materially altered by the introduction of the euro. OUTLOOK We depend in large part on sales of hardware and software products for users of Apple Macintosh computers. These products represented approximately 34% of our net sales for the year ended December 31, 1998. Computers manufactured by Apple Computer, Inc. itself represented approximately 11% of our net sales for the Year ended December 31, 1998. Apple has significantly restricted the number of authorized resellers of its products and sells its products to end users in direct competition with us and other resellers. If Apple were to withdraw our reseller authorization, this would have an immediate adverse impact on our business, financial condition and results of operations. In addition, Compaq Computer Corp., one of our largest suppliers, has recently expanded its direct sales efforts. The continuing impact of these matters may adversely affect our business, financial condition and results of operations. We acquire products for resale both directly from manufacturers and indirectly through distributors and other sources. Many of these manufacturers have historically provided us with incentives in the form of supplier reimbursements, price protection payments, rebates and other similar arrangements. The increasingly competitive environment between and amongst computer hardware manufacturers has already resulted in the reduction and/or elimination of some of these incentive programs. Additionally, the return rights historically offered by manufacturers have become more limited. Manufacturers are also taking steps to reduce their inventory exposure by supporting "build to order" programs in which distributors and resellers are being authorized to directly manufacture computer hardware. This trend is part of an overall effort by manufacturers to reduce their costs and shift the burden of inventory risk to resellers like us, which could have a material adverse effect on our business, financial condition and results of operations. 26 We have embarked on a program to expand our telemarketing sales force and believe that our future success depends, in part, on our ability to recruit, train and retain an adequate number of skilled sales associates. We are in the process of replacing or modifying substantially all of our significant operating and financial systems. We believe that our future success is dependent upon the successful integration of these systems in a timely fashion. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS With the exception of historical information contained in this Report, the matters described in this Report contain "forward-looking statements". Forward-looking statements typically include the words "believe," "expect," "anticipate," "intend," "estimate," or similar expressions. The forward-looking statements in this Report are subject to economic, competitive, governmental, technological and legal contingencies, many of which are beyond our control. They are specifically subject to risks and uncertainties relating to: o increased competition from other catalog, retail store, online and other resellers and manufacturers of computer products o reductions in manufacturers' incentive programs o our foreign operations o the volatility of our stock o privacy concerns with respect to mailing list development and maintenance o IT systems capacity restraints o continued development of electronic commerce o quarterly fluctuations and seasonality of our business o increases in postage, shipping and paper costs o state sales tax collection efforts o the ultimate outcome of the Commission's investigation into our reported accounting errors o the Year 2000 issue and specifically our Year 2000 readiness initiatives o certain provisions of our Certificate of Incorporation that could delay, defer or prevent a change in control We discuss these and other risks in more detail in: o Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Report and more specifically in the paragraphs in that section captioned "Liquidity and Capital Resources," "Impact of Inflation and Seasonality" and "Outlook" o the Risk Factors section of our Registration Statement on Form S-3 dated January 25, 1999 We warn you not to place undue reliance on the forward-looking statements contained in this Report because they speak only as of the date of this Report and we have no obligation to update or revise them in the future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk in the normal course of our business operations due to our operations in different foreign currencies, and our ongoing investing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We 27 have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to these risks. The primary purpose of our foreign currency hedging activities is to manage currency risk related to intercompany loans and investments in our foreign subsidiaries. The single largest hedged currency represented at December 31, 1998 is the French franc. At December 31, 1998, we had outstanding forward exchange contracts in notional amounts totaling $12,973 (fair value of $12,990) which mature in six months or less. We match the term and the notional amount of the contracts to the underlying intercompany loans or investments, and do not enter into any derivative financial instruments for trading purposes. Foreign currency hedging activity is not material to our consolidated financial position, results of operations, or cash flow. We are exposed to changes in interest rates primarily as a result of our investing activities. The primary objective of our investing activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We primarily invest in highly liquid tax exempt municipal bonds, floating rate bonds, commercial paper, money market funds and corporate bonds which totaled $60,520 at December 31, 1998. These investment portfolios have a weighted average maturity of less than one year with no individual investment having a maturity exceeding two years. The market risk associated with investing activity is not material to our consolidated financial position, results of operations or cash flow. The interest rate risk evaluation noted above is based on a sensitivity analysis performed on our marketable securities at December 31, 1998. If the actual changes in interest rates are substantially different from expected changes, the net impact of interest rate risk on our cash flows may be materially different from that disclosed above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 19, 1999, we informed KPMG LLP that upon completion of the audit for the year ended December 31, 1998, we will not reappoint them as the principal accountants for the year ended December 31, 1999. We will engage PricewaterhouseCoopers LLP as our principal accountants. The decision to change accountants was recommended by the Audit Committee of the Board of Directors and approved by the full Board of Directors. In connection with the audits of the two fiscal years ended December 31, 1998, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. The audit reports of KPMG LLP on our consolidated financial statements as of and for the years ended December 31, 1998 and 1997, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. We have requested that KPMG LLP furnish us with a letter to the Commission stating whether or not they agree with the above statements. A copy of this letter, dated March 19, 1999 from KPMG LLP is attached as exhibit 16.1 to this Report. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 3, 1999 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 3, 1999 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 3, 1999 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on June 3, 1999 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements: The following consolidated financial statements are filed as part of this report: Responsibility for Financial Statements and Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity as of and for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. (a)(2) Consolidated Financial Statement Schedule: The following Consolidated Financial Statement Schedule of the Company as set forth below is filed with this report: Schedule II Valuation and Qualifying Accounts 29 Independent Auditors' Report on Consolidated Financial Statement Schedule Consolidated Financial Statement Schedules other than the one listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (a)(3) Exhibits See Exhibit Index for exhibits filed with this report on Form 10-K. (b) Reports on Form 8-K 1. The Company filed a Form 8-K pursuant to Item 5 therein on December 31, 1998 to report that it had amended its By Laws to provide that the Secretary of the Company must receive written notification describing any business proposed to be presented by a stockholder at an annual meeting at least 60 days before the date on which the Company mailed its proxy materials for the prior year's annual meeting. 2. The Company filed a Form 8-K pursuant to Item 4 therein on March 26, 1999 to report that upon completion of the audit for the year ended December 31, 1998 the Company will not reappoint KPMG LLP as its principal accountants for the year ended December 31, 1999 and that the Company will engage PricewaterhouseCoopers LLP as its principal accountants. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Micro Warehouse, Inc. By /s/ PETER GODFREY ----------------------------------------------- Peter Godfrey Chairman, Chief Executive Officer and President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Peter Godfrey and Bruce L. Lev, or either of them, his attorneys-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K for the year ended December 31, 1998, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K for the year ended December 31, 1998 has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. NAME Title Date Peter Godfrey /s/ PETER GODFREY March 31,1999 ------------------------------ Chairman, Chief Executive Officer and President Felix Dennis /s/ FELIX DENNIS March 31,1999 ------------------------------ Director Frederick H. Fruitman /s/ FREDERICK H. FRUITMAN March 31,1999 ------------------------------ Director Joseph M. Walsh /s/ JOSEPH M. WALSH March 31,1999 ------------------------------ Director Wayne P. Garten /s/ WAYNE P. GARTEN March 31,1999 ------------------------------ Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) 31 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Responsibility for Financial Statements F-2 Independent Auditors' Report F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997. F-4 Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 1998, 1997 and 1996. F-5 Consolidated Statements of Stockholders' Equity as of and for the years ended December 31, 1998, 1997 and 1996. F-6 Consolidated Statements of Cash flows for the years ended December 31, 1998, 1997 and 1996. F-7 Notes to Consolidated Financial Statements F-8 F-1 RESPONSIBILITY FOR FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT MICRO WAREHOUSE, INC. MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial data in this report, including the audited financial statements, have been prepared by management using the best available information and applying judgment. Accounting principles used in preparing the financial statements are those that are generally accepted in the United States. In meeting our responsibility for the integrity of the financial statements we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and accounting records provide a reliable basis for the preparation of the financial statements. Management has also established a formal Business Code of Ethics which is distributed throughout the Company. We acknowledge our responsibility to establish and preserve an environment in which all employees properly understand the fundamental importance of high ethical standards in the conduct of our business. Our independent auditors are engaged to audit and to render an opinion on the fairness in all material respects of our consolidated financial statements presented in conformity with generally accepted accounting principles. In performing their audit in accordance with generally accepted auditing standards, they evaluate the effectiveness of our internal accounting control systems, review selected transactions and carry out other auditing procedures to the extent they consider necessary in expressing their opinion on our financial statements. The Audit Committee of the Board of Directors meets with management, our internal auditors and our independent auditors to review accounting, auditing and financial matters. Our Audit Committee is composed of only outside directors. This committee and the independent auditors have free access to each other with or without management being present. Peter Godfrey Wayne P. Garten President, Chief Executive Officer and Executive Vice President and Chairman of the Board Chief Financial Officer F-2 INDEPENDENT AUDITORS' REPORT KPMG LLP THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MICRO WAREHOUSE, INC.: We have audited the accompanying consolidated balance sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Micro Warehouse, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Stamford, Connecticut February 16, 1999 F-3 CONSOLIDATED BALANCE SHEETS MICRO WAREHOUSE, INC. December 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 - ------------------------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 128,035 $ 58,051 Marketable securities at market value 60,520 20,817 Accounts receivable, net of allowance for doubtful accounts ($10,943 and $13,399 at December 31, 1998 and 1997, respectively) 216,487 217,475 Inventories 129,852 170,543 Prepaid expenses and other current assets 14,379 11,763 Tax refunds 13,176 23,452 Deferred taxes 17,666 30,903 - ------------------------------------------------------------------------------------------------- Total current assets 580,115 533,004 - ------------------------------------------------------------------------------------------------- Property, plant and equipment, net 36,950 32,416 Goodwill, net 44,444 45,744 Non-current deferred taxes 3,422 5,850 Other assets 1,599 2,330 - ------------------------------------------------------------------------------------------------- Total assets $ 666,530 $ 619,344 ================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 208,335 $ 168,886 Accrued expenses 50,508 67,055 Accrued litigation settlements -- 16,100 Loans payable, bank -- 12,570 Deferred revenue 9,144 5,944 - ------------------------------------------------------------------------------------------------- Total liabilities 267,987 270,555 - ------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value: Authorized - 100 shares; none issued -- -- Series A Junior Participating Preferred Stock, $.01 par value: Authorized - 45 shares; none issued -- -- Common stock, $.01 par value: Authorized - 100,000 shares; issued and outstanding: 35,413 and 34,639 shares at December 31, 1998 and 1997, respectively 354 346 Additional paid-in capital 299,544 282,865 Deferred compensation (3,123) (4,413) Retained earnings 110,568 80,390 Accumulated other comprehensive loss (8,800) (10,399) - ------------------------------------------------------------------------------------------------- Total stockholders' equity 398,543 348,789 - ------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 666,530 $ 619,344 =================================================================================================
See accompanying notes to consolidated financial statements. F-4 CONSOLIDATED STATEMENTS OF OPERATIONS MICRO WAREHOUSE, INC.
Years Ended December 31, (in thousands, except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net sales $ 2,220,018 $ 2,125,698 $ 1,916,244 Cost of goods sold 1,860,083 1,773,722 1,573,798 - ----------------------------------------------------------------------------------------------------------- Gross profit 359,935 351,976 342,446 Selling, general and administrative expenses 293,407 305,903 277,192 Write-off of goodwill -- 41,907 5,977 Restructuring costs -- 25,921 20,071 Merger costs -- -- 6,113 Provision for settlements of shareholder and derivative litigation 14,000 20,700 -- - ----------------------------------------------------------------------------------------------------------- Income (loss) from operations before interest, income taxes and extraordinary charge 52,528 (42,455) 33,093 Interest income 9,482 6,408 5,717 Interest expense (432) (1,769) (2,209) - ----------------------------------------------------------------------------------------------------------- Interest income, net 9,050 4,639 3,508 - ----------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary charge 61,578 (37,816) 36,601 Income tax provision (benefit) 31,400 (1,135) 19,719 - ----------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary charge 30,178 (36,681) 16,882 Extraordinary charge, net of taxes of $1,078 -- -- 1,584 - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ 30,178 $ (36,681) $ 15,298 =========================================================================================================== Basic net income (loss) per share $ 0.87 ($ 1.06) $ 0.45 Basic net income (loss) per share before extraordinary charge $ 0.87 ($ 1.06) $ 0.49 Diluted net income (loss) per share $ 0.85 ($ 1.06) $ 0.44 Diluted net income (loss) per share before extraordinary charge $ 0.85 ($ 1.06) $ 0.49 Shares used in per share calculation - Basic 34,803 34,475 34,310 Diluted 35,349 34,475 34,793 ===========================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) MICRO WAREHOUSE, INC Years Ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ 30,178 $ (36,681) $ 15,298 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on marketable securities (2) (14) 64 Foreign currency translation adjustments 1,601 (7,356) (2,014) - ----------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 1,599 (7,370) (1,950) - ----------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $ 31,777 $ (44,051) $ 13,348 ===========================================================================================================
See accompanying notes to consolidated financial statements. F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY MICRO WAREHOUSE, INC.
Additional Loan to Accumulated Common Stock Paid-in Deferred Former Retained Comprehensive (In thousands) Shares Amount Capital Compensation Officer Earnings Loss Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 33,944 $ 339 $ 263,636 $ -- $ -- $ 101,773 $ (1,079) $ 364,669 ==================================================================================================================================== Net income -- -- -- -- -- 15,298 -- 15,298 Common stock issued pursuant to stock awards, stock options and warrants exercised 415 4 5,807 -- -- -- -- 5,811 Loan to former officer -- -- 1,400 -- (1,400) -- -- -- Deferred compensation -- -- 340 -- -- -- -- 340 Foreign currency translation Adjustment -- -- -- -- -- -- (2,014) (2,014) Valuation adjustment for Marketable securities -- -- -- -- -- -- 64 64 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 34,359 343 271,183 -- (1,400) 117,071 (3,029) 384,168 ==================================================================================================================================== Net (loss) -- -- -- -- -- (36,681) -- (36,681) Common stock issued pursuant to stock options exercised 280 3 6,256 -- -- -- -- 6,259 Loan to former officer -- -- (775) -- 1,400 -- -- 625 Deferred compensation -- -- 6,201 (4,413) -- -- -- 1,788 Foreign currency translation Adjustment -- -- -- -- -- -- (7,356) (7,356) Valuation adjustment for Marketable securities -- -- -- -- -- -- (14) (14) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 34,639 346 282,865 (4,413) -- 80,390 (10,399) 348,789 ==================================================================================================================================== Net income -- -- -- -- -- 30,178 -- 30,178 Common stock issued pursuant to stock options exercised 774 8 15,710 -- -- -- -- 15,718 Stock issuance for Litigation Settlement 277 3 5,997 -- -- -- -- 6,000 Deferred compensation -- -- (354) 1,290 -- -- -- 936 Repurchase of Common Stock (277) (3) (4,674) -- -- -- -- (4,677) Foreign currency translation Adjustment -- -- -- -- -- -- 1,601 1,601 Valuation adjustment for Marketable securities -- -- -- -- -- -- (2) (2) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 35,413 $ 354 $ 299,544 ($ 3,123) $ -- $ 110,568 ($ 8,800) $ 398,543 ====================================================================================================================================
See accompanying notes to consolidated financial statements. F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS REPRESENTING INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS MICRO WAREHOUSE, INC. Years Ended December 31, (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 30,178 ($ 36,681) $ 15,298 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 15,039 16,160 12,340 Non-cash litigation settlement 6,000 -- -- Write-off of goodwill -- 41,907 5,977 Restructuring costs - non-cash portion -- 11,853 3,457 Litigation settlements -- 20,700 -- Non-cash compensation 936 1,788 421 Deferred taxes 15,665 (19,062) (4,389) Extraordinary charge -- -- 1,900 Changes in assets and liabilities: Accounts receivable, net (2,222) (23,069) (24,662) Inventories 40,361 26,576 (55,530) Prepaid expenses and other current assets (2,817) 1,853 10,781 Tax refunds 10,407 (7,196) (3,710) Other assets 143 (199) 1,119 Accounts payable 43,103 38,936 15,447 Accrued expenses (9,749) 6,607 14,677 Accrued litigation settlements (16,100) -- -- Deferred revenue 3,169 3,619 (2,249) Other (337) (38) (473) - ---------------------------------------------------------------------------------------------- Total adjustments 103,598 120,435 (24,894) Net cash provided (used) by operating activities 133,776 83,754 (9,596) - ---------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of property, plant and equipment (22,240) (16,518) (11,172) Purchases of businesses, represented by: Goodwill -- (20,883) (28,986) Net liabilities (assets) -- 654 (5,836) Proceeds from sale of equipment 73 147 576 Sales (purchases) of marketable securities, net (39,705) (809) 622 - ---------------------------------------------------------------------------------------------- Net cash used by investing activities (61,872) (37,409) (44,796) - ---------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from issuance of common stock 15,718 6,259 5,811 Purchase of treasury stock (4,677) -- -- Borrowings under (repayments of) lines of credit, net (12,584) (24,467) 22,037 Repayment of notes payable -- -- (21,900) Principal payments of obligations under capital leases (509) (218) (378) - ---------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (2,052) (18,426) 5,570 - ---------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 132 (2,102) (558) - ---------------------------------------------------------------------------------------------- Net change in cash 69,984 25,817 (49,380) Cash and cash equivalents: Beginning of year 58,051 32,234 81,614 - ---------------------------------------------------------------------------------------------- End of year $ 128,035 $ 58,051 $ 32,234 ==============================================================================================
See accompanying notes to consolidated financial statements F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICRO WAREHOUSE, INC. (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include Micro Warehouse, Inc. and its subsidiaries (the "Company"), which are all wholly-owned. All significant intercompany accounts and transactions are eliminated in consolidation. Reclassifications have been made to conform prior years to the 1998 presentation. CASH EQUIVALENTS Highly liquid investments with original maturities of three months or less are included in cash equivalents unless designated as available for sale and classified as investment securities. MARKETABLE SECURITIES Marketable securities consist primarily of highly liquid tax exempt municipal bonds, floating rate bonds, commercial paper, money market funds and corporate bonds which have a weighted average maturity of less than one year with no individual investment having a maturity exceeding two years. All investments are classified as available-for-sale and are reported at fair market value with net unrealized gains and losses included in equity. For all investment securities, unrealized losses that are other than temporary are recognized in earnings. INVENTORIES Inventories (substantially all finished goods) consist of computer hardware, software and peripheral equipment, and are stated at cost (determined under the first-in, first-out cost method) or market, whichever is lower. PREPAID CATALOG COSTS AND DEFERRED REVENUE The costs of producing and distributing catalogs are deferred and charged to expense over the period that revenues are derived for each catalog (generally ten weeks). Vendors have the ability to place advertisements in the catalogs for which the Company receives advertising allowances and incentives. These revenues are recognized on the same basis as the catalog costs. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (including equipment acquired under capital leases) are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows: Computer equipment and software 3-7 years Furniture and fixtures 5-7 years Leasehold improvements Life of lease or 7 years Machinery and equipment 7 years
F-8 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. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated into United States dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at average rates in effect during the period. The resultant translation adjustment is reflected as a separate component of Stockholders' Equity and is included in other comprehensive income (loss). FORWARD EXCHANGE CONTRACTS For a foreign currency commitment that is classified as a hedge, any gain or loss on the commitment is deferred and included in the basis of the underlying item. Any unrealized gains or losses associated with foreign currency commitments that are classified as speculative are recognized in the current period. Foreign currency gains and losses realized are included in the Consolidated Statements of Operations as selling, general and administrative expenses. If a foreign currency transaction previously considered as a hedge is terminated before the transaction date of the related commitment, any deferred gain or loss shall continue to be deferred and included in the basis of the underlying item. FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. The fair value of currency forward contracts were estimated based on quoted market prices for contracts with similar terms. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the balance sheet, and the F-9 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME PER SHARE Diluted earnings per share reflects the potential dilution that could occur if outstanding common stock options and awards were exercised. The dilutive effect of such options and awards to weighted average shares outstanding was 546 in 1998 and 483 in 1996. Potentially dilutive shares of 191 in 1997 were not reflected in the calculation of diluted earnings per share since the inclusion of such shares would have been antidilutive as a result of the net loss for the year. LONG-LIVED ASSETS The Company periodically evaluates the carrying value of intangibles and the related periods of amortization to determine whether events and circumstances warrant revised estimates of asset value or useful lives. The Company annually assesses the recoverability of goodwill by determining whether the amortization of the balance over its remaining life can be recovered through projected undiscounted future operating cash flows. Evaluations of asset value as well as periods of amortization are performed for each geographic market. STOCK-BASED COMPENSATION The Company follows the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which allows it to continue to apply APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see note 11). As such, compensation expense is recorded only if the current market price of the Company's stock on the date of grant (or measurement date, if later) exceeds the exercise price. DEPENDENCE ON MACINTOSH PRODUCTS The Company derives approximately 34% of its revenues from the sale of Macintosh products. Sales of computers manufactured by Apple Computer, Inc. represent approximately 11% of net sales. If Apple were to withdraw the Company's reseller authorization, this would have an immediate adverse impact on the Company's business, financial condition and results of operations. UNAUDITED CONDENSED QUARTERLY DATA In the opinion of management, the unaudited condensed quarterly financial data in note 13 reflect all adjustments which are necessary for a fair statement of the results of operations for the periods presented. NOTE 2. BUSINESS COMBINATIONS In July 1997 the Company acquired the business of Online Interactive, Inc., a Seattle, Washington-based electronic reseller of software ("OLI") in a business combination accounted for as a purchase. The total cost of the acquisition was $16,400 which exceeded the fair value of the net liabilities by $17,066. In February 1997 the Company acquired two businesses, one with operations in Canada and one with operations in Australia. These acquisitions were accounted for as purchases. The total cost of the acquisitions was $3,829 which exceeded the fair value of the net assets acquired by $3,817. F-10 In October 1996 the Company acquired the business of USA Flex in a business combination accounted for as a purchase. The total cost of the acquisition was $26,762 which exceeded the fair value of the net assets acquired by $22,053. In January 1996, the Company acquired Inmac Corp. ("Inmac") through an exchange of 3,034 of its shares for all of Inmac's 10,817 shares in a transaction accounted for as a pooling of interests. Under pooling of interests accounting, all of the Company's consolidated financial statements as of and for periods prior to the acquisition of Inmac have been restated to reflect Inmac and the Company on a combined basis. In connection with the transaction, the Company recorded (i) $20,071 of restructuring charges, primarily for personnel and facilities matters; (ii) $6,113 for merger costs; and (iii) an extraordinary charge of $1,584 (net of tax benefit of $1,078) related to a mandatory prepayment to extinguish certain Inmac indebtedness. During 1996 the Company acquired two other businesses, one with operations in Finland and one with operations in the United States. These acquisitions were accounted for as purchases. The aggregate purchase price and goodwill were $7,411 and $6,284, respectively. In connection with the December 1997 announced restructuring plan, the goodwill related to the USA Flex, OLI, Norway, Finland, Germany and Australia businesses were written-off (see note 3). NOTE 3. RESTRUCTURING AND GOODWILL WRITE-OFFS 1997 RESTRUCTURING During December 1997, the Company announced a restructuring of its operations (the "Restructuring"). The objectives of the Restructuring were to simplify the business worldwide, reduce the cost structure, increase productivity of the salesforce and eliminate certain non-core businesses currently operating at a loss. The Restructuring involved the closing of its businesses in Australia and Japan, the sale of its operations in Norway, Denmark and Finland and the write-off of its goodwill of its German business. In addition, the Company closed its European headquarters in the United Kingdom reducing certain functions and transferring others to the United Kingdom operation, other European business units and the United States. In the United States, the Company consolidated its USA Flex and OLI businesses from its facilities in Bloomingdale, Illinois and Seattle, Washington to existing facilities in New Jersey and Connecticut and wrote-off all of the goodwill associated with these businesses. In addition, the Company reorganized its domestic salesforce. In connection with the Restructuring, approximately 600 positions were eliminated. These restructuring activities were completed in 1998. As a result of the Restructuring, the Company recorded a pre-tax charge of $67,828. Details of this restructuring charge are as follows:
Original Utilized Balance at (in millions) Accrual Cash Noncash December 31, 1998 - ----------------------------------------------------------------------------------------------------------- Goodwill write-offs $41,907 $ -- $41,907 $ -- Severance costs $10,314 $ 7,350 $ -- $2,964 Lease terminations, moving costs and asset write-downs $15,607 $ 917 $ 8,756 $5,934 - ----------------------------------------------------------------------------------------------------------- $67,828 $ 8,267 $50,663 $8,898 ===========================================================================================================
As of December 31, 1998, the Company's accrual related primarily to remaining contractual lease termination and severance payments. The operations closed or sold had revenues of approximately $59,000 and operating losses of approximately $5,000 in 1997. F-11 INMAC RESTRUCTURING In connection with the merger with Inmac during 1996, the Company initiated a restructuring plan to reduce costs and increase future operating efficiencies by eliminating excess operations and facilities acquired in the Inmac acquisition. The closing of the facilities was completed during the first half of 1997. As a result, the Company recorded restructuring costs of $20,071 in 1996. In connection with the Inmac restructuring, approximately 493 employees associated with the facilities closed were terminated. Estimated employee termination costs of $10,886 were accrued in 1996 and paid in 1996 and 1997. In addition to the cost of terminating employees, the principal costs of the Inmac restructuring included the write-off of fixed assets and lease terminations. Estimated charges of $2,983 for asset write downs, $3,952 for lease terminations and $2,250 of other costs were accrued in 1996 and paid in 1996 and 1997. NOTE 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of:
1998 1997 - -------------------------------------------------------------------------------- Computer equipment and software $56,260 $47,994 Furniture and fixtures 15,688 14,005 Leasehold improvements 10,937 9,921 Machinery and equipment 6,894 8,687 Construction in Progress 4,468 536 - -------------------------------------------------------------------------------- 94,247 81,143 Less accumulated depreciation and amortization 57,297 48,727 - -------------------------------------------------------------------------------- $36,950 $32,416 ================================================================================
NOTE 5. BORROWING ARRANGEMENTS LINES OF CREDIT The Company has a $55,000 unsecured multi-currency revolving credit facility permitting borrowing by the Company and certain of its foreign subsidiaries. The facility expires on June 30, 1999. This facility was unused at December 31, 1998 and the balance outstanding was $12,570 at December 31, 1997. The facility provides for borrowing with interest at the bank's prime rate or LIBOR (or its foreign currency equivalent) plus 0.50%-1.25%, based on the ratio of debt to earnings before interest and taxes. The weighted average interest rate was approximately 5.8% for loans outstanding as of December 31, 1997. Commitment fees were not significant. At December 31, 1998 and 1997 the Company had unused lines of credit in the United Kingdom and France. The credit line in the United Kingdom provides for unsecured borrowings up to 2,000 British pounds ($3,319 and $3,286 at December 31, 1998 and December 31, 1997 currency exchange rates, respectively). The credit line in France provides for unsecured borrowings up to 45,000 French francs ($8,037 and $7,476 at December 31, 1998 and December 31, 1997 currency exchange rates, respectively). Both these credit lines are available for working capital purposes. F-12 INMAC BORROWINGS During 1996 as a result of the merger with the Company all Inmac borrowings were repaid. An extraordinary charge of $1,584 after-tax ($2,662 pre-tax) was recorded for fees and penalties arising from the early extinguishment of such borrowings. HEDGING The Company utilizes forward exchange contracts to manage exposure to foreign currency risk related to intercompany loans and investments in its foreign subsidiaries. Outstanding agreements involve the exchange of one currency for another at a fixed rate. The Company's credit exposure is limited to the replacement cost, if any, of the instruments and the Company only enters into such agreements with highly rated counterparties. The Company matches the term and notional amount of the contracts to the underlying intercompany loans or investments and does not enter into forward exchange contracts for trading or speculative purposes. At December 31, 1998 the Company had outstanding forward exchange contracts in notional amounts of $12,973 (fair value of $12,990) which mature in six months or less. The single largest currency represented was the French franc. At December 31, 1997 the Company had outstanding forward exchange contracts in notional amounts of $27,095 (fair value of $27,123) which matured in six months or less. The single largest currency represented was the British pound. NOTE 6. GOODWILL Amounts consist of:
1998 1997 - -------------------------------------------------------------------------------- Goodwill $49,676 $49,316 LESS: AMORTIZATION 5,232 3,572 - -------------------------------------------------------------------------------- $44,444 $45,744 ================================================================================
During 1997 in connection with the Restructuring (see note 3) the Company recorded a charge for goodwill write-offs of $41,907 related to the sale or closing of its businesses in Norway, Finland and Australia, and the diminution in value of the goodwill associated with the USA Flex, OLI and German businesses. NOTE 7. ACCRUED EXPENSES Accrued expenses at December 31, 1998 and 1997 include approximately $14,261 and $9,560 respectively, of accrued payroll costs and $8,898 and $21,498 respectively, of accrued restructuring costs. F-13 NOTE 8. COMMITMENTS LEASES The Company rents certain office facilities from related parties, occupies office and warehouse space, and rents equipment under various operating leases with independent parties which provide for minimum annual rentals. Future minimum annual rentals at December 31, 1998 were as follows:
Related Total Party - ------------------------------------------------------------------------------- 1999 $ 9,833 $343 2000 8,814 -- 2001 7,142 -- 2002 5,782 -- 2002 5,096 -- 2003 AND AFTER 9,391 -- - ------------------------------------------------------------------------------- Total $46,058 $343 ===============================================================================
Rent expense was as follows:
Related Total Party - ------------------------------------------------------------------------------- Year ended December 31, 1998 $ 9,829 $312 Year ended December 31, 1997 10,444 312 Year ended December 31, 1996 8,774 312
NOTE 9. INCOME TAXES The provision (benefit) for income taxes is summarized below:
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Current Federal $ 10,605 $ 16,254 $ 23,012 State 1,920 1,195 1,920 Foreign 3,210 478 (1,902) - -------------------------------------------------------------------------------- 15,735 17,927 23,030 Deferred Federal 15,224 (16,155) (1,537) State 589 (1,195) (202) Foreign (148) (1,712) (2,650) - -------------------------------------------------------------------------------- 15,665 (19,062) (4,389) - -------------------------------------------------------------------------------- F-14 Total $ 31,400 ($ 1,135) $ 18,641 ================================================================================
The following table accounts for the difference between the actual tax provision (benefit) and the amounts obtained by applying the statutory United States Federal income tax rate of 35% to income (loss) before taxes.
YEARS ENDED DECEMBER 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Statutory federal tax rate 35.0% (35.0%) 35.0% State income taxes net of Federal benefit 2.6 -- 3.3 Non-deductible restructuring and merger costs -- 11.0 6.3 Goodwill amortization and write-off -- 8.9 7.9 Foreign rate difference and unused foreign losses 2.1 10.6 4.4 Provision for settlement of litigation 10.8 -- -- Other, Net 0.5 1.5 (2.0) - ------------------------------------------------------------------------------------- Effective tax rate 51.0% (3.0%) 54.9% =====================================================================================
The United States and foreign components of income (loss) before income taxes were:
UNITED STATES FOREIGN - -------------------------------------------------------------------------------- Year ended December 31, 1998 $ 56,468 $ 5,110 Year ended December 31, 1997 (11,299) (26,517) Year ended December 31, 1996 52,255 (18,316)
Taxes have not been provided for undistributed earnings of foreign subsidiaries since the Company presently intends to continue to reinvest these earnings. Components of the net deferred tax asset relate to:
December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------- Deferred tax assets Accounts receivable reserve $ 1,886 $ 3,259 $ 2,091 Inventory reserve 1,107 2,503 2,002 Restructuring reserve 8,745 12,489 -- Accrued expenses 3,813 3,169 3,346 Inventory capitalization 1,009 970 1,066 Litigation settlement reserve -- 7,351 -- Other 708 2,613 3,321 Tax loss carryforwards 15,875 20,769 18,970 - ---------------------------------------------------------------------------------------- 33,143 53,123 30,796 Valuation allowance for tax loss carryforwards (12,055) (16,370) (12,906) - ---------------------------------------------------------------------------------------- F-15 Total deferred tax asset 21,088 36,753 17,890 ========================================================================================
The Company has approximately $23,688 in unutilized foreign tax loss carryforwards and approximately $17,370 in unutilized United States federal tax loss carryforwards. Of these loss carryforwards, $20,006 have no expiration dates, $20,344 expire beginning 2005 through 2011, and $708 expire beginning 1999 through 2005. United States tax law imposes a limitation on the amount of the United States tax loss carryforwards which can be utilized each year when there is a change in the stock ownership of the Company which incurred the losses. The United States federal tax losses which became an asset of the Company through the acquisition of Inmac Corp. are subject to this rule. Based on the Company's historical and expected taxable earnings, management believes it is more likely than not that the Company will realize the benefit of the existing net deferred tax asset at December 31, 1998. In 1998 the international tax loss carryforwards and related valuation allowance were reduced by $4,109 relating to the disposal of certain businesses in December 1997 and early 1998. NOTE 10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1997 1996 - -------------------------------------------------------------------------------- Cash paid during the period for: Interest $ 414 $ 1,776 $ 1,805 Income taxes 2,879 18,418 27,297 Non-cash investing and financing activities: Loan to (settlement from) former officer for purchase of stock -- (1,400) 1,400 ================================================================================
NOTE 11. STOCK OPTIONS, EMPLOYEE BENEFIT PLAN AND STOCKHOLDERS RIGHTS PLAN The Company applies APB Opinion No. 25 and related interpretations in accounting for stock-based compensation. Accordingly, compensation expense is recorded only if the current market price of the Company's common stock on the date of grant (or measurement date if later) exceeds the exercise price. Compensation cost recognized in 1998 was $936. Had compensation cost been determined on a fair value basis consistent with SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 - ------------------------------------------------------------------------------------------ Net income (loss) As reported $30,178 ($36,681) $15,298 Pro forma $25,306 ($38,693) $12,673 Net income (loss) per share - diluted basis As reported $0.85 ($1.06) $0.44 Pro forma $0.72 ($1.12) $0.36
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to year 1995 and additional awards in future years are anticipated. A summary of the status of stock options outstanding as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below: F-16
1998 1997 1996 Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------------------------------------- Shares under option: Outstanding at beginning of year 3,172 $14.44 1,710 $22.28 1,328 $17.18 Granted 1,854 $15.06 3,048 13.58 836 27.50 Exercised (808) $16.25 (594) 12.21 (346) 16.79 Forfeited (302) $17.89 (992) 21.40 (108) 23.23 - -------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 3,916 $14.93 3,172 $14.44 1,710 $22.28 ==================================================================================================================== Options exercisable at year end 925 $16.80 512 $16.06 407 $15.56 - -------------------------------------------------------------------------------------------------------------------- Weighted average fair value per share of Options granted during 1998, 1997 and 1996 $9.69 $6.07 $12.64 - --------------------------------------------------------------------------------------------------------------------
The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1998 1997 1996 ---- ---- ---- Risk-free interest rates 5.43% 6.30% 6.20% Expected lives 5 years 5 years 5 years Expected volatility 73.83% 39.30% 42.50% Expected dividend yields 0% 0% 0%
1992 AND 1994 STOCK OPTION PLANS The 1992 and 1994 Stock Option Plans (the "Plans") provide for the grant of stock options to officers, directors and key employees of, and consultants to, the Company and its subsidiaries. Under the Plans, the Company may grant options that are intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or options not intended to qualify as Incentive Stock Options ("Non-statutory Stock Options"). A total of 5,000 shares of common stock have been reserved for issuance upon the exercise of options granted under the Plans. The Plans are administered by the Compensation and Stock Option Committee of the Board of Directors. Subject to the provisions of the Plans, the Committee has the authority to select the employees, directors and consultants to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock covered by the option, (ii) when the option becomes exercisable, (iii) the option exercise price, which must be at least 100%, with respect to Incentive Stock Options, and at least 85%, with respect to Non-statutory Stock Options, of the fair market value of the common stock as of the date of grant, and (iv) the duration of the option (which may not exceed ten years). In June 1997 the Stockholders of the Company approved an amendment to the 1994 stock option plan which increased the number of shares reserved for issuance from 1,000 to 4,000. In January 1997, the Company approved a comprehensive option grant program providing a total of 2,017 options to directors and all qualified employees of the Company and authorized the exchange of 360 outstanding F-17 stock options. The exercise price for options under these programs is $12.63 per share. As a result of this program, the Company recorded deferred compensation of $8,387 representing the difference between the exercise price and closing market price on the date of stockholder approval for the shares granted. Such amount is being amortized over the 5-year vesting period of the options. Amortization of deferred compensation relating to these grants for 1998 and 1997 was $936 and $1,788, respectively and $354 and $2,186 of such amount of deferred compensation was forfeited in 1998 and 1997, respectively. STOCK OPTIONS ISSUED OUTSIDE THE PLANS During 1996 and 1997 the Company granted to certain senior executives options to purchase 890 shares of common stock at prices ranging from $10.75 to $25.00 per share. During 1997 574 of these options were forfeited. During 1998 no options issued outside the Plans were forfeited. Stock options outstanding at December 31, 1998, are summarized as follows:
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 - $13.97 2,576 8.41 years $12.87 602 $12.76 $14.03 - $20.41 1,034 8.97 years 16.17 116 16.28 $22.50 - $32.00 305 7.86 years 28.01 206 28.77 $44.50 1 6.84 years 44.50 1 44.50 - ------------------------------------------------------------------------------------------------------------ $9.00 - $44.50 3,916 8.51 years $14.93 925 $16.80 - ------------------------------------------------------------------------------------------------------------
STOCK AWARDS During 1997 the Company granted to certain senior executives awards for 78 shares of common stock that are outstanding at December 31, 1998. Such awards are fully vested. 401(K) SAVINGS PLAN The Company sponsors a 401(k) Savings Plan (the "401(k) Plan") which covers substantially all full-time employees who meet the 401(k) Plan's eligibility requirements. Participants may make tax deferred contributions of up to 15% of annual compensation (subject to other limitations specified by the Internal Revenue Code) and the Company makes a 50% matching contribution for amounts which do not exceed 6% of participant's annual compensation. The Company may also make discretionary profit sharing contributions to the 401(k) Plan. During 1998, 1997 and 1996, the Company incurred approximately $1,482, $534, and $556, respectively, of expense related to the 401(k) matching component of the 401(k) Plan. STOCKHOLDERS RIGHTS PLAN Under a stockholder rights plan effective June 27, 1996, rights to purchase a unit consisting of one one-thousandth of a share of a new Series A Junior Participating Preferred Stock at an exercise price of $110.00 have been distributed as a dividend at the rate of one right for each share of the Company's common stock. The terms of the Preferred Stock have been designed so that each one one-thousandth of F-18 a share of Preferred Stock will approximate the same economic value of one share of the Company's common stock. The rights become exercisable only following the acquisition by a person or group, without the prior consent of the Company, of 20% or more of the Company's voting stock or following the announcement of a tender offer or exchange offer to acquire an interest in the Company of 20% or more. After the rights become exercisable, they will be adjusted upon the occurrence of certain events relating to an attempted acquisition of the Company so as to entitle all holders, except the takeover bidder, to purchase stock in the Company or the prospective acquirer's company, as the case may be, at a bargain price. The effect of the plan is to encourage a prospective acquirer to negotiate with the Board of Directors of the Company a transaction that is fair to all stockholders. NOTE 12. OPERATIONS BY GEOGRAPHIC AREAS The Company operates primarily in one industry segment, the distribution of computer hardware, software, supplies and accessories. Information about the Company's operations in different geographic areas for the years ended December 31, 1998, 1997 and 1996 is presented below.
Year Ended December 31, 1998 United States International Consolidated - -------------------------------------------------------------------------------- Net Sales $1,603,342 $616,676 $2,220,018 Income from Operations Before Interest and Income Taxes 48,164 4,364 52,528 Long-Lived Assets, Net 28,185 8,765 36,950 Year Ended December 31, 1997 United States International Consolidated - -------------------------------------------------------------------------------- Net sales $1,482,509 $643,189 $2,125,698 Loss from operations before interest and income taxes (16,558) (25,897) (42,455) Long-lived assets, net 22,250 10,166 32,416 Year Ended December 31, 1996 United States International Consolidated - -------------------------------------------------------------------------------- Net sales $1,281,237 $635,007 $1,916,244 Income (loss) from operations before interest, income taxes and extraordinary charges 49,504 (16,411) 33,093 Long-lived assets, net 18,573 11,139 29,712
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended December 31, 1998 and 1997:
First Second Third Fourth Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------- 1998 Net sales $551,706 $521,487 $551,789 $595,036 Gross profit 88,361 84,230 89,738 97,606 Net income (loss) 9,762 (5,040) 11,863 13,593 Basic net income (loss) per share (A) $0.28 ($0.15) $0.34 $0.39 Diluted net income (loss) per share (A) $0.28 ($0.15) $0.33 $0.38 Shares used in per share calculation - Basic 34,600 34,633 34,816 35,101 Incremental shares from assumed F-19 conversion of options and awards (B) 62 -- 775 940 Diluted 34,662 34,633 35,591 36,041 - --------------------------------------------------------------------------------------------- 1997 Net sales $529,503 $500,420 $522,072 $573,703 Gross profit 87,465 83,913 86,457 94,141 Net income (loss) 7,813 7,821 (7,118) (45,197) Basic net income (loss) per share (A) $0.23 $0.23 ($0.21) ($1.30) Diluted net income (loss) per share (A) $0.23 $0.23 ($0.21) ($1.30) Shares used in per share calculation - Basic 34,364 34,432 34,550 34,637 Incremental shares from assumed conversion of options and awards (B) 73 300 -- -- Diluted 34,437 34,732 34,550 34,637
(A) The sum of the quarterly amounts on a per share basis do not equal amounts for the year due to rounding. (B) Incremental shares were not included for periods with a net loss as they would have had an antidilutive effect. NOTE 14. LEGAL PROCEEDINGS During the second quarter of 1998, the Company recorded a pre-tax charge of $14,000 for the settlement of the lawsuit brought by holders of approximately 1.3 million shares of the Company's common stock which arose out of the stock merger between the Company and Inmac Corp., relating to the facts underlying the Company's announcements in September and October, 1996 that it intended to restate certain prior financial statements covering the 1992 through 1995 fiscal years (the "Restatement"). This settlement provided for a total payment of $19,000, $6,000 of which was in the form of the Company's common stock. The implementation of this settlement occurred July 30, 1998. The pre-tax charge was based on the total amount of the settlement, net of a $5,000 contribution from a non-affiliated source. On an after-tax basis, the charge recorded was $15,849. Also in 1998, the Company reached a settlement with the State Board of Administration of Florida covering approximately 51 shares. The Company made a $150 settlement payment to the State Board of Administration which had earlier elected not to participate in the $30,000 settlement of the consolidated securities class action lawsuit approved by the U.S. District Court on June 2, 1998. A pre-tax charge of $20,700 was recorded in the third quarter of 1997 for the settlements of the consolidated class action and derivative lawsuit that arose out of the facts underlying the Restatement. The charge of $20,700 was comprised of $31,600 for the settlements of the consolidated class action and derivative lawsuit including estimated legal fees, offset by insurance proceeds of $10,900. These settlements exclude the ongoing formal investigation by the Securities and Exchange Commission (the "Commission") into the events underlying the Restatement. The Company is cooperating with the Commission in its investigation. NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income, net of related tax, at December 31, 1998 and 1997 are as follows: F-20
Foreign Unrealized Accumulated Other Currency Gains on Comprehensive Items Securities Income ----- ---------- ------ December 31, 1997 ($10,403) $ 4 ($10,399) Current-period change 1,601 (2) 1,599 - ----------------------------------------------------------------------------- December 31, 1998 ($ 8,802) $ 2 ($ 8,800) =============================================================================
NOTE 16. MARKETABLE SECURITIES All marketable securities are classified as available-for-sale. The following is a summary of marketable securities at December 31, 1998 and 1997.
Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Market Value - -------------------------------------------------------------------------------------------------------------- December 31, 1998 State governmental obligations $ 34,638 $ 6 $ (5) $ 34,639 Corporate debt securities 13,580 2 (1) 13,581 Other debt securities 12,300 -- -- 12,300 December 31, 1997 State governmental obligations 18,315 4 -- 18,319 Other debt securities 2,498 -- -- 2,498
At December 31, 1998, marketable securities mature as follows:
Within 1 year 1-2 years - -------------------------------------------------------------------------------- State governmental obligations $ 18,458 $ 16,181 Corporate debt securities 13,581 -- Other debt securities 12,300 --
F-21 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders of Micro Warehouse, Inc. Under date of February 16, 1999, we reported on the consolidated balance sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 which are included in this Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed under (a)(2). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Stamford, Connecticut February 16, 1999 S-1 SCHEDULE II MICRO WAREHOUSE, INC. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Balance at Additions Deductions Balance at Beginning Charged to from End of Year Operations Reserves of Year - ------------------------------------------------------------------------------------------------------- (in thousands) Allowance for doubtful accounts Year ended: December 31, 1996 7,808 8,195 (5,127) 10,876 December 31, 1997 10,876 11,242 (8,719) 13,399 December 31, 1998 13,399 9,917 (12,373) 10,943 Reserve for obsolete inventory Year ended: December 31, 1996 8,336 5,601 (3,416) 10,521 December 31, 1997 10,521 10,246 (8,030) 12,737 December 31, 1998 12,737 10,173 (15,179) 7,731
S-2 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1(6) Amended and Restated Certificate of Incorporation of the Company 3.2(8) Amended and Restated By-Laws of the Company 4.1(1) Stockholders Rights Plan dated June 27, 1996 10.1(2) 1992 Stock Option Plan 10.2(3) Amendment No. 1 to 1992 Stock Option Plan 10.3(4) Amendment No. 2 to 1992 Stock Option Plan 10.4(6) Amended and Restated 1994 Stock Option Plan 10.5(2) Lease Agreements between C.P. Lakewood, L.P. and the Company relating to the Lakewood, New Jersey facilities 10.6(2) Lease Agreement between Miller-Valentine Partners and the Company relating to the Wilmington, Ohio facility 10.7(2) Lease Agreement between Peter Godfrey and the Company relating to the South Norwalk, Connecticut facility (47 Water Street) 10.8(2) Lease Agreement between Hialet Associates and the Company relating to a South Norwalk, Connecticut facility (53 Water Street) 10.9(2) Lease Agreement between Hialet Associates and the Company relating to a South Norwalk, Connecticut facility (29 Haviland Street) 10.10(5) Lease Agreement between BBS Norwalk One Inc. and the Company relating to the Norwalk, Connecticut facility 10.11(3) Employment Agreement between Peter Godfrey and the Company 10.12(6) Consulting Services Agreement between Felix Dennis and the Company, as amended 10.13(6) Form of Indemnification Agreement with Officers and Directors 10.14(6) Amended and Restated Credit Agreement among the Company, the Subsidiaries of the Company, and The Chase Manhattan Bank dated as of December 31, 1997 10.15(6) Resignation Agreement between Linwood A. Lacy, Jr. and the Company dated December 8, 1997 10.16(7) Severance Agreement and General Release between Stephen F. England and the Company dated October 19, 1998 10.17(6) Resignation Agreement between Kris Rogers and the Company 10.18 Amendment to Lease Agreement between C.P. Lakewood, L.P. and the Company relating to Lakewood, New Jersey facility 10.19 Lease Agreement between Wilmington Commerce Park Partnership and the Company relating to new Wilmington, Ohio warehouse/distribution center. 10.20 Fourth Amendment to Lease Agreement between Peter Godfrey and the Company relating to a South Norwalk, Connecticut facility (47 Water Street) 10.21 Fourth Amendment to Lease Agreement between Hialet Associates and the Company relating to a South Norwalk, Connecticut facility (53 Water Street) 10.22 Second Amendment to Lease Agreement between Hialet Associates and the Company relating to a South Norwalk, Connecticut facility (29 Haviland Street) 10.23 Employment Agreement between Stephen J. Carline and the Company dated as of October 28, 1998 10.24 Amended and Restated Employment Agreement between Adam W. Shaffer and the Company dated as of January 1, 1998 10.25 Amended and Restated Employment Agreement between Bruce L. Lev and the Company dated as of January 1, 1998 10.26 Amended and Restated Employment Agreement between Wayne P. Garten and the Company dated as of January 1, 1998 10.27(9) Micro Warehouse, Inc. Deferred Compensation Plan Master Plan Document 10.28 Resignation Agreement between Peter Cannone and the Company dated December 16, 1998 11.1 Statement re Computation of Per Share Earnings 16.1 Letter from KPMG LLP to the SEC dated March 19, 1998 re Change in Certifying Accountants 21.1 Subsidiaries of the Company 23.1 Consent of independent accountants 24.1 Power of Attorney (included on signature page) 27.1 Financial Data Schedule - ---------- (1) Incorporated by reference to the Company's Registration Statement on Form 8-A (File No. 00-20730) (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-53100) (3) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal year 1995 (4) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal year 1996 (5) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1994 (6) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal year 1997 (7) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998 (8) Incorporated by reference to the Company's Form 8-K filed on December 31, 1998 (9) Incorporated by reference to the Company's Registration Statement on Form S-8 filed March 2, 1998 EX-10.18 2 AMENDMENT TO LEASE EXHIBIT 10.18 AMENDMENT TO LEASE This Amendment to Lease is made this ___22nd__ day of September, 1998 by and between 1720 Oak Street, L.L.C. a New Jersey limited liability company, having an address c/o Sudler Management Company, 300 Interpace Parkway, Bldg C, Parsippany, New Jersey 07054-1100, successor in interest to C.P. Lakewood, L.P. ("Landlord"), and Micro Warehouse, Inc., a Delaware corporation, having an address at 29 Haviland Street, South Norwalk, Connecticut 06854 ("Tenant"). WITNESSETH: WHEREAS, by Agreement of Lease dated February 25, 1992 (the "Lease"), by and between Landlord and Tenant, Landlord leased to Tenant and Tenant leased from Landlord the premises located at 1720 Oak Street, Lakewood, New Jersey consisting of approximately 52,109 square feet of space ("Premises"); and WHEREAS, it is now the desire of Landlord and Tenant to amend and extend said Lease as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants herein contained, Landlord and Tenant hereby agree that, effective as the date hereof as set forth above, the Lease is amended as follows: 1. Section 1(b) of the Lease is deleted and the following substituted in its place and stead: "(b) NAME AND ADDRESS OF LANDLORD: 1720 Oak Street, L.L.C. a New Jersey limited liability company c/o Sudler Management Company 300 Interpace Parkway, Bldg C Parsippany, New Jersey 07054-1100" 2. Section 1(h) of the Lease is deleted and the following substituted in its place and stead: "(h) BROKER: Samson Realty Corp.; commission to be paid by Landlord." 3. TERM: The term of the Lease is extended for a period of ten (10) additional years commencing on July 1, 1999 and terminating on June 30, 2009 (the "Extension Term"). 4. Section 3 of the Lease is amended by deleting the second and third paragraphs thereof. 5. RENT: The Fixed Rent payable by Tenant to Landlord during the Extension Term shall be as follows: Period Per Square Foot Monthly Annually ------ --------------- ------- -------- Years 1 - 5 $6.25 $27,140.10 $325,681.25 of the Extension Term Years 6 - 10 $7.19 $31,221.98 $374,663.71 of the Extension Term 6. The first paragraph of Section 8 of the Lease shall be designated Section 8(a) and the following new sections 8(b) and 8(c) shall be added: "(b) In the event that Tenant wishes to utilize services of an alternative electricity service provider ("ASP") rather than the public utility that is servicing the Building as of the date of Tenant's execution of this Amendment, no such ASP shall be permitted to provide service to Tenant or to install its lines or other equipment with the Building without obtaining the prior written consent of Landlord, not to be unreasonably withheld. (c) Unless all of the following conditions are satisfied to in a written agreement between the ASP and Tenant or by any other means acceptable to Landlord, it shall be reasonable for Landlord to refuse its consent: (i) Landlord shall incur no expense whatsoever with respect to any aspect of ASP's provision of its services, including without limitation, the cost of installation, service and materials; (ii) Prior to commencement of any work in or about the Premises by ASP, ASP shall supply verification that ASP is properly insured and financially capable of covering any uninsured damage; (iii) ASP shall agree in writing to abide by rules and regulations, job site rules, and such other requirements, imposed on reasonable notice, as reasonably determined by Landlord, to be necessary to protect Landlord's interest in the Premises; (iv) Landlord reasonably determines that there is sufficient space in the Building for the placement of all of ASP's equipment and materials, including without limitation, in the electricity risers; (v) ASP is, licensed by applicable government agencies, as shown in documents acceptable to Landlord; (vi) ASP agrees that Landlord shall have the right, upon reasonable request, to supervise ASP's performance of any work on or about the Premises, including, without limitation, any installations or repairs; (vii) ASP agrees that Landlord shall have the right to enter ASP's space at any time in the event of an emergency and at all reasonble times and upon reasonable notice for the purpose or inspecting same, making repairs (though nothing herein shall be construed to obligate Landlord to make any repairs), or exhibiting the space for purposes of sale, lease, or financing. (d) Landlord's consent under this Section shall not be deemed any kind of warranty or representation by Landlord, including without limitation, as to the suitability or competence of ASP. (e) Tenant shall indemnify and hold harmless Landlord for all losses, claims, demands, expenses, and judgments against Landlord caused by or arising out of, either directly or indirectly, any negligent or reckless acts or omissions by ASP. 7. Section 11 of the Lease is deleted in its entirety and the following substituted in its place and stead: "11. MAINTENANCE AND REPAIRS. (a) Tenant shall keep and maintain the Property (including all non-structural, exterior, interior and landscaped areas, systems and equipment and the roof of the building) in good order, condition and repair during the Term, normal wear and tear excepted. Tenant shall promptly replace any portion of the Property or any systems or equipment thereof which cannot be fully repaired. All repairs and replacements shall be performed in a good and workmanlike manner. All of Tenant's obligations to maintain and repair the Property shall be accomplished at Tenant's sole expense. (b) Tenant shall keep and maintain all portions of the Property and the parking areas, sidewalks and landscaped areas, in an attractive and clean condition free of dirt and rubbish, and clear the parking areas and sidewalks of accumulations of snow and ice. (c) Landlord shall keep and maintain the structural portions of the building (except the roof) in good order, condition and repair, at Landlord's expense (except Tenant shall be responsible for any structural repairs and replacements necessitated by Tenant's negligence or Tenant's alterations to structural portion of building). (d) During the Term, Tenant shall procure and maintain the following service contracts: (i) contract for inspection and maintenance of the roof of the Building (the inspections pursuant to such contract shall be made at least semi-annually); (ii) contract for the inspection, service, maintenance and repair of all heating, ventilating and air conditioning equipment installed in the Building (the inspection pursuant to such contract shall be made at least quarterly); (iii) contract for the inspection, maintenance and repair of sprinkler and fire protection systems, and (iv) contract for maintenance of the landscaped areas of the Property. The identity of each contractor and each contract shall be subject to Landlord's reasonable approval. Copies of reports of inspections made hereunder shall be promptly supplied to Landlord.." 8. Sections 16(a) and 16(b) of the Lease shall be deleted in their entirety and the following substituted in their place and stead: "16. ENVIRONMENTAL LAW COMPLIANCE. (a) Tenant agrees that it shall, at its sole cost and expense, materially fulfill, observe and comply with all of the applicable terms and provisions of the Industrial Site Recovery Act, N.J.S.A 13:1K-6 ET SEQ., ("ISRA") the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 ET SEQ., (the "Spill Act"), and all other federal, state and local environmental laws now in effect or hereinafter enacted, as any of the same may be amended from time to time, and all rules, regulations, ordinances, opinions, orders and directives issued or promulgated pursuant thereto or in connection therewith. Tenant's obligations pursuant to this Section 16(a) shall apply to conditions relating to Tenant's operations and/or possession or use of the Property, and to conditions arising during Tenant's possession or use of the Property whether pursuant to this Lease or otherwise and whether caused directly or indirectly by Tenant or any other party on or off the Property. Landlord shall be responsible, at its sole cost and expense, for compliance with governmental requirements, if any, for cleanup or removal for any environmental contamination at the Property which pre-existed Tenant's initial occupancy of the Property which initial occupancy, the parties acknowledge, predates this Lease. (b) Without limiting the foregoing, within the time period prescribed by applicable law with respect to "closing operations" or "transferring ownership or operations" (as said terms are defined in ISRA) by Tenant, Tenant, at its sole cost and expense, shall provide Landlord with a certified true copy of: (i) A letter from the New Jersey Department of Environmental Protection ("NJDEP") (or such other agency or body as shall then have jurisdiction over ISRA matters), stating that ISRA does not then apply to Tenant, Tenant's use and occupancy of the Property and the closing of operations or transferring of ownership or operations of all or any portion of the Property; or (ii) A "No further action letter" (as said term is defined in ISRA) duly and finally approved by NJDEP or such other agency or body as shall then have jurisdiction over ISRA matters; or (iii) A "Remedial action workplan" (as said term is defined in ISRA) duly and finally approved by NJDEP or such other agency or body as shall then have jurisdiction over ISRA matters, or (iv) other documentation reasonably acceptable to Landlord evidencing Tenant's compliance with, or the non-applicability of, ISRA. (c) In the event Tenant complies with Section 16(b), by obtaining an approved final Remedial action workplan, Tenant further agrees that it shall, at its sole cost and expense: (i) Post or cause to be posted any financial guarantee or other bond required to secure implementation and completion of such Remedial action workplan, and (ii) Promptly implement and prosecute to completion or cause to be so implemented and prosecuted such Remedial action workplan, in accordance with the schedules contained in said Remedial action workplan or as may be otherwise ordered or directed by NJDEP or such other agency or body as shall then have jurisdiction over such Remedial action workplan. (d) Within twenty (20) days after written request by Landlord, Tenant, shall deliver to Landlord a duly executed and acknowledged affidavit of Tenant as Landlord may, from time to time, reasonably require, certifying: (i) The proper four digit Standard Industrial Classification number relating to Tenant's then current use of the demised premises (said Standard Industrial Classification number to be obtained by reference to the then current Standard Industrial Classification Manual prepared and published by the Executive Office of the President, Office of Management and Budget or the successor to such publication); and (ii) (A) That Tenant's then current use of the Property does not involve the generation, manufacture, refining, transportation, treatment, storage, handling, or disposal of hazardous substances(other than normal and customary office products and cleaning supplies used in Tenant's business in accordance with applicable environmental laws), or hazardous wastes, as hazardous substances and hazardous wastes are defined in ISRA, on site, above ground or below ground (all of the foregoing being hereinafter collectively referred to as the Presence of Hazardous Substances), or, (B) that Tenant's then present use does involve the Presence of Hazardous Substances, (other than normal and customary office products and cleaning supplies used in Tenant's business in accordance with applicable environmental laws) in which event, said affidavit shall describe in reasonable detail that portion of Tenant's operations which involves the Presence of Hazardous Substances. Tenant shall make available to Landlord, at reasonable times and upon Landlord's reasonable request, information which identifies each Hazardous Substance present at the Property, with the exception of ordinary office and/or cleaning supplies and products used in connection with the conduct of Tenant's business at the Premises. Tenant shall supply Landlord with such additional information relating to said Presence of Hazardous Substances as Landlord may reasonably request. (e) Without limiting the foregoing, Tenant agrees, (i) at its sole cost and expense, to promptly discharge and remove any lien or other encumbrance against the Property arising from or in connection with Tenant's failure or inability, for any reason whatsoever, to observe or comply with ISRA, all other environmental laws and the provisions of this Section 16; and (ii) to indemnify and hold Landlord harmless from and against any and all liability, penalties, losses, expenses, damages, costs, claims, causes of action, judgments and/or the like, of whatever nature, including, but not limited to, reasonable attorneys' fees, to the extent said lien, encumbrance, liability, penalty, loss, expense, damage, cost, claim, cause of action, judgment and/or the like arise from or in connection with Tenant's failure or inability, for any reason whatsoever, to observe or comply with ISRA, all other environmental laws and the provisions of this Section 16. (f) Tenant shall not, without the prior written consent of Landlord having been obtained, at any time during the term of this Lease, install any underground or above-ground tanks for the storage of fuel oil, gasoline and/or other petroleum products or by-products. (g) In the event any portion of the Property is subleased or otherwise occupied by or through Tenant, Tenant shall be responsible for causing such parties to comply with the provisions of this Section 16. (h) Any cleanup of the Property required to be performed by Tenant hereunder shall be to the strictest standard regardless of use." 9. Sections 16(c) and 16(d) of the Lease shall be renumbered as 16(i) and 16(j), respectively. 10. All references in the Lease to Sudler Construction Company shall be changed to Sudler Management Company, L.L.C., including but not limited to the references contained in Sections 7 and 25 of the Lease. 11. Remaining Terms. Except as specifically amended and modified herein, all of the terms, covenants or conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereby have duly executed this Amendment to Lease as of the date first above set forth. LANDLORD: 1720 Oak Street, L.L.C. WITNESS: By: /s/ Peter Sudler -------------------------------- Peter D. Sudler Its: Manager TENANT: MICRO WAREHOUSE, INC. ATTEST: By: /s/ Bruce L. Lev -------------------------------- Print Name: Bruce L. Lev Its: Executive Vice President EX-10.19 3 LEASE AGREEMENT EXHIBIT 10.19 WILMINGTON COMMERCE PARK PARTNERSHIP WAREHOUSE/DISTRIBUTION AGREEMENT OF LEASE LEASE FOR BUILDING 11 PROPERTY LOCATED AT 3336 State Route 73 South, Wilmington, Ohio 45177 ARTICLE I TERM .........................................................2 2 ACCEPTANCE OF LEASED PREMISES ................................2 3 RENT .........................................................3 4 COMMON AREA ..................................................3 5 USE OF LEASED PREMISES .......................................4 6 ASSIGNMENT AND SUBLET71NG ....................................5 7 REPAIRS ......................................................5 8 INSTALLATIONS AND ALTERATIONS ................................6 9 RISK OF LOSS .................................................6 10 INSURANCE ....................................................7 11 DAMAGE BY FIRE OR OTHER CASUALTY .............................8 12 EMINENT DOMAIN ...............................................8 13 ACCESS TO LEASED PREMISES ....................................9 14 LESSOR'S SUCCESSORS ..........................................9 15 SUBORDINATION ................................................9 16 ATTORNMENT ..................................................10 17 LIMITATION OF LIABILITY .....................................10 18 LESSEE'S DEFAULT ............................................10 19 SURRENDER OF LEASED PREMISES ................................11 20 WAIVER OF SUBROGATION .......................................12 21 ZONING; PERMITS .............................................12 22 ENVIRONMENTAL PROVISIONS ....................................12 23 ESTOPPEL CERTIFICATE ........................................13 24 ACCELERATION OF RENT ........................................13 25 RENT DEMAND .................................................13 26 NO REPRESENTATION BY LESSOR .................................13 27 WAIVER OF BREACH ............................................14 28 QUIET ENJOYMENT .............................................14 29 INTERPRETATION ..............................................14 30 DEFINITIONS .................................................14 31 HEADINGS ....................................................14 32 NOTICE ......................................................14 33 FINANCIAL STATEMENTS ........................................15 34 MEMORANDUM OF LEASE .........................................15 35 TIME ........................................................15 36 OPTION TO RENEW .............................................15 37 ENTIRE AGREEMENT ............................................16 WILMINGTON COMMERCE PARK PARTNERSHIP WAREHOUSE/DISTRIBUTION AGREEMIENT OF LEASE THIS LEASE made by and between WILMINGTON COMMERCE PARK PARTNERSHIP, hereinafter referred to as the Lessor, and MICROWAREHOUSE, INC., OF OHIO, hereinafter referred to as the Lessee. The Lessor's business enterprise is organized as an Ohio partnership. The Lessee's business enterprise is organized as a corporation and is admitted to do business in the State of Ohio. WITNESSETH: The Lessor does hereby lease and let to the Lessee and the Lessee accepts from the Lessor under the terms and conditions of this Lease, the following described Premises: 220,800 square feet, more or less, located at 3336 State Route 73 South, Wilmington, Ohio 45177 and being the entire building sometimes designated as Building 11, as shown and more particularly described on Schedule A attached hereto, hereinafter referred to as the Leased Premises. ARTICLE 1. TERM. SECTION 1. TO HAVE AND TO HOLD unto the Lessee for a term of Ten (10) years, commencing on the 1st day of February, 1999, ("commencement date") and ending on the 31st day of January, 2009, both dates inclusive. Should the commencement date be delayed as set forth in Section 2 hereof, the term of the Lease shall run for ten years from the actual commencement date. SECTION 2. If this Lease is executed and the Lessor cannot deliver possession of the Leased Premises before the commencement date as defined above, it shall not be deemed to be in default under the Lease, and Lessee shall accept possession of the Leased Premises whenever Lessor is able to tender them; PROVIDED, HOWEVER, that possession must be tendered on or before May 1, 1999, or Lessee shall be released from all liability hereunder. Lessor waives the payment of rent covering any period before possession is tendered to Lessee. Tender of possession must include an unconditional certificate of occupancy issued by the appropriate governing authority. ARTICLE 2. ACCEPTANCE OF LEASED PREMISES. The Leased Premises shall be delivered to the Lessee in Shell condition, subject to the completion of the work set forth on attached Exhibit B in a good and workmanlike manner, which includes the Certificate of Occupancy. Lessor will provide a Tenant Improvement allowance not to exceed $240,000.00 to or on behalf of Lessee toward Lessee's tenant improvements to the Leased Premises. This will allow the finish out of approximately 8000 square feet of office space within the premises. Exhibit C includes a list of additional and/or 2 alternate items for the Premises together with the costs of such elective Tenant Improvements above the $240,000.00 allowance. Lessor shall provide Lessee access to the Leased Premises prior to the commencement date based on the schedule set forth in the Timeline attached hereto as Exhibit D. This access will be for the purpose of Lessee's installation of racking and other operational equipment. Lessee shall not owe rent during this period but the entire risk of loss as to equipment so installed shall be born by Lessee. ARTICLE 3. RENT. SECTION 1. Lessee shall pay to the Lessor as BASIC ANNUAL RENT for the Leased Premises for each year of the period of February 1, 1999 through January 31, 2004 the sum of One Million Fifteen Thousand Four Hundred Sixty-Four Dollars ($1,015,464.00) which shall be paid in equal monthly installments of Eighty Four Thousand Six Hundred Twenty-Two Dollars ($84,622.00), due and payable on the first day of each month, in advance. Said rent shall be paid to the Lessor, or to the duly authorized agent of the Lessor, at its office at 3800 Red Bank Road, Cincinnati, Ohio 45227 during business hours. Checks should be made payable to WILMINGTON COMMERCE PARK PARTNERSHIP. Any Basic Annual Rent payment not received by the Lessor by the first day of the month shall be past due. If the commencement date of this Lease is other than the first day of the month, any rental adjustment or additional rents hereinafter provided for shall be prorated accordingly. The Lessee will pay the rent as herein provided, without deduction whatsoever, and without any obligation of the Lessor to make demand for it. Any installment of rent accruing hereunder and any other sum payable hereunder, if not paid when due, shall bear interest at the rate of eighteen percent (18%) per annum until paid. The Basic Annual Rent of $1,015,464.00 shall be adjusted once during the term of the Lease. Beginning February 1, 2004, the sixth year of Lease, and each year of the term thereafter, the Basic Annual Rent shall be One Million One Hundred Seventeen Thousand Ten Dollars ($1,117,010.00) which shall be paid in equal monthly installments of Ninety-Three Thousand Eighty-Four and 17/100's Dollars ($93,084.17). SECTION 2. The Lessee shall pay for the costs of all water, gas, and electricity, including electricity costs for exterior lighting, or any other utilities in connection with the Leased Premises. SECTION 3. The Lessee agrees to pay all real estate taxes on the Leased Premises during the term of this Lease. Taxes for any portion of a calendar year during the term of this Lease shall be prorated between Lessor and Lessee. The Lessee shall pay its share of expenses that the Lessor shall incur by reason of compliance with new laws, orders, special rent/use taxes, ordinances and new regulations of Federal, State, County and Municipal authorities, and with any lawful direction of any public officer or officers, which lawful direction shall be imposed upon the Lessor for the common good of the occupants of the Airborne Commerce Park. Capital improvements which are the responsibility of Lessor shall not be deemed to be prorated or to be passed through to Lessee hereunder. ARTICLE 4. COMMON AREA. For the purpose of this Lease, the term "common area" is defined for all purposes of this Lease as facilities that are intended for the common use of all tenants of the Airborne 3 Commerce Park. For purposes of this definition, facilities include the parking area, driveways, private streets and alleys, landscaping, curbs, loading area, sidewalks and exterior lighting facilities, which facilities located around the Leased Premises are identified and designated as such in Exhibit B; PROVIDED, HOWEVER, THAT NOTWITHSTANDING the foregoing, the Lessee, as lessee of the entire Building 11 shall have the exclusive right to use all of the parking and loading areas for that Building as shown on Exhibit A. The Lessee shall have no right to use the common area for storage of pallets or other storage purposes and trash shall be stored only in such containers and in such place as approved by the Lessor. The Lessor shall maintain the common area and keep the same in good order and repair including lighting and landscaping. The Lessor may temporarily close any part of the common area for any period necessary to make repairs or alterations or to prevent the public from obtaining prescriptive rights. The cost of exterior lighting and ice and snow removal, general cleaning, asphalt sealing and restriping and landscape maintenance will be charged to the Lessee in accordance with the percentage that the square footage of the Leased Premises bears to the total square footage of all buildings adjacent to the Leased Premises. The share of such cost will be deemed to be additional rent and shall be due the first of the month following the invoice thereof by Lessor to the Lessee of the amount due. ARTICLE 5. Use of Leased Premises. SECTION 1. The Leased Premises shall be used and occupied only for direct mail and telemarketing activities, warehousing and distribution of products and related activities and for no other purposes without the written consent of the Lessor. SECTION 2. The Lessee shall operate its business in a safe and proper manner as is normal, considering the uses of the Leased Premises above provided; and shall not manufacture, store, display or maintain any products or materials that will endanger the Leased Premises; shall do nothing that would increase the cost of insurance on the building or invalidate existing policies; shall not obstruct the sidewalks; shall not use the plumbing for any other purpose than for which it was constructed; shall not make or permit any unreasonable noise and/or odor objectionable to the public or adjacent occupants; shall not create a nuisance on the Leased Premises; and shall commit no waste. SECTION 3. The Lessee shall abide by all police and fire regulations concerning the operation of its business; shall store all trash, rubbish and debris in closed containers; and shall practice all proper procedures and methods that are common to its business enterprise. The Lessee shall maintain a minimum temperature in the Leased Premises of fifty-five (55) degrees fahrenheit. SECTION 4. The Lessee shall at all times keep all improvements and any equipment facilities or fixtures in good order, condition and repair and in a clean, sanitary and safe condition and in accordance with all applicable laws, ordinances and regulations of any governmental authority having jurisdiction. Lessee shall permit no waste, damage or injury to the Leased Premises. SECTION 5. Lessee shall forthwith at its own cost and expense replace with glass of the same kind and quality any cracked or broken glass, including plate glass or glass or other 4 breakable materials used in structural portions, and any interior and exterior windows and doors in the Leased Premises. ARTICLE 6. ASSIGNMENT AND SUBLETTING. Lessee shall not transfer, mortgage, or pledge this lease, or sublease the subject premises or any portion thereof, without the Lessor's prior written consent, which shall not be unreasonably withheld or delayed. Lessee shall give ABX AIR, INC., the first right to sublease any or all of the premises. ABX shall have seven (7) business days following receipt of written notice of such right to sublease to accept or reject all or any portion of the property offered for sublease. Said acceptance or rejection shall be in writing. The Lessor may deem any levy or sale or execution or other legal process against the Lessee, or any assignment or sale in bankruptcy or assignment or a receiver or insolvency of the Lessee, to be an assignment within the meaning of this Article. ARTICLE 7. REPAIRS. SECTION 1. Lessor shall keep the foundations, exterior walls (except plate glass or glass or other breakable materials used in structural portions) roof, and sprinklers in good repair. SECTION 2. Lessee shall contract for the maintenance of mechanical equipment. The Lessee shall replace any hot water heater as the need should arise with the same type and quality servicing the Leased Premises. The Lessor shall replace, as needed, the heating and air conditioning equipment, provided the unit has been serviced annually. Lessee will be entitled to apply any benefits which Lessor may have under any warranties on such mechanical systems either by assignment of such warranties to Lessee or through cooperation of Lessor and Lessee in making claims under such warranties. Lessor shall have the option to elect whether to assign warranties or participate in making claims. SECTION 3. Lessor shall not be liable for failure to keep the Leased Premises in repair, unless notice of the need for repairs has been given Lessor, after the same has come to the explicit attention of Lessee, a reasonable time has elapsed and Lessor has failed to make such repairs. Lessor shall not be liable for any damage done or occasioned by or from the electrical system, the heating and/or air conditioning system, the plumbing and sewer system in, above, upon or about the Leased Premises nor for damage occasioned by water, snow or ice being upon or coming through the roof, walls, windows, doors or otherwise, unless such damages are a result of Lessor's negligence or intentional misconduct in performance or failure to perform as above provided. SECTION 4. Except as provided in Sections 1, 2 and 3 of this Article, Lessor shall not be obligated to make repairs, replacements or improvements of any kind upon said Leased Premises, or to any equipment facilities or fixtures therein contained, which shall at all times be kept in good order, condition and repair by Lessee, and in a clean, sanitary and safe condition and in accordance with all applicable laws, ordinances and regulations of any governmental authority having jurisdiction. Lessee shall permit no waste, damage, or injury to the Leased Premises. 5 ARTICLE 8. INSTALLATIONS AND ALTERATIONS. SECTION 1. Lessee shall not make any alterations or additions to the Leased Premises without first procuring Lessor's written consent, which consent shall be exercised at Lessor's sole discretion, and delivering to Lessor the plans and specifications and copies of the proposed contracts and necessary permits, and shall furnish indemnification against liens, costs, damages and expenses as may be reasonably required by Lessor. All alterations, additions improvements and fixtures, other than trade fixtures, which may be made or installed by either of the parties hereto upon the Leased Premises and which in any manner are attached to the floors, walls or ceilings, at the termination of this Lease shall become the property of the Lessor unless Lessor requests their removal and shall remain upon and be surrendered with the Leased Premises as a part thereof, without damage or injury; and linoleum or other floor covering which may be cemented or adhesively affixed to the floor shall likewise become the property of Lessor, all without compensation or credit to Lessee. SECTION 2. Lessor may withhold consent, whether reasonably or unreasonably, to any proposed alteration, addition or installation which Lessor believes, in the Lessor's sole opinion and discretion, could be considered a safety hazard by the Federal Aviation Administration ("FAA") or which Lessor believes would delay compliance or increase the costs incurred by Lessor in complying with any regulation or law administered or enforced by the FAA or similar regulatory body. SECTION 3. The Lessee shall not erect or install any signage without first procuring Lessor's written consent, which consent shall not be unreasonably withheld or delayed. SECTION 4. The Lessee shall have no rights to use and shall not use the roof of the Leased Premises for any purpose without the written consent of the Lessor. The Lessee shall not use the roof for storage, for any activity that will result in traffic on the roof, for anything that will penetrate the roof, use the roof as an anchor or otherwise damage the roof. The consent of the Lessor must be in writing for each specific use and must also approve the method of installation of the permitted use. Should the Lessee break this covenant, the Lessee shall be responsible for any damages caused to the roof or other parts of the building and shall assume the cost of maintaining and repairing the roof during the term of the Lease, including any renewals. ARTICLE 9. RISK OF LOSS. SECTION 1. The Lessor shall not be held responsible for and is relieved from all liability by reason of, any injury or damage to any person, persons or property in the demised premises, whether belonging to the Lessee or any other person, caused by any fire or by any breakage or leakage in any part or portion of the demised premises, or in any part or portions of the building of which the demised premises are a part, unless such breakage, leakage, injury or damage is caused by or results from the negligence or intentional misconduct of the Lessor or its agents. The Lessee, in consideration of the rent, accepts and assumes such responsibility and liability. 6 SECTION 2. The Lessor shall not be held responsible for and is relieved from all liability by reason of, any injury or damage to any person, persons or property in the demised premises, whether belonging to the Lessee or any other person, from water, rain or snow that may leak into, issue, or flow from any part of the premises or of the building of which the demised premises are a part, from the pipes or plumbing work of the same or from any place or quarter, unless such damage, leak or flow is caused by or results from the negligence or intentional misconduct of the Lessor or its agents. The Lessee, in consideration of the rent herein specified, accepts and assumes such responsibility and liability. SECTION 3. The Lessee releases the Lessor from all liability, and assumes all liability, for damages which may arise from any kind of injury to person, persons or property on account of the use, misuse or abuse of all elevators, hatches, or openings of any kind that may exist or hereinafter be erected or constructed on the premises or from any kind of injury that may arise from any other cause on the premises, unless such damage, injury, use, misuse or abuse is caused by or results from the negligence or intentional misconduct of the Lessor or its agents. ARTICLE 10. INSURANCE. SECTION 1. Lessee shall not carry any stock of goods or do anything in or about said Leased Premises which will in any way tend to increase insurance rates on said Leased Premises or the building in which the same are located. If Lessor shall consent to such use, Lessee agrees to reimburse Lessor, upon demand, all increase or increases of premiums on insurance carried by the Lessor on all or part of the Leased Premises, or on the building of which the Leased Premises are a part, caused in any way by the Lessee's occupancy. If Lessee installs any electrical equipment that overloads or may overload the power lines to the building, Lessee shall make immediately, and at its own expense, whatever changes are necessary to remedy such overload or possible overload and to avoid the same in the future, and shall comply with all requirements of all governmental authorities having jurisdiction and with the requirements of any insurance underwriters and rating bureaus. SECTION 2. Lessee agrees to procure and maintain a policy or policies of insurance, at its own costs and expense, insuring from all claims, demands or actions for injury to or death of more than one person in any one accident and for damages to property in an aggregate amount of not less than $3,500,000.00 made by or on behalf of any person or persons, firm or corporation, arising from, related to, or connected with the conduct and operation of Lessee's business in the Leased Premises. Lessor shall be named an Additional Insured Party in said policy. Such insurance shall be primary relative to any other valid and collectible insurance. Lessee may satisfy this insurance requirement with appropriate coverage under its existing policies and shall not be obligated to obtain a separate policy for the Leased Premises. Said insurance shall not be subject to cancellation except after at least thirty (30) days prior written notice to Lessor, and the policy or policies, or duly executed certificate of insurance for the same, together with satisfactory evidence of the payment of the premium thereon, shall be deposited with Lessor at the commencement of the term and renewals of such coverage. If Lessee fails to comply with such requirement, Lessor may obtain such insurance and keep the same in effect, and Lessee shall pay Lessor the premium cost thereof upon demand. 7 SECTION 3. All property of Lessee or those claiming under Lessee which may be upon said Leased Premises during the term hereof or any renewal thereof shall be at and upon the sole risk and responsibility of the Lessee. ARTICLE 11. DAMAGE BY FIRE OR OTHER CASUALTY. SECTION 1. If the leased Premises shall be destroyed or so injured by any cause as to be unfit, in whole or in part, for occupancy, Lessor shall use its best efforts to provide occupant comparable space within sixty (60) miles of the Leased Premises and if Lessor cannot provide such space, Lessee may terminate this Lease. If the Lessor has provided such temporary space and such destruction or injury could reasonably be repaired within three (3) months from the happening of such destruction or injury, then Lessee shall not be entitled to surrender possession of the Leased Premises nor shall Lessee's liability to pay rent under this Lease cease without mutual consent of the parties hereto. In case of any such destruction or injury, Lessor shall repair the same with all reasonable speed and shall complete such repairs within three (3) months from the happening of such injury, and if during such period Lessee shall be unable to use all or any portion of the Leased Premises, a proportionate allowance shall be made to Lessee from the rent corresponding to the time during which and to the portion of the Leased Premises of which Lessee shall be so deprived of the use on account thereof. SECTION 2. If such destruction or injury cannot reasonably be repaired within three (3) months from the happening thereof, Lessor shall notify Lessee within ten (10) days after the happening of such destruction or injury whether or not Lessee will repair or rebuild. If Lessor elects not to repair or rebuild, this Lease shall be terminated. If Lessor shall elect to repair or rebuild, Lessor shall specify the time within which such repairs or reconstruction will be complete and Lessee shall have the option, within ten (10) days after the receipt of such notice, to elect either to terminate this Lease and further liability hereunder, or to extend the term of the Lease by a period of time equivalent to the time from the happening of such destruction or injury until the Leased Premises are restored to their former condition. In the event Lessee elects to extend the term of the Lease, Lessor shall restore this Leased Premises to its former condition within the specified time in the notice, and Lessee shall not be liable to pay rent for the period from the time of such destruction or injury until the Leased Premises are so restored to their former condition. SECTION 3. All of Lessee's obligations under this lease including, but not limited to the duty to pay rents shall continue unabated if Lessee is provided with substitute space as set forth above at no additional cost to Lessee. ARTICLE 12. EMINENT DOMAIN. SECTION 1. If any of the Leased Premises shall be taken by a public authority under the power of eminent domain and Lessor is unable to provide substitute space within tile area of the Airborne Commerce Park, then the term of this Lease shall cease as of the day possession shall be taken by such public authority, and the rent shall be paid up to that date with a proportionate refund by Lessor of such rent as shall have been paid in advance. 8 SECTION 2. If less than substantially all of the floor area of the Leased Premises shall be so taken, as of the day possession shall be taken by such public authority, and the rent shall be paid up to that day with a proportionate refund by Lessor of such rent as may have been paid in advance, and thereafter the minimum rent shall be equitably abated, and Lessor shall at its own cost and expense make all necessary repairs or alterations as to constitute the remaining Leased Premises a complete architectural unit. SECTION 3. All damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the Leased Premises, shall be the property of Lessor whether such damages shall be awarded as compensation for diminution in value of the leasehold or to the fee of the Leased Premises; provided, however, that the Lessor shall not be entitled to any separate award made to Lessee for loss of business, depreciation to and cost of removal of stock and fixtures. ARTICLE 13. ACCESS TO LEASED PREMISES. Lessee shall retain all keys to the Leased Premises for security reasons. Lessee agrees to have accessible to Lessor for twenty-four (24) hours each day, a person or persons who will be able to provide reasonable access to the Leased Premises for Lessor. The Lessor or its agents shall have the right to enter upon the Leased Premises at all reasonable hours for the purpose of inspecting the same or of making repairs, additions or alterations thereto or to the building in which the same are located. If Lessor must obtain access to the premises in an emergency, and Lessee has not provided access as set forth above, Lessor may use whatever means are necessary to obtain access, and any costs to repair damage caused to the Leased Premises by Lessor in obtaining access shall be paid by Lessee. During the final six months of the Lease term, the Lessor shall have the right, upon reasonable notice, to show the Leased premises to prospective Lessees, purchasers or others. Lessor shall not be liable to Lessee in any manner for any expense, loss or damage by reason thereof, nor shall the exercise of such right be deemed an eviction or disturbance of Lessee's use and possession. ARTICLE 14. LESSOR'S SUCCESSORS. The term "Lessor" as used in this Lease shall be limited to mean and include only the owner or owners, at the time, of the fee of the building, their successors and assigns, so that in the event of any sale or sales of the building, the previous Lessor shall be entirely released with respect to the performance of all subsequently accruing covenants and obligations on the part of lessor. The retention of fee ownership by a lessor of the building or of the land on which it is located under an underlying lease which is now or hereafter in effect, shall not be deemed to impose on such underlying lessor any liability, initial or continuing, for the performance of the covenants and obligations of Lessor. ARTICLE 15. SUBORDINATION. This Lease shall be subject to and subordinate at all times to the lien of any mortgages, now or hereafter made on the Leased Premises, and to all advances made or hereafter to be made thereunder. The Lessee agrees to execute a subordination agreement 9 should Lessor's lender request same. ARTICLE 16. ATTORNMENT. In the event the herein Leased Premises are sold due to any sale, transfer or foreclosure, by virtue of judicial proceedings or otherwise, this Lease shall continue in full force and effect, and Lessee agrees, upon request, to attorn to and acknowledge the transferee(s) or purchaser(s) at such transfer or sale as Lessor(s) hereunder; provided such transferee(s) or purchaser will recognize this Lease, unless and until it is in default. ARTICLE 17. LIMITATION ON LIABILITY. Notwithstanding any other provision of this Lease, Lessee agrees to look solely to Lessor's interest in the building (subject to any mortgage on the building) for the recovery of any judgment requiring the payment of money by Lessor; it being agreed that Lessor, and if Lessor is a partnership, its partners whether general or limited, or if Lessor is a corporation, its directors, officers, and shareholders, shall never be personally liable for any such judgment, and no other assets of the Lessor shall be subject to such levy, execution or other procedures for the satisfaction of Lessee's judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right that Lessee might otherwise have to obtain injunctive relief against Lessor or Lessor's successors in interest, or to maintain any other action not involving the personal liability of Lessor, or to maintain any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Lessor. ARTICLE 18. LESSEE'S DEFAULT. SECTION 1. The Lessee, ten (10) days after receipt of written notice, shall be considered in default of this Lease upon failure to pay when due the rent or any other sum required by the terms of the Lease. Lessee shall also be considered in default thirty (30) days after receipt of written notice for failure to perform any term, covenant or condition of this Lease; upon the commencement of any action or proceeding for the dissolution, liquidation or reorganization under the Bankruptcy Act, of Lessee, or for the appointment of a receiver or trustee of the Lessee's property; upon making of any assignment for the benefit of creditors by Lessee; upon suspension of business; or the abandonment of the Leased Premises by the Lessee. Any defaults other than nonpayment defaults shall have a thirty (30) day cure period. SECTION 2. In the event of default of this Lease by either party, then either party may pursue any and all remedies and rights available under applicable Ohio law. Should Lessor elect to reenter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease, or it may without terminating this Lease relet said Leased Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Lessor may deem advisable, with the right to make alterations and repairs to said Leased Premises for the purpose or rerental. Should such rentals received from such reletting during any month be less than required to be paid by Lessee as defined above, then Lessee shall immediately pay such deficiency to Lessor. 10 SECTION 3. No such reentry or taking possession of said Leased Premises by Lessor shall be construed as an election on its part to terminate this Lease, unless a written notice of such intention be given to Lessee or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Lessor may at any time thereafter elect to terminate this Lease for such previous breach or act of default. Should Lessor at any time terminate this Lease for any breach or act of default, in addition to any other remedy it may have, it may recover from Lessee all damages it may incur by reason of such breach or act of default, including the cost of recovering the Leased Premises, legal fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Leased Premises for the remainder of the stated term. ARTICLE 19. SURRENDER OF LEASED PREMISES. SECTION 1. If Lessee holds possession of the Leased Premises after the termination of this Lease for any reason not authorized by the Lessor, Lessee shall pay Lessor one hundred fifty percent (150%) of the rent provided for herein for such period that Lessee holds over, but such payment of rent shall not create any Lease arrangement whatsoever between Lessor and Lessee, unless expressly agreed to in writing by Lessor. It is further understood that during such period that Lessee holds over, the Lessor retains all of Lessor's rights under this Lease, including damages as a result of the termination of this Lease and the right to immediate possession of the Leased Premises. This paragraph shall not be construed to grant Lessee permission to hold over. SECTION 2. At the expiration of the tenancy created hereunder, whether by lapse of time or otherwise, Lessee shall surrender the Leased Premises broom clean, free of tire marks, free of all debris and in good condition and repair, reasonable wear and loss by fire or other unavoidable casualty excepted. SECTION 3. Prior to surrender of the Leased Premises, the Leased Premises will be reviewed by a representative of the Lessor and Lessee to determine if there is any deferred maintenance or unrepaired damage. Lessee shall have the option to effect such maintenance and repairs. In the event that there is deferred maintenance and/or unrepaired damage not taken care of by Lessee, then Lessor may effect such maintenance and repairs and Lessee will pay the cost thereof. SECTION 4. Upon the expiration of the tenancy hereby created, if Lessor so requests in writing, Lessee shall promptly remove any additions (not to include permitted Tenant Improvements), signs, fixtures and installations placed in the Leased Premises by Lessee that is designated in said request, AND REPAIR ANY DAMAGE occasioned by such removals at its own expense, and in default thereof, Lessor may effect such removals and repairs, and Lessee shall pay Lessor the cost thereof, with interest at the rate of eight (8) percent per annum from the date of payment by Lessor. 11 ARTICLE 20. WAIVER OF SUBROGATION. The Lessor and Lessee waive all rights, each against the other, for damages caused by fire or other perils covered by insurance where such damages are sustained in connection with the occupancy of the Leased Premises. ARTICLE 21. ZONING; PERMITS. Anything herein elsewhere contained to the contrary, this Lease and all the terms and conditions hereof are in all respects subject and subordinate to all zoning restrictions and restricting covenants affecting the Leased Premises, and the building in which they are located, and the Lessee shall be bound by such restrictions. Lessor represents that to the best of its knowledge and belief, the present zoning of the premises permit the activities of Lessee as such are presently carried on. The Lessor further does not warrant that any licenses or permits which may be required for the business to be conducted by the Lessee on the Leased Premises will be granted, or, if granted, will be continued in effect or renewed. Any failure to obtain the licenses, permits, or any revocation thereof or failure to renew them, shall not release the Lessee from the terms of this Lease. ARTICLE 22. ENVIRONMENTAL PROVISIONS. SECTION 1. The Lessor, to the best of its knowledge, represents to the Lessee that no toxic, explosive or other dangerous materials or hazardous substances have been concealed within, buried beneath, released on or from, or removed from and stored off-site of the Property upon which the Leased Premises is constructed. SECTION 2. Lessee shall at all times during the term of this Lease comply with all applicable federal, state, and local laws, regulations, administrative rulings, orders, ordinances, and the like, pertaining to the protection of the environment, including but not limited to, those regulating the handling and disposal of waste materials. Further, during the term of this Lease, neither Lessee nor any agent or party acting at the direction or with the consent of Lessee shall treat, store, or dispose of any "hazardous substance," as defined in Section 101 (14) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA ") (or any analogous legislation), or petroleum (including crude oil or any fraction thereof) on or from the Property. SECTION 3. Lessee shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Lessor from any and all claims, orders, demands, causes of action, proceedings, judgments, or suits and all liabilities, losses, costs or expenses (including, without limitation, technical consultant fees, court costs, expenses paid to third parties and reasonable legal fees) and damages arising out of, or as a result of, (i) any "release" as defined in Section 101 (22) of CERCLA (or any analogous legislation), of any "hazardous substance," as defined in Section 101 (14) of CERCLA (or any analogous legislation), or petroleum, (including crude oil or any fraction thereof) or placed into, on or from the Property at any time after the date of this Lease by Lessee, its agents, or employees; (ii) any contamination of the Property's soil or groundwater or damage to the environment and natural resources of the Property the result of actions occurring after the date of this Lease, whether arising under CERCLA or other statutes 12 and regulations, or common law by Lessee, its agents, or employees; and (iii) any toxic, explosive or otherwise dangerous materials or hazardous substances which have been buried beneath, concealed within or released on or from the Property after the date of this Lease by Lessee, its agents or employees. SECTION 4. Lessor agrees to indemnify and hold harmless Lessee upon the same terms and conditions set forth above for any release which is caused by any other tenant in the Airborne Commerce Park or by Lessor itself, except to the extent that Lessee is determined to be partly or wholly responsible for such release. ARTICLE 23. ESTOPPEL CERTIFICATE. The Lessee agrees to execute an Estoppel Certificate on a form to be supplied by Lessor for the benefit of Lender or any mortgage holder; that wherein the Lessee acknowledges the terms and conditions of this Lease. ARTICLE 24. ACCELERATION OF RENT. If the Lessee becomes insolvent, bankrupt, or makes an assignment for the benefit of creditors, or is levied upon or sold out by Sheriff's or Marshall's sale, or if a receiver is appointed, the Lessor may declare the rent for the balance of the term or any part thereof to be due and payable as if by the terms of the lease it were payable in advance. If the rent or any other sum payable hereunder is at any time unpaid when due, the Lessor may then declare the rent for the balance of the term or any part thereof to be immediately due and payable as if by the terms of the Lease it were payable in advance, and the Lessor may immediately proceed to distrain, collect, or bring action for the whole rent or any part thereof, as if it were in arrears, or may enter judgment therefor, in an amicable action as hereinabove provided in the case of rent in arrears. ARTICLE 25. RENT DEMAND. Every demand for rent due wherever and whenever made shall have the same effect as if made at the time it falls due and at the place of payment, and after the service of any notice or commencement of any suit, or final judgment therein, Lessor may receive and collect any rent due, and such collection or receipt shall not operate as a waiver of nor affect such notice, suit or judgment. ARTICLE 26. NO REPRESENTATION BY LESSOR. Lessor and its agent have made no representations or promises with respect to the Leased Premises or the building of which the same form a part except as herein expressly set forth. Lessor represents that all systems and Leased Premises will be in good working order and in full compliance with law and provision of the certificate of occupancy upon commencement of the Lease. 13 ARTICLE 27. WAIVER OF BREACH. No waiver of any breach of the covenants, provisions or conditions contained in this Lease shall be construed as a waiver of the covenant itself or any subsequent breach itself, and if any breach shall occur and afterwards be compromised, settled or adjusted, this Lease shall continue in full force and effect as if no breach had occurred, unless otherwise agreed. The acceptance of rent hereunder shall neither be or construed to be a waiver of any breach of any term, covenant or condition of this Lease. ARTICLE 28. QUIET ENJOYMENT. Lessor hereby covenants and agrees that if Lessee shall perform all the covenants and agreements herein stipulated to be performed on Lessee's part, Lessee shall at all times during the continuance hereof have the peaceable and quiet enjoyment and possession of the Leased Premises without any manner of let or hindrance from Lessor or any person or persons lawfully claiming the Leased Premises except as otherwise provided for herein. ARTICLE 29. INTERPRETATION. SECTION 1. Wherever either the word "Lessor" or "Lessee" is used in this Lease, it shall be considered as meaning the singular and/or neuter pronouns as used herein, and the same shall be construed as including all persons and corporations designated respectively as Lessor or Lessee in the heading of this instrument wherever the context requires. ARTICLE 30. DEFINITIONS. PRO RATA share. Unless otherwise indicated, "pro rata share" means the share of any costs, fees, or expenses Lessee is required to pay to Lessor under this Agreement calculated by dividing the square footage of the Leased Premises by the total square footage of the building of which the Leased Premises are a part. BUILDING. Unless otherwise indicated, "building" means the building of which the leased premises are a part. ARTICLE 31. HEADINGS. All headings preceding the text of the several Articles and Sections hereof are inserted solely for convenience or reference and shall not constitute a part of this Lease or affect its meaning, construction, or effect. ARTICLE 32. NOTICE. All notices under this Lease may be personally delivered; sent by courier service, with receipt; or mailed to the address shown by certified mail, return receipt requested. The effective date of any mailed notice shall be three (3) days after delivery of the same to the United States Postal Service. 14 Lessor: WILMINGTON COMMERCE PARK PARTNERSHIP Mail: Attn: Dave Neyer 3800 Red Bank Road Cincinnati, OH 5227 Telephone: (513) 271-6400 FAX: (513) 271-1350 Lessee: Microwarehouse, Inc. of Ohio Mail: Attn: Bruce Lev 535 Connecticut Avenue Norwalk, CT 06854 Telephone: (203) 899-4529 FAX: (203) 899-4312 ARTICLE 33. FINANCIAL STATEMENTS. At Lessor's request, the Lessee, within thirty (30) days of Lessor's request, shall furnish the Lessor with Lessee's most current financial statements including the Lessee's balance sheet, a consolidated statement of earnings and retained earnings, and changes in Lessee's financial position for the year. All such statements shall be certified by an independent certified public accountant. All such financial statements shall be prepared in accordance with generally accepted accounting principles which shall be consistently applied. ARTICLE 34. MEMORANDUM OF LEASE. It is agreed by both parties that this instrument is not recordable and if either party should record the same in the office of the Recorder of Clinton County, Ohio, the recording shall have no effect. When possession of the Leased Premises has been delivered to Lessee, the parties hereto may execute, acknowledge and deliver a Memorandum of Lease in recordable form specifying the terms of this Lease and renewal periods of this Lease. In the event they differ from the dates herein, the date in the Memorandum shall control. ARTICLE 35. TIME. Time is of the essence in this Lease. ARTICLE 36. OPTION TO RENEW. Lessee is hereby granted an option to renew this Lease for one (1) additional term of five (5) years on the same terms and conditions contained herein except as to the Basic Annual Rent amount which shall be One Million Two Hundred Twenty-Eight Thousand Seven Hundred Eleven Dollars ($1,228,711.00) for each year of the renewal term and upon the conditions that: 15 A. Written Notice of the exercise of the exercise of such option shall be given by Lessee to Lessor not less than One Hundred Eighty (180) days prior to the end of the term of this Lease; and B. At the time of the giving of such notice and at the expiration of the term of this Lease, there are no defaults in the covenants, agreements, terms and conditions on the part of Lessee to be kept and performed, and all rents are and have been fully paid. Provided also, that the rent to be paid during each said renewal period shall be at the same rate as being paid at the end of the previous term. ARTICLE 37. ENTIRE AGREEMENT. This Lease contains the entire agreement between the parties; it supersedes all previous understandings and agreements between the parties, if any and no oral or implied representation of understandings shall vary its terms; and it may not be amended except by a written instrument executed by both parties hereto. IN WITNESS WHEREOF, the parties hereto set their hands to triplicates hereof, this 5th day of june 1998, as to Lessor, and this 3rd day of June 1998, as to Lessee. Signed and acknowledged Lessor: WILMINGTON COMMMERCE PARK in the presence of: PARTNERSHIP Edward J. Schrier By: David F. Neyer Thomas W. Torbeck Its: Vice President, A. Neyer Inc. Bonnie Ann Bartoli. Lesee: MICROWAREHOUSE, INC. OF OHIO Eden F. Corbett By: Peter Godfrey Its: President STATE OF OHIO, COUNTY OF HAMILTON, SS: The foregoing instrument was acknowledged before me this 3rd-day of June 1998, David F. Neyer on behalf of WILMINGTON COMMERCE PARK PARTNERSHIP,an Ohio partnership. CINDY D. FANCHER NOTARY PUBLIC IN AND FOR THE STATE OF OHIO Notary Public My COMMISSION EXPIRES MAY 31, 2002 16 STATE OF CONNECTICUT, COUNTY OF FAIRFIELD, SS: NORWALK The foregoing instrument was acknowledged before me this 3rd day of June 1998, by Peter Godfrey, President/CEO, on behalf of MICROWAREHOUSE, INC., of Ohio, a corporation EDEN F.CORBET NOTARY PUBLIC IN AND FOR THE STATE OF CONNECTICUT Notary Public My Commission Expires May 31, 2002 Prepared by Karen Buckley, Buckley, Miller& Wright, Attorneys at Law, Wilmington, Ohio. (bldgll/lc) 17 EXHIBIT A Situate in the City of Wilmington, Clinton County, Ohio, and being a part of Military Survey No. 1170 and bounded and described as follows: Beginning at a 1/2" iron pin (found) at the Southerly corner of a 13.500 Acre Tract as recorded in Volume 25, Plat No. 82, of the Clinton County Engineers Record of Land Division: Running thence, from said point of beginning, with the Southwesterly line of said 13.500 Acre Tract, N. 52(0) 09' 02" W. 395.49 feet to a point; thence, by new division lines, on the following courses: (1) N. 49(0) 33' 08" E. 1048.71 feet to a point; (2) S. 40(0) 26' 52" E. 387.27 feet to a point; thence, with the Southeasterly line of the aforesaid 13.500 Acre Tract, S. 49(0) 33' 08" W. 968.49 feet to the point of beginning, containing Eight and Nine Hundred Sixty Seven Thousandths (8.967) Acres. Subject to all easements of record. This description is the result of a new survey made under the direction of Richard D. Roll, Registered Surveyor No. 4957, by CLINCO SURVEYORS, Wilmington, Ohio, in May, 1996, as recorded in Volume 26, Plat No. 293, of the Clinton County Engineers Record of Land Division. The bearings in this description were derived from the survey of the aforesaid 13.500 Acre Tract. 18 EXHIBIT B OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE) GENERAL REQUIREMENTS A) INTENT: This specification outlines the scope of work for the design and construction of an approximate 220,800 square foot building for Airborne Express. Al. Neyer, Inc. (ANI) will have a complete set of certified, final working drawings and specifications prepared in conformance with these outline documents and will furnish all labor, materials, equipment and supervision necessary for the execution and completion of the work. Final specifications will include Year 2000 certification. ANI will include the building permit fee. Additional general requirements will be as outlined in the contract documents. ANI will pay for sewer and water hookup fees. B) GUARANTEE: Except as may otherwise be specified herein or as may be provided by the equipment and material manufacturers, all material, equipment and labor Is guaranteed for a period of two (2) years from the date of "Beneficial Occupancy". C) BUILDERS RISK INSURANCE: Includes all risk insurance during construction. D) PERFORMANCE BOND: Not included. SITE DEVELOPMENT A) GRADING AND EARTHWORK: ANI will complete the excavation and rough and fine grading of the approximate 10 acre site. ANI will provide site survey and engineering. Areas to receive bituminous paving outside the areas of the building structure will be cut and filled to grades appropriate for commercial parking lots. B) EXTERIOR CONCRETE SIDEWALKS, CURB AND GUTTER: ANI will furnish and install 4" concrete at sidewalks. Exterior concrete areas are to be broom-finished unless noted otherwise. Integral curbs and gutters are to be furnished at the parking areas and along the entrance drive. A concrete dolly pad will be placed 45'wide from the loading docks, 6" thickness unreinforced. C) BITUMINOUS PAVING AND STRIPING: ANI will furnish and install all bituminous concrete parking lots, driveways, walkways, and loading areas as shown on the drawing. Approximately one hundred seventy (170) car parking spaces will be provided. All bituminous paving will be constructed to conform to Ohio Department of Transportation Specification #404 over a #304 gravel base. ANI will construct areas designated for auto traffic with total 2" thick bituminous mat over 8" granular base. Areas designated for truck traffic will be constructed with a total 4" bituminous mat over 8" granular base. All bituminous pavements will be striped to indicate parking stalls, median lines, traffic control features, and handicapped parking locations. OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICRO WAREHOUSE) D) TELEPHONE, GAS AND ELECTRIC UTILITIES: ANI will coordinate the service entrances with telephone, gas, and electric utility companies and will interface this work with the gas and electric utility work to provide complete and operable systems. The materials and workmanship for utility work will conform to the standards of various utilities. Wall conduit for fiber optic wires for "Smart Park" is included. E) WATER SERVICE: ANI will provide a 2" water service main for the domestic services within the building and 8" main for the interior fire protection systems, including valves, tap and meter as required by the City of Wilmington. The water main will be buried to the depth from finished grade required by code for frost protection, and tested before backfilling. F) SANITARY SEWERAGE: ANI will furnish and install a 6" sanitary sewer from the building to the property line. The sanitary sewer line will be standard PVC plastic or standard strength vitrified clay sewer pipe with code approved manholes, cleanouts and castings. G) STORM SEWERAGE: ANI will provide an on-site storm sewer system with catch basins and manholes and storm water detention basin. The dock area will be used for a portion of the detention needs in conjunction with one (1) detention basin. The storm sewer will be PVC with catch basins and manholes as required by code and the governing watershed district. All catch basins will have heavy duty grates. H) LAWNS AND LANDSCAPING: An allowance of $30,000 is included for sodded and seeded lawn areas, landscaping and irrigation. All lawn areas to receive sod and seed will be prepared with a minimum of 4" of top soil material. ANI will assist the Owner in soliciting landscaping schemes designed with the restrictions of the allowance. 1) EXTERIOR LIGHTING: Parking lots, drives and dock areas will be lighted using twenty-five (25) 175 watt wallpacks and six (6) uplights. An alternate to provide two (2) footcandles in parking 1=area by adding eight (8) pole lights and three (3) building-mounted flood lights is provided. Page 2 OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE) III. BUILDING STRUCTURE AND EXTERIOR ENVELOPE A) BUILDING STRUCTURAL SYSTEM: ANI will design and construct a structural system consisting of- 1) Open web bar joists, steel columns and beams and metal roof deck; based on an approximate bay size of 52'x 40'. All steel finished with a shop coat of rust inhibitor paint. 2) Concrete slabs-on-grade, unreinforced. 3) Reinforced concrete footings. All concrete footings and foundation walls will have a minimum compressive strength of 3,000 psi at 28 days. Slabs-on-grade will have a minimum compression strength of 4,000 psi at 28 days and will be 6" thick, unreinforced. An alternate for a 7" thick, unreinforced slab is provided. Concrete floor flatness and levelness will conform to the following: 1) The minimum average readings taken as a whole, shall be Ff of 55 for flatness and an F1, of 35 for levelness as set forth by ASTME 1155. The building will be designed in accordance with the standards of the American Concrete Institute, ACI 318, and all other applicable building, codes. A vapor barrier under the warehouse floor is included. The warehouse floor will be sealed with an Ashford formula sealer; the floor joints to be caulked. B) BUILDING EXTERIOR: ANI will construct the building wall system using poured reinforced tiltup concrete panels, painted. Approximately 34' clear to the bottom of the bar joists in the warehouse. Wall insulation will be 4" vinyl faced insulation from 6' above floor level to roof deck. The inside wall surface will be painted to 6' above floor level. C) ROOFING: ANI will install a flexible sheet, ballasted roof membrane insulated to provide an R-Value for the roofing system of IS. All roofs and flashings will be guaranteed by a 10 year limited warranty by the membrane manufacturer. An alternate to provide an R-value of 20 for the roofing system is provided. The roof will slope to interior downspouts that drain underground to the storm detention basin and then to the public storm system. A minimum of' 1/4" per foot slope is to be provided for all roof areas. All flashings will be galvanized metal. Page 3 OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE) INTERIOR FINISHES A tenant improvement allowance of $240,000 (8,000 s.f. x $30/s.f.) is included. An alternate to provide an additional $300,000 of tenant improvements is provided. V. DOORS, FRAMES, AND HARDWARE Included, are entry/exit doors for the shell building. All other doors to be included in tenant improvement allowance. VI. TOILET PARTITIONS AND ACCESSORIES Toilet Rooms: To be included in tenant improvement allowance. VII. DOCK EQUIPMENT Equipment: Includes 6'x 8'mechanical dock levelers [sixteen (16)] at all dock doors. Dock shelters and dock locks are not included. An alternate is provided for dock seals or canopies. VIII. CUSTOM MILLWORK To be included in tenant improvement allowance. IX S IGNAGE One (1) directional sign shall be provided similar to building #12. 1 X. SPECIALTIES A) Fire Extinguishers: Fire extinguishers and cabinets will be provided as required by local fire department. B) Sanitary Sewer: Includes a 6" sewer line along the south wall for future tap-in potential. Page 4 OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE) X1. MECHANICAL A) PLUMBING: To be included in tenant improvement allowance. Floor drains will be provided in each toilet room. Floor drains and cleanouts will be Josam, Smith, Wade, Zurn, or equal. Connections will be made to the municipal utilities and all piping systems will be flushed and tested. Stop valves will be provided at each fixture. Isolating valves will be provided in the supply lines to each set of toilet rooms. B) HEATING, VENTILATING AND AIR CONDITIONING: The warehouse heating system will be four (4) Cambridge direct-fire gas heating units, including all code required smoke detectors (if any), designed to maintain 60'F.D.B. at O'F outside. All heating and cooling equipment for the tenant office buildout is included in the Interior Finish Tenant Improvement allowance. Ten (10) exhaust fans and ten (10) supply fans are provided for the warehouse summertime exhaust system designed to provide four (4) air changes per hour. An alternate to provide one hundred thirty-eight (138) paddle fans (56"; 22,000 cfm) at each bay is provided. C) FIRE PROTECTION SYSTEM: A complete automatic fire protection sprinkler system will be provided for the building in accordance with the requirements of the Fire Department and applicable codes. All necessary piping, valves and specialties will be included to provide a complete system. The automatic fire protection sprinkler system will be designed using ESFR standards. Upturned brass sprinkler heads will be used in areas with exposed structure. This proposal assumes connection to the Wilmington Commerce Park fire pump system at no fee. XII. ELECTRICAL A) POWER DISTRIBUTION: ANI will design and install complete building power distribution system from a utility company furnished, pad mounted transformer. The electrical installation will be complete from the transformer, including concrete transformer pad, to power and lighting panels, switches, and/or circuit breakers throughout the building to supply heating, ventilating, lighting, convenience outlets, and the other items of this specification. A 2,000 amp, 480 volt, 3-phase service, will be supplied to the building. Plug-in type circuit breakers will be used on panel boards. Page 5 OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MLCROWAREHOUSE) Receptacles will be installed as follows: 1) Provide twenty-five (25) duplex receptacles and two (2) weatherproof receptacles. 2) No electrical distribution or hook-up of Owner's equipment is included in this proposal. B) LIGHTING: ANT will design and install all lighting systems. In general, the lighting systems will be as follows: 1) Two hundred sixty-four (264) metal halide (400 watt) fixtures to provide twenty (20) footcandles will be hung at the underside of the structure. An alternate to provide one hundred thirty-eight (138) additional light fixtures - one (1) per bay - is provided. 2) Twenty-six (26) Exit Light Fixtures will be provided where required by code. 3) Twenty-three (23) Emergency Egress Lighting will be provided as required by code. C) TELEPHONE: Based upon future Tenant Specifications. X111. ITEMS NOT INCLUDED The following items shall be specifically excluded from Al. Neyer, Inc.'s proposal: Furniture and office furnishings including demountable or landscape office partitioning, reception desk, marker boards, projection screens, draperies and vending machines. Cable trays, power poles and underfloor electrical duct systems, UPS and generator systems. Central timeclock and music, telephone systems, security or other internal communications systems. Furnishing, moving, handling, wiring or connection of Owner furnished equipment ID1-7 Humidification or dehumidification systems. Special computer room HVAC and electrical systems. Window treatments and draperies. Compressed air piping or system. Page 6 OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE) * Smoke alarms except as required by code for shell building. * Security system * Groundskeepers, HVAC service, janitorial. * Moving expenses. * Interior plantscaping. * Walk-off mats. * Process related exhaust fans, hoods or louvers. * Fencing or padlocks. * Cranes/forklifts. * Wallcoverings or artwork. #I1 air 98 specs4 specs 98 Page 7 EXHIBIT C SUMMARY OF ALTERNATIVES AIRBORNE EXPRESS BUILDING #11 WILMINGTON COMMERCE PARK (220,800 SQUARE FEET) ADDITIONAL
Alternates Lease Amount per - ----------- Year* ---------------- 1. In crease strength of concrete to 4,000 psi at 28 days and provide 4" crushed stone bed at slab-on-grade $0 2. Increase concrete slab-on-grade thickness from 6" to 7". $6,498 3. Provide R-value of 18 for roof system. $0 4. Provide R-value of 20 for roof system. $1,139 5. Add one hundred thirty-eight (138) paddle fans (56"; 22,000 cfm) - one (1) per bay. $10,853 6. Add dock seals for sixteen (16) docks. $1,911 7. Add 4' x 12' dock canopy for sixteen (16) docks. $1,911 8. Add one hundred thirty-eight (138) metal halide light fixtures - one (1) per bay. $5,530 9. Increase exterior lighting, to two foot candle lighting Add eight (8) pole lights and three (3) building mounted flood lights in rear. $3,424
Based upon a 10 year lease term. Tenant Improvements above the $240,000 already included can be added to the lease based upon an annual lease amount change of $1,490 for each $10,000 spent. An additional $300,000 can be spent on Tenant Improvements in this manner. EX-10.20 4 FOURTH AMENDMENT TO LEASE EXHIBIT 10.20 FOURTH AMENDMENT TO LEASE THIS FOURTH AMENDMENT TO LEASE made as of this 31st day of December, 1998 by and between PETER GODFREY, of Beachside Avenue, Westport, Connecticut 06880, and MICRO WAREHOUSE, INC., a Delaware corporation with a principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854. WITNESSETH: WHEREAS, the parties hereto entered into a Lease Agreement dated October 1, 1989, as amended, covering premises located at 47 Water Street, South Norwalk, Connecticut (as amended, the "Lease"); and WHEREAS, the Lease expires on December 31, 1998; and WHEREAS, the parties wish to extend the term of the Lease. NOW, THEREFORE, for One Dollar ($1.00) and other valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Paragraph 3 of said Lease Agreement is hereby amended to read as follows: "3. Term. The term of this Lease shall begin on October 1, 1989 (the "Commencement Date") and end on December 31, 1999 (the "Termination Date")." 2. Paragraph 4(a) of said Lease Agreement is hereby amended by inserting at the end thereof the following: "Beginning on January 1, 1999, the Rent shall be increased by ten percent (10%) to One Hundred Fifty Nine Thousand One Hundred Fifty Two and 40/100 ($159,152.40) payable in equal monthly installments of $13,262.70 in advance on the first day of each calendar month." 3. Except as specifically set forth herein, in all other terms, conditions and provisions set forth in the Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this agreement effective the day and year first above written. By: /s/ Peter Godfrey ------------------------------- Peter Godfrey MICRO WAREHOUSE, INC. By: /s/ Bruce L. Lev ---------------------------------- Bruce L. Lev, Its Executive Vice President, Legal and Corporate Affairs and General Counsel Hereunto Duly Authorized 2 EX-10.21 5 FOURTH AMENDMENT TO LEASE EXHIBIT 10.21 FOURTH AMENDMENT TO LEASE THIS FOURTH AMENDMENT TO LEASE made as of this 31st day of December, 1998 by and between HIALET ASSOCIATES, a Connecticut general partnership with a principal place of business at 29 Haviland Street, South Norwalk, Connecticut 06854, and MICRO WAREHOUSE, INC., a Delaware corporation with a principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854. WITNESSETH: WHEREAS, the parties hereto entered into a Lease Agreement dated February 13, 1991, as amended, covering premises located at 53 Water Street, South Norwalk, Connecticut (as amended, the "Lease"); and WHEREAS, the Lease expires on December 31, 1998; and WHEREAS, the parties wish to extend the term of the Lease on the terms set forth below. NOW, THEREFORE, for One Dollar ($1.00) and other valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Paragraph 3 of said Lease Agreement is hereby amended to read as follows: "3. Term. The term of this Lease shall begin on February 13, 1991 (the "Commencement Date") and end on December 31, 1999 (the "Termination Date")." 2. Paragraph 4(a) of said Lease Agreement is hereby amended by inserting at the end thereof the following: "Beginning on January 1, 1999, the Rent shall be increased by ten percent (10%) to Seventy Eight Thousand Six Hundred Fifty and 00/100 ($78,650.00) payable in equal monthly installments of $6,554.17 in advance on the first day of each calendar month." 3. Except as specifically set forth herein, in all other terms, conditions and provisions set forth in the Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this agreement effective the day and year first above written. HIALET ASSOCIATES By: /s/ Peter Godfrey -------------------------------- Peter Godfrey, a Partner Hereunto Duly Authorized MICRO WAREHOUSE, INC. By: /s/ Bruce L. Lev --------------------------------------- Bruce L. Lev, Its Executive Vice President, Legal and Corporate Affairs and General Counsel Hereunto Duly Authorized 2 EX-10.22 6 SECOND AMENDMENT TO LEASE EXHIBIT 10.22 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE made as of this 31st day of December, 1998 by and between HIALET ASSOCIATES, a Connecticut general partnership with a principal place of business at 29 Haviland Street, South Norwalk, Connecticut 06854, and MICRO WAREHOUSE, INC., a Delaware corporation with a principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854. WITNESSETH: WHEREAS, the parties hereto entered into a Lease Agreement dated November 1, 1992, as amended, covering premises located at 29 Haviland Street, South Norwalk, Connecticut (as amended, the "Lease"); and WHEREAS, the Lease expires on December 31, 1998; and WHEREAS, the parties wish to extend the term of the Lease on the terms set forth below. NOW, THEREFORE, for One Dollar ($1.00) and other valuable consideration, the sufficiency of which is hereby acknowledge, the parties hereby agrees as follows: 1. Paragraph 3 of said Lease Agreement is hereby amended to read as follows: "3. Term. The term of this Lease shall begin on November 1, 1992 (the "Commencement Date") and end on December 31, 1999 (the "Termination Date"). 2. Paragraph 4(a) of said Lease Agreement is hereby amended by inserting at the end thereof the following: "Beginning on January 1, 1999, the Rent shall be increased by ten percent (10%) to One Hundred Five Thousand Six Hundred and 00/100 ($105,600.00) payable in equal monthly installments of $8,800 in advance on the first day of each calendar month. 3. Except as specifically set forth herein, in all other terms, conditions and provisions set forth in the Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this agreement effective the day and year first above written. HIALET ASSOCIATES By: /s/ Peter Godfrey ------------------------------- Peter Godfrey, a Partner Hereunto Duly Authorized MICRO WAREHOUSE, INC. By: /s/ Bruce L. Lev ----------------------------------- Bruce L. Lev, Its Executive Vice President, Legal and Corporate Affairs And General Counsel Hereunto Duly Authorized EX-10.23 7 EMPLOYMENT AGREEMENT (CARLINE) EXHIBIT 10.23 EMPLOYMENT AGREEMENT (CARLINE) This employment agreement ("Agreement") is made as of the 28th day of October, 1998 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred to as the "Company"), with its principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Stephen J. Carline, whose address is 5240 East Cholla Street, Scottsdale, Arizona 85254 (hereinafter referred to as "Employee"). WHEREAS, the Company wishes to retain the full-time services of the Executive, and the Executive is willing to commence employment with the Company on a full-time basis, upon the other terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the premises, the Company and Employee agree as follows: 1. EMPLOYMENT; CONDITION SUBSEQUENT TO EFFECTIVENESS. (a) The Company shall hereby employ Employee, and Employee hereby accepts such employment, commencing on the date hereof, on the terms and conditions set forth below. (b) If the Company has not purchased all of Employee's membership interests in Discovery Training & Development, L.L.C. on or prior to November 30, 1998, then, unless this condition subsequent is specifically waived or extended by a writing signed by both parties, this Agreement shall be null and void AB INITIO and the Company's only obligation to Employee shall be to pay Employee any Base Salary due through November 30, 1998 and reimburse any expenses incurred by Employee in accordance with Section 5. Upon nullification pursuant to this Section 1(b), Employee shall nonetheless be bound by the obligations in Sections 8 and 10; PROVIDED, HOWEVER, that the term "Restrictive Period" as used in Section 10 shall mean the period beginning on the date hereof and ending one year following the last date of employment hereunder. Upon nullification pursuant to this Section 1(b), all stock options granted to Employee pursuant to Section 4(C) shall be rescinded and null and void. 2. DUTIES. During the Period of Employment (as hereinafter defined), the Company shall employ Employee as Executive Vice President of Sales, reporting to Peter Godfrey, the President and Chief Executive Officer of the Company, or his successor, to perform such duties as shall be required by Mr. Godfrey, or his successor, provided the same are consistent with those of an executive vice president of sales of a public company in a business similar to the Company's business. The precise responsibilities of Employee may be revised from time to time provided the same do not materially affect Employee's position. In furtherance of the foregoing, Employee hereby agrees to perform his duties faithfully. Employee acknowledges that the Company in its sole discretion has the right to make all decisions with respect to strategies, plans, budgets, projections, goals, objectives, incentive plans, operations, finances and processes relating to the conduct of its business, and any of these may be amended, modified or rescinded from time-to- time by the Company. During the Period of Employment and except for vacations in accordance herewith, absences due to temporary illness and outside Board responsibilities, Employee shall devote all of his available business time and energies during normal business hours to the business of the Company. Employee's principal place of business will be at any of the Company's facilities in New Jersey. Employee represents and warrants that he is not subject to or bound by any agreement with, or is otherwise under any duty to, any third party that may limit or restrict his right to become employed by the Company or to perform any tasks or responsibilities required of an executive officer of the Company, including without limitation any covenant not to compete, confidentiality agreement or agreement to assign intellectual property. 3. TERM. The term of Employee's employment by the Company (the "Period of Employment") shall commence as of the date hereof and, unless earlier terminated pursuant to the terms hereof, shall end as of the close of business on December 31, 2001. 4. COMPENSATION. (A) BASE SALARY. For all services rendered by Employee under this Agreement, during the Period of Employment the Company shall pay to him a minimum "Base Salary" at the rate of Two Hundred Fifty Thousand Dollars ($250,000) per annum payable in at least equal monthly installments. The term "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. (B) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, beginning calendar year 1999 Employee shall be eligible to earn annual incentive compensation ("Incentive Compensation") as set forth below, not to exceed One Hundred Percent (100%) of Base Salary in any one year. No incentive compensation may be earned for the remainder of calendar year 1998. (i) Prior to each January 1 during the Period of Employment, the Board of Directors and Employee shall mutually agree upon and establish a plan (the "Incentive Plan") describing anticipated results of operations for the coming fiscal year and containing financial goals (hereinafter "Targets"). The Incentive Plan shall be determined in the sole discretion of the Board of Directors and Employee and may vary from year to year. A copy of the Incentive Plan shall be provided to the Company's Certified Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs shall compare the actual results of operations for said year to the Incentive Plan. (ii) The Incentive Plan shall set forth a target bonus amount, One Hundred Percent (100%) of which shall be payable for accomplishing One Hundred Percent (100%) of Targets, which amount shall be Fifty Percent (50%) of Base Salary for each full calendar year beginning 1999 (hereinafter "Target Bonus Amount"). The Board of Directors may modify upward the Target Bonus Amount as part of the salary review process for years subsequent to 1999. The actual amount, if any, of Incentive Compensation to which Employee may be entitled shall range on a linear basis from Fifty 2 Percent (50%) of Target Bonus Amount if Eighty Percent (80%) of Targets are achieved to a maximum of Two Hundred Percent (200%) of Target Bonus Amount if One Hundred Twenty Percent (120%) of Targets are achieved. No Incentive Compensation shall be paid if less than Eighty Percent (80%) of Targets are achieved. By way of example, if Base Salary is $250,000, One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be $125,000. If the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall be $62,500 (I.E., 50% of $125,000), which shall be automatically due and payable to Employee. By way of further example, if the Company achieves One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be $187,500 (I.E., 150% x $125,000), which shall be automatically due and payable to Employee. (iii) Incentive Compensation shall be paid to Employee in a lump sum cash payment as soon as practicable after the CPAs determine the amounts, if any, which are due Employee. Incentive Compensation earned during the final calendar year of the Period of Employment shall be payable as soon as practicable after the CPAs determine the amounts, if any, which are due Employee, notwithstanding the earlier expiration or termination of the Period of Employment. (C) STOCK OPTIONS. (i) On the date hereof, the Company will grant to Employee options to purchase Fifty Thousand (50,000) common shares at an exercise price per share equal to the average of the closing prices of the Company's common shares on the business day preceding the date hereof and the date hereof, which options shall be "non-qualified" stock options. During the Period of Employment such options shall become cumulatively vested and exercisable at the rate of one-third (1/3) per year commencing on the anniversary of the date of grant. (ii) The options set forth in this Paragraph 4(C) shall be granted to Employee pursuant to the Company's 1994 Stock Option Plan (the "Stock Option Plan") and Employee shall be subject to the terms and conditions set forth therein. The options set forth in this Paragraph 4(C) shall also be evidenced by Employee executing and becoming a party to an option agreement between Employee and the Company (the "Option Agreement"). Notwithstanding any of the foregoing, if there is any inconsistency between or among this Agreement, the Stock Option Plan and/or the Option Agreement, this Agreement, to the extent it is consistent with the restrictions provided in the last sentence of paragraph 12 of the Plan, shall govern as to all documents described in this subparagraph 4(C)(ii). 3 (iii) Notwithstanding the foregoing, the options described in this Paragraph 4(C) shall under the following circumstances become vested and exercisable, and expire, as follows: (a) upon a termination of the Period of Employment by the Company without cause pursuant to Paragraph 11(A) that DOES NOT invoke the provisions of Paragraph 11(E)(ii)(a) or upon termination of the Period of Employment by Employee for cause (as described in Paragraph 11(C)), all of Employee's unvested options shall become accelerated and immediately fully vested, and exercisable at any time until the earlier of the expiration date of the options (as specified in the Stock Option Plan) or the first anniversary of the effective date of such termination; or (b) upon a termination of the Period of Employment by the Company without cause pursuant to Paragraph 11(A) that invokes the provisions of Paragraph 11(E)(ii)(a), Employee's unvested options shall not continue to vest beyond the effective date of such termination and all options that were vested as of the effective date of termination shall be exercisable at any time until the earlier of the expiration date of the options (as specified in the Stock Option Plan) or the first anniversary of the effective date of such termination; PROVIDED, HOWEVER, that for purposes of this subparagraph 4(C)(iii), no options will become vested and exercisable subsequent to the expiration date of the options as specified in the Stock Option Plan. (D) ADDITIONAL COMPENSATION. During the Period of Employment, Employee shall be eligible to receive any other payments of bonus, compensation or other amounts not specifically set forth herein but which may be paid by the Company at its sole discretion ("Additional Compensation"). 5. BUSINESS EXPENSES. During the Period of Employment, the Company agrees to reimburse Employee for reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder. Employee shall submit vouchers, invoices and such other documentation in accordance with the Company's general policy with respect thereto. 6. BENEFITS. The Company will provide or, as necessary, reimburse Employee with or for the following benefits: (A) ORDINARY INSURANCE. During the Period of Employment, Employee shall be entitled to medical, dental and hospitalization insurance and short-term disability coverage for himself and his dependents, to the extent provided generally to the senior executives of the Company. 4 (B) VACATIONS. During the Period of Employment, Employee shall be entitled to three (3) weeks paid vacation per year, the scheduling of which shall be in accordance with the general policies and practices of the Company with respect thereto. (C) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of Employment, Employee shall be entitled (i) to participate in all employee benefit plans, programs, policies and arrangements sponsored, maintained or contributed to by the Company, subject to and in accordance with the terms and conditions of such plans, programs, policies and arrangements as they relate to similarly situated executive officers of the Company, and (ii) to receive all other benefits and perquisites provided or made available by the Company to its senior executive officers subject to and in accordance with the terms and conditions of such benefits and perquisites as they relate to similarly situated senior executive officers of the Company. (D) RELOCATION. In connection with Employee's relocation to the State of New Jersey, to occur within the first three (3) months of this Agreement, the Company will provide Employee with the relocation benefits described on EXHIBIT A to this Agreement. 7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent Disability of Employee ("Permanent Disability" being defined as an illness which will prevent Employee from performing his duties for a period of six (6) consecutive months or nine (9) out of any consecutive twelve (12) months) prior to the expiration of the Period of Employment, his employment shall be deemed to cease as of the end of the month of the date of his death or Permanent Disability and this Agreement shall terminate forthwith and all rights under it shall expire, except that Employee or Employee's estate shall be entitled to receive Base Salary for a period of six (6) months from the date of death or Permanent Disability plus the PRO RATA amount of any Incentive Compensation which would have been due Employee pursuant to Paragraph 4 above for the period January 1 of said year through the date of death or Permanent Disability. Said Base Salary shall be paid at the time it would regularly be paid. Said Incentive Compensation shall be paid as soon as practicable after a determination of the amount due is made by the Company's CPAs. Additionally, any options eligible to vest within twelve (12) months of the date of death or Permanent Disability shall be deemed accelerated and fully vested as of the date of death or Permanent Disability subject to the further terms and conditions of the Stock Option Plan pursuant to which the same were granted. 8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company would be damaged if Employee's knowledge with respect to the business of the Company were disclosed to or utilized by parties other than the Company. Accordingly, Employee covenants and agrees that he will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this Paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by Employee and relates to such matters as customer mailing lists, pricing and credit techniques, marketing techniques, research and development activities, sources of product, lists of magazines or other publications containing advertising of the Company and other confidential or restricted information which is 5 not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by Employee from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. The provisions of this Paragraph shall survive the termination of this Agreement. 9. COVENANT NOT TO COMPETE. Employee hereby covenants and agrees that, from the date hereof until December 31, 2002 (the "Restrictive Period"), he shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); PROVIDED, HOWEVER, that the foregoing shall not prevent Employee from (i) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if Employee's services are restricted to employment in such other lines of business; or (ii) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than Two Percent (2%) of any class or type of securities of, or interest in, such Competitive Business. The term "Competitive Business" shall mean and include any business or activity that is substantially the same as any business or activity then conducted by the Company, regardless of where such Competitive Business is located. If either the period of time or the geographic area specified in this Paragraph 9 should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months and/or the geographic area shall be limited in scope so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Employee violates any of the restrictions contained in this Paragraph 9, the Restrictive Period shall not run in Employee's favor from the time of the commencement of any such violation until such time as such violation shall be cured to the satisfaction of the Company. 10. COVENANT NOT TO SOLICIT. Unless Employee has obtained the prior written consent of the Company, he hereby covenants and agrees that, during the Restrictive Period, he shall not, for or on behalf of a Competitive Business, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent creditor, or otherwise, attempt to solicit or in any other way disturb or service any person, firm or corporation that has been a customer account of the Company at any time or times during the Restrictive Period, whether or not he at any time had any direct or indirect account responsibility for, or contact with, such customer account. Further, unless Employee has obtained the prior written consent of the Company, he hereby covenants and agrees that, during the Restrictive Period, he shall not, for or on behalf of a Competitive Business, directly or indirectly, induce, solicit or attempt to influence any employee or former employee (employed by the Company within the prior 12 months) of the Company to terminate his/her employment relationship with the Company or to accept a position with any Competitive Business. If either the period of time or the geographic area specified in this Paragraph 10 should be adjudged unreasonable in any 6 proceeding, then the period of time shall be reduced by such number of months and/or the geographic area shall be limited in scope so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Employee violates any of the restrictions contained in this Paragraph 10, the Restrictive Period shall not run in Employee's favor from the time of the commencement of any such violation until such time as such violation shall be cured to the satisfaction of the Company. 11. TERMINATION. In addition to termination for death or Permanent Disability pursuant to Paragraph 7, the Period of Employment shall terminate upon the occurrence of any of the following: (A) TERMINATION WITHOUT CAUSE UPON PRIOR NOTICE. The Company may terminate the Period of Employment by giving Employee ninety (90) days prior written notice. (B) TERMINATION FOR CAUSE. At the election of the Company, it may immediately upon written notice by the Company to Employee terminate the Period of Employment for cause. For the purposes of this Paragraph, cause for termination shall be deemed to exist upon (i) a good faith finding by the Company of a willful failure or refusal of Employee to perform assigned duties for the Company of which he has knowledge, or the commission of any other willful or grossly negligent action by Employee with the intent to injure the Company; (ii) any material breach of any material provision of this Agreement by Employee if Employee fails to correct such breach (or to take substantial steps to correct such breach) within ten (10) days after receiving written notice thereof; or (iii) the conviction of Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by Employee to, a crime involving an act of fraud or embezzlement against the Company or the conviction of Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by Employee to, any felony involving moral turpitude. Notwithstanding the foregoing, the Company shall not terminate Employee for cause pursuant to subparagraphs (i) or (ii) of this Paragraph unless and until there shall have been delivered to Employee a copy of a resolution, duly adopted by the affirmative vote of the Board of Directors at a meeting called and held after reasonable notice to Employee and an opportunity for Employee, together with his counsel, to be heard before the Board of Directors, finding that in the good faith opinion of the Board of Directors Employee is guilty of conduct set forth in subparagraphs (i) or (ii) of this Paragraph and specifying the particulars thereof in reasonable detail. (C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of Employee, he may terminate the Period of Employment for cause immediately upon written notice by Employee to the Company. For purposes of this Paragraph, cause for termination shall be deemed to exist upon (i) a material failure by the Company to continue Employee's participation in any bonus, compensation or other benefit plan in which Employee is entitled to participate pursuant hereto or the taking by the Company of any action which would directly or indirectly materially reduce his participation therein; or (ii) a material breach of any provision of this Agreement by the Company if such breach is not corrected (or substantial steps have not been taken to correct such breach) within thirty (30) days after the Board of Directors received written notice thereof. 7 (D) EMPLOYEE'S ELECTION WITHOUT CAUSE. Effective any time after the Contingent Amount (as defined in the Interest Purchase Agreement, among the Company, Employee and certain other parties (the "Purchase Agreement")) is earned in full, Employee may terminate the Period of Employment by giving the Company ninety (90) days prior written notice. (E) EFFECT OF TERMINATION. (i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF EMPLOYEE WITHOUT CAUSE. In the event that Period of Employment is terminated by the Company for cause pursuant to Paragraph 11(B)(i) or (ii) or Employee elects to terminate the Period of Employment without cause pursuant to Paragraph 11(D), the Company shall pay to Employee the Base Salary, Incentive Compensation and Additional Compensation due, if any, under Paragraph 4, on a PRO RATA basis to the effective date of termination at the time such Base Salary, Incentive Compensation or Additional Compensation would regularly be paid and benefits otherwise payable to him hereunder all through the last day of his actual employment by the Company. Upon termination under this Paragraph 11(E), Employee will thereupon no longer be entitled to any compensation or benefits provided herein, and nothing herein shall limit the Company's right against Employee or the rights and obligations of the parties under Paragraphs 8, 9, and 10 hereof. (ii) TERMINATION BY THE COMPANY WITHOUT CAUSE OR AT THE ELECTION OF EMPLOYEE FOR CAUSE. In the event the Period of Employment is terminated without cause by the Company pursuant to Paragraph 11(A) or by Employee pursuant to Paragraph 11(C), then, following the occurrence of such event, the Company shall pay to Employee (I) the Base Salary due through the expiration of the Period of Employment as if the Period of Employment had not been earlier terminated, paid at the time such Base Salary would regularly be paid, and (II) the Incentive Compensation and Additional Compensation due, if any, under Paragraph 4 hereof for the year during which termination occurs, on a PRO RATA basis through the effective date of termination, paid at the time such Incentive Compensation or Additional Compensation would regularly be paid. In addition, Employee will continue to receive the benefits provided under Paragraph 6 hereof, including payment of accrued but unused vacation benefits. During said period, Employee shall continue to be bound by the provisions of Paragraphs 8, 9 and 10 hereof. Notwithstanding the foregoing: (a) if the Period of Employment is terminated without cause by the Company pursuant to Paragraph 11(A) between December 31, 1999 and March 31, 2000 and the positive amount of the 1999 Surplus (as defined in the Purchase Agreement) is not equal to or greater than 10% of the Total Gross Profit Dollars (as defined in the Purchase Agreement) for the year ending December 31, 1998, then, following the occurrence of such event, the Company shall pay to Employee (I) the Base Salary due for one year following the effective date of termination, paid at the time such Base Salary would regularly be paid, and (II) the Incentive Compensation and Additional Compensation due, if any, under Paragraph 4 8 hereof for the year ending December 31, 1999 (with no Incentive Compensation and Additional Compensation being payable for any part of the year ending December 31, 2000), paid at the time such Incentive Compensation or Additional Compensation would regularly be paid. In addition, Employee will continue to receive the healthcare benefits provided under Paragraph 6(A) hereof for a period of one year from the effective date of termination. During said period, Employee shall continue to be bound by the provisions of Paragraphs 8, 9 and 10 hereof; PROVIDED, HOWEVER, that the "Restrictive Period" (for purposes of Paragraphs 9 and 10), shall terminate one year from the effective date of termination. (b) if the Period of Employment is terminated without cause by the Company pursuant to Paragraph 11(A) between December 31, 2000 and March 31, 2001 and the positive amount of the 2000 Surplus (as defined in the Purchase Agreement) is not equal to or greater than 10% of the Total Gross Profit Dollars for the year ending December 31, 2000, then, following the occurrence of such event, the Company shall pay to Employee (I) the Base Salary due for a one-year period from the effective date of termination, paid at the time such Base Salary would regularly be paid, and (II) the Incentive Compensation and Additional Compensation due, if any, under Paragraph 4 hereof for the year ending December 31, 2000 (with no Incentive Compensation and Additional Compensation being payable for any part of the year ending December 31, 2001), paid at the time such Incentive Compensation or Additional Compensation would regularly be paid. In addition, Employee will continue to receive the healthcare benefits provided under Paragraph 6(A) hereof for a period of one-year from the effective date of termination. During said period, Employee shall continue to be bound by the provisions of Paragraphs 8, 9 and 10 hereof; PROVIDED, HOWEVER, that the "Restrictive Period" (for purposes of Paragraphs 9 and 10), shall terminate one year from the effective date of termination. 12. SUCCESSORS AND BINDING AGREEMENT. (A) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. 9 (B) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (C) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in subparagraphs 12(A) or (B) above. Without limiting the generality or effect of the foregoing, Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this subparagraph 12(C), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated. 13. SEVERABILITY. In the event that any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. 14. REPRESENTATION. Each party represents and warrants that it is fully authorized and empowered to enter into this Agreement and that performance of its obligations under this Agreement will not violate any agreement between it and any other person or entity. 15. NOTICES. All notices, elections, demands or other communications required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered properly given or made if sent by telecopier, Telex, courier service or certified mail, return receipt requested and addressed to the parties at the respective addresses specified below. Either party may change its address by giving notice in writing pursuant to this Paragraph to the other of its new address. To the Company: Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 Attn.: Bruce L. Lev, Executive Vice President, Legal and Corporate Affairs and General Counsel Telephone: (203) 899-4000 Telecopy: (203) 899-4312 To Employee: Stephen J. Carline 5240 East Cholla Street Scottsdale, Arizona 85254 16. JURISDICTION. 10 (A) Any controversy, claim or breach arising out of or relating to this Agreement (except those relating to monetary damages and those relating to Paragraphs 8, 9 or 10) shall be submitted for settlement to an arbitrator agreed upon by the parties. The decision of such arbitrator shall be final and binding on the parties. If the parties cannot agree upon an arbitrator, the controversy, claim or breach shall be referred to the American Arbitration Association with a request that an arbitrator be appointed pursuant to the rules of said Association. Such arbitration shall be held in Stamford, Connecticut, in accordance with the rules and practices of the American Arbitration Association pertaining to single-party arbitration then in effect, and the judgement upon the award rendered shall be entered by consent in any court having jurisdiction thereof. (B) Employee acknowledges the restrictions contained in Paragraphs 8, 9 and 10, in view of (i) the nature of the business in which the Company is engaged, (ii) the unique nature of the services rendered by Employee to the Company, and (iii) the national and international scope of the business enterprise of the Company, are reasonable, appropriate and necessary in order to protect the legitimate interests of the Company, and that any violation thereof would result in irreparable injuries to the Company, and Employee therefore acknowledges that, notwithstanding subparagraph 16(A), in the event of a violation of any of these restriction, the Company shall be entitled to obtain from any court of competent jurisdiction, temporary, preliminary and permanent injunctive relief as well as damages and equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. 17. ENTIRE AGREEMENT. This Agreement constitutes the full and complete understanding and agreement of the parties. Neither party has relied upon any representation of the other not set forth herein. This Agreement may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. This Agreement supersedes all prior agreements between the parties hereto with respect to its subject matter and notwithstanding any provision hereof, will become effective upon the execution of this Agreement by the parties. 18. BINDING EFFECT. This Agreement shall be binding upon and accrue to the benefit of the parties hereto, their heirs, executors, administrators and successors. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to its principles with respect to conflicts of law. 20. COUNSEL FEES. Except as set forth herein, the parties hereto shall bear their own fees, costs and expenses incurred in connection with this Agreement. If either party is required to bring suit or otherwise seek enforcement of its or his rights in connection with the same, the prevailing party in such action or proceeding shall be entitled to recover counsel fees incurred in such action or proceeding. 11 21. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. 12 IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the day and year first above written. COMPANY: MICRO WAREHOUSE, INC. By: /s/ Peter Godfrey -------------------------------------- Peter Godfrey President and Chief Executive Officer EMPLOYEE: By: /s/ Stephen J. Carline -------------------------------------- Stephen J. Carline 13 EXHIBIT A RELOCATION BENEFITS AND REIMBURSEMENT AGREEMENT 1. The Company will reimburse you for the costs of moving your household goods to a mutually satisfactory location within the State of New Jersey. You will be responsible for obtaining at least two competitive bids for the relocation and for choosing the lowest commercially reasonable bid. 2. In addition, during the period prior to moving to your new location, the Company will reimburse you for the reasonable cost of travel for you and your partner to conduct two house-hunting trips to New Jersey and for the reasonable cost of temporary housing in New Jersey through January 31, 1999. You will be authorized and reimbursed for a total of seven round-trip air fares from Phoenix to New Jersey, including the aforementioned house-hunting trips, and for the cost of hotel and ground transportation in New Jersey through November 30, 1998. Your travel will be reimbursed in accordance with the Company's travel expense policy, a copy of which you have been provided. 3. In consideration of the agreement of the Company to reimburse you for the relocation benefits described in this offer letter, you agree as follows: a. That if I resign before completing twelve (12) months of employment, I will reimburse the Company for the amount of the relocation benefit received by me, prorated on a monthly basis. b. I authorize the Company to withhold from any moneys due to me at the time of resignation (including my final expense reports, vacation pay and, if necessary, regular compensation, the sum exempt from taxation under federal and state law) that is necessary to complete this obligation. ACKNOWLEDGED AND AGREED: /s/ Stephen J. Carline 10/28/99 - -------------------------------- --------------------- Stephen J. Carline Date 14 EX-10.24 8 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.24 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This amended and restated employment agreement ("Agreement") made as of the 1st day of January, 1998 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred to as the "Company"), with its principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Adam W. Shaffer whose address is 7 Godfrey Road West, Weston, Connecticut 06883 (hereinafter referred to as "Employee"). WHEREAS, this Agreement is effective January 1, 1998 (the "Effective Date") and is an amendment and restatement of, and supersedes each provision of the employment agreement and the letter agreement modifying such employment agreement previously entered into for good and valuable consideration by Employee and Company on or about January 1, 1996 and April 24, 1997, respectively; and WHEREAS, this Agreement shall represent the entire employment agreement between the parties with respect to the subject matter herein. NOW, THEREFORE, in consideration of the premises, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Company shall hereby continue to employ Employee, and Employee hereby accepts such continued employment, commencing on the Effective Date, on the terms and conditions set forth below. 2. DUTIES. During the Period of Employment (as hereinafter defined), the Company shall continue to employ Employee as Executive Vice President of Marketing, Advertising and Purchasing reporting to Peter Godfrey, the President and Chief Executive Officer of the Company, or his successor, to perform such duties as shall be required by Mr. Godfrey, or his successor, provided the same are consistent with those of an executive vice president of marketing, advertising and purchasing of a public company. The precise responsibilities of Employee may be revised from time to time provided the same do not materially affect Employee's position. In furtherance of the foregoing, Employee hereby agrees to perform his duties faithfully. During the Period of Employment and except for vacations in accordance herewith and absences due to temporary illness, Employee shall devote all of his available business time and energies during normal business hours to the business of the Company. 3. TERM. The term of Employee's continued employment by the Company shall commence as of the Effective Date and end as of the close of business on December 31, 2000 (the "Period of Employment"). 4. COMPENSATION. (A) BASE SALARY. For all services rendered by the Employee under this Agreement, the Company shall pay to him a minimum "Base Salary" at the rate of Three Hundred Twenty-Five Thousand Dollars ($325,000) per annum during the Period of Employment payable in at least equal monthly installments. The term "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. (B) ADJUSTMENTS TO BASE SALARY. Commencing January 1, 1999, the Base Salary to be paid to the Employee during each year shall be increased by any increase in the cost of living determined in accordance with the formula set forth in subparagraphs (i), (ii) and (iii) hereinbelow. (i) For the purposes of this paragraph 4(B), the following definition shall apply: (a) The term "Base Year" shall mean the twelve month period commencing on January 1, 1998 and terminating on December 31, 1998. The term "Second Year" shall mean the twelve month period commencing on January 1, 1999 and terminating on December 31, 1999. The term "Third Year" shall mean the twelve month period commencing on January 1, 2000 and terminating on December 31, 2000. (b) The term "Price Index" shall mean the average of the monthly "Consumer Price Index" published by the Bureau of Labor Statistics of the U.S. Department of Labor, New York, Northern New Jersey, Long Island, New York-New Jersey-Connecticut, for urban wage earners and clerical workers, or a successor or substitute index appropriately adjusted ("Consumer Price Index"), for each month of any given twelve month period. (ii) Effective as of each of January 1 of 1999 and 2000, there shall be a cost of living adjustment to the Base Salary applicable for the succeeding twelve month period. The adjustment shall be based on the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 1999; and the Price Index for the Third Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 2000. In the event that the Price Index for the Second Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid shall be multiplied by the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, and the resulting sum shall be added to such original Base Salary, effective on January 1, 1999. Said adjusted Base Salary shall thereafter be payable hereunder until it is readjusted pursuant to the terms of this paragraph 4(B) as of January 1, 2000. In the event that the Price Index for the Third Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid (unchanged by any adjustment made pursuant to the immediately preceding sentence) shall be multiplied by the percentage difference between the Price Index for the Third Year, and the Price Index for the Base Year, and the resulting sums shall be added to such original Base Salary, effective on January 1, 2000. In the event that the Price Index ceases to use 1982-1984 = 100 as the basis of calculation, or if a substantial change is made in the terms or number of items contained in the Price Index, then the Price Index shall be adjusted to the figure that would have been arrived at had the manner of computing the Price Index in effect at the date of this Agreement not been altered. In the event such Price Index (or a successor or substitute index) is not available, a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the Price Index shall be used. (iii) In no event shall the Employee's Base Salary provided herein, as the same may be increased from time to time pursuant to this paragraph 4(B), be reduced by virtue of this paragraph 4(B). (C) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, with respect to the Period of Employment, the Employee shall be eligible to receive annual incentive compensation ("Incentive Compensation") as set forth below, which amount of Incentive Compensation shall not exceed One Hundred Percent (100%) of Base Salary in any one year. (i) Prior to January 1 of each year that this Agreement remains in effect, the Board of Directors and the Employee shall mutually agree upon and establish a plan (the "Incentive Plan") describing anticipated results of operations for the coming fiscal year and containing financial goals (hereinafter "Targets"). The Incentive Plan established for 1998 is attached hereto as EXHIBIT A. The Incentive Plan shall be determined in the sole discretion of the Board of Directors and the Employee and may vary from year to year. A copy of the Incentive Plan shall be provided to the Company's Certified Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs shall compare the actual results of operations for said year to the Incentive Plan. (ii) The Incentive Plan shall set forth a target bonus amount, One Hundred Percent (100%) of which shall be payable for accomplishing One Hundred Percent (100%) of Targets, which amount for calendar 1998 shall be One Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500), and for subsequent years shall be Fifty Percent (50%) of Base Salary for each year ending December 31 during the Period of Employment (hereinafter "Target Bonus Amount"). The Board of Directors may modify upward the Target Bonus Amount as part of the salary review process for years subsequent to 1998. The actual amount, if any, of Incentive Compensation to which the Employee may be entitled shall range on a linear basis from Fifty Percent (50%) of Target Bonus Amount if Eighty Percent (80%) of Targets are achieved to a maximum of Two Hundred Percent (200%) of Target Bonus Amount if One Hundred Twenty Percent (120%) of Targets are achieved. By way of example, if Base Salary is Three Hundred Twenty-Five Thousand Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall be Eighty One Thousand Two Hundred Fifty Dollars ($81,250) (I.E., .5 x $162,500) which shall be automatically due and payable to the Employee. By way of further example, if Base Salary is Three Hundred Twenty- Five Thousand Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Two Hundred Forty-Three Thousand Seven Hundred Fifty Dollars ($243,750) (I.E., 1.50 x $162,500), which shall be automatically due and payable to the Employee. (iii) Incentive Compensation shall be paid to Employee in a lump sum cash payment as soon as practicable after the CPAs determine the amounts, if any, which are due the Employee. (D) SPECIAL MONTHLY INCENTIVE COMPENSATION. The Company shall pay to the Employee One Hundred Thousand Dollars ($100,000) in eighteen (18) monthly installments each in the amount of Five Thousand Five Hundred Fifty-Five and 50/100 Dollars ($5,555.50). The first such payment shall have been made on May 1, 1997 and the last such payment shall be made on October 1, 1998, provided that the Employee is in the employ of the Company when such payments are due ("Special Monthly Incentive Compensation"). Notwithstanding the foregoing, if Employee's Period of Employment is terminated by the Company without cause (as defined in paragraph 11(A)) or Employee terminates his Period of Employment for cause (a described in paragraph 11(C)), Employee need not be in the employ of the Company to receive the payments described in this paragraph 4(D). (E) STOCK OPTIONS. (i) On February 26, 1998, the Company granted to the Employee options to purchase Five Hundred Thousand (500,000) shares of common stock at an exercise price of Thirteen and 59/100 Dollars ($13.59) per share, which options shall be "non-qualified" stock options. During the Period of Employment, such options shall become cumulatively vested and exercisable at the rate of one-third (1/3) per year commencing on December 31, 1998 and one-third (1/3) on each of the next two anniversaries of such date. (ii) The options set forth in this paragraph 4(E) shall be granted to the Employee pursuant to the Company's 1994 Stock Option Plan (the "Stock Option Plan") and the Employee shall be subject to the terms and conditions set forth therein. The options set forth in this paragraph 4(E) shall also be evidenced by the Employee executing and becoming a party to an option agreement between the Employee and the Company (the "Option Agreement"). Notwithstanding any of the foregoing, if there is any inconsistency between or among this Agreement, the Stock Option Plan and/or the Option Agreement, this Agreement, to the extent it is consistent with the restrictions provided in the last sentence of paragraph 12 of the Plan, shall govern as to all documents described in this subparagraph 4(E)(ii). (iii) Notwithstanding the foregoing, the options described in this paragraph 4(E) shall, under the following circumstances become vested and exercisable as follows: (I) upon a Change in Control (as defined in paragraph 11(D) herein), except as provided in subparagraph (v) below, all of Employee's unvested options shall become accelerated and immediately fully vested; and (II) upon termination of the Period of Employment by the Company without cause (as described in paragraph 11(A)) or upon termination of the Period of Employment by Employee for cause (as described in paragraph 11(C)), all of Employee's unvested options shall become accelerated and immediately fully vested, and exercisable, at any time prior to the expiration date of the options as specified in the Stock Option Plan, or the expiration of twelve (12) months after the date of such termination, whichever is the longer period; PROVIDED, HOWEVER, that for purposes of this clause 4(E)(iii)(II), no options will become vested and exercisable subsequent to the expiration date of the options as specified in the Stock Option Plan. (iv) If (I) a Change in Control involves any combination of the Company with any other entity, and (II) the Company and such entity desire to account for such combination under the pooling-of-interests method for financial statement purposes ("Pooling"), and (III) the sole reason that Pooling would be unavailable to the Company and such entity is, in the opinion of the Company's independent accountants, the acceleration of vesting of options provided for in subparagraph (iii)(I) above, then such subparagraph (iii)(I) shall be void. (F) ADDITIONAL COMPENSATION. During the Period of Employment, the Employee shall be eligible to receive any other payments of bonus, compensation or other amounts not specifically set forth herein but which may be paid by the Company ("Additional Compensation"). 5. BUSINESS EXPENSES. During the Period of Employment, the Company agrees to reimburse Employee for reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder. Employee shall submit vouchers, invoices and such other documentation in accordance with the Company's general policy with respect thereto. 6. BENEFITS. During the Period of Employment, the Company shall provide or, as necessary, reimburse Employee with or for the following benefits: (A) ORDINARY INSURANCE. Medical, dental, hospitalization and life insurance and short-term disability coverage for himself and his dependents, to the extent provided generally to the senior executive officers of the Company. (B) VACATIONS. Employee shall be entitled to four (4) weeks paid vacation per year, the scheduling of which shall be in accordance with the general policies and practices of the Company with respect thereto. (C) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of Employment, the Employee shall be entitled (i) to participate in all employee benefit plans, programs, policies and arrangements sponsored, maintained or contributed to by the Company, subject to and in accordance with the terms and conditions of such plans, programs, policies and arrangements as they relate to similarly situated executive officers of the Company, and (ii) to receive all other benefits and perquisites provided or made available by the Company to its senior executive officers subject to and in accordance with the terms and conditions of such benefits and perquisites as they relate to similarly situated senior executive officers of the Company. 7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent Disability ("Permanent Disability" being defined as an illness which will prevent the Employee from performing his duties for a period of six (6) consecutive months or nine (9) out of any consecutive twelve (12) months) prior to the expiration of the Period of Employment, his employment shall be deemed to cease as of the end of the month of the date of his death or Permanent Disability and this Agreement shall terminate forthwith and all rights under it shall expire, except that Employee or Employee's estate shall be entitled to receive Base Salary for a period of six (6) months from the date of death or Permanent Disability plus the PRO RATA amount of any Incentive Compensation or Special Monthly Incentive Compensation which would have been due the Employee pursuant to paragraph 4 hereinabove for the period January 1 of said year through the date of death or Permanent Disability. Said Base Salary shall be paid at the time it would regularly be paid. Said Incentive Compensation, Special Monthly Incentive Compensation or Additional Compensation shall be paid as soon as practicable after a determination of the amount due is made by the Company's CPAs. Additionally, any options eligible to vest within twelve (12) months of the date of death or Permanent Disability shall be deemed accelerated and fully vested as of the date of death or Permanent Disability subject to the further terms and conditions of the Stock Option Plan pursuant to which the same were granted. 8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company would be damaged if Employee's knowledge with respect to the business of the Company were disclosed to or utilized by parties other than the Company. Accordingly, Employee covenants and agrees that he will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by Employee and relates to such matters as customer mailing lists, pricing and credit techniques, marketing techniques, research and development activities, sources of product, lists of magazines or other publications containing advertising of the Company and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by the Employee from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. The provisions of this paragraph shall survive the termination of this Agreement. 9. COVENANTS NOT TO COMPETE AND NOT TO SOLICIT. (A) Employee hereby covenants and agrees that from the date of this Agreement until twelve (12) months after the termination of the Period of Employment (the "Non-Compete Period"), within the Territory (as described in subparagraph 9(B)(i)) (and, as to subparagraph 9(A)(iii), any place), he shall not, directly or indirectly, do or suffer any of the following: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as an employee, consultant, independent contractor or otherwise with, any other corporation, partnership, proprietorship, firm, association, or other business, which is in competition with the Company's business (as described in subparagraph 9(B)(ii); PROVIDED, however, that the ownership of not more than Two Percent (2%) of any class of publicly-traded securities of any entity shall not be deemed a violation of this Agreement. (ii) Employ, assist in employing, or otherwise associate in business with any person who during the Period of Employment or at the end of the Period of Employment is an employee, officer or agent of the Company, or any of its affiliated, related or subsidiary entities. (iii) Induce any person who is an employee, officer or agent of the Company, or any of its affiliated, related or subsidiary entities to terminate such relationship. (B) For purposes of this Agreement: (i) "Territory" shall mean the countries identified in EXHIBIT B hereto. (ii) The Company's business shall mean specialty catalogue retailer and direct marketer of brand name personal computers, computer software, hardware, accessories, peripheral and networking products to commercial and consumer customers. Said marketing activities are primarily conducted through frequent catalogue mailings, Internet catalogue and auction web sites and outbound telemarketing activities. (C) In the event Employee shall violate any provision of this paragraph 9 as to which there is a specific time period during which he is prohibited from taking certain actions or from engaging in certain activities, as set forth in such provision, then, in such event, such violation shall toll the running of such time period from the date of such violation until such violation shall cease. (D) Employee has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this paragraph 9 and this Agreement, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of Employee, would not operate as a bar to Employee's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to Employee. 10. DISCLOSURE. Employee, for a period commencing on the date of this Agreement through the end of the Non-Compete Period, agrees to communicate the contents of paragraphs 8 and 9 of this Agreement to any person, firm, association, or corporation which he intends to employed by, associated in business with, or represent. 11. TERMINATION. In addition to termination for death or Permanent Disability pursuant to paragraph 7, the employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: (A) TERMINATION UPON PRIOR NOTICE. The Company may terminate this Agreement by giving the Employee ninety (90) days prior written notice. (B) EMPLOYEE TERMINATION FOR CAUSE. At the election of the Company, it may immediately upon written notice by the Company to the Employee terminate the Employee for cause. For the purposes of this paragraph, cause for termination shall be deemed to exist upon (i) a good faith finding by the Company of a willful failure or refusal of the Employee to perform assigned duties for the Company of which he has knowledge, or the commission of any other willful or grossly negligent action by Employee with the intent to injure the Company; (ii) any material breach of any material provision of this Agreement by the Employee if the Employee fails to correct such breach (or to take substantial steps to correct such breach) within ten (10) days after receiving written notice thereof; or (iii) the conviction of the Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by the Employee to, a crime involving an act of fraud or embezzlement against the Company or the conviction of the Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by the Employee to, any felony involving moral turpitude. Notwithstanding the foregoing, the Company shall not terminate the Employee for cause pursuant to this paragraph unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of the Board of Directors at a meeting called and held after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors, finding that in the good faith opinion of the Board of Directors the Employee is guilty of conduct set forth in subparagraphs (i) and (ii) of this paragraph and specifying the particulars thereof in reasonable detail. (C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of the Employee, he may terminate the Period of Employment for cause immediately upon written notice by Employee to the Company. For purposes of this paragraph, cause for termination shall be deemed to exist upon (i) a material failure by the Company to continue the Employee's participation in any bonus, compensation or other benefit plan in which the Employee is entitled to participate pursuant hereto or the taking by the Company of any action which would directly or indirectly materially reduce his participation therein; or (ii) a material breach of any provision of this Agreement by the Company, or any breach of any provision of this Agreement by the Company, whether or not material, if such breach is not corrected (or substantial steps have not been taken to correct such breach) within thirty (30) days after the Board of Directors received written notice thereof. (D) TERMINATION FOLLOWING A CHANGE IN CONTROL. For purposes of this Agreement, Change in Control means the occurrence during the Period of Employment of any of the following events, subject to the provisions of paragraph (11)(D)(vii) hereof: (i) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than Fifty-One Percent (51%) of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) The Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon the conclusion of the transaction the Company is not the surviving corporation or entity; or (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act (a "Beneficial Owner")) of securities representing Twenty Percent (20%) or more of the combined voting power of the then-outstanding voting securities of the Company; or (iv) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) The individuals who, at the beginning of any period of two (2) consecutive calendar years, constituted the Directors of the Company cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new Director of the Company was approved by a vote of at least two-thirds (2/3) of the Directors of the Company still in office who were Directors of the Company at the beginning of any such period; or (vi) The Board of Directors determines that (I) any particular actual or proposed merger, consolidation, reorganization, sale or transfer of assets, accumulation of shares or tender offer for shares of the Company or other transaction or event or series of transactions or events will, or is likely to, if carried out, result in a Change in Control falling within paragraph 11(D)(i), (ii), (iii), (iv) or (v), and (II) it is in the best interests of the Company and its shareholders, and will serve the intended purposes of this Agreement, if this Agreement shall thereupon become immediately operative with respect to the provisions of this paragraph 11(D) regarding Change in Control. (vii) Notwithstanding the foregoing provisions of this paragraph (11)(D): (I) If any such merger, consolidation, reorganization, sale or transfer of assets, or tender offer or other transaction or event or series of transactions or events mentioned in paragraph (11)(D)(vi) shall be abandoned, or any such accumulations of shares shall be dispersed or otherwise resolved, the Board of Directors may, by notice to the Employee, nullify the effect thereof and reinstate this Agreement as previously in effect, but without prejudice to any action that may have been taken prior to such nullification. (II) Unless otherwise determined in a specific case by the Board of Directors, a "Change in Control" shall not be deemed to have occurred for purposes of paragraph (11)(D)(iii) or (iv) solely because (X) the Company, (Y) a subsidiary of the Company, or (Z) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing Beneficial Ownership by it of shares of the then-outstanding voting securities of the Company, whether in excess of Twenty Percent (20%) or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. Notwithstanding anything contained in this Agreement to the contrary, in the event of a Change in Control, (I) the Employee may terminate employment with the Company for any reason, or without reason, at any time following the date six months after the first occurrence of a Change in Control, and (II) the Employee may terminate employment with the Company during the Period of Employment if the Company relocates its principal executive offices, or requires the Employee to have his principal location of work changed, to any location that is in excess of 35 miles from the location thereof immediately prior to the Change in Control, in each case with the right to receive the benefits described in paragraph 11(E)(iii) below. (E) EFFECT OF TERMINATION. (i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF THE EMPLOYEE WITHOUT CAUSE. In the event that the Employee's employment is terminated by the Company for cause pursuant to paragraph 11(B)(i) or (ii) or the Employee elects to terminate his employment without cause, the Company shall pay to the Employee the Base Salary, Incentive Compensation, and Special Monthly Incentive Compensation due, if any, under paragraph 4, on a PRO RATA basis to the date of termination at the time such Base Salary, Incentive Compensation and Special Monthly Incentive Compensation would regularly be paid and benefits otherwise payable to him hereunder all through the last day of his actual employment by the Company. Upon termination under this paragraph 11(E), the Employee will thereupon no longer be entitled to any compensation or benefits provided herein, and nothing herein shall limit the Company's right against the employee or the rights and obligations of the parties under paragraphs 8, 9, and 10 hereof. (ii) TERMINATION AT THE ELECTION OF THE COMPANY WITHOUT CAUSE OR AT THE ELECTION OF THE EMPLOYEE FOR CAUSE. In the event that the Employee's employment is terminated without cause by the Company pursuant to paragraph 11(A) prior to a Change in Control or with cause by the Employee pursuant to paragraph 11(C), then, following the occurrence of such event, the Company shall pay to the Employee (I) the Base Salary and Special Monthly Incentive Compensation due, if any through the Period of Employment, and (II) the Incentive Compensation due, if any, under paragraph 4 hereof; PROVIDED, HOWEVER, that any such Incentive Compensation shall be paid on a PRO RATA basis to the date of termination. In addition, Employee will continue to receive the benefits provided under paragraph 6 hereof, including payment of accrued but unused vacation benefits. During said period, the Employee shall continue to be bound by the provisions of paragraphs 8, 9 and 10 hereof. (iii) TERMINATION FOLLOWING A CHANGE IN CONTROL. In the event that a Change in Control occurs during the Period of Employment and Employee's employment is terminated in the manner described in paragraph 11(A) or paragraph 11(D), the Company shall pay to the Employee a lump sum cash payment in an amount equal to two (2) times his then current Base Salary, plus two (2) times the average of the sum of the Incentive Compensation and Additional Compensation he received under paragraph 4 for the three (3) years immediately preceding such Change in Control. In addition, Employee will continue to receive the benefits provided under paragraph 6 hereof through the Period of Employment. 12. NO MITIGATION OBLIGATION. (A) Employee shall be under no obligation to seek other employment opportunities during any period between termination of his employment following a Change in Control and the expiration of the Period of Employment (the "Interim Period"), and Employee shall not be obligated to accept any other employment opportunity which may be offered to Employee during the Interim Period; however, subject to the provisions of paragraph 9, and except as provided in the following sentence, nothing in this Agreement shall prohibit the Employee from accepting other employment opportunities during the Interim Period, in which event Employee shall receive the entire amount due and owing to him as described in paragraph 11(E)(iii) without set-off for any amount paid to Employee arising out of any new employment relationship. Benefits described in paragraph 6(A) and (B) will be reduced to the extent comparable welfare benefits are actually received by the Employee from another Company during the Interim Period and such benefits actually received by the Employee shall be reported by the Employee to the Company. (B) Employee's termination of this Agreement by reason of a Change in Control and the receipt by Employee of any amount pursuant to paragraph 11(E)(iii) shall not preclude Employee's continued employment with the Company or the surviving entity in any Change in Control, on such terms as shall be negotiated between the Company (or such surviving entity) and the Employee following termination of this Agreement. 13. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (A) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on, or the vesting or exercisability of, any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (B) Subject to the provisions of paragraph 13(F), all determinations required to be made under this paragraph 13, including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Employee in his sole discretion. The Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Employee within thirty (30) calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is payable by the Employee, the Company shall pay the required Gross-Up Payment to the Employee within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employee. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall, at the same time as it makes such determination, furnish the Company and the Employee an opinion that the Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to paragraph 13(F) and the Employee thereafter is required to make a payment of any Excise Tax, the Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Employee within five (5) business days after receipt of such determination and calculations. (C) The Company and the Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by paragraph 13(B). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Employee. (D) The federal, state and local income or other tax returns filed by the Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Employee. The Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Employee shall within five (5) business days pay to the Company the amount of such reduction. (E) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by paragraph 13(B) shall be borne by the Company. If such fees and expenses are initially paid by the Employee, the Company shall reimburse the Employee the full amount of such fees and expenses within five (5) business days after receipt from the Employee of a statement therefor and reasonable evidence of his payment thereof. (F) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Employee actually receives notice of such claim and the Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Employee). The Employee shall not pay such claim prior to the earlier of (i) the expiration of the thirty (30) calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph 13(F), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this paragraph 13(F) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (PROVIDED, HOWEVER, that the Employee may participate therein at his own cost and expense) and may, at its option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (G) If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 13(F), the Employee receives any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 13(F)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 13(F), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this paragraph 13. 14. SUCCESSORS AND BINDING AGREEMENT. (A) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (B) This Agreement will inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (C) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in paragraphs 9(A) and 9(B). Without limiting the generality or effect of the foregoing, the Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this paragraph 9(C), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated. 15. SEVERABILITY. In the event that any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. 16. REPRESENTATION. Each party represents and warrants that it is fully authorized and empowered to enter into this Agreement and that performance of its obligations under this Agreement will not violate any agreement between it and any other person or entity. 17. NOTICES. All notices, elections, demands or other communications required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered properly given or made if sent by telecopier, Telex, courier service or certified mail, return receipt requested and addressed to the parties at the respective addresses specified below. Either party may change its address by giving notice in writing pursuant to this paragraph to the other of its new address. To the Company: Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 Attn.: Peter Godfrey To Employee: Mr. Adam S. Shaffer 7 Godfrey Road West Weston, Connecticut 06883 18. ARBITRATION. Any controversy, claim or breach (except those relating to monetary damages) arising out of or relating to this Agreement shall be submitted for settlement to an arbitrator agreed upon by the parties. The decision of such arbitrator shall be final and binding on the parties. If the parties cannot agree upon an arbitrator, the controversy, claim or breach shall be referred to the American Arbitration Association with a request that an arbitrator be appointed pursuant to the rules of said Association. Such arbitration shall be held in New Haven, Connecticut, in accordance with the rules and practices of the American Arbitration Association pertaining to single-party arbitration then in effect, and the judgment upon the award rendered shall be entered by consent in any court having jurisdiction thereof. 19. ENTIRE AGREEMENT. This Agreement constitutes the full and complete understanding and agreement of the parties. Neither party has relied upon any representation of the other not set forth herein. This Agreement may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. This Agreement supersedes all prior agreements between the parties hereto with respect to its subject matter and notwithstanding any provision hereof, will become effective upon the execution of this Agreement by the parties. 20. BINDING EFFECT. This Agreement shall be binding upon and accrue to the benefit of the parties hereto, their heirs, executors, administrators and successors. 21. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to its principles with respect to conflicts of law. 22. COUNSEL FEES. (A) Except as set forth herein the parties hereto shall bear their own fees, costs and expenses incurred in connection with this Agreement. If either party is required to bring suit or otherwise seek enforcement of its or his rights in connection with the same, the prevailing party in such action or proceeding shall be entitled to recover counsel fees incurred in such action or proceeding. The Employee shall be reimbursed in an amount not to exceed Two Thousand Dollars ($2,000) for legal fees and costs incurred in connection with the review of this Agreement by his own counsel. (B) Notwithstanding subparagraph (A), in the event of a Change in Control, it is the intent of the Company that the Employee not be required to incur fees and related expenses for the retention of attorneys, accountants, actuaries, consultants, and/or other professionals ("professionals") in connection with the interpretation, enforcement or defense of Employee's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder. Accordingly, if it should appear to the Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Employee the benefits provided or intended to be provided to the Employee hereunder, the Company irrevocably authorizes the Employee from time to time to retain one or more professionals of the Employee's choice, at the expense of the Company as hereafter provided, to advise and represent the Employee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior relationship between the Company and such professional, the Company irrevocably consents to the Employee's entering into a relationship with any such professional, and in that connection the Company and the Employee agree that a confidential relationship shall exist between the Employee and any such professional. Without respect to whether the Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable fees and related expenses incurred by the Employee in connection with any of the foregoing. 23. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the day and year first above written. COMPANY: MICRO WAREHOUSE, INC. By: /s/ Peter Godfrey -------------------------------- Peter Godfrey President and Chief Executive Officer EMPLOYEE: By: /s/ Adam S. Shaffer -------------------------------- Adam S. Shaffer EXHIBIT A INCENTIVE PLAN FOR THE YEAR 1998 The Targets with respect to the 1998 Incentive Plan shall be based upon the projected operating profit for the Company as described in the Company's 1998 Worldwide Plan dated March 13, 1998 (the "Plan"). The Plan includes a separate projected operating profit for all U.S. operations and a separate projected operating profit for the consolidated international operations. In determining the Target Bonus amount, if any, 80% of said amount shall be attributable to and based upon the Plan's projected operating profit for all U.S. operations and 20% shall be attributable to and based upon the Plan's projected operating profit for the consolidated international operations. With respect to said 20%, the Target shall also be considered achieved in full if: (i) all or a material number of the international subsidiaries are sold or otherwise disposed of during 1998; or (ii) the international subsidiaries on a consolidated basis have an operating profit for the year ending December 31, 1998. EX-10.25 9 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.25 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This amended and restated employment agreement ("Agreement") made as of the 1st day of January, 1998 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred to as the "Company"), with its principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Bruce L. Lev whose address is 736 Titicus Road, North Salem, New York 10560 (hereinafter referred to as "Employee"). WHEREAS, this Agreement is effective January 1, 1998 (the "Effective Date") and is an amendment and restatement of, and supersedes each provision of the employment agreement previously entered into for good and valuable consideration by Employee and Company on or about April 1, 1995; and WHEREAS, this Agreement shall represent the entire employment agreement between the parties with respect to the subject matter herein. NOW, THEREFORE, in consideration of the premises, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Company shall hereby continue to employ Employee, and Employee hereby accepts such continued employment, commencing on the Effective Date, on the terms and conditions set forth below. 2. DUTIES. During the Period of Employment (as hereinafter defined), the Company shall continue to employ Employee as Executive Vice President of Legal and Corporate Affairs reporting to Peter Godfrey, the President and Chief Executive Officer of the Company, or his successor, to perform such duties as shall be required by Mr. Godfrey, or his successor, provided the same are consistent with those of an executive vice president of legal and corporate affairs of a public company. The precise responsibilities of Employee may be revised from time to time provided the same do not materially affect Employee's position. In furtherance of the foregoing, Employee hereby agrees to perform his duties faithfully. During the Period of Employment and except for vacations in accordance herewith, absences due to temporary illness and outside Board responsibilities, Employee shall devote all of his available business time and energies during normal business hours to the business of the Company. Subject to the reasonable review and concurrence of the Board of Directors, the Employee shall be permitted to participate as a board member of other publicly traded and privately held companies provided said participation does not interfere with the discharge of the Employee's duties or obligations hereunder. 3. TERM. The term of Employee's continued employment by the Company shall commence as of the Effective Date and end as of the close of business on December 31, 2000 (the "Period of Employment"). 4. COMPENSATION. (A) BASE SALARY. For all services rendered by the Employee under this Agreement, the Company shall pay to him a minimum "Base Salary" at the rate of Three Hundred Thirty-Three Thousand Four Hundred Sixty-Six Dollars ($333,466) per annum during the Period of Employment payable in at least equal monthly installments. The term "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. (B) ADJUSTMENTS TO BASE SALARY. Commencing January 1, 1999, the Base Salary to be paid to the Employee during each year shall be increased by any increase in the cost of living determined in accordance with the formula set forth in subparagraphs (i), (ii) and (iii) hereinbelow. (i) For the purposes of this paragraph 4(B), the following definition shall apply: (a) The term "Base Year" shall mean the twelve month period commencing on January 1, 1998 and terminating on December 31, 1998. The term "Second Year" shall mean the twelve month period commencing on January 1, 1999 and terminating on December 31, 1999. The term "Third Year" shall mean the twelve month period commencing on January 1, 2000 and terminating on December 31, 2000. (b) The term "Price Index" shall mean the average of the monthly "Consumer Price Index" published by the Bureau of Labor Statistics of the U.S. Department of Labor, New York, Northern New Jersey, Long Island, New York-New Jersey-Connecticut, for urban wage earners and clerical workers, or a successor or substitute index appropriately adjusted ("Consumer Price Index"), for each month of any given twelve month period. (ii) Effective as of each of January 1 of 1999 and 2000, there shall be a cost of living adjustment to the Base Salary applicable for the succeeding twelve month period. The adjustment shall be based on the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 1999; and the Price Index for the Third Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 2000. In the event that the Price Index for the Second Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid shall be multiplied by the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, and the resulting sum shall be added to such original Base Salary, effective on January 1, 1999. Said adjusted Base Salary shall thereafter be payable hereunder until it is readjusted pursuant to the terms of this paragraph 4(B) as of January 1, 2000. In the event that the Price Index for the Third Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid (unchanged by any adjustment made pursuant to the immediately preceding sentence) shall be multiplied by the percentage difference between the Price Index for the Third Year, and the Price Index for the Base Year, and the resulting sums shall be added to such original Base Salary, effective on January 1, 2000. In the event that the Price Index ceases to use 1982-1984 = 100 as the basis of calculation, or if a substantial change is made in the terms or number of items contained in the Price Index, then the Price Index shall be adjusted to the figure that would have been arrived at had the manner of computing the Price Index in effect at the date of this Agreement not been altered. In the event such Price Index (or a successor or substitute index) is not available, a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the Price Index shall be used. (iii) In no event shall the Employee's Base Salary provided herein, as the same may be increased from time to time pursuant to this paragraph 4(B), be reduced by virtue of this paragraph 4(B). (C) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, with respect to the Period of Employment, the Employee shall be eligible to receive annual incentive compensation ("Incentive Compensation") as set forth below, which amount of Incentive Compensation shall not exceed One Hundred Percent (100%) of Base Salary in any one year. (i) Prior to January 1 of each year that this Agreement remains in effect, the Board of Directors and the Employee shall mutually agree upon and establish a plan (the "Incentive Plan") describing anticipated results of operations for the coming fiscal year and containing financial goals (hereinafter "Targets"). The Incentive Plan established for 1998 is attached hereto as EXHIBIT A. The Incentive Plan shall be determined in the sole discretion of the Board of Directors and the Employee and may vary from year to year. A copy of the Incentive Plan shall be provided to the Company's Certified Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs shall compare the actual results of operations for said year to the Incentive Plan. (ii) The Incentive Plan shall set forth a target bonus amount, One Hundred Percent (100%) of which shall be payable for accomplishing One Hundred Percent (100%) of Targets, which amount for calendar 1998 shall be One Hundred Sixty-Six Thousand Seven Hundred Thirty-Three Dollars ($166,733), and for subsequent years shall be Fifty Percent (50%) of Base Salary for each year ending December 31 during the Period of Employment (hereinafter "Target Bonus Amount"). The Board of Directors may modify upward the Target Bonus Amount as part of the salary review process for years subsequent to 1998. The actual amount, if any, of Incentive Compensation to which the Employee may be entitled shall range on a linear basis from Fifty Percent (50%) of Target Bonus Amount if Eighty Percent (80%) of Targets are achieved to a maximum of Two Hundred Percent (200%) of Target Bonus Amount if One Hundred Twenty Percent (120%) of Targets are achieved. No Incentive Compensation shall be paid if less than Eighty Percent (80%) of Targets are achieved. By way of example, if Base Salary is Three Hundred Thirty-Three Thousand Four Hundred Sixty-Six Dollars ($333,466), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Sixty-Six Thousand Seven Hundred Thirty Three Dollars ($166,733). If the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall be Eighty Three Thousand Six Hundred Sixty-Six and 50/100 Dollars ($83,366.50) (I.E., .5 x $166,733), which shall be automatically due and payable to the Employee. By way of further example, if Base Salary is Three Hundred Thirty-Three Thousand Four Hundred Sixty-Six Dollars ($333,466), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Sixty-Six Thousand Seven Hundred Thirty-Three Dollars ($166,733). If the Company achieves One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Two Hundred Fifty Thousand Ninety-Nine and 50/100 Dollars ($250,099.50) (i.e., 1.50 x $166,733), which shall be automatically due and payable to the Employee. (iii) Incentive Compensation shall be paid to Employee in a lump sum cash payment as soon as practicable after the CPAs determine the amounts, if any, which are due the Employee. (D) SPECIAL GUARANTEED INCENTIVE COMPENSATION. In addition to Base Salary, the Company shall pay to the Employee a quarterly guaranteed draw against the Target Bonus Amount in the amount of Twelve Thousand Five Hundred Dollars ($12,500) per quarter ("Special Guaranteed Incentive Compensation"). Such amount shall be paid approximately fifteen (15) to thirty (30) days after the close of each quarter. (E) STOCK OPTIONS. (i) On February 26, 1998, the Company granted to the Employee options to purchase One Hundred Thousand (100,000) common shares at an exercise price of Thirteen and 59/100 Dollars ($13.59) per share, which options shall be "non-qualified" stock options. During the Period of Employment such options shall become cumulatively vested and exercisable at the rate of one-third (1/3) per year commencing on December 31, 1998 and one-third (1/3) on each of the next two anniversaries of such date. (ii) As an incentive and inducement to the Employee to remain in the employ of the Company and devote his best efforts to the affairs of the Company, in the sole discretion of the Board of Directors, the Employee shall receive each year, commencing in the year 2000, an option to purchase shares of common stock of the Company, the exact number, terms and option price of which shall be determined yearly by the Stock Option Committee of the Board of Directors. Such option shall not be granted in 1998 and 1999. (iii) The options set forth in this paragraph 4(E) shall be granted to the Employee pursuant to the Company's 1994 Stock Option Plan (the "Stock Option Plan") and the Employee shall be subject to the terms and conditions set forth therein. The options set forth in this paragraph 4(E) shall also be evidenced by the Employee executing and becoming a party to an option agreement between the Employee and the Company (the "Option Agreement"). Notwithstanding any of the foregoing, if there is any inconsistency between or among this Agreement, the Stock Option Plan and/or the Option Agreement, this Agreement, to the extent it is consistent with the restrictions provided in the last sentence of paragraph 12 of the Plan, shall govern as to all documents described in this subparagraph 4(E)(iii). (iv) Notwithstanding the foregoing, the options described in this paragraph 4(E) shall, under the following circumstances become vested and exercisable as follows: (I) upon a Change in Control (as defined in paragraph 11(D) herein), except as provided in subparagraph (v) below, all of Employee's unvested options shall become accelerated and immediately fully vested; and (II) upon termination of the Period of Employment by the Company without cause (as described in paragraph 11(A)) or upon termination of the Period of Employment by Employee for cause (as described in paragraph 11(C)), all of Employee's unvested options shall become accelerated and immediately fully vested, and exercisable, at any time prior to the expiration date of the options, as specified in the Stock Option Plan, or the expiration of twelve (12) months after the date of such termination, whichever is the longer period; PROVIDED, HOWEVER, that for purposes of this clause 4(E)(iv)(II), no options will become vested and exercisable subsequent to the expiration date of the options as specified in the Stock Option Plan. (v) If (I) a Change in Control involves any combination of the Company with any other entity, and (II) the Company and such entity desire to account for such combination under the pooling-of-interests method for financial statement purposes ("Pooling"), and (III) the sole reason that Pooling would be unavailable to the Company and such entity is, in the opinion of the Company's independent accountants, the acceleration of vesting of options provided for in subparagraph (iv)(I) above, then such subparagraph (iv)(I) shall be void. (F) ADDITIONAL COMPENSATION. During the Period of Employment, the Employee shall be eligible to receive any other payments of bonus, compensation or other amounts not specifically set forth herein but which may be paid by the Company ("Additional Compensation"). 5. BUSINESS EXPENSES. During the Period of Employment, the Company agrees to reimburse Employee for reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder. Employee shall submit vouchers, invoices and such other documentation in accordance with the Company's general policy with respect thereto. 6. BENEFITS. During the Period of Employment, the Company will provide or, as necessary, reimburse Employee with or for the following benefits: (A) ORDINARY INSURANCE. Medical, dental and hospitalization insurance and short-term disability coverage for himself and his dependents, to the extent provided generally to the senior executives of the Company. (B) LIFE AND DISABILITY INSURANCE. Notwithstanding the foregoing, during the Period of Employment, the Company shall reimburse Employee or pay directly premiums for disability and life insurance policies in the current aggregate annual amount of approximately Fifteen Thousand Dollars ($15,000). (C) VACATIONS. Employee shall be entitled to four (4) weeks paid vacation per year, the scheduling of which shall be in accordance with the general policies and practices of the Company with respect thereto. (D) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of Employment, the Employee shall be entitled (i) to participate in all employee benefit plans, programs, policies and arrangements sponsored, maintained or contributed to by the Company, subject to and in accordance with the terms and conditions of such plans, programs, policies and arrangements as they relate to similarly situated executive officers of the Company, and (ii) to receive all other benefits and perquisites provided or made available by the Company to its senior executive officers subject to and in accordance with the terms and conditions of such benefits and perquisites as they relate to similarly situated senior executive officers of the Company. 7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent Disability ("Permanent Disability" being defined as an illness which will prevent the Employee from performing his duties for a period of six (6) consecutive months or nine (9) out of any consecutive twelve (12) months) prior to the expiration of the Period of Employment, his employment shall be deemed to cease as of the end of the month of the date of his death or Permanent Disability and this Agreement shall terminate forthwith and all rights under it shall expire, except that Employee or Employee's estate shall be entitled to receive Base Salary for a period of six (6) months from the date of death or Permanent Disability plus the PRO RATA amount of any Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation which would have been due the Employee pursuant to paragraph 4 hereinabove for the period January 1 of said year through the date of death or Permanent Disability. Said Base Salary shall be paid at the time it would regularly be paid. Said Incentive Compensation, Special Guaranteed Incentive Compensation or Additional Compensation shall be paid as soon as practicable after a determination of the amount due is made by the Company's CPAs. Additionally, any options eligible to vest within twelve (12) months of the date of death or Permanent Disability shall be deemed accelerated and fully vested as of the date of death or Permanent Disability subject to the further terms and conditions of the Stock Option Plan pursuant to which the same were granted. 8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company would be damaged if Employee's knowledge with respect to the business of the Company were disclosed to or utilized by parties other than the Company. Accordingly, Employee covenants and agrees that he will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by Employee and relates to such matters as customer mailing lists, pricing and credit techniques, marketing techniques, research and development activities, sources of product, lists of magazines or other publications containing advertising of the Company and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by the Employee from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. The provisions of this paragraph shall survive the termination of this Agreement. 9. COVENANT NOT TO COMPETE. The Employee hereby covenants and agrees that from the date hereof until twelve (12) months after the termination of the Period of Employment (the "Non-Compete Period") he shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); PROVIDED, HOWEVER, that the foregoing shall not prevent the Employee from (i) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if the Employee's services are restricted to employment in such other lines of business; (ii) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than Two Percent (2%) of any class or type of securities of, or interest in, such Competitive Business; or, (iii) practicing law; provided that while engaging in the practice of law during the Non-Compete Period, the Employee does not directly provide legal advice to a Competitive Business. The term "Competitive Business" shall mean and include any business or activity that is substantially the same as any business or activity then conducted by the Company, regardless of where such Competitive Business is located. Notwithstanding the foregoing, the parties to this Agreement hereby agree that the covenant not to compete contained in this paragraph 9 is valid and enforceable only to the extent permissible under applicable law 10. COVENANT NOT TO SOLICIT. Unless the Employee has obtained the prior written consent of the Company, he hereby covenants and agrees that, from the date hereof until the expiration of the Non-Compete Period, he shall not, for or on behalf of a Competitive Business, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent creditor, or otherwise, attempt to solicit or in any other way disturb or service any person, firm or corporation that has been a customer account of the Company at any time or times during the Period of Employment or during the Non-Compete Period, whether or not he at any time had any direct or indirect account responsibility for, or contact with, such customer account. 11. TERMINATION. In addition to termination for death or Permanent Disability pursuant to paragraph 7, the employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: (A) TERMINATION UPON PRIOR NOTICE. The Company may terminate this Agreement by giving the Employee ninety (90) days prior written notice. (B) EMPLOYEE TERMINATION FOR CAUSE. At the election of the Company, it may immediately upon written notice by the Company to the Employee terminate the Employee for cause. For the purposes of this paragraph, cause for termination shall be deemed to exist upon (i) a good faith finding by the Company of a willful failure or refusal of the Employee to perform assigned duties for the Company of which he has knowledge, or the commission of any other willful or grossly negligent action by Employee with the intent to injure the Company; (ii) any material breach of any material provision of this Agreement by the Employee if the Employee fails to correct such breach (or to take substantial steps to correct such breach) within ten (10) days after receiving written notice thereof; or (iii) the conviction of the Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by the Employee to, a crime involving an act of fraud or embezzlement against the Company or the conviction of the Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by the Employee to, any felony involving moral turpitude. Notwithstanding the foregoing, the Company shall not terminate the Employee for cause pursuant to this paragraph unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of the Board of Directors at a meeting called and held after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors, finding that in the good faith opinion of the Board of Directors the Employee is guilty of conduct set forth in subparagraphs (i) and (ii) of this paragraph and specifying the particulars thereof in reasonable detail. (C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of the Employee, he may terminate the Period of Employment for cause immediately upon written notice by Employee to the Company. For purposes of this paragraph, cause for termination shall be deemed to exist upon (i) a material failure by the Company to continue the Employee's participation in any bonus, compensation or other benefit plan in which the Employee is entitled to participate pursuant hereto or the taking by the Company of any action which would directly or indirectly materially reduce his participation therein; or (ii) a material breach of any provision of this Agreement by the Company, or any breach of any provision of this Agreement by the Company, whether or not material, if such breach is not corrected (or substantial steps have not been taken to correct such breach) within thirty (30) days after the Board of Directors received written notice thereof. (D) TERMINATION FOLLOWING A CHANGE IN CONTROL. For purposes of this Agreement, Change in Control means the occurrence during the Period of Employment of any of the following events, subject to the provisions of paragraph (11)(D)(vii) hereof: (i) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than Fifty-One Percent (51%) of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) The Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon the conclusion of the transaction the Company is not the surviving corporation or entity; or (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act (a "Beneficial Owner")) of securities representing Twenty Percent (20%) or more of the combined voting power of the then-outstanding voting securities of the Company; or (iv) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) The individuals who, at the beginning of any period of two (2) consecutive calendar years, constituted the Directors of the Company cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new Director of the Company was approved by a vote of at least two-thirds (2/3) of the Directors of the Company still in office who were Directors of the Company at the beginning of any such period; or (vi) The Board of Directors determines that (I) any particular actual or proposed merger, consolidation, reorganization, sale or transfer of assets, accumulation of shares or tender offer for shares of the Company or other transaction or event or series of transactions or events will, or is likely to, if carried out, result in a Change in Control falling within paragraph 11(D)(i), (ii), (iii), (iv) or (v), and (II) it is in the best interests of the Company and its shareholders, and will serve the intended purposes of this Agreement, if this Agreement shall thereupon become immediately operative with respect to the provisions of this paragraph 11(D) regarding Change in Control. (vii) Notwithstanding the foregoing provisions of this paragraph (11)(D): (I) If any such merger, consolidation, reorganization, sale or transfer of assets, or tender offer or other transaction or event or series of transactions or events mentioned in paragraph (11)(D)(vi) shall be abandoned, or any such accumulations of shares shall be dispersed or otherwise resolved, the Board of Directors may, by notice to the Employee, nullify the effect thereof and reinstate this Agreement as previously in effect, but without prejudice to any action that may have been taken prior to such nullification. (II) Unless otherwise determined in a specific case by the Board of Directors, a "Change in Control" shall not be deemed to have occurred for purposes of paragraph (11)(D)(iii) or (iv) solely because (X) the Company, (Y) a subsidiary of the Company, or (Z) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing Beneficial Ownership by it of shares of the then-outstanding voting securities of the Company, whether in excess of Twenty Percent (20%) or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (ix) Notwithstanding anything contained in this Agreement to the contrary, in the event of a Change in Control, (I) the Employee may terminate employment with the Company for any reason, or without reason, at any time following the date six months after the first occurrence of a Change in Control, and (II) the Employee may terminate employment with the Company during the Period of Employment if the Company relocates its principal executive offices, or requires the Employee to have his principal location of work changed, to any location that is in excess of 35 miles from the location thereof immediately prior to the Change in Control, in each case with the right to receive the benefits described in paragraph 11(E)(iii) below. (E) EFFECT OF TERMINATION. (i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF THE EMPLOYEE WITHOUT CAUSE. In the event that the Employee's employment is terminated by the Company for cause pursuant to paragraph 11(B)(i) or (ii) or the Employee elects to terminate his employment without cause, the Company shall pay to the Employee the Base Salary, Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation due, if any, under paragraph 4, on a PRO RATA basis to the date of termination at the time such Base Salary, Incentive Compensation, Special Guaranteed Incentive Compensation or Additional Compensation would regularly be paid and benefits otherwise payable to him hereunder all through the last day of his actual employment by the Company. Upon termination under this paragraph 11(E), the Employee will thereupon no longer be entitled to any compensation or benefits provided herein, and nothing herein shall limit the Company's right against the Employee or the rights and obligations of the parties under paragraphs 8, 9, and 10 hereof. (ii) TERMINATION AT THE ELECTION OF THE COMPANY WITHOUT CAUSE OR AT THE ELECTION OF THE EMPLOYEE FOR CAUSE. In the event that the Employee's employment is terminated without cause by the Company pursuant to paragraph 11(A) prior to a Change in Control or with cause by the Employee pursuant to paragraph 11(C), then, following the occurrence of such event, the Company shall pay to the Employee (I) the Base Salary and Special Guaranteed Incentive Compensation due, if any, through the Period of Employment, and (II) the Incentive Compensation and Additional Compensation due, if any, under paragraph 4 hereof; PROVIDED, HOWEVER, that any such Incentive Compensation or Additional Compensation shall be paid on a PRO RATA basis to the date of termination. In addition, Employee will continue to receive the benefits provided under paragraph 6 hereof, including payment of accrued but unused vacation benefits. During said period, the Employee shall continue to be bound by the provisions of paragraphs 8, 9 and 10 hereof. (iii) TERMINATION FOLLOWING A CHANGE IN CONTROL. In the event that a Change in Control occurs during the Period of Employment and Employee's employment is terminated in the manner described in paragraph 11(A) or paragraph 11(D), the Company shall pay to the Employee a lump sum cash payment in an amount equal to two (2) times his then current Base Salary, plus two (2) times the average of the sum of the Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation he received under paragraph 4 for the three (3) years immediately preceding such Change in Control. In addition, Employee will continue to receive the benefits provided under paragraph 6 hereof through the Period of Employment. 12. NO MITIGATION OBLIGATION. (A) Employee shall be under no obligation to seek other employment opportunities during any period between termination of his employment following a Change in Control and the expiration of the Period of Employment (the "Interim Period"), and Employee shall not be obligated to accept any other employment opportunity which may be offered to Employee during the Interim Period; however, subject to the provisions of paragraph 9, and except as provided in the following sentence, nothing in this Agreement shall prohibit the Employee from accepting other employment opportunities during the Interim Period, in which event Employee shall receive the entire amount due and owing to him as described in paragraph 11(E)(iii) without set-off for any amount paid to Employee arising out of any new employment relationship. Benefits described in paragraph 6(A) and (B) will be reduced to the extent comparable welfare benefits are actually received by the Employee from another Company during the Interim Period and such benefits actually received by the Employee shall be reported by the Employee to the Company. (B) Employee's termination of his employment following a Change in Control and the receipt by Employee of any amount pursuant to paragraph 11(E)(iii) shall not preclude Employee's continued employment with the Company or the surviving entity in any Change in Control, on such terms as shall be negotiated between the Company (or such surviving entity) and the Employee following termination of this Agreement. 13. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (A) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on, or the vesting or exercisability of, any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (B) Subject to the provisions of paragraph 13(F), all determinations required to be made under this paragraph 13, including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Employee in his sole discretion. The Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Employee within thirty (30) calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is payable by the Employee, the Company shall pay the required Gross-Up Payment to the Employee within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employee. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall, at the same time as it makes such determination, furnish the Company and the Employee an opinion that the Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to paragraph 13(F) and the Employee thereafter is required to make a payment of any Excise Tax, the Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Employee within five (5) business days after receipt of such determination and calculations. (C) The Company and the Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by paragraph 13(B). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Employee. (D) The federal, state and local income or other tax returns filed by the Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Employee. The Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Employee shall within five (5) business days pay to the Company the amount of such reduction. (E) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by paragraph 13(B) shall be borne by the Company. If such fees and expenses are initially paid by the Employee, the Company shall reimburse the Employee the full amount of such fees and expenses within five (5) business days after receipt from the Employee of a statement therefor and reasonable evidence of his payment thereof. (F) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Employee actually receives notice of such claim and the Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Employee). The Employee shall not pay such claim prior to the earlier of (i) the expiration of the thirty (30) calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph 13(F), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this paragraph 13(F) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (PROVIDED, HOWEVER, that the Employee may participate therein at his own cost and expense) and may, at its option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (G) If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 13(F), the Employee receives any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 13(F)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 13(F), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this paragraph 13. 14. SUCCESSORS AND BINDING AGREEMENT. (A) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (B) This Agreement will inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (C) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in paragraphs 9(A) and 9(B). Without limiting the generality or effect of the foregoing, the Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this paragraph 9(C), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated. 15. SEVERABILITY. In the event that any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. 16. REPRESENTATION. Each party represents and warrants that it is fully authorized and empowered to enter into this Agreement and that performance of its obligations under this Agreement will not violate any agreement between it and any other person or entity. 17. NOTICES. All notices, elections, demands or other communications required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered properly given or made if sent by telecopier, Telex, courier service or certified mail, return receipt requested and addressed to the parties at the respective addresses specified below. Either party may change its address by giving notice in writing pursuant to this paragraph to the other of its new address. To the Company: Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 Attn.: Peter Godfrey To Employee: Bruce L. Lev, Esq. 736 Titicus Road North Salem, New York 10560 18. ARBITRATION. Any controversy, claim or breach (except those relating to monetary damages) arising out of or relating to this Agreement shall be submitted for settlement to an arbitrator agreed upon by the parties. The decision of such arbitrator shall be final and binding on the parties. If the parties cannot agree upon an arbitrator, the controversy, claim or breach shall be referred to the American Arbitration Association with a request that an arbitrator be appointed pursuant to the rules of said Association. Such arbitration shall be held in New Haven, Connecticut, in accordance with the rules and practices of the American Arbitration Association pertaining to single-party arbitration then in effect, and the judgment upon the award rendered shall be entered by consent in any court having jurisdiction thereof. 19. ENTIRE AGREEMENT. This Agreement constitutes the full and complete understanding and agreement of the parties. Neither party has relied upon any representation of the other not set forth herein. This Agreement may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. This Agreement supersedes all prior agreements between the parties hereto with respect to its subject matter and notwithstanding any provision hereof, will become effective upon the execution of this Agreement by the parties. 20. BINDING EFFECT. This Agreement shall be binding upon and accrue to the benefit of the parties hereto, their heirs, executors, administrators and successors. 21. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to its principles with respect to conflicts of law. 22. COUNSEL FEES. (A) Except as set forth herein the parties hereto shall bear their own fees, costs and expenses incurred in connection with this Agreement. If either party is required to bring suit or otherwise seek enforcement of its or his rights in connection with the same, the prevailing party in such action or proceeding shall be entitled to recover counsel fees incurred in such action or proceeding. The Employee shall be reimbursed in an amount not to exceed Two Thousand Dollars ($2,000) for legal fees and costs incurred in connection with the review of this Agreement by his own counsel. (B) Notwithstanding subparagraph (A), in the event of a Change in Control, it is the intent of the Company that the Employee not be required to incur fees and related expenses for the retention of attorneys, accountants, actuaries, consultants, and/or other professionals ("professionals") in connection with the interpretation, enforcement or defense of Employee's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder. Accordingly, if it should appear to the Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Employee the benefits provided or intended to be provided to the Employee hereunder, the Company irrevocably authorizes the Employee from time to time to retain one or more professionals of the Employee's choice, at the expense of the Company as hereafter provided, to advise and represent the Employee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior relationship between the Company and such professional, the Company irrevocably consents to the Employee's entering into a relationship with any such professional, and in that connection the Company and the Employee agree that a confidential relationship shall exist between the Employee and any such professional. Without respect to whether the Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable fees and related expenses incurred by the Employee in connection with any of the foregoing. 23. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the day and year first above written. COMPANY: MICRO WAREHOUSE, INC. By: /s/ Peter Godfrey -------------------------------------- Peter Godfrey President and Chief Executive Officer EMPLOYEE: By: /s/ Bruce L. Lev -------------------------------------- Bruce L. Lev EXHIBIT A INCENTIVE PLAN FOR THE YEAR 1998 The Targets with respect to the 1998 Incentive Plan shall be based upon the projected operating profit for the Company as described in the Company's 1998 Worldwide Plan dated March 13, 1998 (the "Plan"). The Plan includes a separate projected operating profit for all U.S. operations and a separate projected operating profit for the consolidated international operations. In determining the Target Bonus amount, if any, 80% of said amount shall be attributable to and based upon the Plan's projected operating profit for all U.S. operations and 20% shall be attributable to and based upon the Plan's projected operating profit for the consolidated international operations. With respect to said 20%, the Target shall also be considered achieved in full if: (i) all or a material number of the international subsidiaries are sold or otherwise disposed of during 1998; or (ii) the international subsidiaries on a consolidated basis have an operating profit for the year ending December 31, 1998. EX-10.26 10 AMENDED AND RESTATED EMPLOYMENT (GARTEN) EXHIBIT 10.26 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This amended and restated employment agreement ("Agreement") made as of the 1st day of January, 1998 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred to as the "Company"), with its principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Wayne Garten whose address is 747 Iris Court, Yorktown Heights, New York 10598 (hereinafter referred to as "Employee"). WHEREAS, this Agreement is effective January 1, 1998 (the "Effective Date") and is an amendment and restatement of, and supersedes each provision of the employment agreement previously entered into for good and valuable consideration by Employee and Company on or about February 6, 1997; and WHEREAS, this Agreement shall represent the entire employment agreement between the parties with respect to the subject matter herein. NOW, THEREFORE, in consideration of the premises, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Company shall hereby continue to employ Employee, and Employee hereby accepts such continued employment, commencing on the Effective Date, on the terms and conditions set forth below. 2. DUTIES. During the Period of Employment (as hereinafter defined), the Company shall continue to employ Employee as Executive Vice President and Chief Financial Officer reporting to the President and Chief Executive Officer of the Company, to perform such duties as shall be required the Company's President and Chief Executive Officer, provided the same are consistent with those of an executive vice president and chief financial officer of a public company. The precise responsibilities of Employee may be revised from time to time provided the same do not materially affect Employee's position. In furtherance of the foregoing, Employee hereby agrees to perform his duties faithfully. During the Period of Employment and except for vacations in accordance herewith and absences due to temporary illness, Employee shall devote all of his available business time and energies during normal business hours to the business of the Company. 3. TERM. The term of Employee's continued employment by the Company shall commence as of the Effective Date and end as of the close of business on December 31, 2000 (the "Period of Employment"). 4. COMPENSATION. (A) BASE SALARY. For all services rendered by the Employee under this Agreement, the Company shall pay to him a minimum "Base Salary" at the rate of Three Hundred Twenty-Five Thousand Dollars ($325,000) per annum during the Period of Employment payable in at least equal monthly installments. The term "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. (B) ADJUSTMENTS TO BASE SALARY. Commencing January 1, 1999, the Base Salary to be paid to the Employee during each year shall be increased by any increase in the cost of living determined in accordance with the formula set forth in subparagraphs (i), (ii) and (iii) herein below. (i) For the purposes of this paragraph 4(B), the following definition shall apply: (a) The term "Base Year" shall mean the twelve month period commencing on January 1, 1998 and terminating on December 31, 1998. The term "Second Year" shall mean the twelve month period commencing on January 1, 1999 and terminating on December 31, 1999. The term "Third Year" shall mean the twelve month period commencing on January 1, 2000 and terminating on December 31, 2000. (b) The term "Price Index" shall mean the average of the monthly "Consumer Price Index" published by the Bureau of Labor Statistics of the U.S. Department of Labor, New York, Northern New Jersey, Long Island, New York-New Jersey-Connecticut, for urban wage earners and clerical workers, or a successor or substitute index appropriately adjusted ("Consumer Price Index"), for each month of any given twelve month period. (ii) Effective as of each of January 1 of 1999 and 2000, there shall be a cost of living adjustment to the Base Salary applicable for the succeeding twelve month period. The adjustment shall be based on the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 1999; and the Price Index for the Third Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 2000. In the event that the Price Index for the Second Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid shall be multiplied by the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, and the resulting sum shall be added to such original Base Salary, effective on January 1, 1999. Said adjusted Base Salary shall thereafter be payable hereunder until it is readjusted pursuant to the terms of this paragraph 4(B) as of January 1, 2000. In the event that the Price Index for the Third Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid (unchanged by any adjustment made pursuant to the immediately preceding sentence) shall be multiplied by the percentage difference between the Price Index for the Third Year, and the Price Index for the Base Year, and the resulting sums shall be added to such original Base Salary, effective on January 1, 2000. In the event that the Price Index ceases to use 1982-1984 = 100 as the basis of calculation, or if a substantial change is made in the terms or number of items contained in the Price Index, then the Price Index shall be adjusted to the figure that would have been arrived at had the manner of computing the Price Index in effect at the date of this Agreement not been altered. In the event such Price Index (or a successor or substitute index) is not available, a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the Price Index shall be used. (iii) In no event shall the Employee's Base Salary provided herein, as the same may be increased from time to time pursuant to this paragraph 4(B), be reduced by virtue of this paragraph 4(B). (C) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, with respect to the Period of Employment, the Employee shall be eligible to receive annual incentive compensation ("Incentive Compensation") as set forth below, which amount of Incentive Compensation shall not exceed One Hundred Percent (100%) of Base Salary in any one year. (i) Prior to January 1 of each year that this Agreement remains in effect, the Board of Directors and the Employee shall mutually agree upon and establish a plan (the "Incentive Plan") describing anticipated results of operations for the coming fiscal year and containing financial goals (hereinafter "Targets"). The Incentive Plan established for 1998 is attached hereto as EXHIBIT A. The Incentive Plan shall be determined in the sole discretion of the Board of Directors and the Employee and may vary from year to year. A copy of the Incentive Plan shall be provided to the Company's Certified Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs shall compare the actual results of operations for said year to the Incentive Plan. (ii) The Incentive Plan shall set forth a target bonus amount, One Hundred Percent (100%) of which shall be payable for accomplishing One Hundred Percent (100%) of Targets, which amount for calendar 1998 shall be One Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500), and for subsequent years shall be Fifty Percent (50%) of Base Salary for each year ending December 31 during the Period of Employment (hereinafter "Target Bonus Amount"). The Board of Directors may modify upward the Target Bonus Amount as part of the salary review process for years subsequent to 1998. The actual amount, if any, of Incentive Compensation to which the Employee may be entitled shall range on a linear basis from Fifty Percent (50%) of Target Bonus Amount if Eighty Percent (80%) of Targets are achieved to a maximum of Two Hundred Percent (200%) of Target Bonus Amount if One Hundred Twenty Percent (120%) of Targets are achieved. By way of example, if Base Salary is Three Hundred Twenty-Five Thousand Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall be Eighty One Thousand Two Hundred Fifty Dollars ($81,250) (I.E., .5 x $162,500), which shall be automatically due and payable to the Employee. By way of further example, if Base Salary is Three Hundred-Twenty Five Thousand Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Two Hundred Forty-Three Thousand Seven Hundred Fifty Dollars ($243,750) (I.E., 1.50 x $162,500), which shall be automatically due and payable to Employee. (iii) Incentive Compensation shall be paid to Employee in a lump sum cash payment as soon as practicable after the CPAs determine the amounts, if any, which are due the Employee. (D) SPECIAL GUARANTEED INCENTIVE COMPENSATION. In addition to Base Salary, the Company shall pay to the Employee a quarterly guaranteed draw against the Target Bonus Amount in the amount of Twelve Thousand Five Hundred Dollars ($12,500) per quarter ("Special Guaranteed Incentive Compensation"). Such amount shall be paid approximately fifteen (15) to thirty (30) days after the close of each quarter. (E) STOCK OPTIONS. (i) On February 26, 1998, the Company granted to the Employee options to purchase One Hundred Thousand (100,000) common shares at an exercise price of Thirteen and 59/100 Dollars ($13.59) per share, which options shall be "non-qualified" stock options. During the Period of Employment such options shall become cumulatively vested and exercisable at the rate of one-third (1/3) per year commencing on December 31, 1998 and one-third (1/3) on each of the next two anniversaries of such date. (ii) As an incentive to the Employee to remain in the employ of the Company and devote his best efforts to the affairs of the Company, in the sole discretion of the Board of Directors, the Employee shall receive each year, commencing in the year 2000, an option to purchase shares of common stock of the Company, the exact number, terms and option price of which shall be determined yearly by the Stock Option Committee of the Board of Directors. Such option shall not be granted in 1998 and 1999. (iii) The options set forth in this paragraph 4(E) shall be granted to the Employee pursuant to the Company's 1994 Stock Option Plan (the "Stock Option Plan") and the Employee shall be subject to the terms and conditions set forth therein. The options set forth in this paragraph 4(E) shall also be evidenced by the Employee executing and becoming a party to an option agreement between the Employee and the Company (the "Option Agreement"). Notwithstanding any of the foregoing, if there is any inconsistency between or among this Agreement, the Stock Option Plan and/or the Option Agreement, this Agreement, to the extent it is consistent with the restrictions provided in the last sentence of paragraph 12 of the Plan, shall govern as to all documents described in this subparagraph 4(E)(iii). (iv) Notwithstanding the foregoing, the options described in this paragraph 4(E) shall, under the following circumstances become vested and exercisable as follows: (I) upon a Change in Control (as defined in paragraph 11(D) herein), except as provided in subparagraph (v) below, all of Employee's unvested options shall become accelerated and immediately fully vested; and (II) upon termination of the Period of Employment by the Company without cause (as described in paragraph 11(A)) or upon termination of the Period of Employment by Employee for cause (as described in paragraph 11(C)), all of Employee's unvested options shall become accelerated and immediately fully vested, and exercisable, at any time prior to the expiration date of the options, as specified in the Stock Option Plan, or the expiration of twelve (12) months after the date of such termination, whichever is the longer period; PROVIDED, HOWEVER, that for purposes of this clause 4(E)(iv)(II), no options will become vested and exercisable subsequent to the expiration date of the options as specified in the Stock Option Plan. (v) If (I) a Change in Control involves any combination of the Company with any other entity, and (II) the Company and such entity desire to account for such combination under the pooling-of-interests method for financial statement purposes ("Pooling"), and (III) the sole reason that Pooling would be unavailable to the Company and such entity is, in the opinion of the Company's independent accountants, the acceleration of vesting of options provided for in subparagraph (iv)(I) above, then such subparagraph (iv)(I) shall be void. (F) ADDITIONAL COMPENSATION. During the Period of Employment, the Employee shall be eligible to receive any other payments of bonus, compensation or other amounts not specifically enumerated herein but which may be paid by the Company ("Additional Compensation"). 5. BUSINESS EXPENSES. During the Period of Employment, the Company agrees to reimburse Employee for reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder. Employee shall submit vouchers, invoices and such other documentation in accordance with the Company's general policy with respect thereto. 6. BENEFITS. During the Period of Employment, the Company will provide or, as necessary, reimburse Employee with or for the following benefits: (A) INSURANCE. Medical, dental, hospitalization and short-term disability coverage for himself and his dependents, to the extent provided generally to the senior executives of the Company. In addition, the Employee will receive term life insurance, insuring the life of the Employee, in the principal face amount of two (2) times the Employee's Base Salary. (B) VACATIONS. Employee shall be entitled to four (4) weeks paid vacation per year, the scheduling of which shall be in accordance with the general policies and practices of the Company with respect thereto. (C) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of Employment, the Employee shall be entitled (i) to participate in all employee benefit plans, programs, policies and arrangements sponsored, maintained or contributed to by the Company, subject to and in accordance with the terms and conditions of such plans, programs, policies and arrangements as they relate to similarly situated executive officers of the Company, and (ii) to receive all other benefits and perquisites provided or made available by the Company to its senior executive officers subject to and in accordance with the terms and conditions of such benefits and perquisites as they relate to similarly situated senior executive officers of the Company. 7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent Disability ("Permanent Disability" being defined as an illness which will prevent the Employee from performing his duties for a period of six (6) consecutive months or nine (9) out of any consecutive twelve (12) months) prior to the expiration of the Period of Employment, his employment shall be deemed to cease as of the end of the month of the date of his death or Permanent Disability and this Agreement shall terminate forthwith and all rights under it shall expire, except that Employee or Employee's estate shall be entitled to receive Base Salary for a period of six (6) months from the date of death or Permanent Disability plus the PRO RATA amount of Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation which would have been due the Employee pursuant to paragraph 4 hereinabove for the period January 1 of said year through the date of death or Permanent Disability. Said Base Salary shall be paid at the time it would regularly be paid. Said Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation shall be paid as soon as practicable after a determination of the amount due is made by the Company's CPAs. Additionally, any options eligible to vest within twelve (12) months of the date of death or Permanent Disability shall be deemed accelerated and fully vested as of the date of death or Permanent Disability subject to the further terms and conditions of the Stock Option Plan pursuant to which the same were granted. 8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company would be damaged if Employee's knowledge with respect to the business of the Company were disclosed to or utilized by parties other than the Company. Accordingly, Employee covenants and agrees that he will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by Employee and relates to such matters as customer mailing lists, pricing and credit techniques, marketing techniques, research and development activities, sources of product, lists of magazines or other publications containing advertising of the Company and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by the Employee from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. The provisions of this paragraph shall survive the termination of this Agreement. 9. COVENANT NOT TO COMPETE. The Employee hereby covenants and agrees that from the date hereof until twelve (12) months after the termination of the Period of Employment (the "Non-Compete Period") he shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); PROVIDED, HOWEVER, that the foregoing shall not prevent the Employee from (i) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if the Employee's services are restricted to employment in such other lines of business; (ii) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than Two Percent (2%) of any class or type of securities of, or interest in, such Competitive Business; or (iii) engaging in his profession as a certified public accountant; provided that while working as an accountant he does not directly provide accounting services or advice to a Competitive Business. The term "Competitive Business" shall mean and include any business or activity that is substantially the same as any business or activity then conducted by the Company, regardless of where such Competitive Business is located. 10. COVENANT NOT TO SOLICIT. Unless the Employee has obtained the prior written consent of the Company, he hereby covenants and agrees that, from the date hereof until the expiration of the Non-Compete Period, he shall not, for or on behalf of a Competitive Business, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent creditor, or otherwise, attempt to solicit or in any other way disturb or service any person, firm or corporation that has been a customer account of the Company at any time or times during the Period of Employment or during the Non-Compete Period, whether or not he at any time had any direct or indirect account responsibility for, or contact with, such customer account. 11. TERMINATION. In addition to termination for death or Permanent Disability pursuant to paragraph 7, the employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: (A) TERMINATION UPON PRIOR NOTICE. The Company may terminate this Agreement by giving the Employee ninety (90) days prior written notice. (B) EMPLOYEE TERMINATION FOR CAUSE. At the election of the Company, it may immediately upon written notice by the Company to the Employee terminate the Employee for cause. For the purposes of this paragraph, cause for termination shall be deemed to exist upon (i) a good faith finding by the Company of a willful failure or refusal of the Employee to perform assigned duties for the Company of which he has knowledge, or the commission of any other willful or grossly negligent action by Employee with the intent to injure the Company; (ii) any material breach of any material provision of this Agreement by the Employee if the Employee fails to correct such breach (or to take substantial steps to correct such breach) within ten (10) days after receiving written notice thereof; or (iii) the conviction of the Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by the Employee to, a crime involving an act of fraud or embezzlement against the Company or the conviction of the Employee of, or the entry of a plea of guilty or NOLO CONTENDERE by the Employee to, any felony involving moral turpitude. Notwithstanding the foregoing, the Company shall not terminate the Employee for cause pursuant to this paragraph unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of the Board of Directors at a meeting called and held after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors, finding that in the good faith opinion of the Board of Directors the Employee is guilty of conduct set forth in subparagraphs (i) and (ii) of this paragraph and specifying the particulars thereof in reasonable detail. (C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of the Employee, he may terminate the Period of Employment for cause immediately upon written notice by Employee to the Company. For purposes of this paragraph, cause for termination shall be deemed to exist upon (i) a material failure by the Company to continue the Employee's participation in any bonus, compensation or other benefit plan in which the Employee is entitled to participate pursuant hereto or the taking by the Company of any action which would directly or indirectly materially reduce his participation therein; or (ii) a material breach of any provision of this Agreement by the Company, or any breach of any provision of this Agreement by the Company, whether or not material, if such breach is not corrected (or substantial steps have not been taken to correct such breach) within thirty (30) days after the Board of Directors received written notice thereof. (D) TERMINATION FOLLOWING A CHANGE IN CONTROL. For purposes of this Agreement, Change in Control means the occurrence during the Period of Employment of any of the following events, subject to the provisions of paragraph (11)(D)(vii) hereof: (i) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than Fifty-One Percent (51%) of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) The Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon the conclusion of the transaction the Company is not the surviving corporation or entity; or (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act (a "Beneficial Owner")) of securities representing Twenty Percent (20%) or more of the combined voting power of the then-outstanding voting securities of the Company; or (iv) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) The individuals who, at the beginning of any period of two (2) consecutive calendar years, constituted the Directors of the Company cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new Director of the Company was approved by a vote of at least two-thirds (2/3) of the Directors of the Company still in office who were Directors of the Company at the beginning of any such period; or (vi) The Board of Directors determines that (I) any particular actual or proposed merger, consolidation, reorganization, sale or transfer of assets, accumulation of shares or tender offer for shares of the Company or other transaction or event or series of transactions or events will, or is likely to, if carried out, result in a Change in Control falling within paragraph 11(D)(i), (ii), (iii), (iv) or (v), and (II) it is in the best interests of the Company and its shareholders, and will serve the intended purposes of this Agreement, if this Agreement shall thereupon become immediately operative with respect to the provisions of this paragraph 11(D) regarding Change in Control. (vii) Notwithstanding the foregoing provisions of this paragraph (11)(D): (I) If any such merger, consolidation, reorganization, sale or transfer of assets, or tender offer or other transaction or event or series of transactions or events mentioned in paragraph (11)(D)(vi) shall be abandoned, or any such accumulations of shares shall be dispersed or otherwise resolved, the Board of Directors may, by notice to the Employee, nullify the effect thereof and reinstate this Agreement as previously in effect, but without prejudice to any action that may have been taken prior to such nullification. (II) Unless otherwise determined in a specific case by the Board of Directors, a "Change in Control" shall not be deemed to have occurred for purposes of paragraph (11)(D)(iii) or (iv) solely because (X) the Company, (Y) a subsidiary of the Company, or (Z) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing Beneficial Ownership by it of shares of the then-outstanding voting securities of the Company, whether in excess of Twenty Percent (20%) or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. Notwithstanding anything contained in this Agreement to the contrary, in the event of a Change in Control, (I) the Employee may terminate employment with the Company for any reason, or without reason, at any time following the date six months after the first occurrence of a Change in Control, and (II) the Employee may terminate employment with the Company during the Period of Employment if the Company relocates its principal executive offices, or requires the Employee to have his principal location of work changed, to any location that is in excess of 35 miles from the location thereof immediately prior to the Change in Control, in each case with the right to receive the benefits described in paragraph 11(E)(iii) below. (E) EFFECT OF TERMINATION. (i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF THE EMPLOYEE WITHOUT CAUSE. In the event that the Employee's employment is terminated by the Company for cause pursuant to paragraph 11(B)(i) or (ii) or the Employee elects to terminate his employment without cause, the Company shall pay to the Employee the Base Salary, Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation due, if any, under paragraph 4, on a PRO RATA basis to the date of termination at the time such Base Salary, Incentive Compensation, Special Guaranteed Incentive Compensation or Additional Compensation would regularly be paid and benefits otherwise payable to him hereunder all through the last day of his actual employment by the Company. Upon termination under this paragraph 11(E), the Employee will thereupon no longer be entitled to any compensation or benefits provided herein, and nothing herein shall limit the Company's right against the employee or the rights and obligations of the parties under paragraphs 8, 9, and 10 hereof. (ii) TERMINATION AT THE ELECTION OF THE COMPANY WITHOUT CAUSE OR AT THE ELECTION OF THE EMPLOYEE FOR CAUSE. In the event that the Employee's employment is terminated without cause by the Company pursuant to paragraph 11(A) prior to a Change in Control or with cause by the Employee pursuant to paragraph 11(C), then, following the occurrence of such event, the Company shall pay to the Employee (I) the Base Salary and Special Guaranteed Incentive Compensation due, if any, through the Period of Employment, and (II) the Incentive Compensation and Additional Compensation due, if any, under paragraph 4 hereof; PROVIDED, HOWEVER, that any such Incentive Compensation or Additional Compensation shall be paid on a PRO RATA basis to the date of termination. In addition, Employee will continue to receive the benefits provided under paragraph 6 hereof, including payment of accrued but unused vacation benefits. During said period, the Employee shall continue to be bound by the provisions of paragraphs 8, 9 and 10 hereof. (iii) TERMINATION FOLLOWING A CHANGE IN CONTROL. In the event that a Change in Control occurs during the Period of Employment and Employee's employment is terminated in the manner described in paragraph 11(A) or paragraph 11(D), the Company shall pay to the Employee a lump sum cash payment in an amount equal to one (1) times his then current Base Salary, plus one (1) times the average of the sum of the Incentive Compensation, Special Guaranteed Incentive Compensation and Additional Compensation he received under paragraph 4 for the three (3) years immediately preceding such Change in Control. In addition, Employee will continue to receive the benefits provided under paragraph 6 hereof through the Period of Employment. 12. NO MITIGATION OBLIGATION. (A) Employee shall be under no obligation to seek other employment opportunities during any period between termination of his employment following a Change in Control and the expiration of the Period of Employment (the "Interim Period"), and Employee shall not be obligated to accept any other employment opportunity which may be offered to Employee during the Interim Period; however, subject to the provisions of paragraph 9, and except as provided in the following sentence, nothing in this Agreement shall prohibit the Employee from accepting other employment opportunities during the Interim Period, in which event Employee shall receive the entire amount due and owing to him as described in paragraph 11(E)(iii) without set-off for any amount paid to Employee arising out of any new employment relationship. Benefits described in paragraph 6(A) and (B) will be reduced to the extent comparable welfare benefits are actually received by the Employee from another Company during the Interim Period and such benefits actually received by the Employee shall be reported by the Employee to the Company. (B) Employee's termination of his employment following a Change in Control and the receipt by Employee of any amount pursuant to paragraph 11(E)(iii) shall not preclude Employee's continued employment with the Company or the surviving entity in any Change in Control, on such terms as shall be negotiated between the Company (or such surviving entity) and the Employee following termination of this Agreement. 13. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (A) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on, or the vesting or exercisability of, any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (B) Subject to the provisions of paragraph 13(F), all determinations required to be made under this paragraph 13, including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Employee in his sole discretion. The Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Employee within thirty (30) calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is payable by the Employee, the Company shall pay the required Gross-Up Payment to the Employee within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employee. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall, at the same time as it makes such determination, furnish the Company and the Employee an opinion that the Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to paragraph 13(F) and the Employee thereafter is required to make a payment of any Excise Tax, the Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Employee within five (5) business days after receipt of such determination and calculations. (C) The Company and the Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by paragraph 13(B). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Employee. (D) The federal, state and local income or other tax returns filed by the Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Employee. The Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Employee shall within five (5) business days pay to the Company the amount of such reduction. (E) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by paragraph 13(B) shall be borne by the Company. If such fees and expenses are initially paid by the Employee, the Company shall reimburse the Employee the full amount of such fees and expenses within five (5) business days after receipt from the Employee of a statement therefor and reasonable evidence of his payment thereof. (F) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Employee actually receives notice of such claim and the Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Employee). The Employee shall not pay such claim prior to the earlier of (i) the expiration of the thirty (30) calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph 13(F), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this paragraph 13(F) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (PROVIDED, HOWEVER, that the Employee may participate therein at his own cost and expense) and may, at its option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (G) If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 13(F), the Employee receives any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 13(F)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 13(F), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this paragraph 13. 14. SUCCESSORS AND BINDING AGREEMENT. (A) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (B) This Agreement will inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (C) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in paragraphs 9(A) and 9(B). Without limiting the generality or effect of the foregoing, the Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this paragraph 9(C), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated. 15. SEVERABILITY. In the event that any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. 16. REPRESENTATION. Each party represents and warrants that it is fully authorized and empowered to enter into this Agreement and that performance of its obligations under this Agreement will not violate any agreement between it and any other person or entity. 17. NOTICES. All notices, elections, demands or other communications required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered properly given or made if sent by telecopier, Telex, courier service or certified mail, return receipt requested and addressed to the parties at the respective addresses specified below. Either party may change its address by giving notice in writing pursuant to this paragraph to the other of its new address. To the Company: Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 Attn.: Peter Godfrey To Employee: Mr. Wayne Garten 747 Iris Court Yorktown Heights, New York 10598 18. ARBITRATION. Any controversy, claim or breach (except those relating to monetary damages) arising out of or relating to this Agreement shall be submitted for settlement to an arbitrator agreed upon by the parties. The decision of such arbitrator shall be final and binding on the parties. If the parties cannot agree upon an arbitrator, the controversy, claim or breach shall be referred to the American Arbitration Association with a request that an arbitrator be appointed pursuant to the rules of said Association. Such arbitration shall be held in New Haven, Connecticut, in accordance with the rules and practices of the American Arbitration Association pertaining to single-party arbitration then in effect, and the judgment upon the award rendered shall be entered by consent in any court having jurisdiction thereof. 19. ENTIRE AGREEMENT. This Agreement constitutes the full and complete understanding and agreement of the parties. Neither party has relied upon any representation of the other not set forth herein. This Agreement may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. This Agreement supersedes all prior agreements between the parties hereto with respect to its subject matter and notwithstanding any provision hereof, will become effective upon the execution of this Agreement by the parties. 20. BINDING EFFECT. This Agreement shall be binding upon and accrue to the benefit of the parties hereto, their heirs, executors, administrators and successors. 21. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to its principles with respect to conflicts of law. 22. COUNSEL FEES. (A) Except as set forth herein the parties hereto shall bear their own fees, costs and expenses incurred in connection with this Agreement. If either party is required to bring suit or otherwise seek enforcement of its or his rights in connection with the same, the prevailing party in such action or proceeding shall be entitled to recover counsel fees incurred in such action or proceeding. The Employee shall be reimbursed in an amount not to exceed Two Thousand Dollars ($2,000) for legal fees and costs incurred in connection with the review of this Agreement by his own counsel. (B) Notwithstanding subparagraph (A), in the event of a Change in Control, it is the intent of the Company that the Employee not be required to incur fees and related expenses for the retention of attorneys, accountants, actuaries, consultants, and/or other professionals ("professionals") in connection with the interpretation, enforcement or defense of Employee's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder. Accordingly, if it should appear to the Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Employee the benefits provided or intended to be provided to the Employee hereunder, the Company irrevocably authorizes the Employee from time to time to retain one or more professionals of the Employee's choice, at the expense of the Company as hereafter provided, to advise and represent the Employee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior relationship between the Company and such professional, the Company irrevocably consents to the Employee's entering into a relationship with any such professional, and in that connection the Company and the Employee agree that a confidential relationship shall exist between the Employee and any such professional. Without respect to whether the Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable fees and related expenses incurred by the Employee in connection with any of the foregoing. 23. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the day and year first above written. COMPANY: MICRO WAREHOUSE, INC. By: /s/ Peter Godfrey ------------------------------------- Peter Godfrey President and Chief Executive Officer EMPLOYEE: By: /s/ Wayne Garten ------------------------------------- Wayne Garten EXHIBIT A INCENTIVE PLAN FOR THE YEAR 1998 The Targets with respect to the 1998 Incentive Plan shall be based upon the projected operating profit for the Company as described in the Company's 1998 Worldwide Plan dated March 13, 1998 (the "Plan"). The Plan includes a separate projected operating profit for all U.S. operations and a separate projected operating profit for the consolidated international operations. In determining the Target Bonus amount, if any, 80% of said amount shall be attributable to and based upon the Plan's projected operating profit for all U.S. operations and 20% shall be attributable to and based upon the Plan's projected operating profit for the consolidated international operations. With respect to said 20%, the Target shall also be considered achieved in full if: (i) all or a material number of the international subsidiaries are sold or otherwise disposed of during 1998; or (ii) the international subsidiaries on a consolidated basis have an operating profit for the year ending December 31, 1998. EX-10.28 11 RESIGNATION AGREEMENT EXHIBIT 10.28 December 16, 1998 BY TELECOPY - ----------- Mr. Peter Cannone 5 Seaman Drive Freehold, New Jersey 07728 Dear Peter: This agreement will serve to confirm the terms and conditions under which we will accept your resignation as Senior Vice President, Sales. 1. RESIGNATIONS. Effective December 31, 1998 (hereinafter the "Resignation Date") you will resign from employment as Senior Vice President, Sales and any other officerships or directorships of Micro Warehouse, Inc. or any of its affiliates, sister companies or subsidiaries (hereinafter "the Company"). 2. EMPLOYMENT AGREEMENT; PAYMENTS HEREUNDER. (a) Any prior employment agreement with the Company, whether written or oral and including specifically the letter agreement between you and the Company dated October 6, 1997, is terminated as of the Resignation Date. (b) You shall be entitled to receive your current bi-weekly base salary of $7,692.31 (after deducting all required withholding and other amounts) until June 30, 1999. You shall also be eligible to receive the following incentive compensation: (i) the actual amount, if any, of your incentive bonus under the Micro Warehouse Officers and Directors Incentive Bonus Plan ($30,000 target), to be calculated prior to January 31, 1999 and paid on the date in 1999 that other eligible employees receive their 1998 bonus under such plan; and (ii) your quarterly bonus for the fourth quarter 1998 in the amount of $4,166, which will be paid in a lump sum within two weeks of your Resignation Date. (c) Within two weeks of the Resignation Date you will also receive a one time payment for your accrued and unused 1998 vacation time (after deducting all required withholding and other amounts). (d) Upon your request and subject to the receipt of appropriate documentation, the Company will reimburse you for your actual expenses incurred in relocation from New Jersey to Massachusetts, including the broker's fee and closing costs on your home, up to a maximum of $25,000. (e) You may retain the Company's laptop computer in your possession having the manufacturer, model and serial number described on the annex hereto, PROVIDED that you remove all copies of any "confidential or proprietary information" (as defined in Paragraph 9 below) from the hard drive of the computer and any disks in your possession and return the same to my attention within five (5) business days of the date hereof. 3. COBRA BENEFITS. The Company agrees to pay directly your COBRA payments required to maintain your and your family's current health insurance coverage through the Company until the earlier of June 30, 1999 or the first date you become eligible for participation in the medical benefits program of any subsequent employer (whether or not you elect coverage under such employer's plan). After that date, all additional available COBRA coverage will be at your expense. You acknowledge that the Company will have no obligation to pay directly or reimburse you for any COBRA payments due more than six (6) months subsequent to the Resignation Date. 4. STOCK OPTIONS. As of the Resignation Date 15,000 of the 60,000 options you hold shall be accelerated and deemed vested and the remainder shall be deemed cancelled. In all other respects, said options will continue to be subject to the terms and conditions of the agreement and or Stock Option Plan under which they were granted to you. All options retained by you pursuant to this agreement shall have an exercise price of $15.44 per share and must be exercised on or before September 30, 1999. You will not be eligible to receive any further stock options or otherwise participate in any deferred compensation programs notwithstanding the possibility that the Company might provide the same participation to other comparably compensated employees. 5. STOCK TRADING RESTRICTIONS. For the period from the date hereof until three business days after the public release of the Company's 1998 fourth quarter and full year earnings, you will continue to be subject to and abide by the Procedures Adopted by the Company to Prevent Insider Trading (incorporated in the Insider Trading Memorandum attached hereto as Exhibit A) and specifically will be prohibited from initiating a purchase or sale transaction in the Company's stock except in a "window period." 6. RELEASE. (a) As consideration for the Company to enter into this agreement and as consideration for the covenants contained herein, subject to the immediately following sentence, you irrevocably and unconditionally release, remit, acquit and forever discharge the Company, its officers, directors, shareholders, agents, employees, representatives, attorneys, parents, divisions, subsidiaries, affiliates, related companies or entities, successors and assigns and the officers, executives, directors, shareholders, agents and employees of any and all of the Company's parents, divisions, subsidiaries, affiliates, related companies or entities, successors or entities (separately or collectively, the "Released Parties"), jointly and individually, from any and all claims, charges, complaints, expenses and causes of action of any nature or kind whatsoever, known or unknown, which you, your heirs, successors or assigns have or may have against the Released Parties based upon, related to or arising out of your employment with the Company through the date hereof, including, but not limited to, claims, charges, complaints, liabilities, losses, obligations, demands, 2 damages, costs, expenses and causes of action relating to the terms, conditions, commencement, duration or termination of your employment, or claims of discrimination under any federal, state or local law, rule, regulation or common law, whether such claims are past or present, whether they arise from equity, common law or statute, and whether they arise from labor laws or discrimination laws, such as the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal Pay Act, as amended, the Americans with Disabilities Act, or any other federal, state or local law, rule or regulation. This release is intended to cover all possible relief, including, but not limited to, reinstatement, wages, back pay, front pay, vacation pay, bonuses or incentive compensation, supplemental or other retirement benefits, perquisites, compensatory damages, punitive damages, damages for pain or suffering, and attorneys' fees, provided, however, that nothing in this agreement will limit or otherwise affect any right you may have to indemnification under the Company's Articles of Incorporation, By Laws or any insurance policy in effect as of the termination of your employment with the Company. In addition, if the Company complies with its obligations hereunder, you agree you will not be entitled to any benefit from any claim or proceeding filed by you or on your behalf with any agency or court which is within the scope of this agreement or which goes to the validity of any provision of this agreement. (b) The releases under this Paragraph 6 are intended to cover all possible rights, obligations and liabilities, including any such rights, obligations or liabilities based upon, relating to or arising from any claim which goes to the validity of any provision of this agreement, other than a claim for any breach of this agreement. (c) You acknowledge that you have been given a period of at least 21 days to review and consider this agreement before signing it, and that you understand that you may use as much of the 21-day period as you wish prior to signing. You also acknowledge that you have obtained independent legal counsel in connection with reviewing this agreement. 7. COVENANT NOT TO COMPETE You hereby covenant and agree that from the date hereof until June 30, 1999 you shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); PROVIDED, HOWEVER, that the foregoing shall not prevent you from (a) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if your services are restricted to employment in such other lines of business; or (b) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any previously held ownership interests, less than two percent (2%) of any class or type of securities of, or interest in, such Business. The term "Competitive Business" shall mean and include any business or activity, wherever located, that engages in the sale or distribution of computers and computer-related products, regardless of the format or method of marketing or order-taking; provided, however, that a "Competitive 3 Business" shall not include wholesalers or distributors of computer products (i.e., entities that do not sell to end-users) or retail stores that specialize in computer products (E.G., CompUSA, Circuit City). 8. COVENANT NOT TO SOLICIT You hereby covenant and agree that, from the date hereof until the expiration of eighteen (18) months from the Resignation Date, you shall not, for or on behalf of any party, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent creditor or otherwise, attempt to solicit for employment any person who has been an employee of the Company at any time or times during your employment by Company. 9. CONFIDENTIAL INFORMATION. You acknowledge that the Company would be damaged if your knowledge with respect to the business of the Company was disclosed to or utilized by parties other than the Company. Accordingly, you covenant and agree that you will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by you and relates to such matters as budget and forecasts, customer mailing lists, data base management techniques, pricing and credit techniques, marketing techniques, research and development activities, sources of product, and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by you from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. 10. ASSIGNMENT. This agreement is not assignable, except that the Company may assign it to any successor of substantially all of the Company's business or assets. This agreement will be binding upon, and inure to the benefit of, the parties and their successors and assigns. Any payments due to you under this agreement shall be paid to your estate in the event that you should die before said payments are made. 11. PARTIAL INVALIDITY. If any provision of this agreement is held to be invalid, void or unenforceable, the remaining provisions shall continue in full force without being impaired or invalidated in any way. 12. GOVERNING LAW. This agreement will be governed by the laws of the State of Connecticut, without giving effect to the conflict of laws principles thereof. Both parties hereby agree to waive the right to a jury trial in the event there is any legal action arising out of the interpretation or enforcement of this Agreement. 13. ENTIRE AGREEMENT. This agreement reflects the complete agreement between the parties with respect to the subject matter hereof, and there are no written or oral understandings, promises 4 or agreements directly or indirectly related to this letter agreement or the subject matter hereof that are not incorporated herein. 14. REVOCATION PERIOD. For a period of seven (7) calendar days following your execution of this agreement, you may revoke this agreement. This agreement will not become effective or enforceable to release any claims or rights which you may have under the Age Discrimination in Employment Act until this revocation period has expired. This agreement also will not become effective or enforceable with respect to any obligations that the Company may have hereunder until this revocation period has expired. You acknowledge and agree that if the Company satisfies any obligations hereunder that otherwise would have arisen during this revocation period as soon as practicable after the revocation period has expired, such action will constitute timely satisfaction of such obligations hereunder. You also acknowledge and agree that the benefits to you of the covenants contained herein, including, but not limited to, payments hereunder, are provided to you in exchange for the promises in this agreement, are not normally available under Company policy or practice to employees whose employment is terminated and provide for the payments of amounts to which you would not otherwise be entitled. 15. CONFIDENTIALITY AND INTENT TO BE BOUND. The terms and conditions of this agreement are confidential and must not be disclosed to any person other than those who must perform tasks to effect the agreement. Notwithstanding the foregoing, the Company and you may disclose any term of this agreement, after prior written notice to the other party that disclosure is about to take place, (i) to any governing authority if disclosure is required to comply with applicable law; or (ii) to either party's attorneys, accountants, spouse or advisors with whom a fiduciary relationship has been established. Both parties have read this agreement, have had the opportunity to consult with counsel, fully understand the agreement's terms and conditions, and enter this agreement freely, voluntarily and intending to be legally bound hereby. 16. ENFORCEMENT OF AGREEMENT. You hereby acknowledge and agree that your obligations under Paragraphs 7, 8 and 9 are a material part of the consideration for this agreement and for the payments from the Company to you under Paragraph 2; that your failure to satisfy any of such obligations could cause irreparable harm to the Company and that the damages caused by such failure would be uncertain and difficult to measure. You further acknowledge and agree that the Company may seek injunctive relief to prevent your failure or further failure to satisfy any of such obligations, in addition to all other rights, remedies and claims that it may have under this agreement, at law or in equity. 17. NO WAIVER. No failure on the part of either party at any time to require the performance by the other party of any term hereof shall be taken or held to be a waiver of such term or in any way affect such party's right to enforce such term, and no waiver on the part of either party of any term hereof shall be taken or held to be a waiver of any other term hereof or the breach thereof. 5 If you agree to and accept the terms and conditions of this agreement, please sign both copies hereof in the space provided below, retain one copy for your records and return the other copy to the undersigned. Very truly yours, MICRO WAREHOUSE, INC. By: /s/ Bruce L. Lev ---------------------------------------- Name: Bruce L. Lev Title: Executive Vice President, Legal and Corporate Affairs and General Counsel YOU ACKNOWLEDGE THAT YOU HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND ARE KNOWINGLY AND VOLUNTARILY ENTERING INTO IT. PLEASE READ AND CONSIDER THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. /s/ Peter Cannone - ----------------------------------- Peter Cannone Date Signed: December 16, 1998 6 EX-11.1 12 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 MICRO WAREHOUSE, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED DECEMBER 31, (in thousands, except per share data)
1998 1997 1996 1995 1994 ------- -------- ------- -------- ------- Net income (loss) Income (loss) before extraordinary charge $30,178 ($36,681) $16,882 $35,244 $24,556 Extraordinary charge, net of taxes -- -- 1,584 -- -- Net income (loss) $30,178 ($36,681) $15,298 $35,244 $24,556 ======= ======== ======= ======== ======= Shares Weighted average common shares outstanding 34,803 34,475 34,310 32,940 29,847 Common equivalent shares 546 -- 483 665 713 Weighted average common shares and common Equivalent shares outstanding - Diluted 35,349 34,475 34,793 33,605 30,560 ======= ======== ======= ======== ======= Per share - Diluted Income (loss) before extraordinary charge $ 0.85 ($ 1.06) $ 0.49 $ 1.05 $ 0.80 Extraordinary charge, net of taxes -- -- 0.05 -- -- Net income (loss) $ 0.85 ($ 1.06) $ 0.44 $ 1.05 $ 0.80 ======= ======== ======= ======== =======
EX-16.1 13 LETTER FROM KPMG EXHIBIT 16.1 KPMG - ---- Stamford Square 3001 Summer Street Stamford, CT 06905 Securities and Exchange Commission Washington, DC 20549 March 19, 1999 Ladies and Gentlemen: We are the principal accountants for Micro Warehouse, Inc. and, under the date of February 16, 1999, we will report on the consolidated financial statements of Micro Warehouse, Inc. and subsidiaries as of and for the years ended December 31, 1998 and 1997. On March 19, 1999, we were informed that upon completion of the audit for the year ended December 31, 1998 we will not be reappointed as principal accountants for the year ended December 31, 1999. We have read Micro Warehouse's statements included under Item 4 of its Form 8-K dated March 25, 1999, and we agree with such statements, except that we are not in a position to agree or disagree with MicroWarehouse's statement that the change was recommended by the Audit Committee of the Board of Directors and approved by the full Board of Directors. Very truly yours, /s/ KPMG LLP EX-21.1 14 LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES The following is a list of subsidiaries of the Company as of March 31, 1999: NAME PLACE OF ORGANIZATION - -------------------------------------------------------------------------------- Subsidiaries of Micro Warehouse, Inc. (Delaware): - ------------------------------------------------- Micro Warehouse Inc. of New Jersey United States Micro Warehouse Inc. of Ohio United States SaveByNet.com, Inc. United States Micro Warehouse International, Inc. United States Micro Warehouse Canada Limited Canada Benton Sistemas SA de CV Mexico Micro Warehouse Australia Pty. Ltd. Australia Online Interactive Inc. United States Auto Register Inc. United States Micro Warehouse Switzerland AG Switzerland Innosoft SARL France Kelar SARL France Inmac Spa Italy Micro Warehouse Holding BV Netherlands Computer Resources International Svenska AB Sweden Subsidiaries of Micro Warehouse International Inc.: - --------------------------------------------------- Micro Warehouse Japan, KK Japan Subsidiaries of Micro Warehouse Holding BV: - ------------------------------------------- TD SA France Micro Warehouse SARL France Micro Warehouse BV Netherlands Inmac AB Sweden Micro Warehouse (Deutschland) GmbH Germany Micro Warehouse Ltd. United Kingdom Subsidiaries of Micro Warehouse Ltd.: - ------------------------------------- Inmac Ltd. United Kingdom Micro Warehouse (1996) Ltd. United Kingdom Subsidiaries of Micro Warehouse (1996) Ltd.: - -------------------------------------------- Technomatic Ltd. United Kingdom Subsidiaries of Inmac AB: - ------------------------- Micro Warehouse Sweden AB Sweden Subsidiaries of Micro Warehouse Sweden AB: - ------------------------------------------ MacKatalogen AB Sweden EX-23.1 15 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Micro Warehouse, Inc. We consent to incorporation by reference in the registration statements (Nos. 333-33945 and 333-47163) on Form S-8 and (Nos. 333-59561 and 333-71131) on Form S-3 if Micro Warehouse, Inc. and subsidiaries (the Company) of our reports dated February 16, 1999, related to the consolidated balance sheets of the Company as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, and the related schedule, which reports appear in the December 31, 1998 annual report on Form 10-K of the Company. KPMG LLP Stamford, Connecticut March 31, 1999 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 YEAR YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 128,035 58,051 32,234 60,520 20,817 20,022 216,487 217,475 203,687 10,943 13,339 10,876 129,852 170,543 201,119 580,115 533,004 494,828 36,950 32,416 29,712 57,297 48,727 39,482 666,530 619,344 607,842 267,987 270,555 223,298 0 0 376 0 0 0 0 0 0 354 346 343 398,189 348,443 383,825 666,530 619,344 607,842 2,220,018 2,125,698 1,916,244 2,220,018 2,125,698 1,916,244 1,860,083 1,773,722 1,573,798 1,860,083 1,773,722 1,573,798 293,407 305,903 277,192 0 0 0 432 1,769 2,209 61,578 (37,816) 36,601 31,400 (1,135) 19,719 30,178 (36,681) 16,882 0 0 0 0 0 1,584 0 0 0 30,178 (36,681) 15,298 0.87 (1.06) 0.45 0.85 (1.06) 0.44
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