<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
MICROAGE, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
MICROAGE, INC.
2400 SOUTH MICROAGE WAY
TEMPE, ARIZONA 85282-1896
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 13, 1996
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of MicroAge,
Inc., a Delaware corporation (the "Company"), will be held at the Fiesta Inn,
2100 South Priest Drive, Tempe, Arizona 85282, on Wednesday, March 13, 1996, at
4:00 p.m., Arizona time, for the following purposes:
1. Election of Directors:
- to elect two Class I Directors to serve until the 1999 Annual Meeting
of Stockholders or until their successors are elected and qualified;
- to elect one Class III Director to serve until the 1998 Annual Meeting
of Stockholders or until his successor is elected and qualified; and
2. to transact such other business as may properly come before the meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. The Company's Audited Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations are included in Appendix A to the Proxy Statement.
Only stockholders of record at the close of business on January 19, 1996
are entitled to notice of and to vote at the meeting. A complete list of the
stockholders entitled to vote at the meeting will be open for examination by any
stockholder, for any purposes germane to the meeting, at the offices of the
Company, at 2400 South MicroAge Way, Tempe, Arizona 85282-1896, during normal
business hours commencing March 1, 1996.
YOUR VOTE IS IMPORTANT!
By order of the Board of Directors,
ALAN P. HALD
Secretary
Tempe, Arizona
February 16, 1996
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS............................................. 1
PROXY STATEMENT...................................................................... 1
ELECTION OF DIRECTORS.............................................................. 1
SECURITY OWNERSHIP OF MANAGEMENT................................................... 3
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS................................. 3
PRINCIPAL STOCKHOLDERS............................................................. 5
EXECUTIVE COMPENSATION............................................................. 6
SUMMARY COMPENSATION TABLE...................................................... 6
OPTION/SAR GRANTS IN LAST FISCAL YEAR........................................... 7
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES.............................................................. 7
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PENSION BENEFITS......................... 8
EMPLOYMENT CONTRACTS AND RELATED MATTERS........................................ 8
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION.................. 9
STOCK PERFORMANCE GRAPH............................................................ 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................... 12
SECTION 16 REQUIREMENTS............................................................ 13
AUDITORS........................................................................... 13
STOCKHOLDER NOMINATIONS AND PROPOSALS.............................................. 13
OTHER INFORMATION.................................................................. 13
APPENDIX A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................... A-1
REPORT OF INDEPENDENT ACCOUNTANTS.................................................. A-5
CONSOLIDATED FINANCIAL STATEMENTS.................................................. A-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................................... A-10
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............. A-23
</TABLE>
i
<PAGE> 4
MICROAGE, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 13, 1996
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of MicroAge, Inc., a Delaware
corporation (the "Company"), for use at the Annual Meeting of Stockholders to be
held on Wednesday, March 13, 1996, at 4:00 p.m., Arizona time (the "1996 Annual
Meeting"), and at any adjournment or adjournments thereof. Only stockholders of
record at the close of business on January 19, 1996 (the "Record Date") will be
entitled to notice of and to vote at the meeting. On the Record Date, the
Company had outstanding 14,409,678 shares of Common Stock, par value $.01 per
share ("Common Stock"). There are no other voting securities outstanding.
Each stockholder is entitled to one vote per share for the election of
directors, as well as on all other matters that may be properly brought before
the meeting. If the accompanying proxy is signed and returned, the shares
represented thereby will be voted in accordance with any directions on the
proxy. If a proxy does not specify how the shares represented thereby are to be
voted in connection with the election of the director nominees, it is intended
that it will be voted for the director nominees named herein. A stockholder may
revoke the proxy at any time prior to the voting thereof by giving due notice of
such revocation to the Company, by executing and duly delivering a subsequent
proxy, or by attending the 1996 Annual Meeting and voting in person. This Proxy
Statement and the enclosed proxy are first being mailed to stockholders on or
about February 16, 1996.
The presence in person or by proxy of holders of a majority of the
outstanding shares of Common Stock entitled to vote will constitute a quorum for
the transaction of business at the 1996 Annual Meeting. If a quorum is present,
a plurality of the votes cast at the 1996 Annual Meeting is required for the
election of directors. Abstentions are counted as "shares present" for purposes
of determining the presence of a quorum and have the effect of a vote "against"
any matter as to which they are specified. Broker non-votes with respect to any
matter are not considered "shares present" and will not affect the outcome of
the vote on such matter.
In addition to the use of the mails, proxies may be solicited by directors,
officers, or regular associates (employees) of the Company in person, by
telegraph, telecopy, or telephone. The Company has retained Georgeson and
Company, Inc., to assist in the distribution of proxy solicitation materials and
in the solicitation of proxies for an anticipated fee of $5,000, plus
out-of-pocket expenses. The Company will pay all expenses of the solicitation.
As of the date of this Proxy Statement, the Company knows of no matters to
be brought before the meeting other than those referred to in the accompanying
notice of annual meeting. If, however, any other matters properly come before
the meeting, it is intended that proxies in the accompanying form will be voted
thereon in accordance with the judgment of the persons voting such proxies.
ELECTION OF DIRECTORS
The Company's Board of Directors consists of seven directors. The Company's
Restated Certificate of Incorporation provides for the division of the Board of
Directors into three classes: Class I, Class II, and Class III. Each director is
elected for three years and the terms are staggered so that only one class is
elected by the stockholders annually. At the 1996 Annual Meeting, (i) two Class
I directors will be elected to serve until the 1999 annual meeting of
stockholders or until their successors are duly elected and qualified and (ii)
one Class III director will be elected to serve until the 1998 annual meeting of
stockholders or until his successor is duly elected and qualified.
Effective January 18, 1996, the Board of Directors elected Ms. Lynda M.
Applegate and Mr. Roy A. Herberger, Jr., as a Class I director and a Class III
director, respectively. These elections followed the
1
<PAGE> 5
resignation on September 25, 1995 of Keiichi Eguchi as a Class I director and
the Board's subsequent determination to expand the number of Board members to
seven. It is the intention of those persons named in the accompanying form of
proxy or their substitutes to vote for the election of the nominees listed below
unless instructed to the contrary. However, if any nominee named herein at the
time of the election becomes unavailable to serve (which is not anticipated)
and, as a consequence, other nominees are designated, the persons named in the
proxy or their substitutes will have the discretion or authority to vote or
refrain from voting in accordance with their judgment with respect to the other
nominees.
NOMINEES
NOMINEES FOR ELECTION AS CLASS I DIRECTORS
(TERM TO EXPIRE AT 1999 ANNUAL MEETING)
WILLIAM H. MALLENDER, 60, was elected a director of the Company in 1987.
Since 1983, Mr. Mallender has served as Chairman of the Board of Directors and
Chief Executive Officer of Talley Industries, Inc., a publicly-held company that
designs, manufactures, and supplies aerospace, industrial, and commercial
products and services.
LYNDA M. APPLEGATE, 46, was elected a director of the Company effective
January 18, 1996. Since 1986, Ms. Applegate has served as a Professor at the
Harvard Business School.
NOMINEE FOR ELECTION AS CLASS III DIRECTOR
(TERM TO EXPIRE AT 1998 ANNUAL MEETING)
ROY A. HERBERGER, Jr., 53, was elected a director of the Company effective
January 18, 1996. Since 1989, Mr. Herberger has served as President of the
American Graduate School of International Management, "Thunderbird." Mr.
Herberger is also a director of Pinnacle West Capital Corporation, Bank of
America of Arizona, and Express America Holdings Corporation.
DIRECTORS CONTINUING IN OFFICE
CLASS II DIRECTORS
(TERM TO EXPIRE AT 1997 ANNUAL MEETING)
ALAN P. HALD, 49, has served as Vice-Chairman of the Board of the Company
since October 1991 and Secretary since February 1987. Along with Mr. McKeever,
he co-founded the Company in August 1976 and has served as a director of the
Company since October 1976. He also served as President from February 1993 to
August 1993 and October 1976 to February 1987, Chairman of the Board from
February 1987 to October 1991, and Treasurer from February 1983 to February
1987. Pursuant to his employment agreement, the Company has agreed to have the
Board of Directors nominate Mr. Hald for election to the Board of Directors of
the Company as long as he owns at least 80,000 shares of Common Stock. See
"Employment Contracts and Related Matters" for additional information regarding
Mr. Hald's employment agreement.
STEVEN G. MIHAYLO, 52, was elected a director of the Company in 1988. Since
1969, Mr. Mihaylo has served as Chief Executive Officer and since 1983 as
Chairman of the Board of Inter-Tel, Incorporated, a publicly-held company that
designs, manufactures, and services digital and analog telephone systems and
voice processing systems, and provides long distance services.
CLASS III DIRECTORS
(TERM TO EXPIRE AT 1998 ANNUAL MEETING)
JEFFREY D. MCKEEVER, 53, has served as Chief Executive Officer of the
Company since February 1987 and as Chairman of the Board since October 1991.
Along with Mr. Hald, he co-founded the Company in August 1976 and has served as
a director of the Company since October 1976. He also served as President from
January 1993 to February 1993 and February 1987 to October 1991, Chairman of the
Board and Secretary
2
<PAGE> 6
from October 1976 to February 1987, and Treasurer from October 1976 to February
1983 and from February 1987 to December 1988. Pursuant to his employment
agreement, the Company has agreed to have the Board of Directors nominate Mr.
McKeever for election to the Board of Directors of the Company as long as he
owns at least 80,000 shares of Common Stock. See "Employment Contracts and
Related Matters" for additional information regarding Mr. McKeever's employment
agreement.
FRED ISRAEL, 68, was elected a director of the Company in 1990. Until his
retirement on June 30, 1993, Mr. Israel was Managing Principal in the
Washington, D.C. law firm of Israel & Raley, Chartered. Mr. Israel is a member
of the board of directors of Talley Industries, Inc., a publicly-held company
that designs, manufactures, and supplies aerospace, industrial, and commercial
products and services. Mr. Israel is also a member of the Board of Regents of
Georgetown University, the International Board of Directors of Tel Aviv
University, the Board of Directors of Wheeling Jesuit College, and the Board of
Visitors of the School of Music, University of Maryland.
SECURITY OWNERSHIP OF MANAGEMENT
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
OF COMMON STOCK COMMON STOCK
NAME BENEFICIALLY OWNED(1) BENEFICIALLY OWNED
- - --------------------------------------------------------- --------------------- ------------------
<S> <C> <C>
Jeffrey D. McKeever
Chairman of the Board and Chief Executive Officer...... 537,262(2) 3.7%
Alan P. Hald
Vice-Chairman of the Board and Secretary............... 349,935 2.4%
William H. Mallender
Director............................................... 7,000 (3)
Steven G. Mihaylo
Director............................................... 7,500 (3)
Fred Israel
Director............................................... 130,999 (3)
Lynda M. Applegate
Director............................................... 0 (3)
Roy A. Herberger, Jr.
Director............................................... 0 (3)
Kenneth R. Waters*
President.............................................. 35,813 (3)
James R. Daniel
Senior Vice President, Chief Financial Officer and
Treasurer.............................................. 69,313 (3)
John H. Andrews
Vice President, Logistics.............................. 46,605 (3)
All executive officers and directors as a group (18
persons)............................................... 1,321,752 9.0%
</TABLE>
- - ---------------
* Mr. Waters left the Company effective January 31, 1996 due to a medical
condition. Mr. McKeever assumed Mr. Waters' responsibilities after Mr.
Waters underwent heart surgery in June 1995.
(1) Includes shares, if any, held by spouse; held in joint tenancy with spouse;
held by or for the benefit of the listed individual (or group member) or one
or more members of his immediate family; with respect to which the listed
individual (or group member) has or shares voting or investment powers
(including shares allocated to the listed individual's (or group member's)
account under the MicroAge, Inc. Retirement Savings and Employee Stock
Ownership Plan and Trust); subject to stock options that were exercisable on
December 31, 1995 or within 60 days thereafter, or in which the listed
individual (or group member) otherwise has a beneficial interest. At
December 31, 1995, all directors and executive officers as a group owned
beneficially an aggregate of 1,321,752 shares (9.0%) of which 340,825
shares, including 96,500 shares for Mr. McKeever, 38,500 shares for Mr.
Hald, 3,000 shares each for Messrs. Mallender, Mihaylo, and Israel, 35,000
shares for Mr. Waters, 51,000 shares for Mr. Daniel, and 39,250 shares for
3
<PAGE> 7
Mr. Andrews are subject to stock options granted by the Company that were
exercisable on December 31, 1995 or within 60 days thereafter.
(2) Mr. McKeever disclaims beneficial ownership in 8,750 of these shares held by
family members.
(3) Common Stock beneficially owned does not exceed one percent of the
outstanding Common Stock at December 31, 1995.
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS
Board of Directors' Meetings, Audit and Compensation Committees. The
Company's Board of Directors met in person or acted by written consent eight
times during the fiscal year ended October 29, 1995 ("fiscal year 1995"). The
Board of Directors maintains a standing Audit Committee and Compensation
Committee; it does not have a standing nominating committee or other committee
performing similar functions. Directors who are not officers or associates
(employees) of the Company receive a $15,000 annual retainer fee and $1,500 for
attendance at regular Board meetings; $1,000 for attendance at special Board
meetings; and $1,000 for attendance at meetings of committees of which they are
members. Mr. Israel and Ms. Applegate are reimbursed for reasonable travel
expenses incurred to attend meetings of the Board or committees of which each is
a member held in the metropolitan Phoenix area. All directors attending any
meeting of the Board or its committees held outside the metropolitan Phoenix
area are reimbursed for reasonable travel expenses incurred in the continental
United States of America.
The Audit Committee is responsible for appointing the Company's independent
accountants and for reviewing and evaluating the Company's accounting principles
and its system of internal accounting controls. The Audit Committee met two
times during fiscal year 1995, and consisted of Messrs. Mallender (Chairman),
Mihaylo, and Israel. Mr. Herberger was elected to the Audit Committee effective
January 18, 1996.
The Compensation Committee acts on matters relating to the compensation of
senior management and key associates (employees) of the Company, including the
granting of stock options and the approval of employment agreements. The
Compensation Committee met in person or acted by written consent seven times
during fiscal year 1995, and consisted of Messrs. Mihaylo (Chairman), Mallender,
and Israel. Ms. Applegate was elected to the Compensation Committee effective
January 18, 1996.
1995 Director Incentive Plan. Under the Company's 1995 Director Incentive
Plan (the "Director Plan"), on November 1 of each year, beginning in 1995 and
ending in 2004, each person serving as a director of the Company who is not also
an associate (employee) of the Company is automatically granted (i) 1,000 shares
of Common Stock, subject to certain restrictions as described below ("Director
Restricted Stock"), and (ii) options to purchase 1,000 shares of Common Stock
("Director Options"). Messrs. Mihaylo, Mallender, and Israel were each granted
1,000 shares of Director Restricted Stock and 1,000 Director Options on November
1, 1995.
The restrictions on the Director Restricted Stock will lapse on the later
of (i) the date the director owns (for one year) shares of Common Stock, but the
restrictions will lapse on one share of Director Restricted Stock for each two
shares of unrestricted stock the director owns; and (ii) the date the shares of
Director Restricted Stock "vest." The Director Restricted Stock has two vesting
hurdles. First, the Director Restricted Stock vests in one-third increments over
the three years following the date of grant. Second, the Director Restricted
Stock vests in one-third increments following the date of grant only if the
Common Stock trades above certain specified prices after the first vesting
hurdle occurs. In the case of the Director Restricted Stock granted on November
1, 1995, the Common Stock must trade at or above (i) $9.22 on or after November
1, 1996; (ii) $10.14 on or after November 1, 1997; and (iii) $11.15 on or after
November 1, 1998.
The exercise price of the Director Options is the fair market value of the
Common Stock on the relevant grant date (i.e., each November 1). Each Director
Option has two vesting hurdles. First, the Director Options vest in one-third
increments over the three-year period following the date of grant. Second, the
Director Options vest in one-third increments over the three years following the
date of grant only if the Common Stock trades at or above certain specified
prices after the first vesting hurdle occurs. In the case of the Director
4
<PAGE> 8
Options granted on November 1, 1995, the Common Stock must trade at or above (i)
$9.22 on or after November 1, 1996; (ii) $10.14 on or after November 1, 1997;
and (iii) $11.15 on or after November 1, 1998.
Voting Agreement. On April 27, 1990, Mr. Fred Israel entered into an
agreement with the Company pursuant to which Mr. Israel agreed that, during the
period described in such agreement, in circumstances in which he, or his
Purchaser Affiliates (as such term is defined in the agreement), does not or do
not vote all shares of the Voting Securities (as defined in such agreement and
which includes the Common Stock) beneficially owned by him in favor of the
position on any matter adopted by the majority of the Board of Directors, he
will vote such shares in the same manner and in the same proportion as are voted
by the other stockholders of the Company on such matter. At December 31, 1995,
Mr. Israel beneficially owned approximately 0.9% of the outstanding shares of
Common Stock. See "Security Ownership of Management" and "Certain Relationships
and Related Transactions."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock by each person who is known to the Company
to own beneficially more than 5% of the outstanding Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK BENEFICIALLY PERCENTAGE OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) STOCK BENEFICIALLY OWNED
--------------------------------------- -------------------------- ------------------------
<S> <C> <C>
FMR Corp............................... 1,810,750(2) 12.6%
82 Devonshire Street
Boston, Massachusetts 02109
Pioneering Management Corporation...... 1,430,000(3) 10.0%
60 State Street
Boston, Massachusetts 02109
</TABLE>
- - ---------------
(1) The beneficial ownership information regarding: (i) FMR Corp. ("FMR"), is as
of December 31, 1994; and (ii) Pioneering Management Corporation is as of
December 13, 1995. For certain additional information with respect to
beneficial ownership of the Common Stock, see "Security Ownership of
Management," "Executive Compensation," and "Certain Relationships and
Related Transactions." Percentages are based on the number of shares of
Common Stock outstanding on December 31, 1995.
(2) FMR Corp. is the parent company of the following investment companies
beneficially owning Common Stock: (i) Fidelity Management & Research Company
beneficially owned 1,388,000 shares while serving as investment adviser to
various investment companies registered under Section 8 of the Investment
Company Act of 1940; (ii) Fidelity Management Trust Company beneficially
owned 347,200 shares while serving as trustee or managing agent for various
private investment accounts; and (iii) Fidelity International Limited
beneficially owned 15,000 shares while serving as investment adviser to
various non-U.S. investment companies. FMR has sole voting power with regard
to 328,600 shares and sole dispositive power with regard to 1,810,750
shares; and Fidelity International Limited has sole voting and dispositive
power with regard to its 15,000 shares. FMR provided the Company with the
information contained in this footnote. Accordingly, the Company makes no
representation as to the accuracy or completeness of the information
provided.
(3) Pioneering Management Corporation ("PMC") is an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940. PMC has
sole power to vote or to direct the vote with regard to all 1,430,000 shares
and sole dispositive power with regard to 100,000 shares, and shared power
to dispose or to direct disposition of 1,330,000 shares. PMC provided the
Company with the information contained in this footnote. Accordingly, the
Company makes no representation as to the accuracy or completeness of the
information provided.
5
<PAGE> 9
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation awarded to or paid by the Company and its subsidiaries to
the chief executive officer and the four most highly compensated executive
officers of the Company for services rendered during the fiscal years ended
September 30, 1993, October 30, 1994, and October 29, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------------ -------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK UNDERLYING PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) AWARD(S)($) OPTIONS/SARS(3) ($) ($)(4)
- - -------------------------- ---- -------- -------- ------------ ------------ --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever....... 1995 $462,500 $606,315(2) 0 0 0 0 $122,973
Chairman of the 1994 $500,000 $128,313 0 0 321,611 0 $ 75,170
Board of Directors 1993 $400,000 $311,851 0 0 30,000 0 $ 78,635
and Chief Executive
Officer
Alan P. Hald.............. 1995 $282,500 $586,831(2) 0 0 0 0 $ 44,814
Vice-Chairman of the 1994 $240,000 $ 65,509 0 0 165,628 0 $ 40,718
Board of Directors and 1993 $225,000 $ 59,237 0 0 15,000 0 $ 41,578
Secretary
Kenneth R. Waters......... 1995 $329,167 $ 6,634 0 0 25,000 0 $ 7,717
President 1994 $275,000 $ 61,739 0 0 195,805 0 $ 4,975
1993 $ 20,000 $ 1,828 0 0 0 0 $ 0
James R. Daniel........... 1995 $304,167 $ 16,738 0 0 0 0 $ 21,932
Senior Vice President, 1994 $260,000 $ 63,754 0 0 164,698 0 $ 2,252
Chief Financial Officer, 1993 $174,615 $ 65,248 0 0 45,000 0 $ 2,185
and Treasurer
John H. Andrews........... 1995 $166,667 $ 0 0 0 0 0 $ 14,312
Vice President,
Logistics 1994 $165,000 $ 61,568 0 0 74,228 0 $ 2,553
1993 $150,000 $100,546 0 0 11,250 0 $ 2,322
</TABLE>
- - ---------------
(1) See footnote 3 below for a discussion of the MicroAge, Inc. 1994 Management
Equity Program (the "MEP"), under which each of the named individuals was
eligible to receive option grants by reducing his compensation.
(2) Includes a one-time Warrant Restitution and Founder's Bonus in the amount of
$569,194 paid to each of Mr. McKeever and Mr. Hald prior to the March 29,
1995 expiration of warrants held by each of them. The Company issued these
warrants to Messrs. McKeever and Hald in 1985, and the warrants were
originally to have expired on March 29, 2005. As a condition to the Company
effecting its initial public offering in 1987, state regulatory authorities
required the expiration date of the warrants to be reduced by ten years to
March 29, 1995. In recognition of (i) the substantial economic benefits that
Messrs. McKeever and Hald were required to forego as a result of the
reduction of the exercise period of the warrants, (ii) the substantial
personal investments that Messrs. McKeever and Hald have made in the Company
through Common Stock purchases and on-going commitments to purchase Common
Stock under the MEP, and (iii) the record financial results achieved by the
Company in fiscal year 1993 and fiscal year 1994, the Compensation Committee
approved the payment of the Warrant Restitution and Founder's Bonuses in the
indicated amounts. The Warrant Restitution and Founder's Bonuses were used
to reimburse Messrs. McKeever and Hald for the warrant exercise price and
their personal tax obligations resulting from the warrant exercise and bonus
payment. The breakdown of each Warrant Restitution and Founder's Bonus is as
follows: warrant exercise price ($208,709); and tax obligations ($360,485).
The balance of the bonus amounts paid to Mr. McKeever ($37,121) and to Mr.
Hald ($17,637) and disclosed in the above table represents annual fixed cash
bonuses payable under their respective employment agreements.
(3) The 1994 totals include options granted to each named individual under the
MEP as a result of his election to restructure his compensation package by
reducing his fiscal year 1993, 1994, 1995, and 1996 compensation. The total
number of MEP options granted to each of the named individuals during fiscal
year 1994 and the expected MEP compensation reduction during the 1993-1996
fiscal years for each of the named individuals (other than Mr. Waters) is as
follows: Mr. McKeever (241,611; $600,000); Mr. Hald (125,638; $312,000); Mr.
Daniel (104,698; $260,000); and Mr. Andrews (34,228; $85,000). During the
1993, 1994, and 1995 fiscal years, the MEP compensation reductions for each
of the named
6
<PAGE> 10
individuals were as follows: Mr. McKeever (1993: $75,000 bonus reduction;
1994: $125,000 bonus reduction; 1995: $62,500 salary reduction); Mr. Hald
(1993: $104,000 bonus reduction; 1994: $20,000 salary reduction and $65,000
bonus reduction; 1995: $32,500 salary reduction); Mr. Waters (1994: $25,000
salary reduction and $75,000 bonus reduction; 1995: $20,833 salary
reduction); Mr. Daniel (1993: $104,000 bonus reduction; 1994: $65,000 bonus
reduction; 1995: $10,833 salary reduction); and Mr. Andrews (1993: $33,000
bonus reduction; 1994: $20,000 bonus reduction; 1995: $8,333 salary
reduction). No SARs were granted during fiscal year 1995. Mr. Waters left
the Company effective January 31, 1996 due to a medical condition. Pursuant
to his MEP Award Agreement, Mr. Waters is entitled to exercise 51,175 MEP
options at an exercise price of $8.75 per share on or before January 31,
1997.
(4) The 1995 amounts include, as to each named individual, the following amounts
for the indicated purposes: Mr. McKeever (life insurance premiums: $120,723
and the Company's contribution to the Amended and Restated MicroAge, Inc.
Retirement Savings and Employee Stock Ownership Plan and Trust (the "401(k)
Plan"): $2,250); Mr. Hald (life insurance premiums: $42,496 and 401(k) Plan
contribution: $2,318); Mr. Waters (life insurance premiums: $5,415 and
401(k) Plan contribution: $2,302); Mr. Daniel (life insurance premiums:
$19,053 and 401(k) Plan contribution: $2,879); and Mr. Andrews (life
insurance premiums: $11,933 and 401(k) Plan contribution: $2,379).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning grants of stock
options to the named executive officers of the Company during the fiscal year
ended October 29, 1995:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
--------------------------------------------------- REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATE OF
NUMBER OF OPTIONS/SARS STOCK
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING ASSOCIATES PRICE OPTION TERM
OPTIONS/SARS IN (PER EXPIRATION ------------------
NAME GRANTED FISCAL YEAR SHARE) DATE 5% 10%
- - --------------------------------- ------------ ------------ -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever.............. 0 0 0 0 0 0
Alan P. Hald..................... 0 0 0 0 0 0
Kenneth R. Waters................ 25,000 15.4% $10.88 1/31/97 $75,149 $166,059
James R. Daniel.................. 0 0 0 0 0 0
John H. Andrews.................. 0 0 0 0 0 0
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information concerning option exercises by
the named executive officers of the Company during the fiscal year ended October
29, 1995 and the value of such officers' unexercised options at October 29,
1995. There were no outstanding SARs as of October 29, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever.......... 63,000 $366,525 96,500 307,611 $ 154,943 $42,270
Alan P. Hald................. 62,979 $329,921 46,000 157,138 $ 72,120 $16,943
Kenneth R. Waters............ 0 $ 0 35,000 185,805 $ 0 $ 0
James R. Daniel.............. 0 $ 0 51,000 158,698 $ 52,785 $35,190
John H. Andrews.............. 450 $ 2,869 39,250 65,728 $ 57,806 $17,948
</TABLE>
7
<PAGE> 11
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PENSION BENEFITS
<TABLE>
<CAPTION>
PENSION TABLE YEARS OF SERVICE
------------------------------------------------------------
FINAL AVERAGE PAY 5 10 15 20 25
- - ---------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000.......................... $ 26,401 $ 52,801 $ 79,210 $ 79,210 $ 79,210
$150,000.......................... $ 32,611 $ 65,223 $ 97,844 $ 97,844 $ 97,844
$175,000.......................... $ 38,861 $ 77,722 $116,594 $116,594 $116,594
$200,000.......................... $ 45,110 $ 90,220 $135,344 $135,344 $135,344
$225,000.......................... $ 51,360 $102,719 $154,094 $154,094 $154,094
$250,000.......................... $ 57,609 $115,218 $172,844 $172,844 $172,844
$300,000.......................... $ 70,108 $140,215 $210,344 $210,344 $210,344
$350,000.......................... $ 82,606 $165,213 $247,844 $247,844 $247,844
$400,000.......................... $ 95,105 $190,210 $285,344 $285,344 $285,344
$450,000.......................... $107,604 $215,208 $322,844 $322,844 $322,844
$500,000.......................... $120,103 $240,205 $360,344 $360,344 $360,344
</TABLE>
The Company maintains a non-qualified deferred compensation plan for
certain executives who have attained age 50 and completed 10 years of service
with the Company (the "Supplemental Executive Retirement Plan" or "SERP"). Under
the SERP, retirement income commencing at age 65 equals 75% of
final-five-year-average compensation (defined as "wages" under Internal Revenue
Code (the "Code") Section 3401(a)), reduced by Social Security and the employer
portion (annuitized) of the 401(k) Plan, and pro rated for "Benefit Accrual
Service" (service after age 50) under 15 years. The table above shows estimated
annual income on a life-annuity basis, although the SERP's normal form provides
for payment of the actuarially-equivalent lump sum of this amount. Mr. McKeever
is currently the only participant in the SERP. Mr. McKeever has three years of
Benefit Accrual Service and is expected to have 15 years of Benefit Accrual
Service at normal retirement at age 65. The retirement benefit is to be
financed, in part, through life insurance policies issued in accordance with his
employment agreement, which provide a pre-retirement death benefit of
$3,000,000. The imputed income for the death coverage is included in the
insurance premiums paid on behalf of Mr. McKeever and referenced in footnote 4
to the Summary Compensation Table.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
Messrs. McKeever, Hald, Daniel, and Andrews are each employed pursuant to
an employment agreement with the Company that is terminable by either party at
any time. Each agreement includes restrictions and noncompetition covenants
during the term of the agreement and for a period of 24 months after termination
of employment for Messrs. McKeever, Hald and Daniel, and 12 months for Mr.
Andrews. Upon the Company's termination of the executive's employment without
cause following a change of control or, under certain circumstances, upon the
executive's termination of employment following a change of control, the Company
must pay a lump sum severance pay benefit equal to, for each of Messrs. McKeever
and Hald: three times (i) his base salary and (ii) his incentive bonus for the
prior fiscal year; for Mr. Daniel: two times (i) his base salary and (ii) his
incentive bonus for the prior fiscal year; and for Mr. Andrews: one-and-one half
times (i) his base salary for the prior fiscal year and (ii) the average of his
incentive bonuses for the two prior fiscal years. Upon the Company's termination
of the executive's employment without cause prior to a change of control or,
under certain circumstances, upon the executive's termination of employment
prior to a change of control, the Company must pay a severance pay benefit equal
to, for each of Messrs. McKeever and Hald: three times (i) his base salary and
(ii) the average of his incentive bonus for the three prior fiscal years; and
for each of Messrs. Daniel and Andrews: (i) his base salary and (ii) the average
of his incentive bonus for the two prior fiscal years.
In addition, the Company may elect, during the term of the noncompetition
covenant, to pay supplementary severance pay to Messrs. McKeever and Hald in an
amount equal to their respective monthly pay. Also, upon termination of Messrs.
McKeever and Hald's employment for specified circumstances, including a material
change in the employment relationship, a change in control of the Company, or
8
<PAGE> 12
termination by the Company without cause, the terminated executive has certain
additional rights including the following: (i) the right to sell to the Company
all Common Stock beneficially owned by the executive as of the executive's
termination date, at the fair market value of the Common Stock on the
termination date, subject to certain limitations; and (ii) should the executive
hold any stock options which have not vested, receive, as additional severance
pay, a lump sum payment in an amount equal to the excess, if any, of the fair
market value of the shares subject to outstanding stock options over the
exercise price specified in all non-vested stock options, subject to certain
limitations.
Mr. Waters was employed as the Company's President at the end of the 1995
fiscal year pursuant to an employment agreement with the Company, but left the
Company effective January 31, 1996 due to a medical condition. Under the terms
of Mr. Waters' employment agreement, Mr. Waters received, as a termination
payment, accrued vacation pay.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company's Executive Compensation Program is administered by the
Compensation Committee of the Board of Directors. The members of the
Compensation Committee are not employees of the Company. The Compensation
Committee determines the compensation of the Company's executive officers,
approves any employment agreements with executive officers, and administers the
Company's stock option plans and certain of the Company's other benefit plans.
EXECUTIVE COMPENSATION POLICIES
Overview. Incentive compensation arrangements are the cornerstone of the
Compensation Committee's executive compensation policies. These incentive
compensation arrangements reward those executive officers who achieve individual
and Company objectives that increase stockholder value.
The Company's executive compensation package consists of three components:
base salary and related benefits; annual cash bonus incentives; and stock-based
compensation incentives. The Compensation Committee reviews each of these
components and develops an incentive compensation package for each of the
Company's executive officers based, in part, upon the review of competitive
compensation information and the recommendations of compensation consultants and
senior management. The Compensation Committee strives to develop individual
compensation packages for the Company's executive officers that will encourage
superior individual and Company-wide performance, serve to retain those
executive officers that perform well, and lead to increased stockholder value.
Each component of the Company's executive compensation package is discussed in
detail below.
Base Salary and Benefits. The first component of the Company's executive
compensation package is base salary and related benefits. Each executive officer
receives a base salary and benefits based on competitive compensation
information and his or her responsibilities and performance. The Compensation
Committee, with the assistance of an independent compensation consultant,
compares the Company's compensation levels with published surveys of executive
compensation at comparable companies as well as with recent proxy data for
eleven publicly-traded companies also involved in the integration and
distribution of information technology products and services. In order to
maximize the incentive elements of the executive officers' total compensation
packages, the Compensation Committee sets the base salary and benefits component
of these packages within the competitive range of salary and benefits levels of
the executive officers of the eleven comparative companies. The Compensation
Committee reviews each executive officer's base salary and benefits on at least
an annual basis. Based on the Company's fiscal year 1995 financial results, the
Compensation Committee determined not to increase the fiscal year 1996 base
salaries of any of the Company's executive officers.
Annual Incentive Bonus. The second component of the Company's executive
compensation package is an annual incentive bonus. Consistent with prior years,
in the beginning of fiscal year 1995, the Compensation Committee established
bonus compensation formulas for the Company's executive officers that gave each
9
<PAGE> 13
executive officer the ability to earn a cash bonus calculated as a percentage of
his base salary. This is consistent with the Compensation Committee's overriding
policy of incentive compensation arrangements.
The Compensation Committee's fiscal year 1995 bonus plan (the "1995 Bonus
Plan") established a formula by which executive officer bonus awards were tied
directly to the Company's success in achieving targeted goals of income and
return on equity. During fiscal year 1995, the Company did not meet the targeted
levels of income and return on equity. As a result, the executive officers did
not receive cash incentive bonuses pursuant to the 1995 Bonus Plan. As reflected
in the "Summary Compensation Table," however, the following executive officers
received fixed cash bonuses under their respective employment agreements: Mr.
McKeever ($37,121); Mr. Hald ($17,637); Mr. Waters ($6,634); and Mr. Daniel
($16,738). See also footnote 2 to the Summary Compensation Table for information
regarding the Warrant Restitution and Founder's Bonus paid to each of Mr.
McKeever and Mr. Hald.
Stock-Based Compensation Incentives. The third component of the Company's
executive compensation package is stock-based compensation incentives,
traditionally stock options. This compensation component is an important
incentive tool designed to more closely align the interests of the executive
officers of the Company with the long-term interests of the Company's
stockholders and to encourage its executive officers to remain with the Company.
The Compensation Committee traditionally grants options to the Company's
executive officers and key associates (employees) on an annual basis. In
selecting recipients and the size of option grants during fiscal year 1995, the
Compensation Committee considered the recommendations of the Company's Chief
Executive Officer and Chairman of the Board, Jeffrey D. McKeever; the other
components of the recipients' compensation packages; the recipients'
responsibilities and performance; the Company's performance during the preceding
fiscal year; and prior option grants. The Compensation Committee gave a great
deal of weight to Mr. McKeever's recommendations. Based upon the number of
options received and, in the case of the Management Equity Plan ("MEP"),
purchased, by the Company's executive officers during fiscal year 1994, the only
executive officer who was granted options during fiscal year 1995 was Mr.
Waters, who was unable to participate in certain fiscal year 1994 option grants.
See "Option/SAR Grants in Last Fiscal Year" for information regarding Mr.
Waters' option grant.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In fiscal year 1995, the Chief Executive Officer of the Company, Jeffrey D.
McKeever, was compensated pursuant to an employment agreement. Under the
agreement, Mr. McKeever was entitled to receive a base salary of $525,000
($62,500 of which he waived under the MEP) plus a fixed cash bonus of $37,121.
In arriving at Mr. McKeever's base salary, the Compensation Committee, with the
assistance of an independent compensation consultant, compared Mr. McKeever's
compensation level to the compensation levels paid to chief executive officers
of a group of eleven companies that are also involved in the integration and
distribution of information technology products and services. The Compensation
Committee set Mr. McKeever's base salary within the salary range of chief
executive officers in the comparative group.
Under the 1995 Bonus Plan discussed above under "Annual Incentive Bonus,"
Mr. McKeever did not receive an incentive bonus during fiscal year 1995 because
the Company did not meet the targeted financial goals. The Compensation
Committee did, however, authorize the payment of a one-time Warrant Restitution
and Founder's Bonus to Mr. McKeever. See footnote 2 to the Summary Compensation
Table.
See footnote 3 to the Summary Compensation Table for a discussion of the
MEP and Mr. McKeever's election to waive $600,000 of salary and bonuses during
the 1994-1996 calendar years in return for stock options. During fiscal year
1995, Mr. McKeever waived $62,500 of his salary under the MEP. During fiscal
year 1995, Mr. McKeever did not receive any additional stock option grants.
Overall, the Compensation Committee believes that Mr. McKeever has managed
the Company well in a challenging business climate. The Compensation Committee
has determined not to adjust Mr. McKeever's base salary during fiscal year 1996.
Based on the comparative group compensation levels, Mr. McKeever's base salary
remains within the salary range of chief executive officers in the comparative
group.
10
<PAGE> 14
SECTION 162(M) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Code, adopted as part of the Revenue Reconciliation
Act of 1993, generally limits to $1 million the deduction that can be claimed by
any publicly-held corporation for compensation paid to any "covered employee" in
any taxable year beginning after December 31, 1993. The term "covered employee"
for this purpose is defined generally as the chief executive officer and the
four other highest paid employees of the corporation.
Performance-based compensation is outside the scope of the $1 million
limitation and, hence, generally can be deducted by a publicly-held corporation
without regard to amount; provided that, among other requirements, such
compensation is approved by stockholders. During fiscal year 1995, Mr.
McKeever's Section 162(m) income was $1,157,691; accordingly, the Company was
unable to deduct $157,691 of Mr. McKeever's compensation. It is the general
policy of MicroAge, Inc. to comply with Section 162(m), and it will continue to
do so to the extent such compliance is consistent with the best interest of the
Company's stockholders.
STEVEN G. MIHAYLO, CHAIRMAN
FRED ISRAEL
WILLIAM H. MALLENDER*
- - ---------------
* Ms. Lynda M. Applegate was elected to the Compensation Committee effective
January 18, 1996, after the foregoing report was prepared.
11
<PAGE> 15
STOCK PERFORMANCE GRAPH
The following graph compares the total cumulative stockholder return on the
Company's Common Stock for the period September 30, 1990 through October 29,
1995 with the cumulative total return on the Nasdaq Index and the Standard &
Poors 600 SmallCap Index. The comparison assumes that $100 was invested on
September 30, 1990 in the Company's Common Stock and in each of the comparison
indices, and assumes reinvestment of dividends. The Company chose to include the
Standard & Poors 600 SmallCap Index in its stock performance graph because it
believes that it cannot reasonably identify a peer group of sufficient size to
constitute a meaningful comparative measure.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) MICA NASDAQ SMALLCAP
<S> <C> <C> <C>
1990 100 100 100
1991 92 153 140
1992 77 169 153
1993 207 221 206
1994 151 226 201
1995 104 302 240
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 27, 1990, the Company and Mr. Israel entered into the Company and
Purchasers Rights Agreement (the "Rights Agreement"), pursuant to which Mr.
Israel agreed with the Company that neither he nor his affiliates (as defined in
the Rights Agreement) would for a period from April 27, 1990 until such time as
he and his affiliates beneficially own less than 25,000 shares, acquire more
than 5% of the Company's outstanding capital stock without the Company's prior
consent. Mr. Israel also agreed, and agreed to cause his Purchaser Affiliates
(as such term is defined in the Rights Agreement), not to enter into voting
agreements, participate in proxy solicitations or similar activities intended to
cause shares of the Company's stock to be voted contrary to the recommendation
of the Board of Directors of the Company, or to challenge the performance of the
Company's management in order to acquire control of the Company, to call or seek
to call any meeting of stockholders of the Company, to form or join a "group"
within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934,
or to engage in certain other activities with a similar purpose. Mr. Israel (and
his Purchaser Affiliates) also agreed not to dispose of his shares except
subject to certain limitations. The Rights Agreement also contains certain other
covenants by the parties thereto, including the granting by the Company to Mr.
Israel of certain registration rights with respect to the Common Stock and the
voting agreements with respect to the Company's Voting Stock (as defined in the
Rights Agreement). Mr. Israel (and his Purchaser Affiliates) also granted the
Company a right of first refusal to repurchase shares of Common Stock that are
subject to the agreement if he (or certain of his transferees)
12
<PAGE> 16
wish to dispose of them, all as provided in the Rights Agreement. Mr. Israel
also agreed to vote his shares of Common Stock as described under "Other
Information Regarding the Board of Directors -- Voting Agreement."
The Company has entered into employment agreements with Messrs. McKeever,
Hald, Daniel and Andrews. See "Executive Compensation -- Employment Contracts
and Related Matters."
SECTION 16 REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes of ownership with the Securities and Exchange Commission.
Based solely on its review of the copies of such forms received by it, the
Company believes that during fiscal year 1995 all filing requirements applicable
to its directors, officers and greater-than-10% beneficial owners were complied
with.
AUDITORS
The Board of Directors has appointed Price Waterhouse LLP to audit the
consolidated financial statements of the Company for the fiscal year ending
November 3, 1996. Representatives of Price Waterhouse LLP are expected to be
present at the meeting and will be available to respond to appropriate questions
and may make a statement if they so desire.
STOCKHOLDER NOMINATIONS AND PROPOSALS
The Company's By-Laws require that there be furnished to the Company
written notice with respect to the nomination of a person for election as a
director (other than a person nominated at the direction of the Board of
Directors), as well as the submission of a proposal (other than a proposal
submitted at the direction of the Board of Directors), at a meeting of
stockholders. In order for any such nomination or submission to be proper, the
notice must contain certain information concerning the nominating or proposing
stockholder, and the nominee or the proposal, as the case may be, and must be
furnished to the Company generally not less than 60 nor more than 90 days prior
to the first anniversary date of the preceding year's annual meeting. To
properly bring a director nomination or other matter before the 1997 annual
meeting of stockholders, the nomination or proposal must be received by January
14, 1997. A copy of the applicable By-Law provision may be obtained, without
charge, upon written request to the Secretary of the Company at its principal
executive offices in Tempe, Arizona.
In addition to the foregoing, in accordance with the rules of the
Securities and Exchange Commission, any proposal that a stockholder intends to
present at the 1997 annual meeting of stockholders must be received by the
Company by October 19, 1996 to be eligible for inclusion in the proxy statement
and proxy form relating to such meeting.
OTHER INFORMATION
The Company's consolidated financial statements are included in Appendix A
to this Proxy Statement and in the Annual Report on Form 10-K for the fiscal
year ended October 29, 1995 (the "1995 Form 10-K") that the Company has filed
with the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
A COPY OF THE 1995 FORM 10-K IS AVAILABLE UPON WRITTEN REQUEST AT NO CHARGE
TO STOCKHOLDERS BY CONTACTING MICROAGE, INC. INVESTOR RELATIONS, 2400 SOUTH
MICROAGE WAY, TEMPE, ARIZONA 85282-1896, (602) 929-2414.
13
<PAGE> 17
APPENDIX A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, data as
percentages of total revenue:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Revenue....................................... $ 2,941,100 $ 2,220,816 $ 1,509,823
Cost of sales................................. 94.8% 94.8% 94.9%
---------- ---------- ----------
Gross profit.................................. 5.2 5.2 5.1
Operating other expenses
Operating expenses.......................... 4.3 3.7 3.9
Restructuring and other one-time charges.... 0.3 -- --
---------- ---------- ----------
Total............................... 4.6 3.7 3.9
---------- ---------- ----------
Operating income.............................. 0.6 1.5 1.2
Other expenses -- net......................... 0.5 0.3 0.1
---------- ---------- ----------
Income before income taxes.................... 0.0 1.2 1.2
Provision for income taxes.................... 0.0 0.5 0.5
---------- ---------- ----------
Net income.................................... 0.0% 0.7% 0.7%
========== ========== ==========
</TABLE>
Fiscal Year Ended October 29, 1995 Versus Fiscal Year Ended October 30, 1994
Total Revenue. Total revenue increased $720 million, or 32%, to $2.9
billion for the fiscal year ended October 29, 1995 as compared to the fiscal
year ended October 30, 1994. This revenue increase included a $320 million, or
41%, increase in sales to large accounts and a $341 million, or 26%, increase in
sales to resellers.
These revenue increases were primarily due to sales to resellers added
since October 30, 1994, the Company's focus on large account sales, increased
demand for the Company's major vendors' products, the Company's addition of new
product lines and same location sales growth (including sales to large
accounts).
The Company experienced quarterly revenue growth rates in excess of 40%
(when compared to the same quarters of the prior years) during the fiscal years
ended September 30, 1993 and October 30, 1994 as well as for the first two
quarters of fiscal 1995. Quarter over quarter revenue growth decreased to 30%
and 20% for the last two quarters of fiscal 1995. In fiscal 1996, the Company
will emphasize increased profitability rather than revenue growth. See "Business
Strategy" in Part I, Item 1 of the 1995 Form 10-K for a discussion of the
Company's strategic focus.
Gross Profit Percentage. The Company's gross profit percentage was 5.2%
for the fiscal year ended October 29, 1995 and for the fiscal year ended October
30, 1994.
Future gross profit percentages may be affected by market pressures, the
introduction of new Company programs, changes in revenue mix, the Company's
utilization of early payment discount opportunities, vendor pricing actions and
other competitive and economic factors. See "Potential Fluctuations in Operating
Results" below for information regarding industry trends that may affect future
gross profit percentages.
Operating Expense Percentage. As a percentage of revenue, operating
expenses increased to 4.3% for the fiscal year ended October 29, 1995, from 3.7%
for the fiscal year ended October 30, 1994. Operating expenses increased from
$83.2 million for fiscal 1994 to $126.4 million for fiscal 1995. The increase
was primarily due to increased costs as a result of higher volumes, capacity
expansion in both personnel and
A-1
<PAGE> 18
facilities added in anticipation of revenue growth and increased depreciation as
a result of expenditures for automation initiatives and facility expansion.
Restructuring and Other One-time Charges. During the fourth quarter of
fiscal 1995, the Company approved and implemented actions targeted at reducing
the Company's future cost structure and improving its profitability. These
actions included, among other things, (i) the sale of the Company's memory
distribution business, (ii) outsourcing a certain business function and (iii) a
reduction in the number of the Company's employees. The Company's consolidated
statement of income for fiscal 1995 includes $9.0 million of pretax charges
($5.4 million net of tax benefits, or $0.38 per share) for restructuring and
other one-time charges.
If the restructuring and other one-time charges are calculated as though
all of the actions targeted at reducing expenses and improving profitability had
been implemented on the first day of the fourth fiscal quarter, the total of
these charges would have been $10.8 million before tax, or $0.45 per share. The
Company reported a loss of $0.40 per share for its fourth fiscal quarter of
1995, including restructuring and other one-time charges. Excluding the $10.8
million in charges, the Company's fourth quarter net income would have been
$744,000, or $0.05 per share, up slightly from the $662,000, or $0.05 per share
reported for the third quarter of fiscal 1995, and net income for the year would
have been $6.7 million, or $0.47 per share.
Other Expenses -- Net. Other expenses -- net increased to $15.6 million
for the fiscal year ended October 29, 1995 from $5.6 million for the fiscal year
ended October 30, 1994. The increase is primarily attributable to an increase in
net financing costs during the year. These financing costs included expenses
from the sale of receivables under an agreement with a commercial lender, costs
from flooring subsidies provided to lenders who floor product purchases from the
Company's customers and increased interest expense due to higher average
borrowings during the fiscal year.
Effective tax rate. The Company's effective tax rate increased from 39.4%
for the fiscal year ended October 30, 1994 to 78.3% for the fiscal year ended
October 29, 1995. This increase is a result of the impact of certain state taxes
not based on income and non-deductible expenses, such as meals and entertainment
and goodwill amortization, on a lower pretax income amount.
Marketing Development Funds. The Company receives funds from certain
vendors which are earned through marketing programs, meeting established
purchasing objectives or meeting other objectives determined by the vendor.
There can be no assurance that these programs will be continued by the vendors.
A substantial reduction in the vendor funds available to the Company would have
an adverse effect on the Company's results of operations.
Fiscal Year Ended October 30, 1994 Versus Fiscal Year Ended September 30, 1993
Total Revenue. Total revenue increased $711 million, or 47%, to $2.2
billion for the fiscal year ended October 30, 1994 as compared to the fiscal
year ended September 30, 1993. This revenue increase included a $264 million, or
46%, increase in sales to large accounts and a $447 million, or 48%, increase in
sales to resellers.
These revenue increases were primarily due to sales to resellers added
since September 30, 1993, same location sales growth (including sales to large
accounts), the Company's focus on large account sales, increased demand for the
Company's major vendors' products and the Company's addition of new product
lines.
Gross Profit Percentage. The Company's gross profit percentage increased
to 5.2% for the fiscal year ended October 30, 1994 from 5.1% for the fiscal year
ended September 30, 1993.
During the fiscal year, the Company's gross profit percentage decreased
from 5.5% for the quarter ended May 1, 1994 to 4.9% for the quarter ended July
31, 1994. The gross profit percentage increased slightly to 5.1% for the quarter
ended October 30, 1994. The gross profit percentage decrease between the
quarters ended May 1, 1994 and July 31, 1994 was primarily attributable to
general market pricing pressure and costs associated with actions taken to
reduce inventory levels.
A-2
<PAGE> 19
Operating Expense Percentage. As a percentage of revenue, operating
expenses decreased from 3.9% for the fiscal year ended September 30, 1993 to
3.7% for the fiscal year ended October 30, 1994.
Other Expenses -- Net. Other expenses -- net increased to $5.6 million for
the fiscal year ended October 30, 1994 from $1.2 million for the fiscal year
ended September 30, 1993. The increase is primarily attributable to an increase
in net financing costs incurred during the year.
These financing costs included expenses from the sale of receivables under
an agreement with a commercial lender, costs from flooring subsidies provided to
lenders who floor product purchases from the Company's customers and increased
interest expense due to higher average borrowings during the fiscal year.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from quarter to
quarter depending on certain factors, including, but not limited to, demand for
the Company's information technology products and services, product
availability, competitive conditions, and general economic conditions. See
"Products and Vendors" and "Competition" in Part I, Item 1 of the 1995 Form 10-K
for additional information regarding certain of these factors. Although the
Company attempts to control its expense levels, these levels are based, in part,
on anticipated revenues. Therefore, the Company may not be able to control
spending in a timely manner to compensate for any unexpected revenue shortfall.
As a result, quarterly period-to-period comparisons of the Company's financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs to date primarily
through working capital financing facilities, bank credit lines, common stock
offerings and cash generated from operations. The primary uses of cash have been
to fund increases in inventory and accounts receivable resulting from increased
sales. If the Company is successful in achieving continued revenue growth (see
"Business Strategy -- Large Account Sales" in Part I, Item 1 of the 1995 Form
10-K), its working capital requirements will continue to increase.
During the fiscal year ended October 29, 1995, the Company used $6 million
of cash for a business purchase. In order to establish or solidify its presence
in strategic markets or to respond to competitive pressures, the Company may
make acquisitions of, or investments in, reseller locations. These acquisitions
or investments may be made utilizing cash, stock or a combination of cash and
stock. See "Competition" in Part I, Item 1 of the 1995 Form 10-K for information
regarding competitive pressures.
For the fiscal year ended October 29, 1995, $32 million of cash was
provided by operating activities. Net cash provided by operating activities
included a decrease in inventory of $9 million, an increase in accounts payable
of $51 million, non-cash depreciation, amortization and bad debt charges of $21
million and non-cash restructuring and other one-time charges of $7 million
offset by an increase in accounts receivable of $53 million and increases in
other assets of $7 million. The number of days sales in ending accounts
receivable increased from 20 days at October 30, 1994 to 22 days at October 29,
1995. The Company's annualized inventory turnover rate increased from 8 times at
October 30, 1994 to 10 times at October 29, 1995. The number of days cost of
sales in ending accounts payable remained constant at 47 days at October 30,
1994 and October 29, 1995. For fiscal year 1995, net cash of $29 million used in
investing activities consisted primarily of $23 million for the purchase of
property and equipment and $6 million for a business purchase.
In August 1995, the Company amended its primary financing agreement (the
"Agreement") to increase its financing facility from $250 million to $400
million. The Agreement includes two major components: an accounts receivable
facility (the "A/R Facility") and an inventory facility (the "Inventory
Facility"). The Agreement expires in August 1997.
Under the A/R Facility, the Company has the right to sell certain accounts
receivable from time to time, on a limited recourse basis, up to an aggregate
amount of $250 million sold at any given time. At October 29, 1995, the net
amount of sold accounts receivable was $125 million.
A-3
<PAGE> 20
The Inventory Facility provides for borrowings up to $150 million. Within
the Inventory Facility, the Company has a line of credit for the purchase of
inventory from selected product suppliers ("Inventory Line of Credit") of $50
million and a line of credit for general working capital requirements
("Supplemental Line of Credit") of $100 million. Payments for products purchased
under the Inventory Line of Credit vary depending upon the product supplier, but
generally are due between 45 and 60 days from the date of the advance. No
interest or finance charges are payable on the Inventory Line of Credit if
payments are made when due. At October 29, 1995, the Company had $3 million
outstanding under the Inventory Line of Credit and had no amounts outstanding
under the Supplemental Line of Credit.
Of the $400 million of financing capacity represented by the Agreement,
$272 million was unused as of October 29, 1995. Utilization of the unused $272
million is dependent upon the Company's collateral availability at the time the
funds would be needed.
Borrowings under the Agreement are secured by substantially all of the
Company's assets, and the Agreement contains certain restrictive covenants,
including working capital and tangible net worth requirements, and ratios of
debt to tangible net worth and current assets to current liabilities. At October
29, 1995, the Company was in compliance with these covenants.
The Company also maintains trade credit arrangements with its vendors and
other creditors to finance product purchases. Several major vendors maintain
security interests in their products sold to the Company.
The unavailability of a significant portion of, or the loss of, the
Agreement or trade credit from vendors would have a material adverse effect on
the Company.
INFLATION
The Company believes that inflation has generally not had a material impact
on its operations or liquidity to date.
A-4
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of MicroAge, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
MicroAge, Inc. and its subsidiaries at October 29, 1995 and October 30, 1994,
and the results of their operations and their cash flows for the fiscal years
ended October 29, 1995, October 30, 1994 and September 30, 1993, in conformity
with generally accepted accounting principles. These 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
December 5, 1995
A-5
<PAGE> 22
MICROAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 13,700 $ 11,074
Accounts and notes receivable, net.................................. 183,286 136,736
Inventory, net...................................................... 297,742 306,584
Other............................................................... 13,006 8,148
-------- --------
Total current assets........................................ 507,734 462,542
Property and equipment, net........................................... 45,689 31,607
Intangible assets, net................................................ 11,201 9,377
Other................................................................. 7,939 6,673
-------- --------
Total assets................................................ $ 572,563 $ 510,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 379,897 $ 325,673
Accrued liabilities................................................. 13,968 12,206
Current portion of long-term obligations............................ 2,908 1,245
Other............................................................... 3,258 2,862
-------- --------
Total current liabilities................................... 400,031 341,986
Long-term obligations................................................. 4,079 2,054
Stockholders' equity:
Preferred stock, par value $1.00 per share; Shares authorized:
5,000,000 Issued and outstanding: none........................... -- --
Common stock, par value $.01 per share;
Shares authorized: 40,000,000
Issued: October 29, 1995 -- 14,459,847
October 30, 1994 -- 14,267,700............................ 145 143
Additional paid-in capital.......................................... 122,399 121,249
Retained earnings................................................... 49,539 49,298
Loan to ESOT........................................................ (768) (1,408)
Note receivable -- stock purchase agreement......................... (2,000) (2,000)
Treasury stock, at cost;
Shares: October 29, 1995 -- 115,443
October 30, 1994 -- 150,434............................... (862) (1,123)
-------- --------
Total stockholders' equity.................................. 168,453 166,159
-------- --------
Total liabilities and stockholders' equity.................. $ 572,563 $ 510,199
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-6
<PAGE> 23
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Revenue............................................... $ 2,941,100 $ 2,220,816 $ 1,509,823
Cost of sales......................................... 2,789,009 2,105,069 1,432,477
---------- ---------- ----------
Gross profit.......................................... 152,091 115,747 77,346
Operating and other expenses
Operating expenses.................................. 126,400 83,226 58,645
Restructuring and other one-time charges............ 9,029 -- --
---------- ---------- ----------
Total....................................... 135,429 83,226 58,645
---------- ---------- ----------
Operating income...................................... 16,662 32,521 18,701
Other expenses -- net................................. 15,552 5,551 1,208
---------- ---------- ----------
Income before income taxes............................ 1,110 26,970 17,493
Provision for income taxes............................ 869 10,628 6,993
---------- ---------- ----------
Net income............................................ $ 241 $ 16,342 $ 10,500
========== ========== ==========
Net income per common share........................... $ 0.02 $ 1.22 $ 1.15
========== ========== ==========
Weighted average common and common equivalent shares
outstanding......................................... 14,338 13,385 9,125
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-7
<PAGE> 24
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 241 $ 16,342 $ 10,500
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 15,439 9,280 6,377
Provision for losses on accounts and notes
receivable....................................... 5,844 3,193 1,594
Non-cash restructuring and other one-time
charges.......................................... 7,410 -- --
Other.............................................. -- -- 127
Changes in assets and liabilities net of business
acquisitions:
Accounts and notes receivable.................... (52,790) (28,404) (41,437)
Inventory........................................ 9,280 (117,859) (55,973)
Other current assets............................. (4,802) (7,146) (216)
Other assets..................................... (1,830) 2,007 (1,046)
Accounts payable................................. 50,950 99,460 50,704
Accrued liabilities.............................. 1,833 5,516 2,966
Other liabilities................................ 396 1,223 615
---------- ---------- ----------
Net cash provided by (used in) operating
activities....................................... 31,971 (16,388) (25,789)
Cash flows from investing activities:
Purchases of property and equipment................... (22,885) (17,569) (7,887)
Purchases of businesses and investments in
unconsolidated companies........................... (6,099) (8,955) --
---------- ---------- ----------
Net cash used in investing activities.............. (28,984) (26,524) (7,887)
Cash flows from financing activities:
Amounts received from ESOT............................ 640 595 555
Proceeds from issuance of stock, net of issuance
costs.............................................. 1,037 40,305 40,104
Principal payments on debt............................ (2,038) (1,418) (9,933)
---------- ---------- ----------
Net cash provided by (used in) financing
activities....................................... (361) 39,482 30,726
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.... 2,626 (3,430) (2,950)
Cash and cash equivalents at beginning of period........ 11,074 14,504 23,194
---------- ---------- ----------
Cash and cash equivalents at end of period.............. $ 13,700 $ 11,074 $ 20,244
========== ========== ==========
</TABLE>
Supplemental disclosure to cash flows -- See Note 14
The accompanying notes are an integral part of these financial statements.
A-8
<PAGE> 25
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 29, 1995, OCTOBER 30, 1994, AND SEPTEMBER 30, 1993
---------------------------------------------------------------------------------------------
ADDITIONAL NOTE-STOCK TOTAL
PREFERRED COMMON PAID-IN RETAINED LOAN TO PURCHASE TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS ESOT AGREEMENT STOCK EQUITY
--------- ------ ---------- --------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at September 30, 1992...... $-- $ 59 $ 38,495 $22,414 $(2,609) $ -- $(1,493 ) $ 56,866
Issuance of 3,018,000 shares of
common stock, net of issuance
costs.......................... -- 20 39,376 -- -- -- -- 39,396
Options for 139,280 common shares
exercised...................... -- 1 707 -- -- -- -- 708
Contribution of 19,962 treasury
shares to employee benefit
plan........................... -- -- (22) -- -- -- 149 127
Loan payments from ESOT.......... -- -- -- -- 555 -- -- 555
Net income....................... -- -- -- 10,500 -- -- -- 10,500
--
--- -------- ------- ----- ------- ----- --------
BALANCE at September 30, 1993...... $-- $ 80 $ 78,556 $32,914 $(2,054) $ -- $(1,344 ) $ 108,152
== === ======== ======= ===== ======= ===== ========
BALANCE at October 31, 1993........ $-- $ 80 $ 78,558 $32,995 $(2,005) $ -- $(1,344 ) $ 108,284
Issuance of 2,000,000 shares of
common
stock, net of issuance costs... -- 20 39,482 -- -- -- -- 39,502
Three for two stock split........ -- 39 -- (39) -- -- -- --
Options for 153,365 common shares
exercised...................... -- 3 800 -- -- -- -- 803
Issuance of 72,728 shares of
common stock for convertible
subordinated debentures........ -- 1 1,999 -- -- (2,000) -- --
Contribution of 26,266 treasury
shares to employee benefit
plan........................... -- -- 200 -- -- -- 221 421
Tax benefit from employees' stock
option plans................... -- -- 210 -- -- -- -- 210
Loan payments from ESOT.......... -- -- -- -- 597 -- -- 597
Net income....................... -- -- -- 16,342 -- -- -- 16,342
--
--- -------- ------- ----- ------- ----- --------
BALANCE at October 30, 1994........ -- 143 121,249 49,298 (1,408 ) (2,000) (1,123 ) 166,159
Options for 192,147 common shares
exercised...................... -- 2 1,035 -- -- -- -- 1,037
Contribution of 34,991 treasury
shares to employee benefit
plan........................... -- -- 115 -- -- -- 261 376
Loan payments from ESOT.......... -- -- -- -- 640 -- -- 640
Net income....................... -- -- -- 241 -- -- -- 241
--
--- -------- ------- ----- ------- ----- --------
BALANCE at October 29, 1995........ $-- $145 $122,399 $49,539 $ (768 ) $ (2,000) $ (862 ) $ 168,453
== === ======== ======= ===== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-9
<PAGE> 26
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS
MicroAge, Inc. ("MicroAge") distributes and integrates information
technology products and services through, and in partnership with, a network of
resellers, including twelve Company-owned resellers (the "MicroAge Network" or
the "Network"). The products and services the Company markets and sells include
microcomputer systems; workstations; networking and telecommunications
equipment; system solutions, including integration and installation services and
various technical services and support; software and related products and
services. Unless the context otherwise requires, references to the "Company"
include MicroAge, Inc. and its consolidated subsidiaries.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements of the Company include the accounts
of companies more than 50% owned. Investments in affiliates owned 50% or less
are accounted for by the equity method. All material intercompany accounts and
transactions have been eliminated.
Disclosures about fair value of financial instruments
Financial instruments that are subject to fair value disclosure
requirements are carried in the consolidated financial statements at amounts
that approximate fair value.
Cash equivalents
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents. The Company did not
have any cash equivalents at October 29, 1995 or October 30, 1994.
Cash overdrafts
Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes. Such
amounts, aggregating $38.5 million and $21.5 million at October 29, 1995 and
October 30, 1994, respectively, are included as a component of accounts payable
in the accompanying balance sheets.
Accounts and notes receivable
Accounts and notes receivable are comprised of amounts due from financing
companies, end-users, and resellers and are net of an allowance for doubtful
accounts of $12,255,000 and $6,833,000 at October 29, 1995 and October 30, 1994,
respectively.
Inventory
Inventory consisting of resale merchandise is stated at lower of cost
(first-in, first-out method) or market. International Business Machines
Corporation ("IBM") products totaling $54,083,000 and $48,375,000 included in
inventory at October 29, 1995 and October 30, 1994, respectively, are subject to
a reservation of the title in IBM for the purpose of assuring that such products
are sold and delivered only to IBM-authorized personal computer dealers; such
reservation does not prohibit the Company from granting security interests to
other parties.
During the fiscal year ended October 29, 1995, sales of COMPAQ Computer
Corporation, Hewlett-Packard Company and IBM products accounted for
approximately 21%, 20% and 15%, respectively, of the
A-10
<PAGE> 27
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's revenue from sales of merchandise. The sales of no other individual
vendor's products accounted for more than 10% of such revenue during the fiscal
year ended October 29, 1995.
Property and equipment
Property and equipment are recorded at cost and are depreciated on the
straight-line method over their estimated useful lives. Equipment under capital
lease is recorded at the lower of fair market value or the present value of
future lease payments and is amortized on the straight-line method over the
estimated useful life or the term of the lease, whichever is less.
The following reflects the estimated lives by category of property and
equipment:
<TABLE>
<S> <C>
Furniture, fixtures, equipment and software..................... 3 to 7 years
Equipment under capital lease................................... 4 to 5 years
Leasehold improvements.......................................... 3 to 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations in the
year in which the expense is incurred.
Intangible assets
Intangible assets are amortized over their economic lives ranging from
three to fifteen years using the straight-line method. The Company periodically
reviews goodwill to assess recoverability, and impairments would be recognized
in operating results if a permanent reduction in value were to occur. The excess
of cost over the fair value of net identifiable assets acquired is classified as
goodwill and is included in intangible assets. Intangible assets are net of
$4,573,000 and $4,830,000 of accumulated amortization at October 29, 1995 and
October 30, 1994, respectively.
Revenue recognition
Revenue from product sales is recognized at the time of shipment. Revenue
associated with service contracts is initially recorded as deferred income
(included in other liabilities) and amortized on the straight-line method over
the service period of the contract.
Marketing development funds
In general, vendors provide the Company with various incentive programs.
The funds received under these programs are determined based on the Company's
purchases and/or sales of the vendor's product. The funds are earned by the
performance of specific marketing programs or upon completion of predetermined
objectives dictated by the vendor. Once earned, the funds are applied against
product cost or operating expenses.
Income taxes
In addition to charging income for taxes paid or payable, the provision for
income taxes reflects deferred income taxes resulting from changes in temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the accompanying financial statements.
Income per common share
Income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent
A-11
<PAGE> 28
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares consist of stock options and warrants using the treasury stock method.
The weighted average common and common equivalent shares consist of the
following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Weighted average common shares................ 14,133,260 12,754,988 8,840,288
Stock options and warrants.................... 204,804 629,532 284,913
----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding............... 14,338,064 13,384,520 9,125,201
=========== =========== ===========
</TABLE>
Fully diluted earnings per share includes the exercise of all outstanding
dilutive options and warrants and results in a dilution of less than 3%. The
number of common and common equivalent shares used to compute fully diluted
earnings per share was 14,342,326 in fiscal 1995, 13,385,091 in fiscal 1994 and
9,345,456 in fiscal 1993.
Franchising Activities
MicroAge distributes its products and services through a network of
franchised and affiliated resellers and Company-owned locations. In fiscal 1995,
325 franchised resellers were added and 289 were eliminated due to transferring
to an affiliate agreement, closing or terminating their agreement, resulting in
789 franchised reseller locations at October 29, 1995. In fiscal 1995, one
business was purchased, resulting in an increase of three Company-owned
locations. There were twelve Company-owned locations at October 29, 1995. In
fiscal 1995, total revenue and total cost of sales from Company-owned locations
were $305,265,000 and $273,936,000, respectively.
Postemployment Benefits
During 1994, the Company adopted Financial Accounting Standards Board
Statement No. 112 ("SFAS 112"), "Employers' Accounting for Postretirement
Benefits." SFAS 112 established standards of financial accounting and reporting
for the estimated cost of benefits provided by an employer to current and former
employees pursuant to the terms of an employer's agreement to provide those
benefits. The adoption of this statement did not have a material impact on the
Company's operating results.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year financial statement presentation.
NOTE 3 -- CHANGE IN FISCAL YEAR
Effective for the 1994 fiscal year, the Company changed its fiscal year end
from September 30 to the Sunday nearest October 31 in each calendar year. The
consolidated statements of income are presented for the 52 weeks ended October
29, 1995 and October 30, 1994, exclusive of October 1993 results, and the fiscal
period ended September 30, 1993. The Company's financial performance has not
exhibited significant seasonality in the past; therefore, the results of
operations presented for the fiscal 1995 and 1994 periods are comparable to the
results for the fiscal 1993 period.
The Company's results of operations for the month of October 1993 reflected
revenue of $135.1 million, gross profit of $6.1 million, income tax expense of
$73,000, net income of $81,000 and net income per common share of $0.01. During
the month of October 1993, net cash of $5.0 million, $696,000 and $85,000 was
used in
A-12
<PAGE> 29
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating, investing and financing activities, respectively. Cash decreased from
$20.2 million to $14.5 million during October 1993.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Equipment, furniture, fixtures and software................... $62,376 $44,217
Equipment under capital lease................................. 11,876 7,150
Leasehold improvements........................................ 12,581 7,860
Land.......................................................... 164 154
------- -------
86,997 59,381
Less: accumulated depreciation and amortization............... 41,308 27,774
------- -------
$45,689 $31,607
======= =======
</TABLE>
NOTE 5 -- LEASES
The following is a schedule by year of future minimum lease obligations
under noncancelable leases together with the present value of the net minimum
capital lease obligations as of October 29, 1995:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Fiscal year ending in:
1996........................................................... $ 5,231 $ 2,336
1997........................................................... 5,257 2,049
1998........................................................... 4,894 1,548
1999........................................................... 4,639 886
2000........................................................... 3,605 59
Thereafter....................................................... 10,363 --
------- ------
Total minimum lease obligations.................................. $33,989 6,878
=======
Less: amount representing interest............................... 891
------
Present value of minimum lease obligations....................... $ 5,987
======
</TABLE>
None of the leases contain significant restrictive provisions; however,
some of the leases contain renewal options and provisions for payment by the
Company of real estate taxes, insurance and maintenance costs. Total rent
expense was (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended:
<S> <C>
September 30, 1993........................................................ $3,783
October 30, 1994.......................................................... 6,017
October 29, 1995.......................................................... 7,830
</TABLE>
NOTE 6 -- FINANCING ARRANGEMENTS
In August 1995, the Company amended its financing agreement (the
"Agreement") to increase its financing facility from $250 million to $400
million. The Agreement includes two major components: an accounts receivable
facility (the "A/R Facility") and an inventory facility (the "Inventory
Facility"). The Agreement expires in August 1997.
A-13
<PAGE> 30
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the A/R Facility, the Company has the right to sell certain accounts
receivable from time to time, on a limited recourse basis, up to an aggregate
amount of $250 million sold at any given time. At October 29, 1995, the net
amount of sold accounts receivable was $125 million.
The Inventory Facility provides for borrowings up to $150 million. Within
the Inventory Facility, the Company has a line of credit for the purchase of
inventory from selected product suppliers ("Inventory Line of Credit") of $50
million and a line of credit for general working capital requirements
("Supplemental Line of Credit") of $100 million. Payments for products purchased
under the Inventory Line of Credit vary depending upon the product supplier, but
generally are due between 45 and 60 days from the date of the advance. No
interest or finance charges are payable on the Inventory Line of Credit if
payments are made when due. At October 29, 1995, the Company had $3 million
outstanding under the Inventory Line of Credit (included in accounts payable in
the accompanying Balance Sheet), and no amounts outstanding under the
Supplemental Line of Credit.
Borrowings under the Agreement are secured by substantially all of the
Company's assets, and the Agreement contains certain restrictive covenants,
including working capital and tangible net worth requirements, and ratios of
debt to tangible net worth and current assets to current liabilities. At October
29, 1995, the Company was in compliance with these covenants.
The Company also maintains trade credit arrangements with its vendors and
other creditors to finance product purchases. Several major vendors maintain
security interests in their products sold to the Company.
NOTE 7 -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations..................................... $ 5,987 $ 3,299
Note payable resulting from business purchase................. 1,000 --
------ ------
6,987 3,299
Less: current portion......................................... 2,908 1,245
------ ------
$ 4,079 $ 2,054
====== ======
</TABLE>
Following are the annual maturities of long-term obligations (in
thousands):
<TABLE>
<CAPTION>
Fiscal year ending in:
<S> <C>
1996........................................................................ $2,908
1997........................................................................ 1,772
1998........................................................................ 1,407
1999........................................................................ 842
2000........................................................................ 58
-------
$6,987
=======
</TABLE>
NOTE 8 -- STOCKHOLDERS' EQUITY
Stock Split
On December 8, 1993, the Company's Board of Directors declared a 3-for-2
stock split effected in the form of a common stock dividend. The dividend was
paid on January 13, 1994, to stockholders of record on December 20, 1993, in the
amount of 0.5 shares of common stock for each share of common stock held by
A-14
<PAGE> 31
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such stockholders. All data in the accompanying financial statements and related
notes have been restated to give effect to the stock split effected in the form
of a common stock dividend.
Public Offering
On June 16, 1994, the Company completed a public offering of 2,000,000
shares of common stock. The proceeds from the sale, net of issuance costs, were
approximately $39,502,000.
Increase in Authorized Common Shares
In March 1994, the Company's stockholders approved an increase in the
number of authorized common shares, par value $.01 per share, from 20,000,000
shares to 40,000,000 shares.
Warrants
During fiscal 1985, the Company granted stock purchase warrants for 95,958
shares of common stock at $4.35 per share. During fiscal 1995, 47,979 warrants
were exercised, and at October 29, 1995, there were no unexercised warrants. No
additional shares may be granted under these warrant agreements.
Employee Stock Option and Award Plans
During fiscal 1994, the Board of Directors and stockholders of the Company
approved the adoption of the MicroAge Inc. Long-Term Incentive Plan (the
"Incentive Plan") for officers and other key employees of the Company. The
Incentive Plan authorizes grants of Incentive Stock Options, Non-Qualified Stock
Options (NQSOs), Stock Appreciation Rights, Performance Shares, Restricted
Stock, Dividend Equivalents and other Common Stock based awards. The total
number of shares of common stock available for awards under the Incentive Plan
is 1,800,000.
The Company has issued NQSOs under the Incentive Plan at prices
representing the fair market value of the Company's common stock on the date of
the grant. The NQSOs are granted for terms of five years and become exercisable
on a pro-rata basis on each anniversary of the grant over a five-year period as
long as the holder remains an employee of the Company. NQSOs under the Incentive
Plan were granted in fiscal 1994 to selected employees in exchange for the
employee's irrevocable waiver of a specific amount of base salary or bonus
otherwise payable by the Company during a specific period. The options will vest
in one-third increments beginning on the January 1 which is three years
following the January 1 of the calendar year in which the participant elects to
waive compensation. Subsequent to the 1995 fiscal year end, the NQSOs granted
during 1994 under the Incentive Plan were amended whereby the exercise price was
reduced to reflect the fair market value of the Company's common stock at the
date of the amendment. No other awards have been made under the Incentive Plan.
In addition to the Incentive Plan, stock options are available under four
plans for grant to certain officers and employees of the Company at prices
representing the fair market value of the Company's common stock on the date of
the grant. Options under these plans are granted for terms of five years and
become exercisable on a pro-rata basis on each anniversary date of the grant
over a five-year period as long as the holder remains an employee of the
Company.
A-15
<PAGE> 32
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes during fiscal 1993, 1994 and 1995 in options outstanding under the
employee stock option plans (including the Incentive Plan) were as follows:
<TABLE>
<CAPTION>
PRICE RANGE
NUMBER -----------------
OF OPTIONS TO FROM
---------- ------ ------
<S> <C> <C> <C>
Outstanding at September 30, 1992...................... 526,545 $ 4.00 $ 7.92
Granted.............................................. 623,625 $ 6.00 $14.59
Exercised............................................ (102,765) $ 4.00 $ 6.37
Canceled or expired.................................. (97,950) $ 4.00 $ 7.50
---------
Outstanding at September 30, 1993...................... 949,455 $ 4.00 $14.59
=========
Outstanding at October 31, 1993........................ 949,455 $ 4.00 $14.59
Granted.............................................. 919,547 $21.00 $31.75
Exercised............................................ (74,185) $ 4.00 $ 7.92
Canceled or expired.................................. (18,595) $ 4.42 $31.75
---------
Outstanding at October 30, 1994........................ 1,776,222 $ 4.42 $31.75
Granted.............................................. 162,750 $ 9.25 $11.13
Exercised............................................ (120,900) $ 4.42 $10.42
Canceled or expired.................................. (46,174) $ 5.33 $24.83
---------
Outstanding at October 29, 1995........................ 1,771,898 $ 4.42 $31.75
=========
Exercisable at October 29, 1995........................ 333,575 $ 4.42 $31.75
=========
</TABLE>
Franchisee Stock Option Plans
Stock options were granted in 1989 and 1990 under two plans to certain
franchisees of the Company at prices representing the fair market value of the
Company's common stock on the date of grant. As of October 29, 1995, all options
granted in 1989 had been exercised or forfeited. Outstanding options granted in
1990 were granted at $6.38 per share.
Options under these plans were granted for terms of six years and become
exercisable on a pro-rata basis on each anniversary date of the grant over a
five-year period as long as the holder remains a franchisee in good standing of
the Company. At October 29, 1995, 9,602 options were outstanding under the
remaining stock option plan and all options were exercisable.
Director Stock Plans
During fiscal 1989, the Board of Directors and stockholders approved a
stock option plan for those Directors who are not officers or employees of the
Company or its subsidiaries (the "Directors' Plan"). Under the Directors' Plan,
on or before December 7, 1998, options to purchase 1,000 shares of common stock
will be automatically granted, immediately following each annual meeting of
stockholders, to eligible Directors. The option price will be the fair market
value of the Company's common stock on the date of the grant. Options granted
pursuant to this plan are exercisable, in full, during the period between three
months from the date of grant and three years from the date of grant, and
terminate on the earlier of the expiration date or six months after the date
that an optionee ceases to be a Director of the Company for any reason other
than death or permanent disability. The aggregate number of shares of the
Company's common stock which may be sold pursuant to the Directors' Plan may not
exceed 75,000 shares. As of October 29, 1995, 27,000 options had been granted
under this plan at prices ranging from $8.42 to $31.88 per share. There were
12,000 options exercisable as of October 29, 1995. Options to eligible Directors
will no longer be granted under the Directors' Plan. Instead, eligible Directors
will be granted options under the 1995 Director Plan (see below).
A-16
<PAGE> 33
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1995, the Board of Directors and stockholders approved an
incentive plan for those Directors who are not officers or employees of the
Company or its subsidiaries (the "1995 Director Plan"). Under the 1995 Director
Plan, on November 1 of each year, commencing in 1995 and ending in 2004, each
eligible Director will automatically be granted (i) 1,000 shares of the
Company's common stock subject to certain restrictions and (ii) options to
purchase 1,000 shares of the Company's common stock.
The aggregate number of shares of the Company's common stock available for
awards under the 1995 Director Plan is 80,000.
Restricted Stock Plan
In accordance with the provisions of a restricted stock plan approved in
fiscal 1982, 45,000 shares of common stock were reserved for issuance. At
October 29, 1995, 39,938 shares had been awarded under the plan, and 5,062
additional shares may be awarded under the plan.
Preferred Stock Purchase Rights
In February 1989, as amended in November 1994, the Company's Board of
Directors adopted a Stockholder Rights Agreement (the "Rights Plan") and
declared a dividend distribution of one Right for each share of the Company's
common stock outstanding as of the close of business on March 7, 1989 and
intends to issue one Right for each share of common stock issued between March
7, 1989 and the date of the distribution of the Rights. As amended, the Rights
Plan provides that when exercisable, each Right will entitle its holder to
purchase from the Company one one-hundredth (.01) of a share of Series C Junior
Participating Preferred stock at a price of $19.90. The Company has reserved
500,000 preferred shares for issuance upon exercise of the Rights. Generally,
the Rights become exercisable on the earlier of the date a person or group of
affiliated or associated persons acquires or obtains the rights to acquire
securities representing fifteen percent (15%) or more of the common stock of the
Company or on the tenth day following the commencement of a tender or exchange
offer which would result in the offeror beneficially owning fifteen percent
(15%) or more of the Company's common stock without the prior consent of the
Company. In the event that an unauthorized person or group of affiliated persons
becomes the beneficial owner of fifteen percent (15%) or more of the common
stock of the Company, proper provision shall be made so that each holder of a
Right will have the right to receive, upon exercise thereof and the payment of
the exercise price, that number of shares of common stock having a market value
of two times the exercise price of the Right. The Rights will expire on February
23, 1999, unless redeemed earlier by the Company pursuant to authorization by
the Board of Directors.
Generally, in the event that the Company is involved in a merger or other
business combination transaction after the Rights become exercisable, provision
shall be made so that each holder of a Right shall have the right to receive,
upon the exercise thereof and the payment of the exercise price, that number of
shares of common stock of the acquiring company which at the time of such
transaction would have a market value of two times the exercise price of the
Right.
Associate Stock Purchase Plan
In March 1995, the Board of Directors and stockholders approved an
associate stock purchase plan (the "Associate Plan"). The Associate Plan
provides a means for the Company's employees to authorize payroll deductions up
to 10% of their earnings to be used for the periodic purchase of the Company's
common stock. Under the Associate Plan, the Company will initially sell shares
to participants at a price equal to the lesser of 85% of the fair market value
of the common stock at the beginning of a six month subscription period or 85%
of fair market value at the end of the subscription period. The Associate Plan
is intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended. The
A-17
<PAGE> 34
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum number of shares that may be purchased under the Associate Plan is
500,000. The initial subscription period began July 1, 1995.
NOTE 9 -- OTHER EXPENSES -- NET
Other expenses -- net consists of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense.................................... $ 3,370 $ 1,263 $ 668
Expenses from the sale of accounts receivable....... 10,468 3,274 979
Other............................................... 1,714 1,014 (439)
------- ------ ------
$15,552 $ 5,551 $ 1,208
======= ====== ======
</TABLE>
NOTE 10 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal........................................... $ 3,905 $10,398 $ 5,796
State............................................. 1,065 2,416 1,361
Deferred............................................ (4,101) (2,186) (164)
------- ------- ------
$ 869 $10,628 $ 6,993
======= ======= ======
</TABLE>
The components of deferred income tax expense (benefit) from operations are
as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts..................... $(2,014) $(1,142) $ (437)
Restructuring reserves.............................. (533) -- --
State deferral, net of federal benefit.............. (528) (242) (18)
Deferred service revenue............................ (307) (44) (18)
Software development costs.......................... 247 224 133
Depreciation and amortization....................... (159) (163) (161)
Inventory valuation reserve......................... (112) (1,382) 365
All other -- net.................................... (695) 563 (28)
------- ------- -------
$(4,101) $(2,186) $ (164)
======= ======= =======
</TABLE>
A-18
<PAGE> 35
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred tax assets, which are recorded as a component of other assets
or other current assets, are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Allowance for doubtful accounts............................. $ 5,208 $ 2,827
Inventory valuation......................................... 3,067 3,203
Depreciation and amortization............................... 2,007 1,039
Restructuring reserve....................................... 667 --
Deferred service revenue.................................... 593 226
Other....................................................... 1,139 414
------- ------
Total gross deferred tax assets............................. 12,681 7,709
------- ------
Gross deferred tax liabilities:
Software development........................................ 1,347 979
Other....................................................... 171 --
------- ------
Total gross deferred tax liabilities........................ 1,518 979
------- ------
Net deferred tax asset........................................ $11,163 $ 6,730
======= ======
</TABLE>
In light of the Company's history of profitable operations, management has
concluded that it is more likely than not that the Company will ultimately
realize the full benefit of its deferred tax assets related to future deductible
items. Accordingly, the Company believes that no valuation allowance is required
for the deferred tax assets in excess of deferred tax liabilities.
The effective tax rate applied to income before income taxes differs from
the expected federal statutory rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Federal statutory rate.......................... 34.0% 35.0% 34.5%
Addition (reduction) in taxes resulting from:
State income taxes, net of federal tax
benefit.................................... 15.7 4.6 5.0
Non-deductible meals and entertainment........ 13.8 0.1 0.1
Goodwill amortization......................... 3.6 0.2 0.2
Other......................................... 11.2 (0.5) 0.2
--- --- ---
78.3% 39.4% 40.0%
=== === ===
</TABLE>
During fiscal 1994, the Company adopted Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires an asset and liability approach for financial accounting and reporting
of income taxes. Adoption of this statement did not have a material impact on
the Company's operating results.
NOTE 11 -- COMMITMENTS
The Company has arrangements with major vendors and certain financing
companies to develop inventory and accounts receivable financing facilities for
certain reseller customers. These arrangements include repurchase agreements
that would require the Company to repurchase inventory which might be
A-19
<PAGE> 36
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repossessed from a reseller by the vendor or the financing company. As of
October 29, 1995, such repurchases have been insignificant.
NOTE 12 -- EMPLOYEE BENEFIT PLAN
In July 1988, a deferred compensation plan (the "Savings Plan") became
effective for all eligible employees of the Company under the provisions of
Section 401(k) of the Internal Revenue Code. Employees are eligible to
participate after one year of service and may contribute a percentage of their
salary subject to certain limitations. Subject to certain profitability
requirements, the Company has historically matched 25% of the employee
contribution up to a maximum employee contribution of 6%, as defined in the
Savings Plan. Participants are at all times fully vested in their contributions,
and the Company contributions, if any, become fully vested to the participant
after five years of employment.
In April 1989, the Company amended and restated the Savings Plan to include
a leveraged Employee Stock Ownership Plan and Trust (the "ESOT") for eligible
employees. The ESOT used proceeds of loans from the Company to purchase 312,500
shares and 157,827 shares of the Company's common stock for $2,396,000 and
$1,105,000 during the years ended September 30, 1990 and 1989, respectively.
The Company's stock is held by the ESOT trustee as collateral for the loans
from the Company. The Company makes periodic contributions to the ESOT which are
used to make loan principal and interest payments. A portion of the common stock
is allocated to the accounts of participating employees annually based upon
principal and interest payments. The Company, using the shares allocated method,
recognized contribution expenses of $675,000, $694,000, and $731,000 during the
fiscal years ended October 29, 1995, October 30, 1994 and September 30, 1993,
respectively.
The loans from the Company to the ESOT are payable in quarterly
installments ending March 31,1997. Interest is payable quarterly at rates equal
to 85% of prime and prime plus 0.75%. The Company's receivable from the ESOT is
recorded as a separate reduction of the Company's stockholders' equity.
NOTE 13 -- NOTE RECEIVABLE -- STOCK PURCHASE AGREEMENT
During fiscal 1994, the Company exchanged 72,728 shares of common stock for
a $2,000,000 convertible subordinated debenture. The debenture is payable on
February 8, 1998, and accrues interest at the rate of 9% per annum, payable on a
quarterly basis. The note is secured by the Company's common shares issued in
exchange for the note as well as certain other rights.
A-20
<PAGE> 37
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 29, OCTOBER 30, SEPTEMBER 30,
1995 1994 1993
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Details of acquisitions:
Fair value of assets acquired................. $ 1,252 $20,158 $ --
Liabilities assumed and acquisition -- related
accruals................................... $ 383 $17,549 $ --
Cash acquired................................. $ -- $ 354 $ --
Details of other investing activities:
Note receivable exchanged for 72,728 shares of
the Company's stock (See Note 13).......... $ -- $ 2,000 $ --
Details of other financing activities:
Capital lease obligations executed for
equipment.................................. $ 4,726 $ 2,780 $ 879
Cash paid for:
Interest...................................... $ 3,370 $ 1,263 $ 723
Income taxes.................................. $ 9,050 $12,449 $ 6,923
</TABLE>
NOTE 15 -- LITIGATION
On July 14 through July 19, 1994, seven class action complaints were filed
in the United States District Court for the District of Arizona against the
Company, certain of its officers and directors, and, in three of the lawsuits,
one of the underwriters of the Company's June 16, 1994 public offering of common
stock. On December 5, 1994, the Court consolidated the seven actions into a
single action. On February 16, 1995, plaintiffs filed and served an amended,
consolidated complaint against the Company, certain officers and directors of
the Company, and three of the underwriters of the Company's June 16, 1994 public
offering of common stock ("the Complaint"). The Complaint purports to be brought
on behalf of a class of purchasers of the Company's common stock during the
period April 13, 1994 through July 14, 1994. The Complaint alleges, among other
things, that the Company violated federal securities laws by making misleading
public statements and omitting material facts regarding the Company's operations
and financial results, which the plaintiffs contend to have artificially
inflated the price of the Company's common stock during the alleged class
period. The Complaint seeks unspecified compensatory damages as well as fees and
costs. On April 28, 1995, the Company filed a motion to dismiss the Complaint in
its entirety. The motion was heard on July 31, 1995; no decision has yet been
issued. Discovery is ongoing. The Company and the individual defendants deny the
plaintiffs' allegations of wrongdoing and intend to vigorously defend themselves
in these actions. The proceeding is in its early stages, however, and its
outcome cannot be predicted with certainty at this time.
NOTE 16 -- RESTRUCTURING AND OTHER ONE-TIME CHARGES
During the fourth fiscal quarter of 1995, the Company approved and
implemented actions targeted at reducing expenses and improving profitability.
The Company's consolidated statement of income for fiscal
A-21
<PAGE> 38
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 includes $9.0 million of pretax charges ($5.4 million net of tax benefits,
or $0.38 per share) for restructuring and other one-time charges, consisting of
the following (in thousands):
<TABLE>
<S> <C>
Charges associated with the sale of a memory distribution business.......... $5,563
Charges associated with outsourcing a business function..................... 1,517
Charges associated with staff reductions.................................... 1,170
Other one-time charges...................................................... 779
------
Total restructuring and other one-time charges.............................. $9,029
======
</TABLE>
All actions related to the restructuring were implemented as of October 29,
1995, and the liability for restructuring activities at October 29, 1995 was not
material.
NOTE 17 -- RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121 -- Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Effective for fiscal years beginning after December 15, 1995, the standard
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company does not believe
that adoption of this Statement will have a material impact on its financial
position or results of operations.
Statement of Financial Accounting Standards No. 123 -- Accounting for
Stock-Based Compensation. The accounting requirements are effective for
transactions entered into in fiscal years beginning after December 15, 1995. The
disclosure requirements are effective for fiscal years beginning after December
31, 1995. Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB Opinion No. 25 must include the effects of
all awards granted in fiscal years that begin after December 15, 1994. This
Statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. This Statement defines the fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has not completed an
evaluation of the effect of this Statement.
Statement of Position 94-6 -- Disclosure of Certain Significant Risks and
Uncertainties. Effective for fiscal years ending after December 15, 1995, the
statement of position provides guidance on financial statement disclosures of
risks and uncertainties that could significantly affect the amounts reported in
the financial statements in the near term. Such risks and uncertainties can stem
from the nature of the Company's operations, from the necessary use of estimates
in the preparation of the Company's financial statements, and from significant
concentrations in certain aspects of the Company's operations. The Company
expects to adopt this statement during fiscal 1996. Management will continue to
assess the impact of implementation.
A-22
<PAGE> 39
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market under
the symbol MICA and has been quoted on the Nasdaq National Market since July 1,
1987. The following table sets forth the quarterly high and low sale prices for
the common stock as reported by the Nasdaq National Market for the two most
recent fiscal years:
<TABLE>
<CAPTION>
RANGE OF SALE
PRICES(1)
---------------
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1994
First Quarter.................................................... $28 5/6 $16 1/3
Second Quarter................................................... $32 3/8 $20
Third Quarter.................................................... $28 $9 9/16
Fourth Quarter................................................... $15 3/4 $10
FISCAL 1995
First Quarter.................................................... $12 1/2 $10 3/4
Second Quarter................................................... $11 3/4 $8 5/8
Third Quarter.................................................... $14 7/8 $9 13/16
Fourth Quarter................................................... $13 1/8 $8 1/8
</TABLE>
- - ---------------
(1) On December 8, 1993, the Company's Board of Directors declared a 3- for-2
stock split effected in the form of a Common Stock dividend that was paid on
January 13, 1994. All prices in this table give effect to the stock split.
As of December 31, 1995, there were approximately 447 stockholders of
record of the common stock. The Company believes that as of such date there were
approximately 6,900 beneficial holders of the common stock.
The Company has never declared or paid a cash dividend on its common stock
and does not presently intend to do so. Future dividend policy will depend upon
the Company's earnings, capital requirements, financial condition and other
factors deemed relevant by the Board of Directors.
A-23
<PAGE> 40
PROXY
MICROAGE, INC.
The undersigned hereby appoints Jeffrey D. McKeever and James R.
Daniel and each of them, proxies, with power of substitution and
revocation, acting unanimously and voting or if only one is present
and voting then that one, to vote the shares of stock of MICROAGE,
INC. which the undersigned is entitled to vote, at the annual meeting
of stockholders to be held at the Fiesta Inn, 2100 South Priest Drive,
Tempe, Arizona 85282, on Wednesday, March 13, 1996 at 4:00 p.m.,
Arizona time, and at any adjournment or adjournments thereof, with all
the powers the undersigned would possess if present.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
MICROAGE, INC. AND WILL BE VOTED FOR THE ELECTION OF DIRECTORS UNLESS
MARKED TO WITHHOLD AUTHORITY AND WILL BE VOTED IN ACCORDANCE WITH ANY
SPECIFICATION INDICATED HEREON; IN THE ABSENCE OF A SPECIFICATION AS
TO ANY PROPOSAL, THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL.
1. ELECTION OF DIRECTORS:
For all nominee(s) listed below except as marked to the contrary.
/ / FOR / / AGAINST / / ABSTAIN
Instruction: To withhold authority to vote for any individual nominee,
strike a line through that nominee's name below.
CLASS I DIRECTORS:
Nominees: William H. Mallender Lynda M. Applegate
CLASS III DIRECTOR:
Nominee: Roy A. Herberger, Jr.
(Continued, and to be marked, dated and signed, on other side)
<PAGE> 41
(continued from other side)
2. Upon any other matter which may properly come before the meeting
Signature:
Date:
Signature:
Date:
(Sign name exactly as imprinted
hereon. If signing as attorney,
executor, administrator,
trustee or guardian give full
title as such. If signer is a
corporation, give full
corporate name and have signed
by duly authorized officer
showing the officer's title.)
PLEASE SIGN AND DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
