<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934,
For the quarterly period ended January 28, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15995
MICROAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0321346
(State of incorporation) (I. R. S. Employer
Identification No.)
2400 SOUTH MICROAGE WAY
TEMPE, AZ 85282
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 804-2000
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
---
The number of shares of the registrant's Common Stock (par value $.01 per share)
outstanding at March 8, 1996 was 14,440,916.
<PAGE> 2
INDEX
MICROAGE, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- January 28, 1996 and October 29, 1995.
Consolidated statements of income -- Quarters ended January 28, 1996
and January 29, 1995.
Consolidated statements of cash flows -- Quarters ended January 28,
1996 and January 29, 1995.
Notes to consolidated financial statements -- January 28, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MICROAGE, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
ASSETS
January 28, October 29,
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,562 $ 13,700
Accounts and notes receivable, net 128,784 183,286
Inventory, net 367,161 297,742
Other 12,348 13,006
-------- --------
Total current assets 518,855 507,734
Property and equipment, net 45,030 45,689
Intangible assets, net 10,992 11,201
Other 7,706 7,939
-------- --------
Total assets $582,583 $572,563
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $377,198 $379,897
Accrued liabilities 15,341 13,968
Note payable 10,000 --
Current portion of long-term obligations 2,845 2,908
Other 2,896 3,258
-------- --------
Total current liabilities 408,280 400,031
Long-term obligations 3,673 4,079
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: January 28, 1996 - 14,525,121
October 29, 1995 - 14,459,847 145 145
Additional paid-in capital 122,851 122,399
Retained earnings 51,096 49,539
Loan to ESOT (600) (768)
Note receivable - stock purchase agreement (2,000) (2,000)
Treasury stock, at cost;
Shares: January 28, 1996 - 115,443
October 29, 1995 - 115,443 (862) (862)
-------- --------
Total stockholders' equity 170,630 168,453
-------- --------
Total liabilities and stockholders' equity $582,583 $572,563
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarters ended
--------------------------------
January 28, January 29,
1996 1995
--------------------------------
<S> <C> <C>
Revenue $780,318 $674,319
Cost of sales 740,375 640,052
-------- --------
Gross profit 39,943 34,267
Operating expenses 34,015 25,861
-------- --------
Operating income 5,928 8,406
Other expenses - net 3,158 3,443
-------- --------
Income before income taxes 2,770 4,963
Provision for income taxes 1,213 2,091
-------- --------
Net income $ 1,557 $ 2,872
======== ========
Net income per common share $ 0.11 $ 0.20
======== ========
Weighted average common and
common equivalent
shares outstanding 14,386 14,446
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<TABLE>
<CAPTION>
Quarters ended
----------------------------
January 28, January 29,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,557 $ 2,872
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 4,520 3,155
Provision for losses on accounts and notes receivable 1,782 1,539
Changes in assets and liabilities:
Accounts and notes receivable 52,720 32,643
Inventory (69,419) (62,798)
Other current assets 658 (1,050)
Other assets 233 (810)
Accounts payable (2,699) 12,427
Accrued liabilities 1,373 (144)
Other liabilities (362) (73)
-------- --------
Net cash used in operating activities (9,637) (12,239)
Cash flows from investing activities:
Purchases of property and equipment (3,529) (5,514)
Increases in intangible assets - (182)
-------- --------
Net cash used in investing activities (3,529) (5,696)
Cash flows from financing activities:
Amounts received from ESOT 168 156
Proceeds from stock options exercised 452 261
Net borrowings under line of credit 10,000 19,221
Principal payments on long-term obligations (592) (451)
-------- --------
Net cash provided by financing activities 10,028 19,187
-------- --------
Net increase (decrease) in cash and cash equivalents (3,138) 1,252
Cash and cash equivalents at beginning of period 13,700 11,074
-------- --------
Cash and cash equivalents at end of period $ 10,562 $ 12,326
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MicroAge, Inc.
(the "Company") do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of results for the periods
have been included. Operating results for the quarter ended January 28, 1996 are
not necessarily indicative of the results that may be expected for the year
ending November 3, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended October 29, 1995.
NOTE B - OTHER EXPENSES - NET
Other expenses - net consists of the following:
<TABLE>
<CAPTION>
Quarters ended
-------- - --------
Jan. 28, Jan. 29,
1996 1995
-------- --------
<S> <C> <C>
Interest expense $ 242 $1,070
Expenses from sales of
accounts receivable 2,799 2,136
Other 117 237
------ ------
$3,158 $3,443
====== ======
</TABLE>
NOTE C - FINANCING ARRANGEMENTS
The Company maintains a financing agreement (the "Agreement") which contains a
financing facility of $400 million. The note payable in the accompanying balance
sheet represents borrowings under a line of credit option in the Agreement.
NOTE D - 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.
5
<PAGE> 7
ITEM 2. 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>
Quarter ended
---------------------------------------------------------
Jan. 28, Oct. 29, July 30, April 30, Jan. 29,
1996 1995 1995 1995 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue (in thousands) $780,318 $764,239 $759,082 $743,460 $674,319
Cost of sales 94.9% 94.8% 94.9% 94.7% 94.9%
------- -------- -------- -------- --------
Gross profit 5.1 5.2 5.1 5.3 5.1
Operating and other expenses
Operating expenses 4.4 4.8 4.4 4.1 3.8
Restructuring and other
one-time charges - 1.2 - - -
-------- -------- -------- -------- --------
Total 4.4 6.0 4.4 4.1 3.8
-------- -------- -------- -------- --------
Operating income 0.8 (0.8) 0.7 1.2 1.3
Other expenses - net 0.4 0.5 0.5 0.6 0.6
-------- -------- -------- -------- --------
Income (loss) before income
taxes 0.4 (1.2) 0.2 0.6 0.7
Provision for income taxes 0.2 (0.5) 0.1 0.3 0.3
-------- -------- -------- -------- --------
Net income (loss) 0.2% (0.8)% 0.1% 0.3% 0.4%
======== ======== ======== ======== ========
</TABLE>
TOTAL REVENUE. Total revenue increased $106 million, or 16%, to $780 million
for the quarter ended January 28, 1996 as compared to the quarter ended January
29, 1995. This revenue increase included a $52 million, or 21%, increase in
sales to large accounts, including Company-owned location revenue (Systems
Integrator business) and a $73 million, or 19%, increase in sales to resellers
(Master Distributor business).
The revenue increase was primarily due to sales to resellers added since January
29, 1995, 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 was 5.1% for the
quarter ended January 28, 1996 and for the quarter ended January 29, 1995.
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 also "Potential Fluctuations in
Operating Results" below.
OPERATING EXPENSES. As a percentage of revenue, operating expenses were 4.4% for
the quarter ended January 28, 1996 compared to 3.8% for the quarter ended
January 29, 1995. Operating expenses increased $8.2 million to $34.0 million for
the quarter ended January 28, 1996, as compared to the quarter ended January 29,
1995.
The operating expense increases were primarily due to costs associated with
increased revenue, capacity expansion in both personnel and facilities, the
addition of a Company-owned location and higher depreciation as a result of
expenditures for automation initiatives and facility expansion.
Operating expenses decreased from $36.7 million, or 4.8% of revenue, for the
quarter ended October 29, 1995 to $34.0 million, or 4.4% of revenue, for the
quarter ended January 28, 1996. The $36.7 million for the fourth quarter
6
<PAGE> 8
of fiscal 1995 does not include $9.0 million of restructuring and other one-time
charges associated with actions targeted at reducing expenses and improving
profitability.
OTHER EXPENSES - NET. Other expenses - net decreased from $3.4 million for the
quarter ended January 29, 1995 to $3.2 million for the quarter ended January 28,
1996. This decrease was primarily due to a slight decrease in net financing
costs.
If the Company is successful in achieving continued revenue growth, its working
capital requirements and related financing costs are likely to increase.
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.
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. 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 gross accounts receivable resulting from increased
sales. If the Company is successful in achieving continued revenue growth, its
working capital requirements are likely to increase.
In order to establish or solidify its presence in strategic markets or in
response 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.
For the quarter ended January 28, 1996, $9.6 million of cash was used in
operating activities. Net cash used in operating activities included an increase
in inventory of $69.4 million and a decrease in accounts payable of $2.7
million, offset by a decrease in accounts receivable of $52.7 million, net
income, before certain non-cash items, of $7.9 million, and an increase in
accrued liabilities of $1.4 million.
The number of days cost of sales in ending inventory increased from 37 days at
October 29, 1995 to 45 days at January 28, 1996. This increase was primarily due
to purchases made during the quarter to take advantage of vendor incentive
opportunities. The number of days cost of sales in ending accounts payable
decreased from 47 days at October 29, 1995 to 46 days at January 28, 1996. The
number of days sales in ending accounts receivable decreased from 22 days at
October 29, 1995 to 15 days at January 28, 1996, primarily due to accounts
receivable that were sold under a financing facility (see discussion below). The
receivables days adjusted for sold receivables were 38 days at January 28, 1996
compared to 36 days at October 29, 1995.
For the quarter ended January 28, 1996, $3.5 million was used in investing
activities for the purchase of property and equipment, and net cash of $10.0
million provided by financing activities consisted primarily of borrowings under
the Company's financing facility.
7
<PAGE> 9
The Company maintains a primary financing agreement (the "Agreement") with a
financing facility of $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 January 28, 1996, the net
amount of sold accounts receivable was $203 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 January 28, 1996, the Company had $0.4 million
outstanding under the Inventory Line of Credit (included in the accounts payable
in the accompanying Balance Sheets), and $10 million outstanding under the
Supplemental Line of Credit. As of January 28, 1996, the interest rate on the
Supplemental Line of Credit was 7.56%.
Of the $400 million of financing capacity represented by the Agreement, $187
million was unused as of January 28, 1996. Utilization of the unused $187
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 January 28,
1996, 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.
8
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note D of Notes to Consolidated Financial Statements (Unaudited)
for information regarding a consolidated class action lawsuit against the
Company, its directors, certain of its officers, and three of the underwriters
of the Company's June 16, 1994 public offering of Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 MicroAge, Inc. 1995 Associate Stock Purchase
Plan (Incorporated by reference to Appendix
C to the Company's Proxy Statement for the
Annual Meeting of Stockholders of the
Company held March 15, 1995, File No.
0-15995)
10.2 First Amendment to the MicroAge, Inc. 1995
Associate Stock Purchase Plan (Incorporated
by reference to Exhibit 99.1 to Registration
Statement No. 33-58901)
10.3 Second Amendment to the MicroAge, Inc. 1995
Associate Stock Purchase Plan
11.1 Primary EPS Detail Calculation
11.2 Fully Diluted EPS Detail Calculation
27 Financial Data Schedule
(b) The Company did not file any Reports on Form
8-K during the quarter ended January 28,
1996.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICROAGE, INC.
(Registrant)
Date: March 13, 1996 By: /s/ Jeffrey D. McKeever
-------------------------
Jeffrey D. McKeever
Chairman of the Board and
Chief Executive Officer
Date: March 13, 1996 By: /s/ James R. Daniel
-------------------------
James R. Daniel
Senior Vice President, Chief
Financial Officer and Treasurer
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.1 MicroAge, Inc. 1995 Associate Stock Purchase Plan
(Incorporated by reference to Appendix C to the Company's
Proxy Statement for the Annual Meeting of Stockholders of the
Company held March 15, 1995, File No. 0-15995)
10.2 First Amendment to the MicroAge, Inc. 1995 Associate Stock
Purchase Plan (Incorporated by reference to Exhibit 99.1 to
Registration Statement No. 33-58901)
10.3 Second Amendment to the MicroAge, Inc. 1995 Associate Stock
Purchase Plan
11.1 Primary EPS Detail Calculation
11.2 Fully Diluted EPS Detail Calculation
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.3
SECOND AMENDMENT
TO THE
MICROAGE, INC
1995 ASSOCIATE STOCK PURCHASE PLAN
Effective March 15, 1995, the stockholders of MicroAge, Inc. (the
"Company") approved the adoption of the MicroAge, Inc. 1995 Associate Stock
Purchase Plan (the "Plan"). By the First Amendment to the Plan, the Company
amended the Plan to make various technical changes. By this instrument, the
Company desires to amend the Plan to provide that the "Purchase Date" for shares
shall be the last business day of each Subscription Period rather than the fifth
business day following the last day of each Subscription Period.
1. This Second Amendment shall amend only that Section
specified herein and those Sections not amended hereby shall remain in full
force and effect.
2. Section 2(i) of the Plan, which defines the term
"Purchase Date," shall be amended and restated in its entirety as follows:
(i) "Purchase Date" means the last business day
of each Subscription Period.
3. This Second Amendment shall be effective for
Subscription Periods beginning on or after January 1, 1996.
<PAGE> 1
EXHIBIT 11.1
MICROAGE, INC.
PRIMARY EPS DETAIL CALCULATION
<TABLE>
<CAPTION>
Quarters ended
---------------------------
January 28, January 29,
1996 1995
----------- -----------
<S> <C> <C>
Common stock
- -------------------------------
Weighted average common shares 14,293,201 14,149,745
Common stock equivalents
- -------------------------------
Weighted average warrants and options 92,820 295,834
----------- -----------
Total weighted average common and
common equivalent shares outstanding 14,386,021 14,445,579
=========== ===========
Net income available for EPS $ 1,557,000 $ 2,872,000
Primary EPS $ 0.11 $ 0.20
</TABLE>
<PAGE> 1
EXHIBIT 11.2
MICROAGE, INC.
FULLY DILUTED EPS DETAIL CALCULATION
<TABLE>
<CAPTION>
Quarters ended
-----------------------------
January 28, January 29,
1996 1995
----------- -----------
<S> <C> <C>
Net income available for primary EPS $ 1,557,000 $ 2,872,000
=========== ===========
Shares: per primary EPS 14,386,021 14,445,579
additional shares issuable 2,819 1,765
----------- -----------
14,388,840 14,447,344
=========== ===========
Fully diluted EPS $ 0.11 $ 0.20
=========== ===========
</TABLE>
Note: Since fully diluted EPS affects primary EPS by less than 3%, it is not
disclosed in the financial statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains sumary financial information extracted from the
Consolidated Balance Sheets (Unaudited) as of January 28, 1996 and October 29,
1995 and the Consolidated Statements of Income (Unaudited) for the quarters
ended January 28, 1996 and January 29, 1995 contained in the Form 10-Q for the
quarterly period ended January 28, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-3-1996
<PERIOD-START> OCT-30-1995
<PERIOD-END> JAN-28-1996
<EXCHANGE-RATE> 1
<CASH> 10,562
<SECURITIES> 0
<RECEIVABLES> 142,130
<ALLOWANCES> (13,346)
<INVENTORY> 367,161
<CURRENT-ASSETS> 518,855
<PP&E> 90,643
<DEPRECIATION> (45,613)
<TOTAL-ASSETS> 582,583
<CURRENT-LIABILITIES> 408,280
<BONDS> 0
0
0
<COMMON> 145
<OTHER-SE> 170,485
<TOTAL-LIABILITY-AND-EQUITY> 582,583
<SALES> 780,318
<TOTAL-REVENUES> 780,318
<CGS> 740,375
<TOTAL-COSTS> 740,375
<OTHER-EXPENSES> 34,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242
<INCOME-PRETAX> 2,770
<INCOME-TAX> 1,213
<INCOME-CONTINUING> 1,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,557
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
