SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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:
[ ] 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 Rule 14a-11(c) or Rule 14a-12
MicroAge, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] 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:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed pursuant to
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[ ] 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:
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<PAGE>
MICROAGE(R), INC.
2400 SOUTH MICROAGE WAY
TEMPE, ARIZONA 85282-1896
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 2, 1997
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 Company Sales
Center, 3015 South Priest Drive, Tempe, Arizona 85282, on Wednesday, April 2,
1997, at 4:00 p.m., Arizona time, for the following purposes:
1. to elect two Class II Directors to serve until the 2000 Annual Meeting
of Stockholders or until their successors are 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 February 7, 1997 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 21, 1997.
YOUR VOTE IS IMPORTANT!
By order of the Board of Directors,
/s/ ALAN P. HALD
ALAN P. HALD
Secretary
Tempe, Arizona
February 20, 1997
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT ........................................................... 1
ELECTION OF DIRECTORS ................................................... 1
NOMINEES ............................................................. 2
DIRECTORS CONTINUING IN OFFICE ....................................... 2
SECURITY OWNERSHIP OF MANAGEMENT AT JANUARY 15, 1997 .................... 3
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS ...................... 4
PRINCIPAL STOCKHOLDERS .................................................. 5
EXECUTIVE COMPENSATION .................................................. 6
SUMMARY COMPENSATION TABLE ........................................... 6
OPTION/SAR GRANTS IN LAST FISCAL YEAR ................................ 8
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/SAR VALUES .......................................... 9
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING .................... 9
TEN-YEAR OPTION/SAR REPRICING ........................................ 10
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PENSION BENEFITS .............. 10
EMPLOYMENT CONTRACTS AND RELATED MATTERS ............................. 11
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION ....... 12
STOCK PERFORMANCE GRAPH ............................................. 14
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ................. 15
REQUIREMENTS
AUDITORS ................................................................ 15
STOCKHOLDER NOMINATIONS AND PROPOSALS ................................... 15
OTHER INFORMATION ....................................................... 16
APPENDIX A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS A-1
REPORT OF INDEPENDENT ACCOUNTANTS ....................................... A-6
CONSOLIDATED FINANCIAL STATEMENTS ....................................... A-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................. A-11
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................................. A-24
1
<PAGE>
MICROAGE, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 2, 1997
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, April 2, 1997, at 4:00 p.m., Arizona time (the "1997 Annual
Meeting"), and at any adjournment or adjournments thereof. Only stockholders of
record at the close of business on February 7, 1997 (the "Record Date") will be
entitled to notice of and to vote at the meeting. On the Record Date, the
Company had outstanding 14,839,561 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 1997 Annual Meeting and voting in person. This Proxy
Statement and the enclosed proxy are first being mailed to stockholders on or
about February 20, 1997.
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 1997 Annual Meeting. If a quorum is present,
a plurality of the votes cast at the 1997 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
telecopy, or telephone. The Company has retained American Stock Transfer and
Trust Company to assist in providing annual services, including the distribution
of proxy solicitation materials and the solicitation of proxies for an
anticipated fee of $4,200, 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 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 1997 Annual
Meeting, two Class II directors will be elected to serve until the 2000 Annual
Meeting of Stockholders or until their successors are duly elected and
qualified.
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.
1
<PAGE>
NOMINEES
NOMINEES FOR ELECTION AS CLASS II DIRECTORS
(TERM TO EXPIRE AT 2000 ANNUAL MEETING)
JEFFREY D. MCKEEVER, 54, has served as Chief Executive Officer of the Company
since February 1987 and as Chairman of the Board since October 1991. 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 June 1995 to
January 1996, from January 1993 to February 1993, and from February 1987 to
October 1991, as Chairman of the Board and Secretary from October 1976 to
February 1987, and as 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. Mr.
McKeever was elected as a Class III director at the 1995 Annual Meeting with a
term to expire at the 1998 Annual Meeting. In order to equalize the number of
director positions in each class, on January 31, 1997, Mr. McKeever submitted
his resignation as a Class III director, effective immediately prior to the
commencement of the election of directors at the 1997 Annual Meeting, and the
Board of Directors has nominated Mr. McKeever for election as a Class II
director.
STEVEN G. MIHAYLO, 53, 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.
DIRECTORS CONTINUING IN OFFICE
CLASS I DIRECTORS
(TERM TO EXPIRE AT 1999 ANNUAL MEETING)
WILLIAM H. MALLENDER, 61, 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, 47, 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.
CLASS III DIRECTORS
(TERM TO EXPIRE AT 1998 ANNUAL MEETING)
FRED ISRAEL, 69, 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 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.
ROY A. HERBERGER, JR., 54, 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.
2
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AT JANUARY 15, 1997
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE 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 .............. 528,838 (2) 3.5%
Alan P. Hald
Vice-Chairman of the Board and Secretary ........................ 379,683 2.6%
William H. Mallender
Director ........................................................ 9,334 (3)
Steven G. Mihaylo
Director ........................................................ 9,834 (3)
Fred Israel
Director ........................................................ 133,333 (3)
Lynda M. Applegate
Director ........................................................ 1,000 (3)
Roy A. Herberger, Jr.
Director ........................................................ 1,500 (3)
Robert G. O'Malley
President ....................................................... 18,091 (3)
James R. Daniel
Senior Vice President, Chief Financial Officer and Treasurer .... 106,538 (3)
Christopher J. Koziol
Senior Vice President-Sales and President, Distribution Group .... 47,266 (3)
All executive officers and directors as a group (15 persons) ....... 1,322,921 8.7%
</TABLE>
- ----------
(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 January 15, 1997 or within 60 days thereafter, or in which
the listed individual (or group member) otherwise has a beneficial
interest. At January 15, 1997, all directors and executive officers as a
group owned beneficially an aggregate of 1,322,921 shares (8.7%) of which
405,020 shares, including 131,846 shares for Mr. McKeever, 59,460 shares
for Mr. Hald, 1,834 shares each for Messrs. Mallender, Mihaylo, and Israel,
16,000 shares for Mr. O'Malley, 87,960 shares for Mr. Daniel, and 37,695
shares for Mr. Koziol, are subject to stock options granted by the Company
that were exercisable on January 15, 1997 or within 60 days thereafter.
(2) Mr. McKeever disclaims beneficial ownership in 11,550 of these shares held
by family members.
(3) Common Stock beneficially owned does not exceed one percent of the
outstanding Common Stock at January 15, 1997.
3
<PAGE>
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 nine
times during the fiscal year ended November 3, 1996 ("fiscal year 1996"). 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. The annual retainer fee was raised to $18,000 effective January 1,
1997. Effective January 1, 1997, each Committee Chairperson will receive an
additional annual retainer fee of $3,000. 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 1996, and consisted of Messrs. Mallender (Chairman),
Mihaylo, Israel, and Herberger.
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 six times
during fiscal year 1996, and consisted of Messrs. Mihaylo (Chairman), Mallender,
and Israel, and Ms. Applegate.
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, Israel, and Herberger, and Ms.
Applegate were each granted 1,000 shares of Director Restricted Stock and 1,000
Director Options on November 1, 1996.
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, 1996, the Common Stock must trade at or above (i) $21.32 on or after November
1, 1997; (ii) $23.45 on or after November 1, 1998; and (iii) $25.80 on or after
November 1, 1999.
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). In the case of
the Director Options granted on November 1, 1996, the exercise price is $19.38
per share. 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 Options granted on November 1, 1996, the Common Stock must
trade at or above (i) $21.32 on or after November 1, 1997; (ii) $23.45 on or
after November 1, 1998; and (iii) $25.80 on or after November 1, 1999.
4
<PAGE>
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 January 15, 1997,
Mr. Israel beneficially owned approximately 0.9% of the outstanding shares of
Common Stock. See "Security Ownership of Management at January 15, 1997" 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:
NUMBER OF SHARES OF PERCENTAGE OF
NAME AND ADDRESS COMMON STOCK COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2)
------------------- --------------------- ---------------------
American Express
Financial Corporation(3)..... 845,800 5.7%
American Express Tower
200 Vesey Street
New York, New York 10285
- ----------
(1) The beneficial ownership information regarding American Express Financial
Corporation is as of December 31, 1996. For certain additional information
with respect to beneficial ownership of the Common Stock, see "Security
Ownership of Management at January 15, 1997," "Executive Compensation," and
"Certain Relationships and Related Transactions."
(2) The percentage of Common Stock beneficially owned is based on the number of
shares of Common Stock outstanding on January 15, 1997.
(3) American Express Financial Corporation is an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940. American Express
Financial Corporation has shared dispositive power with respect to the
845,800 shares and shared voting power with respect to 167,000 shares. The
information contained in this footnote was obtained from a Schedule 13-G
dated December 31, 1996, filed by American Express Financial Corporation
with the Securities and Exchange Commission. The Company makes no
representation as to the accuracy or completeness of the information
reported.
5
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the 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 November 3, 1996, October
29, 1995, October 30, 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPETITION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------- ------------------------ ---------
OTHER ANNUAL STOCK SECURITIES LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(1) ($) ($) OPTIONS/SARS(3) ($) ($)(4)
- --------------------------- ---- ------ ------ ------------ ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever 1996 $460,962 $ 87,121 0 0 306,611 0 $ 98,670
Chairman of the Board of 1995 $462,500 $606,315(2) 0 0 0 0 $122,973
Directors and Chief 1994 $500,000 $128,313 0 0 80,000 0 $ 75,170
Executive Officer
Alan P. Hald 1996 $282,173 $ 46,654 0 0 135,638 0 $ 73,190
Vice Chairman of the Board 1995 $282,500 $586,831(2) 0 0 0 0 $ 44,814
of Directors and Secretary 1994 $240,000 $ 65,509 0 0 40,000 0 $ 40,718
Robert G. O'Malley 1996 $245,128 $ 69,883 0 0 65,000 0 $ 16,631
President 1995 $130,577 $ 25,000 0 0 15,000 0 $ 7,794
James R. Daniel 1996 $285,582 $ 77,527 0 0 114,698 0 $ 18,511
Senior Vice President, 1995 $304,167 $ 16,738 0 0 0 0 $ 21,932
Chief Financial Officer, 1994 $260,000 $ 63,754 0 0 60,000 0 $ 2,252
and Treasurer
Christopher J. Koziol 1996 $161,539 $ 77,190 0 0 71,192 0 $ 15,065
Senior Vice President-Sales 1995 $138,551 $ 20,741 0 0 0 0 $ 12,357
and President, Distribution 1994 $142,000 $ 33,500 0 0 35,000 0 $ 2,265
Group
</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
(other than Mr. O'Malley, who began his employment with the Company on May
15, 1995, and, therefore, was not employed by the Company at the time the
MEP was adopted) 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.
6
<PAGE>
(3) The 1996 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 calendar year 1993, 1994, 1995, and 1996 compensation. The
total number of MEP options granted to each of the named individuals (other
than Mr. O'Malley, who did not participate in the MEP because he was not
employed by the Company at the time the MEP was adopted) under the MEP and
the compensation amounts waived by each of the named individuals (other
than Mr. O'Malley) under the MEP is as follows: Mr. McKeever (241,611;
$600,000); Mr. Hald (125,638; $312,000); Mr. Daniel (104,698; $260,000);
and Mr. Koziol (43,692; $108,000). In accordance with Securities and
Exchange Commission rules, the MEP options originally granted during fiscal
year 1994 are reported under fiscal year 1996 as a result of the MEP option
repricing that occurred in fiscal year 1996. See "Report of the
Compensation Committee on Repricing" for a discussion of the MEP option
repricing. Accordingly, the options reported for fiscal year 1994 have been
reduced for each of the named individuals (other than Mr. O'Malley) as
follows: Mr. McKeever (241,611); Mr. Hald (125,638); Mr. Daniel (104,698);
and Mr. Koziol (43,692).
During the 1993, 1994, 1995, and 1996 fiscal years, the MEP compensation
reductions for each of the named individuals (other than Mr. O'Malley) were
as follows: Mr. McKeever (1993: $75,000 bonus reduction; 1994: $125,000
bonus reduction; 1995: $62,500 salary reduction; 1996: $78,125 salary
reduction and $250,000 bonus reduction); Mr. Hald (1993: $104,000 bonus
reduction; 1994: $20,000 salary reduction and $65,000 bonus reduction;
1995: $32,500 salary reduction; 1996: $40,625 salary reduction and $45,000
bonus reduction); Mr. Daniel (1993: $104,000 bonus reduction; 1994: $65,000
bonus reduction; 1995: $10,833 salary reduction; 1996: $13,542 salary
reduction and $65,000 bonus reduction); and Mr. Koziol (1993: $49,500 bonus
reduction; 1994: $30,000 bonus reduction; 1995: $5,833 salary reduction;
1996: $7,292 salary reduction and $15,000 bonus reduction). As of December
31, 1996, the named individuals have no remaining amounts to be waived
under the MEP. No SARs were granted during fiscal year 1996.
(4) The 1996 amounts include, as to each named individual, the following
amounts for the indicated purposes: Mr. McKeever (life insurance premiums:
$96,420 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:
$70,940 and 401(k) Plan contribution: $2,250) Mr. O'Malley (life insurance
premiums: $15,506 and 401(k) Plan contribution: $1,125); Mr. Daniel (life
insurance premiums: $16,679 and 401(k) Plan contribution: $1,832); and Mr.
Koziol (life insurance premiums: $12,815 and 401(k) Plan contribution:
$2,250).
7
<PAGE>
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
November 3, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS/SARS ASSOCIATES IN PRICE EXPIRATION -------------------------
NAME GRANTED(1) FISCAL YEAR (PER SHARE) DATE 5% 10%
- --------------------- -------------- --------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever 15,000 1.28% $ 8.75 12/13/2005 $ 82,542 $ 209,179
241,611 20.60% $ 8.75 12/14/2003 $1,009,387 $2,417,657
50,000 4.26% $17.88 09/26/2006 $ 562,232 $1,424,806
Alan P. Hald 10,000 0.85% $ 8.75 12/13/2005 $ 55,028 $ 139,452
125,638 10.71% $ 8.75 12/14/2003 $ 524,882 $1,257,184
Robert G. O'Malley 15,000 1.28% $ 8.75 12/13/2005 $ 82,542 $ 209,179
50,000 4.26% $ 9.25 03/14/2006 $ 290,864 $ 737,106
James R. Daniel 10,000 0.85% $ 8.75 12/13/2005 $ 55,028 $ 139,452
104,698 8.93% $ 8.75 12/14/2003 $ 437,401 $1,047,650
Christopher J. Koziol 7,500 0.64% $ 8.75 12/13/2005 $ 41,271 $ 104,589
43,692 3.73% $ 8.75 12/14/2003 $ 182,534 $ 437,200
20,000 1.71% $12.63 05/23/2006 $ 158,859 $ 402,579
</TABLE>
- ----------
(1) The figures in the second row of this column for each of the named
executive officers (other than Mr. O'Malley, who did not participate in the
MEP because he was not employed by the Company at the time the MEP was
adopted) include options originally granted during fiscal year 1994
pursuant to the MEP; in accordance with Securities and Exchange Commission
rules, these options are reported as options granted during fiscal year
1996 as a result of the repricing of these options on December 13, 1995.
See footnote 3 to the "Summary Compensation Table" and "Report of the
Compensation Committee on Repricing" for additional information regarding
the MEP.
(2) In accordance with Securities and Exchange Commission rules, the figures in
the second row of the "5%" and "10%" columns of this table for each of the
named executive officers (other than Mr. O'Malley) assume compounded annual
stock price appreciation of 5% and 10%, respectively, based on a stock
price of $8.75 per share, which was the market price of the Common Stock on
December 13, 1995. Subtracting from the potential realizable value the
compensation amounts waived under the MEP (but not subtracting any
additional amounts for the time value of the waived compensation), the
potential realizable values of the MEP options for each of the named
individuals (other than Mr. O'Malley), assuming an annual stock price
appreciation of 10% through December 14, 2003, the termination date of the
MEP options, are as follows: Mr. McKeever ($1,817,657); Mr. Hald
($945,184); Mr. Daniel ($787,650); and Mr. Koziol ($329,200).
8
<PAGE>
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 November 3,
1996 and the value of such officers' unexercised options at November 3, 1996.
There were no outstanding SARs as of November 3, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY
FISCAL YEAR-END OPTIONS/SARS
SHARES --------------- AT FISCAL YEAR-END
ACQUIRED VALUE EXERCISABLE ------------------------------
NAME ON EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ------------- ---------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever 0 $ 0 112,500 356,611 $1,310,408 $3,332,572
Alan P. Hald 7,500 $108,750 46,500 159,138 $ 520,478 $1,685,751
Robert G. O'Malley 0 $ 0 3,000 77,000 $ 24,735 $ 764,565
James R. Daniel 0 $ 0 63,000 156,698 $ 678,915 $1,671,276
Christopher J. Koziol 0 $ 0 29,100 88,342 $ 298,523 $ 846,819
</TABLE>
- ----------
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING
In December 1995 the Compensation Committee of the Board of Directors
approved a repricing of all outstanding options (the "MEP Options") under the
MicroAge, Inc. 1994 Management Equity Program (the "MEP"). Pursuant to the MEP,
in December 1994 certain of the Company's key officers agreed to reduce their
current and future compensation in exchange for MEP Options. See footnote 3 to
the "Summary Compensation Table" for the amount of compensation waived by some
of these officers pursuant to the MEP. In December 1995 the Compensation
Committee of the Board of Directors determined that the imbalance between the
exercise price of the MEP Options ($24.83 per share) and the lower market price
of the Common Stock that prevailed in December 1995 was not an appropriate
incentive for the officers holding the MEP Options to achieve the Company's
long-term goals. In making this determination, the Compensation Committee
considered, among other things, the fact that the officers participating in the
MEP (a) had made significant personal investments in the Company through
November 1995 to acquire MEP Options (approximately $799,437 in the aggregate)
and (b) were required to make significant additional investments pursuant to the
MEP after November 1995 (approximately $971,063 in the aggregate). With respect
to these further required investments, the Compensation Committee considered the
effect that these investments might have on an officer's willingness to remain
with the Company. The repriced MEP Options have exercise prices of $8.75 per
share, the fair market value on the date of the repricing. Except for the new
exercise price, the terms of the MEP Options remain the same.
STEVEN G. MIHAYLO, CHAIRMAN
LYNDA M. APPLEGATE(1)
FRED ISRAEL
WILLIAM H. MALLENDER
- ----------
(1) Ms. Lynda M. Applegate was elected to the Compensation Committee effective
January 18, 1996, after the option repricing was approved.
9
<PAGE>
TEN-YEAR OPTION/SAR REPRICING
The following table sets forth information concerning the repricing of stock
options with respect to executive officers of the Company during the last ten
completed fiscal years:
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL OPTION
SECURITIES MARKET PRICE OF TERM
UNDERLYING STOCK AT TIME EXERCISE PRICE REMAINING AT
OPTIONS/SARS OF REPRICING OR AT TIME OF NEW DATE OF
REPRICED OR AMENDMENT REPRICING OR EXERCISE REPRICING OR
NAME AND POSITION(1) DATE AMENDED (#) ($) AMENDMENT ($) PRICE ($) AMENDMENT
- ------------------------ ---------- -------------- --------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. McKeever 12/14/95 241,611 $8.75 $24.83 $8.75 8 years
Chairman of the Board
of Directors and
Chief Executive Officer
Alan P. Hald 12/14/95 125,638 $8.75 $24.83 $8.75 8 years
Vice-Chairman of the
Board of Directors
and Secretary
James R. Daniel 12/14/95 104,698 $8.75 $24.83 $8.75 8 years
Senior Vice President,
Chief Financial Officer,
and Treasurer
Christopher J. Koziol 12/14/95 43,692 $8.75 $24.83 $8.75 8 years
Senior Vice-President,
Sales and President,
Distribution Group
</TABLE>
- ----------
(1) Mr. O'Malley is not referenced in this table because he was not employed by
the Company at the time the MEP was adopted and, accordingly, did not
participate in the MEP, pursuant to which the referenced options were
originally granted.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PENSION BENEFITS
PENSION TABLE YEARS OF SERVICE
------------------------------------------------------
FINAL AVERAGE PAY 5 10 15 20 25
---------- ---------- ---------- ---------- ----------
$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
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 the average of a
participant's compensation (generally defined as "wages" under Internal Revenue
Code (the "Code") Section 3401(a)) for the highest five calendar years out of
the fifteen calendar years preceding retirement or termination, 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
10
<PAGE>
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. Messrs. McKeever and Hald are currently the only participants 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. Currently, Mr. Hald does not have any 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 the employment agreements of
Messrs. McKeever and Hald, respectively, which provide a pre-retirement death
benefit of $3,000,000 and $1,000,000, respectively. The imputed income for the
death coverage is included in the insurance premiums paid on behalf of Messrs.
McKeever and Hald and referenced in footnote 4 to the Summary Compensation
Table.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
Messrs. McKeever, Hald, O'Malley, Daniel, and Koziol are each employed
pursuant to an employment agreement with the Company for a period of three years
for each of Messrs. McKeever and Hald, two years for each of Messrs. O'Malley
and Daniel, and one year for Mr. Koziol. Each agreement is terminable by either
party at any time and provides for an automatic renewal of the agreement unless
otherwise terminated so that the remaining term of the agreement is always the
length of each of the named officer's original terms described immediately
above. 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, O'Malley, and Daniel, and 12 months for
Mr. Koziol. 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 Messrs. O'Malley and Daniel: two times (i) his base
salary and (ii) his incentive bonus for the prior fiscal year; and for Mr.
Koziol: 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. O'Malley, Daniel, and Koziol:
(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's and Hald's employment for specified circumstances, including a
material change in the employment relationship, a change in control of the
Company, or 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.
11
<PAGE>
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 five leading published surveys
of executive compensation levels at comparable companies in the high technology
industry as well as with recent proxy data for ten publicly-traded companies
also involved in the manufacturing, integration, and distribution of computer
information technology products and services. In order to maximize the incentive
elements of the executive officers' total compensation packages, the
Compensation Committee attempts to set the base salary and benefits component of
these packages within the competitive range of salary and benefits levels of the
executive officers of the ten comparative companies. The Compensation Committee
reviews each executive officer's base salary and benefits on at least an annual
basis.
Annual Incentive Bonus. The second component of the Company's executive
compensation package is an annual incentive bonus. At the beginning of fiscal
year 1996, the Compensation Committee established bonus compensation formulas
for the Company's executive officers that gave each 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 1996 bonus plan (the "1996 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. In accordance with this formula, if, at fiscal year 1996 year
end, actual Company income was less than 50% of targeted income, the executive
officers would not receive a bonus award. If, on the other hand, actual Company
income was 50% or more of targeted income, each executive officer would receive
a bonus award calculated pursuant to a formula based upon the following three
factors: (i) actual Company income as compared to target income, (ii) actual
Company return on equity as compared to targeted return on equity, and (iii) the
particular executive officer's annual base salary. Under this formula, if actual
Company income and return on equity equaled targeted Company income and return
on equity, each of Messrs. McKeever, Hald, O'Malley, Daniel, and Koziol would
receive a bonus equivalent of 50% of his annual base salary. The named executive
officers received the cash incentive bonuses reflected in the Summary
Compensation Table on page 6 of this Proxy Statement (such amounts, which are
net of any amounts waived under the MicroAge, Inc. 1994 Management Equity
Program (the "MEP") also include fixed bonuses of $37,121, $17,637, and $16,738
for
12
<PAGE>
Messrs. McKeever, Hald, and Daniel, respectively, as well as cash incentive
bonuses in addition to the amounts received under the 1996 Bonus Plan for
Messrs. McKeever, O'Malley, and Daniel, respectively, as compensation for each
of these individuals' significant contribution to the Company's financial
performance during fiscal year 1996).
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 1996, 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.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In fiscal year 1996, 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
($75,000 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 ten companies that are also involved in the manufacturing,
integration, and distribution of computer information technology products and
services. The Compensation Committee set Mr. McKeever's base salary at
approximately the median level within the salary range of chief executive
officers in the comparative group.
Under the 1996 Bonus Plan discussed above under "Annual Incentive Bonus" and
as a result of Mr. McKeever's significant contribution to the Company's
financial results during fiscal year 1996, Mr. McKeever received an incentive
bonus of $300,000. Mr. McKeever chose to participate in the MEP during December
1993 and at that time irrevocably waived $600,000 of salary and bonuses in
return for options on 241,611 shares of Common Stock with a $8.75 per share
exercise price (after repricing approval in December 1995 -- see "Report of the
Compensation Committee on Repricing"). See footnote 3 to the "Summary
Compensation Table" for a discussion of the MEP. For fiscal year 1996, Mr.
McKeever waived $75,000 of his salary and $250,000 of his incentive bonus,
satisfying his compensation waiver amounts under the MEP. Currently, Mr.
McKeever does not have any salary or bonus amounts remaining to be waived under
the MEP.
Overall, the Compensation Committee believes that Mr. McKeever has managed
the Company well in a challenging business climate and has achieved excellent
results in comparison to competitors in fiscal year 1996. The Company earned
$13.2 million in fiscal year 1996 compared to approximately $241,000 in fiscal
year 1995 (which included restructuring and other one-time charges of
approximately $9 million). Other indications of the Company's success during
fiscal year 1996 can be determined by reviewing key financial indicators at
November 3, 1996 versus October 29, 1995, including the following: the Company's
annual revenues increased from approximately $2.9 billion to approximately $3.5
billion; the market value of the Company's Common Stock increased from $8.125
per share to $19.375 per share; and the Company's market capitalization
increased from approximately $117 million to approximately $283 million.
In light of the Company's performance during fiscal year 1996 and Mr.
McKeever's contributions to that performance, the Compensation Committee
increased Mr. McKeever's base salary from $525,000 per year to $600,000 per
year, effective November 4, 1996. Based on the comparative group compensation
levels, this places Mr. McKeever's base salary at approximately the median level
within the salary range of chief executive officers in the comparative group.
13
<PAGE>
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. 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. 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
LYNDA M. APPLEGATE
FRED ISRAEL
WILLIAM H. MALLENDER
STOCK PERFORMANCE GRAPH
The following graph compares the total cumulative stockholder return on the
Company's Common Stock for the period September 30, 1991 through November 3,
1996 with the cumulative total return on the (a) Nasdaq Index, (b) Standard &
Poor's 400 MidCap Index, an index that includes 400 companies with a total
capitalization of $681 billion, and (c) Standard & Poor's 600 SmallCap Index, an
index that includes 600 companies with a total capitalization of $290 billion.
The comparison assumes that $100 was invested on September 30, 1991 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 & Poor's
400 MidCap 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. The Company intends to use the Standard & Poor's
400 MidCap Index as a comparative measure in the future because it believes it
currently is a more representative comparative index than the Standard & Poor's
600 SmallCap Index.
STOCK PERFORMANCE
Year-end Cumulative Return
1991 1992 1993 1994 1995 1996
MICA 100 84 226 165 114 271
NASDAQ 100 111 145 148 197 232
S&P 400 MIDCAP 100 110 134 134 161 185
S&P 600 SMALLCAP 100 109 148 144 172 205
14
<PAGE>
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 wishes (or certain of his transferees 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, O'Malley, Daniel, and Koziol. See "Executive Compensation -- Employment
Contracts and Related Matters."
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE 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 1996 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 2, 1997. 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 1998 annual meeting of stockholders, the
nomination or proposal must be received by February 1, 1998. 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.
15
<PAGE>
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 1998 annual meeting of stockholders must be received by the Company by
October 17, 1997 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 November 3, 1996 (the "1996 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 1996 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) 366-2414.
16
<PAGE>
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:
FISCAL YEARS ENDED
--------------------------------------
NOV. 3, OCT. 29, OCT. 30,
1996 1995 1994
------------ ------------ ------------
Revenue ..................................$3,516,446 $2,941,100 $2,220,816
Cost of sales ............................ 94.7% 94.8% 94.8%
------------ ------------ ------------
Gross profit ............................. 5.3 5.2 5.2
Operating and other expenses
Operating expenses ..................... 4.2 4.3 3.7
Restructuring and other one-time charges -- 0.3 --
------------ ------------ ------------
Total .................................... 4.2 4.6 3.7
------------ ------------ ------------
Operating income ......................... 1.0 0.6 1.5
Other expenses -- net .................... 0.4 0.5 0.3
------------ ------------ ------------
Income before income taxes ............... 0.7 0.0 1.2
Provision for income taxes ............... 0.3 0.0 0.5
------------ ------------ ------------
Net income ............................... 0.4% 0.0% 0.7%
============ ============ ============
Fiscal Year Ended November 3, 1996 Versus Fiscal Year Ended October 29, 1995
Total Revenue. Total revenue during fiscal 1996 was $3.5 billion, $2.1
billion (61%) of which was attributable to the Company's distribution business,
and $1.4 billion (39%) of which was attributable to the Company's systems
integration business. The Company's distribution business is conducted through
the MicroAge Distribution Group, which provides more than 20,000 technology
hardware and software products and value-added services to reseller customers
worldwide. The Company's systems integration business is conducted through the
MicroAge Integration Group, which provides distributed computing solutions to
large corporations, government agencies, and educational institutions worldwide
through a global network of qualified resellers, which includes affiliated
branches and thirteen Company-owned resellers. See "Business -- Business Groups"
in Part 1, Item 1 of the 1996 Form 10-K for additional information about the
MicroAge Distribution Group, the MicroAge Integration Group, and the Company's
other principal business groups.
Total revenue increased $575 million, or 20%, for the fiscal year ended
November 3, 1996 as compared to the fiscal year ended October 29, 1995. This
revenue increase included a $422 million, or 25%, increase in distribution
business revenue and a $214 million, or 19%, increase in systems integration
business revenue, partially offset by a decrease in revenue due to the sale of
the Company's memory distribution business in the fourth quarter of fiscal year
1995.
The revenue increases were primarily due to sales to resellers (primarily
non-franchised resellers) added since October 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.
The fiscal year ended November 3, 1996 included 53 weeks, while the fiscal
year ended October 29, 1995 included 52 weeks. See Note 3 to the Company's
Consolidated Financial Statements.
During the first three quarters of fiscal 1996, the Company's primary focus
was on improving internal processes and profitability, rather than pursuing
aggressive revenue growth. Revenue for this period grew by 14% compared to the
same period of fiscal 1995. In the fourth quarter of fiscal 1996, the Company
began to emphasize revenue growth. Revenue for the fourth quarter of fiscal 1996
was $1.0 billion, a 35% increase over the fourth quarter of fiscal 1995. The
Company intends to continue to pursue revenue
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<PAGE>
growth; however, there can be no assurances that revenue increases will be
achieved. If revenue does continue to increase, the Company's capital
requirements are likely to increase.
Gross Profit Percentage. The Company's gross profit percentage was 5.3% for
the fiscal year ended November 3, 1996 and 5.2% for the fiscal year ended
October 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 "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
decreased to 4.2% for the fiscal year ended November 3, 1996 compared to 4.3%
for the fiscal year ended October 29, 1995. Operating expenses increased from
$126.4 million for fiscal 1995 to $148.4 million for fiscal 1996. The increase
was primarily due to increased costs as a result of higher volumes.
Restructuring and Other One-Time Charges. The Company's consolidated
statement of income for fiscal 1995 includes $9.0 million of pre-tax charges
($5.4 million net of taxes, or $0.38 per share) for restructuring and other
one-time charges. See "Fiscal Year Ended October 29, 1995 Versus Fiscal Year
Ended October 30, 1994 -- Restructuring and Other One-Time Charges" below.
Other Expenses -- Net. Other expenses -- net decreased to $13.3 million for
the fiscal year ended November 3, 1996 from $15.6 million for the fiscal year
ended October 29, 1995. The decrease is primarily attributable to a decrease in
net financing costs during the year as a result of the Company's focus on
inventory management during the 1996 fiscal year. Days cost of sales in ending
inventory decreased from 37 days at October 29, 1995 to 33 days at November 3,
1996.
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 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.
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.
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 for the year increased by
$43.2 million over the prior year. If expenses had remained at the same
percentage of revenue as in the prior year, the expense increase would have been
$27.0 million. The remainder of the increase was primarily due to facilities
expansion ($3.0 million), increased depreciation
A-2
<PAGE>
as a result of automation initiatives and facilities expansion ($5.8 million),
the addition of a Company- owned location ($6.0 million) and other personnel
additions. Some of the expense increases were made in anticipation of revenue
growth at historical rates. Revenue growth slowed in the last two quarters of
fiscal year 1995 (see "Total Revenue" above) and a decision was made to reduce
expense levels during the fourth quarter. This contributed to the restructuring
charges taken during the fourth quarter.
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.
The charges for the memory distribution business sale included a loss on the
sale of fixed assets and intangible assets of $3.4 million. Also included in
these charges was $1.3 million for asset liquidations and write-offs and other
charges totaling $0.9 million. The pretax loss for the memory distribution
company in fiscal 1995 was $1.7 million. Losses incurred during fiscal 1995 on
the outsourced business function totaled $1.6 million. Most of the costs related
to this business will be eliminated, although some expenses will be incurred for
coordinating the relationship with the outsourcing company. The charges
associated with staff reductions consist primarily of severance pay for 219
associates. See Note 16 of the Company's Consolidated Financial Statements for
additional information regarding the 1995 restructuring 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.
The Company believes the restructuring charges contributed to the Company's
improved financial performance in fiscal 1996 by positively impacting the
Company's earnings and cash flows through a reduction in expenses and the sale
or outsourcing of certain parts of the business that were operating at a loss.
However, there can be no assurance that the restructuring charges will continue
to positively impact the Company's earnings and cash flows.
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.
The financing cost increase included higher expenses from the sale of
receivables under an agreement with a commercial lender ($7.2 million increase),
higher costs from flooring subsidies provided to the lenders that floor product
purchases for the Company's customers ($1.1 million increase) and higher net
interest expense due to higher average borrowings during the fiscal year ($1.6
million increase). The flooring subsidy costs represent amounts paid to finance
companies who provide payment terms to the Company's customers on sales made by
the Company to such customers.
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.
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
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<PAGE>
services, product availability, competitive conditions, and general economic
conditions. In particular, the Company's operating results are sensitive to
changes in the mix of product and service revenues, product margins, inventory
adjustments, and interest rates. See "Products and Vendors" and "Competition" in
Part I, Item 1 of the 1996 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" in Part I, Item 1 of the 1996 Form 10-K), its working
capital requirements will continue to increase.
During the fiscal year ended November 3, 1996, the Company used $4 million of
cash for a business purchase. See Note 14 of the Company's Financial Statements
for information regarding non-cash investing activities. 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
1996 Form 10-K for information regarding competitive pressures.
For the fiscal year ended November 3, 1996, $36 million of cash was provided
by operating activities. Net cash provided by operating activities included an
increase in accounts payable of $91 million, income (before certain non-cash
charges) of $41 million and an increase in accrued liabilities of $9 million,
partially offset by an increase in accounts receivable of $78 million and an
increase in inventory of $26 million. The number of days sales in ending
accounts receivable increased from 22 days at October 29, 1995 to 25 days at
November 3, 1996. The receivable days adjusted for receivables sold under a
financing facility (see discussion below) were 42 days at November 3, 1996
compared to 36 days at October 29, 1995. The increase in receivable days was
primarily due to the continued increases in sales to large end-user customers
through the MicroAge Integration Group. The number of days cost of sales in
ending inventory decreased from 37 days at October 29, 1995 to 33 days at
November 3, 1996. The decrease in inventory days was primarily due to a focus on
controlling inventory levels; however, there can be no assurance that the
inventory level will remain as low as the 33 days reported at November 3, 1996.
For fiscal year 1996, net cash of $28 million used in investing activities
consisted of $24 million for the purchase of property and equipment and $4
million for a business purchase.
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, but will
remain in effect until 90 days after either party to the Agreement gives the
other party notice of termination.
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 November 3, 1996, the net
amount of sold accounts receivable was $191 million, and the effective funding
rate was LIBOR plus 2.1%.
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, provided in the aggregate that
the sum under the A/R Facility and the Supplemental Line of Credit may not
exceed $350 million at any given time. Payments for
A-4
<PAGE>
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 November 3, 1996, the Company had $2
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, $207
million was unused as of November 3, 1996. Utilization of the unused $207
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
November 3, 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.
Although the Company has no material capital commitments, the Company expects
to make capital expenditures of approximately $20 to $25 million in the next
fiscal year.
Inflation
The Company believes that inflation has generally not had a material impact
on its operations or liquidity to date.
A-5
<PAGE>
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 November 3, 1996 and October 29, 1995, and the
results of their operations and their cash flows for the fiscal years ended
November 3, 1996, October 29, 1995 and October 30, 1994, 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 11, 1996
A-6
<PAGE>
MICROAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
NOVEMBER 3, OCTOBER 29,
1996 1995
---------- -----------
Current assets:
Cash and cash equivalents .......................... $ 20,496 $ 13,700
Accounts and notes receivable, net ................. 253,220 183,286
Inventory, net ..................................... 325,213 297,742
Other .............................................. 11,129 13,006
--------- ---------
Total current assets ............................ 610,058 507,734
Property and equipment, net .......................... 53,141 45,689
Intangible assets, net ............................... 17,499 11,201
Other ................................................ 8,807 7,939
--------- ---------
Total assets .................................... $ 689,505 $ 572,563
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 471,318 $ 379,897
Accrued liabilities ................................ 22,478 13,968
Current portion of long-term obligations ........... 2,121 2,908
Other .............................................. 3,573 3,258
--------- ---------
Total current liabilities ...................... 499,490 400,031
Long-term obligations ............................... 3,892 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: November 3, 1996 -- 14,679,640
October 29, 1995 -- 14,459,847 .......... 147 145
Additional paid-in capital ......................... 124,115 122,399
Retained earnings .................................. 62,792 49,539
Loan to ESOT ....................................... (207) (768)
Note receivable -- stock purchase agreement ........ -- (2,000)
Treasury stock, at cost;
Shares: November 3, 1996 -- 97,028
October 29, 1995 -- 115,443 ............. (724) (862)
--------- ---------
Total stockholders' equity ...................... 186,123 168,453
--------- ---------
Total liabilities and stockholders' equity ...... $ 689,505 $ 572,563
========= =========
The accompanying notes are an integral part of these financial statements.
A-7
<PAGE>
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenue ......................................$ 3,516,446 $ 2,941,100 $ 2,220,816
Cost of sales ................................ 3,331,610 2,789,009 2,105,069
------------- ------------- -------------
Gross profit ................................. 184,836 152,091 115,747
Operating and other expenses
Operating expenses ......................... 148,388 126,400 83,226
Restructuring and other one-time charges ... -- 9,029 --
------------- ------------- -------------
Total ................................... 148,388 135,429 83,226
------------- ------------- -------------
Operating income ............................. 36,448 16,662 32,521
Other expenses -- net ........................ 13,317 15,552 5,551
------------- ------------- -------------
Income before income taxes ................... 23,131 1,110 26,970
Provision for income taxes ................... 9,878 869 10,628
------------- ------------- -------------
Net income ...................................$ 13,253 $ 241 $ 16,342
============= ============= =============
Net income per common share
Primary ....................................$ 0.89 $ 0.02 $ 1.22
============= ============= =============
Fully diluted ..............................$ 0.86 $ 0.02 $ 1.22
============= ============= =============
Weighted average common and common equivalent
shares outstanding
Primary .................................... 14,883 14,338 13,385
Fully diluted .............................. 15,397 14,342 13,385
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-8
<PAGE>
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 13,253 $ 241 $ 16,342
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 20,337 15,439 9,280
Provision for losses on accounts and notes
receivable ....................................... 7,629 5,844 3,193
Non-cash restructuring and other one-time charges .... -- 7,410 --
Changes in assets and liabilities net of business
acquisitions:
Accounts and notes receivable .................... (77,563) (52,790) (28,404)
Inventory ........................................ (26,307) 9,280 (117,859)
Other current assets ............................. 1,877 (4,802) (7,146)
Other assets ..................................... (3,668) (1,830) 2,007
Accounts payable ................................. 91,421 50,950 99,460
Accrued liabilities .............................. 8,510 1,833 5,516
Other liabilities ................................ 315 396 1,223
--------- --------- ---------
Net cash provided by (used in) operating activities 35,804 31,971 (16,388)
Cash flows from investing activities:
Purchases of property and equipment .................. (23,991) (22,885) (17,569)
Purchases of businesses and investments in ........... (4,150) (6,099) (8,955)
unconsolidated companies
--------- --------- ---------
Net cash used in investing activities .............. (28,141) (28,984) (26,524)
Cash flows from financing activities:
Amounts received from ESOT ........................... 561 640 595
Proceeds from issuance of stock, net of issuance costs 1,856 1,037 40,305
Principal payments on long-term obligations .......... (3,284) (2,038) (1,418)
--------- --------- ---------
Net cash provided by (used in) financing activities (867) (361) 39,482
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ... 6,796 2,626 (3,430)
Cash and cash equivalents at beginning of period ....... 13,700 11,074 14,504
--------- --------- ---------
Cash and cash equivalents at end of period ............$ 20,496 $ 13,700 $ 11,074
========= ========= =========
Supplemental disclosure to cash flows -- See Note 14
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-9
<PAGE>
MICROAGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 3, 1996, OCTOBER 29, 1995 AND OCTOBER 30, 1994
----------------------------------------------------------------------------------------
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 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
Options for 108,861 common
shares exercised ........................ -- 1 934 -- -- -- -- 935
Contribution of 18,415 treasury ........... -- -- 5 -- -- -- 138 143
shares to employee benefit plan
Issuance of 110,932 shares under
the employee stock purchase
plan .................................... -- 1 777 -- -- -- -- 778
Cancellation of convertible
subordinated debentures due to
acquisition ............................. -- -- -- -- -- 2,000 -- 2,000
Loan payments from ESOT ................... -- -- -- -- 561 -- -- 561
Net income ................................ -- -- -- 13,253 -- -- -- 13,253
------- -------- -------- -------- -------- -------- -------- --------
BALANCE at November 3, 1996 ................ $ -- $ 147 $124,115 $ 62,792 $ (207) $ -- $ (724) $186,123
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-10
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS
MicroAge, Inc. ("MicroAge") is a global systems integrator and a full-line
distributor of information technology products and services. Information
technology solutions offered by the Company include servers, desktops, mobile
computing, mass storage, connectivity, imaging, peripherals, software, and
component products. Unless the context otherwise requires, references to the
"Company" include MicroAge, Inc. and its consolidated subsidiaries, which
include thirteen Company-owned resellers.
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 20% to 50% 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 November 3, 1996 or October 29, 1995.
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 $65.0 and $38.5 million at November 3, 1996 and October 29,
1995, 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 $7,254,000 and $12,255,000 at November 3, 1996 and October 29, 1995,
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 $43,231,000 and $54,083,000 included in
inventory at November 3, 1996 and October 29, 1995, 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 November 3, 1996, sales of COMPAQ Computer
Corporation, Hewlett- Packard Company and IBM products accounted for
approximately 22%, 20% and 14%, respectively, of the 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
November 3, 1996.
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.
A-11
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following reflects the estimated lives by category of property and
equipment:
Furniture, fixtures, equipment and software 3 to 7 years
Equipment under capital lease 4 to 5 years
Leasehold improvements 3 to 5 years
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
$5,343,000 and $4,573,000 of accumulated amortization at November 3, 1996 and
October 29, 1995, 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 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
-----------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Primary
Weighted average common shares ...................... 14,409 14,133 12,755
Stock options and warrants .......................... 474 205 630
------ ------ ------
Weighted average common and common equivalent
shares outstanding ................................ 14,883 14,338 13,385
====== ====== ======
Fully diluted
Weighted average shares from primary calculation .... 14,883 14,338 13,385
Additional stock options and warrants ............... 514 4 --
------ ------ ------
Weighted average common and common equivalent
shares outstanding ................................ 15,397 14,342 13,385
====== ====== ======
</TABLE>
A-12
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The additional stock options and warrants in the fully diluted calculation
are a result of using the market price of the Company's stock at the end of the
period under the treasury stock method.
Franchising Activities
MicroAge distributes its products and services through a network of
franchised and affiliated resellers and Company-owned locations. In fiscal 1996,
193 franchised resellers were added and 203 were eliminated due to transferring
to an affiliate agreement, closing or terminating their agreement, resulting in
779 franchised reseller locations at November 3, 1996. There were 13
Company-owned locations at November 3, 1996. In fiscal 1996, total revenue and
total cost of sales from Company-owned locations were $403,852,000 and
$360,426,000, 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.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
NOTE 3 -- FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest October 31 in each
calendar year. The fiscal year ended November 3, 1996 included 53 weeks. The
fiscal years ended October 29, 1995 and October 30, 1994 included 52 weeks.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
NOVEMBER 3, OCTOBER 29,
1996 1995
------------- -------------
(IN THOUSANDS)
Equipment, furniture, fixtures and software ..... $ 82,528 $ 62,376
Equipment under capital lease .................... 14,179 11,876
Leasehold improvements ........................... 14,071 12,581
Land ............................................. 1,839 164
-------- --------
112,617 86,997
Less: accumulated depreciation and amortization .. 59,476 41,308
-------- --------
$ 53,141 $ 45,689
======== ========
A-13
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 November 3, 1996:
OPERATING CAPITAL
LEASES LEASES
----------- ---------
(IN THOUSANDS)
Fiscal year ending in:
1997 ..................................... $ 6,172 $ 2,557
1998 ..................................... 5,782 1,960
1999 ..................................... 5,383 1,394
2000 ..................................... 4,341 550
2001 ..................................... 3,520 410
Thereafter ............................... 10,737 68
------- -------
Total minimum lease obligations ............... $35,935 6,939
=======
Less: amount representing interest ............ 926
-------
Present value of minimum lease obligations .... $ 6,013
=======
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):
Fiscal year ended:
October 30, 1994 ......... $ 6,017
October 29, 1995 ......... 7,830
November 3, 1996 ......... 10,175
NOTE 6 -- FINANCING ARRANGEMENTS
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, but will
remain in effect until 90 days after either party to the Agreement gives the
other party notice of termination.
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 November 3, 1996, the net
amount of sold accounts receivable was $191 million, and the effective funding
rate was LIBOR plus 2.1%
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, provided in the aggregate that
the sums under the A/R Facility and the Supplemental Line of Credit may not
exceed $350 million at any given time. 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 November 3, 1996, the Company had $2 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.
A-14
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
November 3, 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.
NOTE 7 -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
NOVEMBER 3, OCTOBER 29,
1996 1995
------------- -------------
(IN THOUSANDS)
Capital lease obligations ........... $ 6,013 $ 5,987
Note payable resulting from business purchase -- 1,000
------------- -------------
6,013 6,987
Less: current portion ............... 2,121 2,908
------------- -------------
$ 3,892 $ 4,079
============= =============
Following are the annual maturities of long-term obligations (in thousands):
Fiscal year ending in:
1997 .................. $2,121
1998 .................. 1,691
1999 .................. 1,257
2000 .................. 491
2001 .................. 386
Thereafter ............ 67
------
$6,013
======
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 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.
A-15
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 (ISOs), 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 and ISOs 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 and ISOs 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 also granted in fiscal 1994 to selected employees
in exchange for the employees' 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. 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.
Changes during fiscal 1994, 1995 and 1996 in options outstanding under the
employee stock option plans (including the Incentive Plan) were as follows:
PRICE RANGE
NUMBER ---------------------
OF OPTIONS FROM TO
---------- --------- ---------
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
Granted ............................. 339,000 $ 8.75 $ 14.13
Exercised ........................... (97,125) $ 5.33 $ 10.88
Canceled or expired ................. (157,630) $ 5.33 $ 31.75
----------
Outstanding at November 3, 1996 ....... 1,856,143 $ 4.42 $ 31.75
==========
Exercisable at November 3, 1996 ....... 512,225 $ 4.42 $ 31.75
==========
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, options
to purchase 1,000 shares of common stock were automatically granted, immediately
following each annual meeting of stockholders, to eligible Directors. The option
price is the
A-16
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. As of November 3, 1996, 27,000
options had been granted under this plan at prices ranging from $8.42 to $31.88
per share. There were 7,500 options exercisable as of November 3, 1996. Options
to eligible Directors may no longer be granted under the Directors' Plan.
Instead, eligible Directors are granted options under the 1995 Director Plan
(see below).
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 options vest over three years and are subject
to certain stock price hurdles after each vesting date. As of November 3, 1996,
16,000 options had been granted under this plan at prices ranging from $8.38 to
$19.38 per share. There were 6,000 options exercisable as of November 3, 1996.
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
November 3, 1996, 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.
A-17
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 the 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 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:
FISCAL YEARS ENDED
-------------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
------------- ----------- -----------
(IN THOUSANDS)
Interest expense .......................... $ 1,286 $ 3,370 $1,263
Expenses from sales of accounts receivable. 11,438 10,468 3,274
Other ..................................... 593 1,714 1,014
--------- ---------- ---------
$ 13,317 $ 15,552 $5,551
========= ========== =========
NOTE 10 -- INCOME TAXES
The provision for income taxes consists of the following:
FISCAL YEARS ENDED
---------------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
Current
Federal ........................... $ 6,806 $ 3,905 $ 10,398
State ............................. 1,721 1,065 2,416
Deferred ............................... 1,351 (4,101) (2,186)
--------- --------- -----------
$ 9,878 $ 869 $ 10,628
========= ========= ===========
The components of deferred income tax expense (benefit) from operations are
as follows:
FISCAL YEARS ENDED
----------------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
------------- ------------- ------------
(IN THOUSANDS)
Allowance for doubtful accounts ....... $1,440 $ (2,014) $ (1,142)
Software development costs ............. 433 247 224
Depreciation and amortization .......... (429) (159) (163)
Restructuring reserves ................. 358 (533) --
Inventory valuation reserve ............ (300) (112) (1,382)
State deferral, net of federal benefit 168 (528) (242)
All other -- net ....................... (319) (1,002) 519
------------- ------------- ------------
$1,351 $ (4,101) $ (2,186)
============= ============= ============
A-18
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax assets, which are recorded as a component of other assets or
other current assets, are comprised of the following:
NOVEMBER 3, OCTOBER 29,
1996 1995
----------- -----------
(IN THOUSANDS)
Gross deferred tax assets:
Depreciation and amortization ........... $ 3,682 $ 2,007
Allowance for doubtful accounts ......... 3,265 5,208
Inventory valuation ..................... 2,729 3,067
Deferred service revenue ................ 596 593
Restructuring reserve ................... 234 667
Other ................................... 2,337 1,139
------- -------
Total gross deferred tax assets .... 12,843 12,681
------- -------
Gross deferred tax liabilities:
Software development .................... 1,872 1,347
Other ................................... 471 171
------- -------
Total gross deferred tax liabilities 2,343 1,518
------- -------
Net deferred tax asset ....................... $10,500 $11,163
======= =======
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:
FISCAL YEARS ENDED
-----------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
----------- ----------- -----------
Federal statutory rate .......................... 35.0 % 34.0 % 35.0 %
Addition (reduction) in taxes resulting from:
State income taxes, net of federal tax benefit. 5.6 15.7 4.6
Non-deductible meals and entertainment ........ 0.7 13.8 0.1
Goodwill amortization ......................... 0.2 3.6 0.2
Other ......................................... 1.2 11.2 (0.5)
------ ------ ------
42.7 % 78.3 % 39.4 %
====== ====== ======
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
repossessed from a reseller by the vendor or the financing company. As of
November 3, 1996, such repurchases have been insignificant.
A-19
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company also provides a program whereby the Company may guarantee an
addition to a reseller's credit facility with certain finance companies. As of
November 3, 1996 losses related to the guarantee program have been
insignificant, and the Company's exposure for guaranteed amounts is not
material.
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 $510,000, $675,000, and $694,000 during the
fiscal years ended November 3, 1996, October 29, 1995 and October 30, 1994,
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. During fiscal 1996, the debenture
was forgiven as partial consideration in an agreement for the purchase of
certain assets from the issuer.
A-20
<PAGE>
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
-----------------------------------------
NOVEMBER 3, OCTOBER 29, OCTOBER 30,
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Details of acquisitions:
Fair value of assets acquired ...................... $ 2,000 $ 1,252 $20,158
Liabilities assumed and acquisition-related accruals $ -- $ 383 $17,549
Cash acquired ........................................ $ -- $ -- $ 354
Note forgiven ........................................ $ 2,000 $ -- $ --
Purchase obligation forgiven ......................... $ 1,029 $ -- $ --
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 ... $ 2,303 $ 4,726 $ 2,780
Cash paid for:
Interest ........................................... $ 1,286 $ 3,370 $ 1,263
Income taxes ....................................... $ 4,903 $ 9,050 $12,449
</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. On March 25, 1996, the Court dismissed the majority of the
allegations contained in the Complaint. An agreement in principle has since been
reached to settle the litigation, subject to reducing the settlement terms to
writing and obtaining court approval thereof. The Company's contribution to the
proposed settlement, after the contributions of the Company's directors and
officers insurers, constitutes amounts immaterial to the Company's financial
statements.
A-21
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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):
Charges associated with the sale of a memory distribution business .... $5,563
Charges associated with outsourcing 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
=====
The charges associated with staff reductions consist primarily of severance
pay for 219 associates. The reductions occurred in virtually all areas of the
Company and were completed by October 29, 1995. The amount of benefits paid and
charged against the restructuring liability as of October 29, 1995 was $1.0
million. 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.
The revenue and net operating results of the activities that will not be
continued are as follows (in millions):
1995 1994 1993
-------- -------- ------
Revenue
Memory distribution business .................... $70.5 $47.1 $0.0
Outsourced business function .................... $ 3.5 $ 7.1 $0.3
Pretax income (loss)
Memory distribution business .................... $(1.7) $(0.1) $0.0
Outsourced business function .................... $(1.6) $ 0.0 $0.2
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 will implement
the provisions of SFAS 121 for its fiscal year ending November 2, 1997. 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
A-22
<PAGE>
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
expects to implement the disclosure provisions of SFAS No. 123 for its fiscal
year ending November 2, 1997.
NOTE 18 -- SUBSEQUENT EVENT (UNAUDITED)
On January 15, 1997, the Company completed the acquisition of a previously
franchised reseller location. Under the terms of the acquisition, to be
accounted for as a pooling of interests, a subsidiary of the Company exchanged
640,493 shares of the Company's common stock for all of the outstanding shares
of the acquired company. The financial position and results of operations of the
Company and the acquired company will be combined in fiscal 1997 retroactive to
November 4, 1996. In addition, all prior periods presented will be restated to
give effect to the merger. The impact of the combination on the previously
reported financial position and results of operations of the Company will not be
material.
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<PAGE>
MICROAGE, INC.
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:
RANGE OF SALE
PRICES
-----------------
HIGH LOW
-------- --------
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
FISCAL 1996
First Quarter ...... $ 9 1/2 $ 7 1/2
Second Quarter ..... $10 5/8 $ 9
Third Quarter ...... $15 3/8 $11
Fourth Quarter ..... $20 $12 7/16
As of January 15, 1997, there were approximately 392 stockholders of record
of the common stock. The Company believes that as of such date there were
approximately 3,906 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.
During fiscal 1996, the Company did not sell any equity securities that were
not registered under the Securities Act of 1933, as amended.
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<PAGE>
MICROAGE, INC.
PROXY
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 MicroAge, Inc. Sales
Center, 3015 South Priest Drive, Tempe, Arizona 85282, on Wednesday, April 2,
1997 at 4:00 p.m., Arizona time, and at any adjournment or adjournments thereof,
with all the powers the undersigned would possess if present:
1. ELECTION OF CLASS II DIRECTORS:
FOR __ all the nominees listed below (except as marked to the contrary below)
WITHHOLD __ authority to vote for all nominees listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THAT NOMINEE'S NAME BELOW.
Jeffrey D. McKeever Steven G. Mihaylo
2 Upon any other matter which may properly come before the meeting.
(continued and to be signed on other side)
* * * * * *
<PAGE>
[reverse side of card]
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.
PLEASE SIGN AND DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE
NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
The undersigned hereby revokes proxy or
proxies heretofore given to vote such shares
at said meeting or at any adjournment
thereof.
Date: __________, 1997
----------------------------------
SIGNATURE OF STOCKHOLDER
(Please sign exactly as name appears on this
proxy, indicating, where proper, official
position or representative capacity).
2400 South MicroAge Way
Tempe, Arizona 85282-1896
FIRST CLASS MAIL
IMPORTANT: PLEASE SIGN AND RETURN PROMPTLY
PROXY MATERIAL ENCLOSED
