FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____________ to _______________
Commission File Number: 0-20730
MICRO WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1192793
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
535 CONNECTICUT AVENUE, NORWALK, CONNECTICUT 06854
(Address of principal executive offices)
(203) 899-4000
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------
Indicate the number of shares outstanding of each of issuer's class of common
stock as the latest practicable date:
CLASS: COMMON STOCK OUTSTANDING SHARES AT MARCH 31, 1996: 34,019,463
------------ ----------
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MICRO WAREHOUSE, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets ...........................................3
Consolidated Statements of Income .....................................4
Consolidated Statements of Cash Flows .................................5
Notes to Unaudited Consolidated Financial Statements ..................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................7
PART II - OTHER INFORMATION................................................10
SIGNATURE .................................................................11
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICRO WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $84,430 $81,614
Marketable securities at market value 17,725 20,580
Accounts receivable, net of allowance for doubtful accounts ($7,279
and $7,498 at March 31, 1995 and December 31, 1995, respectively) 192,184 172,275
Inventories 118,753 143,941
Prepaid expenses and other current assets 34,556 28,156
Deferred taxes 6,288 5,266
----- -----
TOTAL CURRENT ASSETS 453,936 451,832
------- -------
Property, plant and equipment, net 31,188 32,175
Goodwill, net 49,445 44,644
Other assets 2,696 4,133
----- -----
TOTAL ASSETS $537,265 $532,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $57,161 $65,785
Accrued expenses 71,730 36,569
Income taxes 6,190 5,939
Deferred revenue 7,439 4,602
Loans payable, bank 17,786 38,294
Equipment obligations 367 384
--- ---
TOTAL CURRENT LIABILITIES 160,673 151,573
------- -------
Equipment obligations 938 668
--- ---
TOTAL LIABILITIES 161,611 152,241
------- -------
Stockholders' equity:
Preferred stock, $.01 par value: - -
Authorized - 100 shares; none issued
Common stock, $.01 par value:
Authorized - 50,000 shares; issued and outstanding; 34,019 and
33,963 shares at March 31, 1996 and December 31, 1995, respectively 340 339
Additional paid in capital 264,905 265,648
Retained earnings 112,837 117,647
Cumulative translation adjustment (2,407) (1,033)
Valuation adjustment for marketable securities (21) (46)
Treasury stock 0 (2,012)
- ------
TOTAL STOCKHOLDERS' EQUITY 375,654 380,543
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $537,265 $532,784
======== ========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
3
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $514,390 $380,323
Cost of Goods Sold 412,701 293,147
------- -------
Gross Profit 101,689 87,176
Selling, general and administrative 75,736 65,759
Restructuring costs 21,226 0
Merger costs 6,113 0
----- -
Income (loss) from operations before interest,
income taxes and extraordinary charge (1,386) 21,417
Interest income 126 270
--- ---
Income (loss) from operations before income taxes
and extraordinary charge (1,260) 21,687
Provision for income taxes (1,966) (8,610)
------ ------
Income (loss) before extraordinary charge (3,226) 13,077
Extraordinary charge, net of taxes (1,584) 0
------ -
Net income (loss) ($4,810) $13,077
======= =======
Net income (loss) per share ($0.14) $0.40
====== =====
Net income (loss) per share before extraordinary charge ($0.09) $0.40
====== =====
Weighted average number of shares outstanding 34,807 33,021
====== ======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
4
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
---- ----
<S> <C> <C>
Net income (loss) $ (4,810) $ 13,077
------- ------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,072 2,261
Deferred taxes (1,022) (500)
Loss on disposal of fixed assets - 224
Changes in assets and liabilities:
Accounts receivable, net (19,398) (24,207)
Inventories 26,121 (1,815)
Prepaid expenses and other current assets (4,956) (5,901)
Accounts payable-trade (8,686) 18,734
Income taxes payable 251 1,176
Accrued expenses 35,134 (2,452)
Deferred revenue 2,837 821
----- ---
Total adjustments 33,353 (11,659)
------ -------
Net cash provided by operating activities 28,543 1,418
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities, net 2,880 21,602
Purchases or adjustments to acquisitions
of businesses, represented by:
Goodwill (5,149) (1,054)
Other net assets (1,405) -
Acquisition of property, plant and equipment (1,345) (4,263)
Proceeds from sale of equipment - 5
----- ------
Net cash (used) provided by investing activities (5,019) 16,290
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,270 (68)
Bank borrowings, net (20,508) (1,807)
Principal payments of obligations under capital leases (96) (173)
--- ----
Net cash (used) in financing activities (19,334) (2,048)
------ -----
Effect of exchange rate changes on cash (1,374) 3,390
----- ------
Net change in cash 2,816 19,050
CASH AND CASH EQUIVALENTS:
Beginning of period 81,614 36,007
------ ------
End of period $84,430 $55,057
======= =======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
5
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MICRO WAREHOUSE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Micro
Warehouse, Inc. and its subsidiaries (the "Company") and have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
these financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report to Shareholders which was filed as an exhibit to its Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at March 31, 1996 and the results of
operations and cash flows for the three months ended March 31, 1996 and
1995.
2. NET INCOME PER SHARE
Following is an analysis of the components of the shares used to compute
net income per share
THREE MONTHS ENDED
MARCH 31
1996 1995
---------------------------
(IN THOUSANDS)
Shares outstanding at beginning of period 33,963 32,475
Purchase of Treasury Shares - (14)
Incremental shares related to stock options 844 560
--- ---
34,807 33,021
====== ======
3. BUSINESS COMBINATIONS
On January 25, 1996, the Company completed a merger with Inmac Corp. ("Inmac").
Under the terms of the merger, the Company exchanged 3,033,682 common shares for
all of Inmac's 10,816,836 common shares in a transaction accounted for as a
pooling of interests. Accordingly, all historical financial information
contained in these financial statements has been restated to include Inmac. In
connection with this
6
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transaction, the Company has recorded restructuring charges of $21.2 million
comprised of: Personnel (severance) of $10.0 million; facilities (leases and
fixed assets) of $9.6 million; and other of $1.6 million.
4. EXTRAORDINARY CHARGE
The Company recorded an extraordinary charge of $1.6 million related to early
extinguishment of debt (net of tax benefit of $1.1 million) resulting from the
mandatory prepayment of $20 million of Senior Notes of Inmac Corp., which action
was caused by the merger. The extraordinary charge consisted of a premium of
$1.9 million paid on the redemption of the Senior Notes and the write-off of
deferred financing costs of $0.8 million.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Overview
- --------
The Company sells computer products primarily through its two main catalogs,
MacWAREHOUSE and MicroWAREHOUSE. The Company has experienced significant growth
in its customer list, catalog mailings, sales and operating profitability since
its organization in 1987.
In late 1987, the Company introduced its MacWAREHOUSE catalog for users of
Macintosh computers. In 1989, the Company began distributing its first
MicroWAREHOUSE catalog for users of IBM-compatible PCs and instituted its
business-to-business outbound sales program. The Company also publishes targeted
catalogs namely, Data CommWAREHOUSE, directed to the data communications and
networking markets, Micro SystemsWAREHOUSE, offering microcomputer systems and
peripherals to the PC/Windows market and its newest specialty catalog, Mac
SystemsWAREHOUSE, offering Mac computer systems and peripherals to the Mac
market. During 1995, the Company combined the CD-Rom and Home ComputerWAREHOUSE
catalogs with its core catalogs and discontinued its Paper design and Micro
SuppliesWAREHOUSE catalogs.
Over the past few years, the Company has expanded its international operations.
The Company commenced full-scale operations in the United Kingdom in 1991 and in
France and Germany in 1992. In 1993, the Company established a licensing
arrangement in Australia and acquired, through newly-formed foreign
subsidiaries, businesses with operations in Denmark, Norway and Sweden. During
1994, the Company acquired eight additional businesses with operations in
Holland, Belgium, Finland, Norway, Sweden, France, Mexico and Canada. The
Company also began operations in Japan. In 1995, the Company acquired
complimentary businesses in the United Kingdom, Germany, Australia (including
its licensee) and Switzerland. Micro Warehouse international catalog
distribution includes the MacWAREHOUSE, MicroWAREHOUSE and LanWAREHOUSE (the
European counterpart to the U.S. Data CommWAREHOUSE) catalogs.
In January, the Company acquired Inmac Corp. in a stock transaction accounted
for as a pooling of interests. Prior periods have been restated to include Inmac
Corp. and all comparisons and discussions are based on the restated figures.
7
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RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
- --------------------------------------------------------------------------------
Net sales increased by $134.1 million or 35% to $514.4 million for the three
months ended March 31, 1996, from $380.3 million for the three months ended
March 31, 1995. This increase in net sales was primarily attributable to
continued growth in the core domestic business which increased by 45% to $333.7
million. There were 1,265,000 orders fulfilled during the first three months of
1996, which compares to 1,157,000 during the same period last year.
The sales increase was due to increases in the average order size coupled with
increased catalog circulation in both the Macintosh and PC/Windows business
areas. The average order size increased to $442 in 1996 from $359 in 1995 due to
an increase in the proportion of hardware sales which typically have a higher
per unit price than software sales. Circulation of the MacWAREHOUSE catalog
increased by 78% to approximately 13.5 million, the MicroWAREHOUSE circulation
increased by 39% to approximately 8.8 million and the Inmac circulation
increased by 5% to approximately 7.4 million. The Company's business-to-business
sales program, combining outbound telemarketing and catalog mailings to selected
commercial, governmental and educational accounts, increased by 45% over the
comparable period in 1995, and represented approximately 35% of net sales for
the three months ended March 31, 1996. This increase was primarily due to an
increase in the circulation of business-to-business catalogs, an increase in
outbound telemarketing personnel and an increase in penetration to existing
accounts.
International sales decreased to 35% of net sales in the three months ended
March 31, 1996 from 38% in the same period in 1995, but increased in total to
$180.7 million from $143.0 million. The increase in dollars during the three
months ended March 31, 1996 was due primarily to an increase in the number of
catalogs distributed and an increase in the customer base. The decrease, as a
percentage of net sales, was due to Inmac having a high percentage of
international sales with lower growth rates. The total international customer
base increased by 45% and the number of catalogs distributed grew by 3% to
approximately 7.7 million. Of the total international catalogs distributed, the
Inmac circulation decreased by 11% and the Company's circulation increased by
34%. It is the Company's intention to maintain a separate Inmac catalog for the
foreseeable future.
Gross profit, which consists of net sales less product and transportation costs,
decreased as a percentage of net sales to 19.8% in 1996 from 22.9% during the
same period last year. The decrease in gross profit was due to a higher
proportion of hardware sales which are typically at lower margins, as a percent
of sales, than software sales. Hardware as a percent of total sales increased
from 62% in the first quarter of 1995 to 72% in the first quarter of 1996.
Selling, general and administrative expenses increased by 15% to $75.7 million
for the three months ended March 31, 1996 from $65.8 million for the same period
in 1995, but decreased as a percentage of net sales to 14.7% from 17.3%. The
increase in dollars during the three months ended March 31, 1996 was due
primarily to an increase in fulfillment costs resulting from increased sales
volume and increased promotional spending. The decrease, as a percentage of net
sales, was attributable to cost controls coupled with a higher average order
size due to the increased hardware sales.
Operating loss for the first three months of 1996 was $1.4 million as compared
to income of $21.4 million for the same period in 1995. The operating loss in
1996 includes $27.3 million of restructuring and merger
8
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costs relating to the acquisition of Inmac Corp. International operations during
the first quarter of 1996 generated a loss before taxes of $7.2 million as
compared to income before taxes of $1.3 million in the comparable period in
1995. The international net loss in 1996 includes $12.4 million of the total
restructuring and merger costs.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In October 1995, the Company completed a follow-on offering of its common stock
resulting in net proceeds to the Company of $50.8 million. As of March 31, 1996,
the Company had cash and short-term investments totaling $102.2 million.
Inventories decreased to $118.8 million at March 31, 1996 from $144.0 million at
December 31, 1995. Accounts receivable increased to $192.2 million at March 31,
1996 from $172.3 million at December 31, 1995. This represents a 12.0% increase
in accounts receivable on a 35.0% increase in sales. In addition, prepaid
expenses increased by $6.4 million due primarily to the increased purchase of
paper used in catalog production. Overall, operations generated cash of $28.5
million.
Capital expenditures for the first three months of 1996 and 1995 were $1.3
million and $4.3 million, respectively, primarily for computer systems and
distribution equipment both in the United States and internationally. Although
the Company's primary capital needs will be to fund its working capital
requirements for expected sales growth, the Company expects that future growth
will also require continued expansion of its computer systems and distribution
capacity. The Company has a multi-currency borrowing facility for $50 million.
The purpose of this facility is to provide working capital financing for its
foreign subsidiaries in local currencies, thus limiting exposure to foreign
exchange fluctuation. Total borrowings as of March 31, 1996 under this
arrangement were $14.3 million. Additionally, at March 31, 1996 the Company had
an unused line of credit in the United States which provided for unsecured
borrowings of up to $15.0 million for working capital purposes. During the first
quarter, the Company paid off bank debts totaling $25.0 million, including the
Inmac Senior Notes, by using funds from its cash and short-term investments.
The Company believes that its existing cash reserves, cash flow from operations
and existing credit facilities will be sufficient to satisfy its operating cash
needs for at least the next 12 months. Thereafter, the Company may require
additional cash reserves.
OUTLOOK
- -------
The Company expects that the installed base of personal computers will continue
to expand but at slower rates than experienced in the past. Furthermore, Apple
Computer has experienced difficulties in the past two quarters. Although the Mac
business performed well in the 1996 first quarter for the Company with a growth
rate of 50%, this business softened as the quarter progressed, reflecting
uncertainties in the Apple marketplace. The growth rate of this business has
stabilized at approximately 20% for the Company. The growth in the installed
base of personal computers, coupled with the Company's prospecting activities
for new customers should increase the Company's sales in the future.
Furthermore, the Company will continue to pursue acquisition opportunities that
should allow it to increase its customer base and product offerings.
9
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STATEMENT UNDER THE PRIVATE SECURITY LITIGATION REFORM ACT
- ----------------------------------------------------------
With the exception of the historical information contained in this release, the
matters described herein contain forward-looking statements that involve risk
and uncertainties including but not limited to economic, competitive,
governmental and technological factors outside of the control of the Company.
These and other factors are described generally in the MD&A section of the
Company's 1995 Annual Report to Stockholders and most specifically in the
paragraphs in that section captioned "Liquidity and Capital Resources", "Impact
of Inflation and Seasonality", "Subsequent Event", and " Outlook".
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
None
ITEM 2. CHANGES IN SECURITIES
---------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
ITEM 5. OTHER INFORMATION
-----------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Form 8-K on January 25, 1996 reporting the
acquisition of Inmac Corp. pursuant to Item 2.
10
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MICRO WAREHOUSE, INC.
FORM 10-Q
MARCH 31, 1996
-------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MICRO WAREHOUSE, INC.
The Registrant
Date: May 13, 1996
/s/STEVEN PURCELL
----------------------------------
STEVEN PURCELL
Vice President-Finance, Chief
Financial Officer and Treasurer
(Duly Authorized Officer of the
Registrant and
Principal Financial Officer)
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