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: SEPTEMBER 30, 1997
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 Number)
incorporation or organization)
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 September 30, 1997: 34,631,840
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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 ............................ 9
PART II - OTHER INFORMATION................................................ 14
SIGNATURE ................................................................. 15
EXHIBIT 11................................................................. 16
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICRO WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1997 1996
---- ----
ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 65,212 $ 32,234
Marketable securities at market value 20,660 20,022
Accounts receivable, net of allowance for
doubtful accounts ($12,032 and $10,876 at
September 30, 1997 and December 31, 1996,
respectively) 202,062 203,687
Inventories 157,278 201,119
Prepaid expenses and other current assets 13,549 17,886
Tax refunds 18,928 16,433
Deferred taxes 11,307 3,447
--------- ---------
Total current assets 488,996 494,828
--------- ---------
Property, plant and equipment, net 31,576 29,712
Goodwill, net 86,366 66,291
Non-current deferred taxes 12,615 14,443
Other assets 2,154 2,568
--------- ---------
Total assets $ 621,707 $ 607,842
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162,720 $ 127,723
Accrued expenses 52,155 52,445
Litigation settlement accrual 16,100 --
Loans payable, bank -- 40,505
Deferred revenue 3,268 2,327
Equipment obligations 452 298
--------- ---------
Total current liabilities 234,695 223,298
Equipment obligations and other 203 376
--------- ---------
Total liabilities 234,898 223,674
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value Authorized
- 100 shares; none issued: -- --
Common stock, $.01 par value:
Authorized - 50,000 shares; issued and
outstanding; 34,632 and 34,359 shares at
September 30, 1997 and December 31, 1996,
respectively 346 343
Additional paid-in-capital 284,856 270,762
Deferred compensation (9,066) 421
Loan to officer (1,400) (1,400)
Retained earnings 125,585 117,071
Cumulative translation adjustment (13,416) (3,047)
Valuation adjustment for marketable securities (96) 18
--------- ---------
Total stockholders' equity 386,809 384,168
--------- ---------
Total liabilities and stockholders' equity $ 621,707 $ 607,842
========= =========
See accompanying notes to unaudited consolidated financial statements.
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME For the three and
nine months ended September 30, 1997 and 1996
(in thousands, except per share data)
------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 522,072 $ 437,981 $1,551,994 $1,389,546
Cost of goods sold 435,615 359,289 1,294,161 1,127,325
---------- ---------- ---------- ----------
Gross margin 86,457 78,692 257,833 262,221
Selling, general and administrative
expenses 77,844 61,510 225,040 203,333
Write-off of goodwill -- -- -- 5,977
Restructuring costs -- -- -- 21,226
Merger costs -- -- -- 6,113
---------- ---------- ---------- ----------
Income from operations before interest,
litigation provision, income taxes and
extraordinary charge 8,613 17,182 32,793 25,572
Interest income, net 1,439 846 4,011 1,208
Provision for settlement of class
action and derivative litigation 20,700 -- 20,700 --
---------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary charge (10,648) 18,028 16,104 26,780
Income tax provision (benefit) (3,530) 7,303 7,590 15,746
---------- ---------- ---------- ----------
Income (loss) before extraordinary
charge (7,118) 10,725 8,514 11,034
Extraordinary charge, net of taxes
of $1,078 -- -- -- 1,584
---------- ---------- ---------- ----------
Net income (loss) ($7,118) $ 10,725 $ 8,514 $ 9,450
========== ========== ========== ==========
Net income (loss) per share ($0.21) $ 0.31 $ 0.24 $ 0.27
========== ========== ========== ==========
Net income (loss) per share before
extraordinary charge ($0.21) $ 0.31 $ 0.24 $ 0.32
========== ========== ========== ==========
Weighted average number of shares
outstanding 34,550 34,630 34,919 34,667
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(in thousands)
-----------------------------------------------------------
(unaudited)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 8,514 $ 9,450
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,062 8,514
Litigation settlement charge 20,700 --
Restructuring cost - non-cash portion -- 3,457
Extraordinary charge -- 1,900
Write-off of goodwill -- 5,977
Write-off of deferred financing costs -- 762
Deferred taxes (6,032) 417
Changes in assets and liabilities:
Accounts receivable, net (6,458) (18,180)
Inventories 40,338 22,236
Prepaid expenses and other current assets (2,578) 3,752
Other assets 72 844
Accounts payable 31,286 (4,944)
Accrued expenses 2,522 12,680
Deferred revenue 936 (168)
Other (1,832) (225)
--------- ---------
Total adjustments 91,016 37,022
--------- ---------
Net cash provided by operating activities 99,530 46,472
--------- ---------
Cash flows from investing activities:
Sales (purchases) of marketable securities, net (752) 6,553
Purchases or adjustments to cost of acquisitions
of businesses, represented by:
Goodwill (18,642) (6,900)
Other net assets 654 (2,119)
Acquisition of property, plant and equipment (11,659) (7,860)
--------- ---------
Net cash (used) by investing activities (30,399) (10,326)
Cash flows from financing activities:
Net proceeds from issuance of common stock 3,228 5,456
Borrowings (repayments) under lines of credit, net (37,473) 18,521
Repayment of notes payable -- (21,900)
Principal payments of obligations under capital leases (87) (312)
--------- ---------
Net cash provided (used) by financing activities (34,332) 1,765
--------- ---------
Effect of exchange rate changes on cash (1,821) (419)
--------- ---------
Net change in cash 32,978 37,492
Cash and cash equivalents:
Beginning of period 32,234 81,614
--------- ---------
End of period $ 65,212 $ 119,106
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
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MICRO WAREHOUSE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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 (the "SEC"). 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, 1996.
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 September 30, 1997 and the
results of operations for the three and nine months ended September 30,
1997 and 1996 and cash flows for the nine months ended September 30, 1997
and 1996.
2. BUSINESS COMBINATIONS
In October 1996, the Company acquired the business of USA Flex in a
business combination accounted for as a purchase. USA Flex directly
markets IBM PC-compatible ("Wintel")computers and peripherals. The total
cost of the acquisition was $26,762 which exceeded the fair value of the
net assets acquired by $22,053. Commencing in 1997 the goodwill recorded
as a result of the USA Flex acquisition is being amortized over 15 years.
Initially, the Company had commenced amortization of this goodwill over a
40 year period.
In February 1997, the Company acquired two businesses with operations in
Canada and Australia. The total cost of the acquisitions was $3,829 which
exceeded the fair value of the net assets acquired by $3,816.
In July 1997, the Company acquired the business of OnLine Interactive,
Inc., a Seattle, Washington based reseller of electronic software ("OLI").
The cost of the acquisition was $14,159 in cash plus a potential future
earnout payment of a maximum of $6,000 based on certain 1998 operating and
performance targets and other contingencies, including any change of the
Company's Chief Executive Officer (See Note 7). The cost of the
acquisition exceeded the fair value of the net assets by an estimated
$14,800. Additionally, the Company entered into two-year employment
contracts with five key OLI employees which provide base compensation,
cash incentives and stock options and grants. The Company granted these
employees an aggregate of 125,000 stock options at $16.63 per share
vesting over four years. Additionally, these employees are eligible to
receive 125,000 shares of stock. These shares will be granted over a three
and one-half year period based upon achieving certain operating and
performance targets and continuation of employment. Deferred compensation
expense in the aggregate of $2,078 was recorded and will be amortized over
the three and one-half years.
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The excess cost over the fair value of the net assets acquired for the
1997 acquisitions has been allocated on a preliminary basis to goodwill,
which is subject to change as the valuation of such net assets are
finalized. As a result of the analysis performed to date, management has
determined that the appropriate amortization periods for such goodwill
range from 5 to 15 years.
3. STOCK-BASED COMPENSATION
In June 1997, the Stockholders of the Company approved an amendment to the
1994 stock option plan (as amended, the "Plan") which increased the number
of shares reserved for issuance from 1,000,000 to 4,000,000. In January
1997, the Company approved a comprehensive option grant program providing
a total of 2,017,000 options to directors and all qualified full-time
employees of the Company and authorized the exchange of 360,000
outstanding stock options. The exercise price for options under these
programs is $12.63 per share. The Company recorded deferred compensation
expense of $8,387, the difference between the exercise price and closing
market price on the date of stockholder approval. Such amount is being
amortized over the 5 year vesting period of the options.
During 1997, the Company granted pursuant to the Plan additional options
to purchase 225,000 shares of common stock with exercise prices ranging
from $11.69 to $28.25 per share. Also during 1997, the Company granted
options to purchase 390,000 shares of common stock to senior executives
outside of its stock option plans. The exercise prices of these options
range from $10.75 to $17.32 per share.
Compensation expense relating to these grants for the three months and
nine months ended September 30, 1997 was $420 and $1,260, respectively.
4. LEGAL PROCEEDINGS
A charge of $20.7 million was recorded in the third quarter of 1997 for
the proposed settlements of the consolidated class action and derivative
lawsuit that arose out of the facts underlying the Company's announcements
in September and October, 1996 that it intended to restate certain prior
financial statements covering the 1992 through 1995 fiscal years. The
charge of $20.7 million was comprised of $31.1 million for the settlements
of the consolidated class action and derivative lawsuit plus estimated
legal fees, offset by insurance proceeds of $10.9 million. The settlements
are contingent upon negotiation and execution of definitive settlement
stipulations and hearings and approvals by the U.S. District Court.
The settlement of these matters excludes a separate action relating to the
issues underlying the Company's restated financial statements brought in
the U.S. District Court in Connecticut against the Company and certain of
its present and former officers and directors by the State Board of
Administration of Florida covering its purchase of less than 60,000
shares. The settlement also excludes the lawsuit brought by holders of
approximately 1.3 million shares of the Company's stock against the
Company and certain of its officers, former officers and directors in
Santa Clara County, California, arising out of the stock merger between
the Company and Inmac Corp. on January 25, 1996. The Company is unable to
predict the outcome or the financial impact of these litigations and,
accordingly, has made no provision therefor in the consolidated financial
statements.
In addition, the staff of the SEC is conducting a formal investigation
into the events underlying the restatement. The Company is cooperating
with the staff in its investigation.
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5. NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
which specifies the computation, presentation and disclosure requirements
for earnings per share. This statement is effective for both interim and
annual periods ending after December 15, 1997. Early implementation is not
permitted. The Statement will require the replacement of the Company's
previous presentation of primary earnings per share with a dual
presentation of basic and diluted earnings per share. The Company expects
that the application of this standard will result in basic earnings per
share for certain prior year periods that are higher than previously
reported primary earnings per share. The Company does not expect that the
application of this standard will have a material effect on the
calculation of diluted earnings per share as compared to primary earnings
per share previously reported.
6. HEDGING INSTRUMENTS
The Company is utilizing forward exchange contracts to manage exposure to
foreign currency price fluctuations on intercompany loans to its foreign
subsidiaries. Outstanding agreements involve the exchange of one currency
for another at a fixed rate. The Company's credit exposure is limited to
the replacement cost, if any, of the instruments and the Company only
enters into such agreements with highly rated counterparties. The Company
does not enter into forward exchange contracts for trading or speculative
purposes and matches the term and notional amount of the contracts to the
underlying intercompany loans.
At September 30, 1997 the Company had outstanding forward exchange
contracts of $50.0 million which mature in 38 days or less. The single
largest currency represented is the British pound followed by the German
deutsche mark and Dutch guilder.
7. SUBSEQUENT EVENT
On October 26, 1997 Linwood A. Lacy, Jr. resigned as President and Chief
Executive Officer of the Company. Peter Godfrey, who remains Chairman of
the Board of Directors of the Company, has been appointed to these
positions. As a result of this resignation, the Company became committed
to pay the OLI shareholders $2,000 of the $6,000 contingent earnout (See
Note 2).
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Overview
Micro Warehouse, Inc. (the "Company") is a specialty catalog retailer and direct
marketer of brand name personal computers, computer software, accessories,
peripheral and networking products to commercial and consumer customers. The
Company markets its products through frequent mailings of its distinctive,
colorful catalogs, Internet catalog sites on the worldwide web and dedicated
telemarketing account managers who focus on corporate, education and government
accounts. The Company offers brand name hardware and software from leading
vendors such as Adobe, Apple, Compaq, Hewlett Packard, IBM, Iomega, Microsoft,
Motorola, 3Com, and Toshiba.
Through its three core catalogs, MicroWarehouse, MacWarehouse and Data Comm
Warehouse, various specialty catalogs and its Internet sites, the Company offers
a broad assortment of more than 25,000 computer products at competitive prices.
With colorful illustrations, concise product descriptions and relevant technical
information, each catalog title focuses on a specific segment of the computer
market. The catalogs are recognized as a leading source for computer hardware,
software and other products.
RESULTS OF OPERATIONS
The table below sets forth certain items expressed as a percent of net sales for
each of the interim periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.4 82.0 83.4 81.1
----- ----- ----- -----
Gross margin 16.6 18.0 16.6 18.9
Selling, general and administrative
expenses 14.9 14.1 14.5 14.6
Write-off of goodwill, restructuring
and merger costs - - - 2.5
----- ----- ----- -----
Income from operations before
interest, litigation provision,
income taxes and extraordinary
charge 1.7 3.9 2.1 1.8
Interest income, net .3 .2 .2 .1
Provision for settlement of class
action and derivative litigation 4.0 - 1.3 -
----- ----- ----- -----
Income before income taxes and
extraordinary charge (2.0%) 4.1% 1.0% 1.9%
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Net sales increased by $84.1 million or 19.2% to $522.1 million for the three
months ended September 30, 1997, from $438.0 million for the three months ended
September 30, 1996. This increase in net sales was primarily attributable to
continued growth in the Wintel business which increased by approximately 34%.
Worldwide Macintosh ("Mac") sales were nominally higher. The Mac business
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represented approximately 40% of total worldwide sales, down from approximately
47% in the same period last year.
Domestic sales for the three months ended September 30, 1997 increased $83.0
million or 27.6% from the prior year to $383.5 million. Wintel sales increased
approximately 50%, due to significant increases in Wintel desktop and notebook
PC's, monitors and printers. Mac sales increased approximately 8%. Wintel CPU
sales increased by approximately 80% while Wintel CPU unit volume grew by
approximately 110% over the same period last year. The average order size
increased 15.6% to $548. Circulation increased 25.0% to 26.9 million catalogs.
The Wintel sales growth in the U.S. without the USA Flex and Inmac businesses
acquired in 1996 was approximately 49%. USA Flex sales in the quarter were $15.0
million and Inmac sales of $15.5 million declined 21.6% from the prior year.
International sales for the three months ended September 30, 1997 increased by
$1.2 million or 0.9% from the prior year to $138.6 million. International Wintel
sales were up approximately 10%, offsetting a decline of approximately 16% in
Mac sales. International sales decreased to 26.6% of total net sales in the
three months ended September 30, 1997 from 31.4% in the same period in 1996. The
average order size decreased 16.2% to $421. Circulation increased by 1.3% to 5.7
million catalogs. In addition, translation of international sales at 1997
exchange rates reduced sales in dollars by approximately 8.0% as compared to
last year.
Gross margin, which consists of net sales less product and transportation costs,
decreased as a percentage of net sales to 16.6% in 1997 from 18.0% for the same
period in 1996. The decline in gross margin was due to a continuing shift in mix
towards lower margin Wintel products, a decline in the Mac and DataComm margins
in the US, and lower margins in all categories in Europe.
Selling, general and administrative expenses increased by 26.6% to $77.8 million
for the three months ended September 30, 1997 from $61.5 million for the same
period in 1996 and increased as a percentage of net sales to 14.9% from 14.1%.
The principal reason for the percentage increase was an increase in payroll
costs due to headcount increases in the domestic telemarketing and
administration areas of the Company ($5.6 million). These increases were offset
partially by lower net advertising costs which declined from 2.2% of sales to
1.7% of sales.
Operating income before interest, litigation provision, income taxes and
extraordinary charges for the three months ended September 30, 1997 was $8.6
million as compared to $17.2 million for the same period in 1996. International
operations for the three months ended September 30, 1997 operated at a loss of
$3.0 million ($3.6 million loss after interest expense) compared to income of
$0.1 million in 1996, resulting primarily from losses in Germany, France and
Finland.
Net interest income increased to $1.4 million for the three months ended
September 30, 1997 from $0.8 million for the same period in 1996. The increase
was due primarily to the higher level of cash and cash equivalents in the third
quarter of 1997 available for investment and the lower level of debt due to the
early extinguishment of Inmac's debt.
The effective income tax rate was a benefit of 33.2% of pretax income in the
three months ended September 30, 1997 versus 40.5% of a provision of pretax
income for the same period in 1996. This change was primarily the result of
providing a benefit on the litigation settlements at US statutory rates and not
providing a tax benefit on certain foreign losses.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
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Net sales increased by $162.5 million or 11.7% to $1,552.0 million in the nine
months ended September 30, 1997 from $1,389.5 million in the nine months ended
September 30, 1996. This increase in net sales was primarily attributable to
continued growth in the Wintel business which increased by approximately 30%,
including USA Flex net sales of $53.5 million. The worldwide Mac business
declined approximately 6%. The Mac business represented approximately 42% of
total worldwide sales, down from approximately 50% in the same period last year.
Worldwide average order size increased 7.1% to $498 and worldwide catalog
circulation increased 8.6% to 93.0 million. Domestic sales increased 17.2% to
$1,087.7 million and international sales increased 0.6% to $464.3 million. In
addition, translation of international sales at 1997 exchange rates reduced
sales in dollars by approximately 5.3% as compared to last year.
Gross margin for the nine months ended September 30, 1997 decreased as a
percentage of net sales to 16.6% in 1997 from 18.9% for the same period in 1996.
The decline in gross margin was due to a continuing shift in mix towards lower
margin Wintel products, a decline in the Mac and DataComm margins in the US, and
lower margins in all categories in Europe, particularly the legacy Inmac
business in Europe.
Selling, general and administrative expenses increased by 10.7% to $225.0
million for the nine months ended September 30, 1997 from $203.3 million for the
same period in 1996 and decreased as a percentage of net sales to 14.5% from
14.6%. The principal reason for the percentage decline in 1997 was due to lower
net advertising costs which declined from 2.3% of sales to 1.4% of sales,
resulting from increased co-op income and lower catalog costs ($10.5 million).
These savings were offset by higher domestic payroll costs due to headcount
increase in the telemarketing and administration areas ($10.9 million), legal
and insurance costs ($2.4 million), stock option compensation expense
($1.3 million) and bad debt expenses ($0.8 million), as well as certain fixed
asset write-offs ($0.5 million) and transition costs for the integration of the
Company's operation in Australia ($0.8 million). The stock option compensation
expense relates to the January 1997 stock option grants and represents the
difference between the option grant price on January 23,1997 and the price of
the Company's stock on June 10, 1997, the date of Stockholder approval of the
expanded Plan. This aggregate difference of $8.4 million is being amortized over
the five year vesting period of the options granted.
Operating income before interest, litigation provision, income taxes and
extraordinary charges for the nine months ended September 30, 1997 was $32.8
million as compared to $25.6 million for the same period in 1996. Operating
income in 1996 included a $6.0 million write-off of goodwill and restructuring
and merger costs relating to the acquisition of Inmac of $21.2 million and $6.1
million, respectively. Operating income for international operations for the
nine months ended September 30, 1997 was a loss of $3.7 million compared to a
profit of $8.3 million in 1996, resulting primarily from losses in Germany,
Australia and Finland as well as declining profitability in France.
Net interest income increased to $4.0 million for the nine months ended
September 30, 1997 from $1.2 million for the same period in 1996. The increase
was due primarily to the higher level of cash and cash equivalents in 1997
available for investment and the lower level of debt due to the early
extinguishment of Inmac's debt.
The effective income tax rate was 47.1% of before tax income in the nine months
ended September 30, 1997 versus 58.8% for the same period in 1996. Excluding the
pretax charge of $20.7 million for the litigation settlement the effective
income tax rate for the nine months ended September 30, 1997 was 43.0% of before
tax income. The 1997 effective income tax rate does not provide any income tax
benefit to the foreign losses. The 1996 effective income tax rate includes
non-deductible merger costs and goodwill write-offs.
Liquidity and Capital Resources
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As of September 30, 1997, the Company had cash and short-term investments
totaling $85.9 million compared to $52.3 million at December 31, 1996. This
increase was primarily due to a reduction in inventories and an increase in
accounts payable offset by business acquisitions and line of credit repayments.
Inventories decreased to $157.3 million at September 30, 1997 from $201.1
million at December 31, 1996. Accounts receivable decreased to $202.1 million at
September 30, 1997 from $203.7 million at December 31, 1996. In 1997 the Company
completed its system integration of its domestic inventory, accounts
receivables, customer database and product listings. The integration of these
systems as well as better monitoring of inventory levels improved inventory
turnover from approximately 10 times in the first quarter of 1997 to
approximately 12 times in the third quarter of 1997. The current ratio was 2.1
to 1 at September 30, 1997 compared to 2.2 to 1 at December 31, 1996 and working
capital was $254.3 million compared to $271.5 million for the same periods,
respectively. Overall, operations generated cash of $89.0 million for the nine
months ended September 30, 1997.
Capital expenditures for the nine months ended September 30, 1997 were $11.7
million, primarily for computer systems and distribution equipment both in the
United States and internationally. Although the Company's primary capital need
will be to fund its working capital requirements for expected sales growth and
funding of litigation settlement payments, 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 of $75 million. The purpose
of this facility is to provide working capital financing for the Company and its
foreign subsidiaries. The Company had no borrowings under this facility as of
September 30, 1997. Additionally, at September 30, 1997, the Company had unused
lines of credit in the United Kingdom and France, which provided for unsecured
borrowings up to 1.8 million British pounds and 45 million French francs,
respectively, for working capital purposes.
The Company is utilizing forward exchange contracts to manage exposure to
foreign currency risk related to intercompany loans to its foreign subsidiaries.
At September 30, 1997 the Company had outstanding forward exchange contracts of
$50.0 million which mature in 38 days or less. The single largest currency
represented is the British pound followed by the German deutsche mark and Dutch
guilder.
The Company believes that its existing cash reserves, cash flow from operations
and existing credit facilities will be sufficient to satisfy its cash needs for
at least the next 12 months including settlement of the class and derivative
litigations but without consideration of uncertainties surrounding other
litigation pending against the Company.
Outlook
The Company experienced disappointing financial results in its USA Flex and
international businesses as discussed above. USA Flex experienced operating
losses of $1.0 million and $4.3 million for the three and nine months ended
September 30, 1997, respectively. The Company's international operations
experienced operating losses of $3.0 million and $3.7 million for the three and
nine months ended September 30, 1997, respectively. The Company is in the
process of reviewing these operations to determine appropriate courses of
action.
Apple Computer, Inc. ("Apple") continues to experience difficulties and has
significantly downsized its operations. It continues to search for a new CEO to
replace Steve Jobs who is currently acting as interim CEO. It has effectively
terminated its licensing program for Macintosh "clones", announced its intention
to reduce the number of wholesale distributors of its own Macintosh computers
and announced more restrictive
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price protection and other terms for 1998. It has also announced its intention
to offer its products direct to end user customers via an internet site. All
these matters and the ongoing uncertainties concerning Apple may adversely
affect the Company's worldwide Macintosh related sales.
Statement under the Private Securities Litigation Reform Act
With the exception of the historical information contained in this report, the
matters described herein contain forward-looking statements that involve risk
and uncertainties including but not limited to economic, competitive,
governmental, technological and litigation factors outside of the control of the
Company. These factors more specifically include : uncertainties surrounding the
electronic software reselling business attributable to technological and
commercial issues; uncertainties attributable to internet commerce generally;
uncertainties surrounding the demand for and supply of products manufactured by
and compatible with those of Apple products; competition from other catalog,
retail store, on-line and other resellers of computer products; issues
surrounding the Company's European business and the ultimate outcome of the not
yet settled litigation proceedings and SEC formal investigation brought in
connection with the Company's reported accounting errors. These and other
factors are described generally in the MD&A section of the Company's 1996 Annual
Report to Stockholders and most specifically in the paragraphs in that section
captioned "Liquidity and Capital Resources," "Impact of Inflation and
Seasonality", and "Outlook." Forward-looking statements are typically identified
by the words "believe," "expect," "anticipate," "intend," "estimate," and
similar expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates.
13
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item appears on page 1 of the Company's
1996 Annual Report to Stockholders under the caption "Restatement of
Financial Statements" and in Note 17 to Notes to Consolidated Financial
Statement on page 36 of the Company's 1996 Annual Report to Stockholders,
all of which information is incorporated herein by reference. For an
update to this information, see Note 4 to Notes to Unaudited Consolidated
Financial Statements in this Form 10-Q.
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
Exhibit 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(b) Reports on Form 8-K
1. The Company filed a Form 8-K pursuant to Item 5 therein on September
4, 1997 to report that it had reached a tentative settlement of the
consolidated securities class action lawsuit pending in the U.S.
District Court for the District of Connecticut.
2. The Company filed a Form 8-K pursuant to Item 5 therein on October
27, 1997 to report that Linwood A. Lacy, Jr. had resigned as
President and Chief Executive Officer and that Peter Godfrey,
Chairman of the Board of Directors of the Company, had been
appointed to those positions.
14
<PAGE>
MICRO WAREHOUSE, INC.
FORM 10-Q
September 30, 1997
-------------------------------------
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: November 14, 1997
By /s/ Wayne P. Garten
--------------------------------------
WAYNE P. GARTEN
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer of the
Registrant and Principal Financial
Officer)
15
EXHIBIT 11
MICRO WAREHOUSE, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Primary Primary
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)
Income (loss) before extraordinary charge ($7,118) $ 10,725 $ 8,514 $ 11,034
Extraordinary charge, net of taxes -- -- -- 1,584
-------- -------- -------- --------
Net income (loss) ($7,118) $ 10,725 $ 8,514 $ 9,450
======== ======== ======== ========
Shares
Weighted average common shares outstanding 34,550 34,294 34,432 34,156
Common equivalent shares -- 336 327 511
-------- -------- -------- --------
Weighted average common shares and common
stock equivalent shares outstanding
34,550 34,630 34,759 34,667
======== ======== ======== ========
Per share
Income (loss) before extraordinary charge ($0.21) $ 0.31 $ 0.24 $ 0.32
Extraordinary charge, net of taxes -- -- -- (0.05)
-------- -------- -------- --------
Net income (loss) ($0.21) $ 0.31 $ 0.24 $ 0.27
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Fully diluted Fully diluted
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)
Income (loss) before extraordinary charge ($7,118) $ 10,725 $ 8,514 $ 11,034
Extraordinary charge, net of taxes -- -- -- 1,584
-------- -------- -------- --------
Net income (loss) ($7,118) $ 10,725 $ 8,514 $ 9,450
======== ======== ======== ========
Shares
Weighted average common shares outstanding 34,550 34,294 34,416 34,156
Common equivalent shares -- 336 503 511
-------- -------- -------- --------
Weighted average common shares and common
stock equivalent shares outstanding
34,550 34,630 34,919 34,667
======== ======== ======== ========
Per share
Income (loss) before extraordinary charge ($0.21) $ 0.31 $ 0.24 $ 0.32
Extraordinary charge, net of taxes -- -- -- (0.05)
-------- -------- -------- --------
Net income (loss) ($0.21) $ 0.31 $ 0.24 $ 0.27
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 65,212
<SECURITIES> 20,660
<RECEIVABLES> 214,094
<ALLOWANCES> 12,032
<INVENTORY> 157,278
<CURRENT-ASSETS> 488,996
<PP&E> 78,141
<DEPRECIATION> 46,565
<TOTAL-ASSETS> 621,707
<CURRENT-LIABILITIES> 234,695
<BONDS> 655
0
0
<COMMON> 346
<OTHER-SE> 386,463
<TOTAL-LIABILITY-AND-EQUITY> 621,707
<SALES> 1,551,994
<TOTAL-REVENUES> 1,551,994
<CGS> 1,294,161
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,277
<INTEREST-EXPENSE> 1,440
<INCOME-PRETAX> 16,104
<INCOME-TAX> 7,590
<INCOME-CONTINUING> 8,514
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,514
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
