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: JUNE 30, 1998
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 June 30, 1998: 34,632,208
<PAGE>
MICRO WAREHOUSE, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets .............................3
Consolidated Statements of Operations ...................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 ....8
PART II - OTHER INFORMATION................................14
SIGNATURE .................................................15
EXHIBIT 11.................................................16
EXHIBIT 27.................................................17
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Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (unaudited)
MICRO WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
---------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 162,434 $ 58,051
Marketable securities at market value 21,192 20,817
Accounts receivable, net of allowance for doubtful accounts ($9,062
and $13,399 at June 30, 1998 and December 31, 1997, respectively) 203,332 217,475
Inventories 101,481 170,543
Prepaid expenses and other current assets 14,904 11,763
Tax refunds 17,449 23,452
Deferred taxes 25,585 30,903
--------- ---------
Total current assets 546,377 533,004
--------- ---------
Property, plant and equipment, net 28,854 32,416
Goodwill, net 44,944 45,744
Non-current deferred taxes 4,187 5,850
Other assets 1,770 2,330
--------- ---------
Total assets $ 626,132 $ 619,344
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 169,117 $ 168,886
Accrued expenses 60,418 66,563
Accrued litigation settlements 34,000 16,100
Deferred revenue 8,615 5,944
Loans payable, bank -- 12,570
Obligations under capitalized leases 206 492
--------- ---------
Total liabilities 272,356 270,555
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized - 100 shares; none issued -- --
Series A Junior Participating Preferred Stock, $.01 par value:
Authorized - 45 shares; none issued -- --
Common stock, $.01 par value:
Authorized - 100,000 shares; issued and outstanding; 34,632 and
34,639 shares at June 30, 1998 and December 31, 1997, respectively 346 346
Additional paid-in capital 283,331 282,865
Deferred compensation (3,861) (4,413)
Retained earnings 85,112 80,390
Cumulative translation adjustment (11,163) (10,403)
Valuation adjustment for marketable securities 11 4
--------- ---------
Total stockholders' equity 353,776 348,789
--------- ---------
Total liabilities and stockholders' equity $ 626,132 $ 619,344
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 1998 and 1997
(in thousands, except per share data)
------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 521,487 $ 500,420 $1,073,193 $1,029,922
Cost of goods sold 437,257 416,507 900,602 858,546
---------- ---------- ---------- ----------
Gross profit 84,230 83,913 172,591 171,376
Selling, general and administrative expenses 68,559 71,953 142,025 147,196
---------- ---------- ---------- ----------
Income from operations before interest,
litigation provision and income taxes 15,671 11,960 30,566 24,180
Interest income, net 2,347 1,712 3,721 2,572
Provision for settlement of Inmac Corp.
shareholder litigation 14,000 -- 14,000 --
---------- ---------- ---------- ----------
Income before income taxes 4,018 13,672 20,287 26,752
Income tax provision 9,058 5,851 15,565 11,120
---------- ---------- ---------- ----------
Net income (loss) $ (5,040) $ 7,821 $ 4,722 $ 15,632
========== ========== ========== ==========
Basic net income (loss) per share $ (0.15) $ 0.23 $ 0.14 $ 0.45
========== ========== ========== ==========
Diluted net income (loss) per share $ (0.15) $ 0.23 $ 0.14 $ 0.45
========== ========== ========== ==========
Shares used in per share calculation -
Basic 34,633 34,432 34,617 34,378
========== ========== ========== ==========
Diluted 34,633 34,732 34,796 34,563
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(in thousands)
-----------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Cash flows from operating activities: 1998 1997
--------- ---------
<S> <C> <C>
Net income $ 4,722 $ 15,632
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,847 8,372
Non-cash compensation 552 839
Deferred taxes 6,981 1,037
Changes in assets and liabilities:
Accounts receivable, net 7,861 10,083
Inventories 66,663 56,945
Prepaid expenses and other current assets 2,603 (4,558)
Other assets 260 (1,390)
Accounts payable 4,679 10,115
Accrued expenses 1,525 (9,464)
Accrued litigation settlements 17,900 --
Deferred revenue 2,656 5,391
Other 33 (3,268)
--------- ---------
Total adjustments 118,560 74,102
--------- ---------
Net cash provided by operating activities 123,282 89,734
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities, net (368) (493)
Purchases or adjustments to acquisitions of businesses, represented by:
Goodwill -- (3,816)
Other net assets -- (13)
Acquisition of property, plant and equipment (6,023) (7,749)
--------- ---------
Net cash used by investing activities (6,391) (12,071)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,310 706
Repurchase of common stock (844) --
Repayments under lines of credit, net (12,584) (14,201)
Principal payments of obligations under capital leases (286) (70)
--------- ---------
Net cash used by financing activities (12,404) (13,565)
--------- ---------
Effect of exchange rate changes on cash (104) (1,582)
--------- ---------
Net change in cash 104,383 62,516
Cash and cash equivalents:
Beginning of period 58,051 32,234
--------- ---------
End of period $ 162,434 $ 94,750
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
MICRO WAREHOUSE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except 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 on Form 10-K for
the fiscal year ended December 31, 1997.
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 June 30, 1998 and the
results of operations for the three and six months ended June 30, 1998
and 1997. Certain reclassifications have been made to conform the prior
year to the 1998 presentation.
2. RESTRUCTURING
On December 11, 1997, the Company announced a restructuring of its
operations (the "Restructuring"). The objectives of the Restructuring
were to simplify the business worldwide, reduce the cost structure,
increase productivity of the sales force and eliminate certain non-core
businesses operating at a loss. The Restructuring involved the closing
of the Company's businesses in Australia and Japan, the sale of its
operations in Norway, Denmark and Finland and the write-off of the
goodwill of its German subsidiary. In addition, the Company closed its
European headquarters in the United Kingdom, reducing certain functions
and transferring others to the United Kingdom operation, other European
business units and the United States. In the United States, the Company
consolidated its USA Flex business from its facility in Bloomingdale,
Illinois to existing facilities in New Jersey and Connecticut and wrote
off all of the goodwill associated with this business. The Company also
closed its Online Interactive, Inc. subsidiary in Seattle, Washington
and wrote off the related goodwill. In addition, the Company
reorganized its domestic sales force. In connection with the
Restructuring, approximately 600 positions were eliminated.
As a result of the Restructuring, the Company recorded a pre-tax charge
of $67,828 in the fourth quarter of 1997. The charge comprised goodwill
write-offs of $41,907, severance costs of $10,314 and $15,607 of other
costs including lease terminations, moving costs and asset write-downs.
These activities were substantially completed in the first quarter of
1998.
3. NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components. The adoption of SFAS No. 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign
currency translation adjustments be included in the presentation of
comprehensive income. The Company adopted SFAS No. 130 effective
January 1, 1998.
6
<PAGE>
The components of comprehensive income (loss), net of related tax, for
the three and six month periods ended June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(5,040) $ 7,821 $ 4,722 $ 15,632
Unrealized gains (losses) on marketable securities 1 (64) 7 (100)
Foreign currency translation adjustments (264) (1,713) (760) (6,714)
------- ------- ------- --------
Comprehensive income (loss) $(5,303) $ 6,044 $ 3,969 $ 8,818
======= ======= ======= ========
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, at June 30, 1998 and December 31, 1997 are as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Unrealized gains on marketable securities $ 11 $ 4
Foreign currency translation adjustments (11,163) (10,403)
-------- --------
Accumulated other comprehensive income $(11,152) $(10,399)
======== ========
Also in June 1997 the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements. The Company will implement SFAS No. 131 in its year end 1998
financial statements.
4. LEGAL PROCEEDINGS
A pre-tax charge of $14,000 was recorded in the second quarter of 1998
for the settlement of the lawsuit brought by holders of approximately
1,300 shares of the Company's common stock which arose out of the stock
merger between the Company and Inmac Corp., relating to 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 "Restatement"). This settlement
provided for a total payment of $19,000, $6,000 of which was in the form
of freely tradeable common stock. The implementation of this settlement
occurred July 30, 1998. The pre-tax charge was based on the total amount
of the settlement ($19,000), net of a $5,000 contribution from a
non-affiliated source. On an after-tax basis, the charge recorded was
$15,849.
In addition, the Company reached a settlement with the State Board of
Administration of Florida covering approximately 51 shares. The Company
has made a $150 settlement payment to the State Board of Administration
which had earlier elected not to participate in the $30,000 settlement
of the consolidated securities class action lawsuit approved by the U.S.
District Court on June 2, 1998.
These settlements exclude the ongoing SEC formal investigation into the
events underlying the Restatement. The Company is cooperating with the
SEC in its investigation.
7
<PAGE>
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, space advertising in computer publications, Internet catalog
and auction web sites on the worldwide web and 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,
3Com, Compaq, Hewlett Packard, IBM, Iomega, Microsoft, Motorola, and Toshiba.
Through its four core catalogs, Micro Warehouse, Mac Warehouse, Data Comm
Warehouse and Inmac, various specialty catalogs, space advertising and its
Internet sites, the Company offers a broad assortment of more than 30,000
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.
The Company currently publishes catalogs in seven countries outside the United
States, specifically Canada, France, Germany, Mexico, the Netherlands, Sweden
and the United Kingdom. The international operations represented approximately
29% of the Company's sales in the six month period ended June 30, 1998. In
December 1997 the Company announced a major restructuring of its operations
including the sale or disposal of Macintosh-dependent operations in Australia,
Denmark, Finland, Japan and Norway.
RESULTS OF OPERATIONS
The table below sets forth certain items expressed as a percent of net sales for
each of the three and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 83.8 83.2 83.9 83.4
------ ------ ------ ------
Gross profit 16.2 16.8 16.1 16.6
Selling, general and administrative expenses 13.1 14.4 13.2 14.3
Litigation settlement 2.8 -- 1.3 --
------ ------ ------ ------
Income from operations before interest and income taxes 0.3 2.4 1.6 2.3
Interest income, net 0.5 0.3 0.3 0.3
------ ------ ------ ------
Income before income taxes 0.8% 2.7% 1.9% 2.6%
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net sales increased by $21.1 million or 4.2% to $521.5 million for the three
months ended June 30, 1998, from $500.4 million for the same period last year.
This increase in net sales was primarily attributable to continued growth in the
IBM PC-compatible ("Wintel") business which increased by approximately 20%.
Worldwide Macintosh ("Mac") sales declined by approximately 18%. The Mac
business represented approximately 33% of
8
<PAGE>
net sales, down from approximately 42% in the same period last year. Excluding
the results of the small Mac-dependent businesses that were sold in early 1998,
net sales increased by $35.2 million or 7.2% for the three months ended June 30,
1998, compared to the same period last year. Worldwide average order value
increased 4.0% to $514 while worldwide catalog circulation increased 1.1% to
27.4 million. The active customer base decreased approximately 8% to 2.1 million
for the three months ended June 30, 1998 compared to the same period last year,
principally due to a reduction in the number of Macintosh consumer customers.
Domestic sales for the three months ended June 30, 1998 increased $31.5 million
or 9.1% from the same period last year to $379.2 million. Wintel sales increased
approximately 32% due to significant increases in sales of Wintel desktop
computers, printers, servers, PDAs, digital cameras, networking routers and
remote access products. Mac sales decreased approximately 16%. Wintel CPU sales
increased by approximately 46% while Wintel CPU unit volume grew by
approximately 83% over the same period last year. Mac CPU sales decreased
approximately 11% while Mac CPU unit volume declined 6% over the same period
last year. The average order value increased 6.7% to $554. Catalog circulation
increased 7.4% from the same period last year to 22.5 million catalogs
principally as a result of increased Macintosh and Inmac catalog circulation.
Internet-related sales for the quarter were approximately $41 million, up from
$30 million in the first quarter of 1998 and up from $7 million in the year-ago
second quarter. Sales from the Company's e-commerce site warehouse.com were
approximately $28 million, while sales from its Internet auction site
webauction.com were approximately $13 million for the three months ended June
30, 1998. In June 1998 the number of daily visitors to the two Internet sites
was approximately 51,000.
International sales for the three months ended June 30, 1998 decreased by $10.4
million or 6.8% from the prior year to $142.3 million, and were down 4.3% on a
currency-adjusted basis compared to 1997. Wintel sales were flat while
Macintosh-related sales declined approximately 25%. International sales
decreased to 27.3% of total net sales in the three months ended June 30, 1998
from 30.5% in the same period last year. The average order size decreased 3.2%
to $430. Catalog circulation decreased by 21.0% to 4.9 million catalogs
principally as a result of reduced Inmac and Wintel catalog circulation.
Excluding the results of the businesses disposed of in early 1998, international
sales were up 2.6%, and, on a currency adjusted basis, 5.5% compared to the same
period last year.
The gross profit margin for the three months ended June 30, 1998 was 16.2% of
net sales compared to 16.0% in the first quarter of 1998 and 16.8% in the same
period last year. The year-on-year decline was principally due to a decline in
gross margin for software products and gross margins in the Company's
webauction.com business that were lower than the Company's average gross
margins.
Selling, general and administrative expenses were $68.6 million, or 13.1% of net
sales for the three months ended June 30, 1998, compared to $72.0 million or
14.4% of net sales for the second quarter of 1997. The percentage decrease was
principally due to savings from the disposal and restructuring of certain
international businesses, lower insurance and legal costs and lower net
advertising costs which decreased to 0.6% of net sales compared to 0.8% in the
same period last year. These savings were partially offset by an increase in
compensation costs for the domestic sales force.
Operating income for the three months ended June 30, 1998 included a pre-tax
charge of $14.0 million relating to the settlement of the lawsuit brought by the
holders of approximately 1.3 million shares of the Company's common stock which
arose out of the stock merger between the Company and Inmac Corp. relating to
the facts underlying the Company's restatement of certain financial statements
covering the 1992 through 1995 fiscal years (the "Restatement"). Excluding this
charge, operating income for the three months ended June 30, 1998 was $15.7
million as compared to $12.0 million for the same period last year.
International operations during the three months ended June 30, 1998 had
operating income of $1.4 million compared to a loss of $0.8 million in the same
period last year. Reductions in net catalog expenses were the primary factor in
the improved international
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<PAGE>
operating profit. The prior year results included $1.3 million in aggregate
losses related to the Company's businesses in Denmark, Finland, Norway,
Australia and Japan that were sold or disposed of in early 1998.
Net interest income increased to $2.3 million for the three months ended June
30, 1998 from $1.7 million for the same period last year. The increase was due
primarily to the higher level of cash and cash equivalents in the three months
ended June 30, 1998 available for investment.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net sales increased by $43.3 million or 4.2% to $1,073.2 million in the six
months ended June 30, 1998 from $1,029.9 million in the six months ended June
30, 1997. This increase in net sales was primarily attributable to continued
growth in the Wintel business which increased by approximately 19%. The
worldwide Mac business declined approximately 17%. The Mac business represented
approximately 34% of net sales, down from approximately 43% in the same period
last year. Worldwide average order value increased 5.9% to $521 while worldwide
catalog circulation declined 5.6% to 57.0 million. Excluding sales from
webauction.com, worldwide average order value was $540.
Domestic sales increased 8.6% to $764.9 million while international sales
declined 5.4% to $308.3 million. Excluding the results of the small
Mac-dependent businesses that were sold in early 1998, international sales were
up 4.1%, and, on a currency-adjusted basis, 7.9% compared to the same period
last year. Internet-related sales increased to approximately $72 million for the
six months ended June 30, 1998 from $12 million during the six months ended June
30, 1997.
Gross profit margin for the six months decreased as a percentage of net sales to
16.1% in 1998 from 16.6% during the same period last year. The percentage
decline in gross margin in 1998 is principally attributable to a decline in
margins for software products and gross margins in the webauction.com business
unit that were lower than the Company's average gross margins.
Selling, general and administrative expenses decreased by 3.5% to $142.0 million
for the six months ended June 30, 1998 from $147.2 million for the same period
in 1997 and declined as a percentage of net sales to 13.2% from 14.3%. The
percentage decrease was principally due to savings from the disposal and
restructuring of certain international businesses, lower insurance and legal
costs and lower net advertising costs which decreased to 0.8% of net sales from
1.2% of net sales. These savings were partially offset by an increase in
compensation costs for the domestic sales force.
Operating income for the six months ended June 30, 1998 included a pre-tax
charge of $14.0 million relating to the settlement of the lawsuit brought by the
holders of approximately 1.3 million shares of the Company's common stock which
arose out of the stock merger between the Company and Inmac Corp. relating to
the facts underlying the Company's Restatement. Excluding this charge, operating
income for the six months ended June 30, 1998 was $30.6 million as compared to
$24.2 million for the same period last year. International operations during the
three months ended June 30, 1998 had operating income of $6.0 million compared
to a loss of $0.8 million in the same period last year. Reductions in net
catalog expenses were the primary factor in the improved international operating
profit. The prior year results included $2.3 million in aggregate losses related
to the Company's businesses in Denmark, Finland, Norway, Australia and Japan
that were sold or disposed of in early 1998.
Net interest income increased to $3.7 million for the six months ended June 30,
1998 from $2.6 million for the same period in 1997. The increase was due
primarily to the higher level of cash and cash equivalents available for
investment.
10
<PAGE>
The Company's effective income tax rate was 76.7% for the six months ended June
30, 1998 versus 41.6% for the same period in 1997. The increase in the effective
tax rate resulted primarily from the provision for settlement of the Inmac Corp.
shareholder litigation, since the settlement is not deductible for tax purposes.
The $19 million pre-tax charge for the settlement was recorded net of a $5
million contribution from a non-affiliated source. Excluding the net after tax
charge of $15.8 million for the litigation settlement, the effective income tax
rate for the six months ended June 30, 1998 was 40.0%.
Liquidity and Capital Resources
As of June 30, 1998, the Company had cash and short-term investments totaling
$183.6 million compared to $78.9 million at December 31, 1997 while all of the
$12.6 million of short-term borrowings outstanding at December 31, 1997 were
paid off. The increase was due primarily to improved inventory management as
inventories decreased to $101.5 million at June 30, 1998 from $170.5 million at
December 31, 1997. Inventory turns for the three months ended June 30, 1998 were
16 compared to 11 in the same period in 1997. Accounts receivable decreased to
$203.3 million at June 30, 1998 from $217.5 million at December 31, 1997. Days
sales outstanding increased slightly to 48 days from 44 days in the same period
in 1997. Accounts payable increased slightly to $169.1 million at June 30, 1998
from $168.9 million at December 31, 1997. Overall, operations generated cash of
$123.3 million during the six months ended June 30, 1998.
Capital expenditures for the first six months of 1998 were $6.0 million,
primarily for computer software and equipment and leasehold improvements. In
July 1998 the Company completed arrangements for the construction of a new
221,000 sq. ft. warehouse facility at the Airborne Express hub in Wilmington,
Ohio for occupancy in spring of 1999. The Company anticipates that future growth
will require continued investment in its computer systems. In addition, the
Company anticipates spending approximately $12-15 million for equipment,
fixtures and a warehouse management system for the new warehouse over the next
twelve months. The Company has executed a 10-year lease of this warehouse
facility to commence upon completion of construction which is anticipated to be
during the first half of 1999.
At June 30, 1998, the Company had a multi-currency revolving credit facility of
$68.3 million which reduces by an aggregate of $13.3 million in equal increments
on each of September 30, and December 31, 1998. This facility expires on June
30, 1999. The facility is available for general corporate and working capital
purposes for the Company's domestic and certain of the Company's foreign
subsidiaries. As of June 30, 1998, there were no borrowings under this facility.
Additionally, at June 30, 1998 the Company had unused lines of credit in the
United Kingdom and France which provide for unsecured borrowings up to 2.0
million British pounds and 45 million French francs ($3.3 million and $7.4
million at June 30, 1998 exchange rates, respectively), for working capital
purposes.
The Company is utilizing forward exchange contracts to manage exposure to
foreign currency risk related to intercompany loans and investments in 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 matches the
term and notional amount of the contracts to the underlying intercompany loans
or investments and does not enter into forward exchange contracts for trading or
speculative purposes. At June 30, 1998 the Company had outstanding forward
exchange contracts in notional amounts of $10.8 million which mature in three
months or less. The single largest currency represented is the French franc.
In June 1998, the Board of Directors authorized a program for the purchase of up
to $10.0 million of its common stock. To date the Company purchased 277,000
shares at a cost of $4.7 million representing 0.8% of the Company's outstanding
common stock at the beginning of the year. In connection with the settlement of
the Inmac Corp. shareholder litigation, 277,457 shares were issued.
11
<PAGE>
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.
Year 2000 Compliant Information Systems
The Company uses software and related technologies throughout its business that
will be affected by the Year 2000 problem common to most businesses concerning
the inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. The Company is evaluating its software operating systems to improve
its operations and achieve year 2000 compliance. As a result, the Company will
modify certain of its software operating systems and is in the process of
replacing its financial software systems. The Company is presently finalizing
its estimates with respect to such costs and expects that such costs will not be
material to the Company's results of operations, though there can be no
assurance in this regard.
In addition, the Year 2000 problem may adversely affect the manufacturers of the
products that the Company resells to its customers. While the Company believes
that the manufacturers of such products fully intend to achieve Year 2000
compliance, there can be no assurance they will or of the impact on the Company
that any such failure may cause.
Outlook
The Company depends in large part on sales of hardware and software products for
users of Apple Macintosh computers. These products represented approximately 33%
of the Company's net sales for the quarter ended June 30, 1998. Published
reports indicate that the level of supply of and demand for Apple Macintosh
products continues to be uncertain. By the end of 1997 the Apple "clone" market
had essentially disappeared. Apple has also implemented more restrictive price
protection and other terms for 1998 and has reduced the level of advertising
allowances and incentives available to resellers. Apple has also significantly
restricted the number of authorized resellers of its products and has commenced
direct competition with the Company and other resellers on the Internet. In
addition to the continuing impact of these matters, other ongoing uncertainties
concerning Apple may adversely affect the Company's worldwide Macintosh-related
sales and the Company's business, financial condition and results of operations.
The Company acquires Wintel products for resale both directly from manufacturers
and indirectly through distributors and other sources. Many of these
manufacturers and distributors have historically provided the Company with
incentives in the form of supplier reimbursements, price protection payments,
rebates and other similar arrangements. The increasingly competitive environment
between and amongst computer hardware manufacturers has already resulted in
reduction and/or elimination of some of these incentive programs. Additionally,
the return rights historically offered by manufacturers have become more
limited. Manufacturers are also taking steps to reduce their inventory exposure
by supporting "build to order" programs in which distributors and resellers are
being authorized to directly manufacture computer hardware. This trend is part
of an overall effort by manufacturers to reduce their costs and shift the burden
of inventory risk to resellers like the Company, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that its future success depends, in part, on its ability to
improve the skills and productivity of its sales force. These improvements will
require that the Company establish successful recruiting, training and retention
programs and initiatives.
Information Concerning Forward-Looking Statements
12
<PAGE>
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 attributable to
Internet commerce generally; risks associated with systems capacity restraints;
uncertainties surrounding the electronic software reselling business
attributable to technological and commercial issues; 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
businesses; uncertainties surrounding the implementation of programs and
activities described in the Company's December 1997 announced restructuring;
uncertainties surrounding the Company's recruiting, training and retention
initiatives; and the ultimate outcome of the SEC formal investigation brought in
connection with the Company's reported accounting errors. These and other
factors are described generally in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of the Company's 1997
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" and in the Company's Form 10-Q for the quarter ended
March 31, 1998 and the "Risk Factors" in the Company's Form S-3 filed July 22,
1998. Forward-looking statements are typically identified by the works
"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 in Note 14 to Notes to
Consolidated Financial Statements on page 40 of the Company's 1997
Annual Report to Stockholders, Item 1 of Part II of the Company's Form
10-Q for the quarter ended March 31, 1998 and the section captioned
"Litigation" in the Company's Form S-3 filed July 22, 1998, all of
which information is incorporated herein by reference. Additionally,
the Company has settled with and paid to the State Board of
Administration of Florida $150,000 in satisfaction of its claims
arising out of the Restatement.
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
The Company filed a Form 8-K pursuant to Item 5 therein on July 22,
1998 to report that it had reached a preliminary settlement of the
lawsuit brought by the holders of approximately 1.3 million shares of
the Company's common stock which arose out of the stock merger between
the Company and Inmac Corp. relating to the facts underlying the
Company's Restatement and a final settlement of the lawsuit brought by
the State Board of Administration of Florida covering approximately
50,600 shares.
14
<PAGE>
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.
Date: August 13, 1998
By /s/ Wayne P. Garten
---------------------------------
WAYNE P. GARTEN
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer of the
Registrant and Principal Financial
Officer)
15
EXHIBIT 11
MICRO WAREHOUSE, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ (5,040) $ 7,821 $ 4,722 $15,632
======== ======= ======= =======
Shares
Weighted average common shares outstanding 34,633 34,432 34,617 34,378
Common equivalent shares -- 300 179 185
-------- ------- ------- -------
Weighted average common shares and common
equivalent shares outstanding - Diluted 34,633 34,732 34,796 34,563
======== ======= ======= =======
Net income per share - Diluted $ (0.15) $ 0.23 $ 0.14 $ 0.45
======== ======= ======= =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 162,434
<SECURITIES> 21,192
<RECEIVABLES> 212,394
<ALLOWANCES> 9,062
<INVENTORY> 101,481
<CURRENT-ASSETS> 546,377
<PP&E> 28,864
<DEPRECIATION> 53,976
<TOTAL-ASSETS> 626,132
<CURRENT-LIABILITIES> 272,356
<BONDS> 0
0
0
<COMMON> 346
<OTHER-SE> 353,430
<TOTAL-LIABILITY-AND-EQUITY> 626,132
<SALES> 1,073,193
<TOTAL-REVENUES> 1,073,193
<CGS> 900,602
<TOTAL-COSTS> 900,602
<OTHER-EXPENSES> 156,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> 20,287
<INCOME-TAX> 15,565
<INCOME-CONTINUING> 4,722
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,722
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
