<PAGE>
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, 1999
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 of the latest practicable date:
CLASS: COMMON STOCK OUTSTANDING SHARES AT SEPTEMBER 30, 1999: 35,780,938
<PAGE>
MICRO WAREHOUSE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets .........................................................3
Consolidated Statements of Income ...................................................4
Consolidated Statements of Cash Flows ...............................................5
Notes to Consolidated Financial Statements ..........................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ...............................................8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...................20
PART II - OTHER INFORMATION.............................................................21
SIGNATURE ..............................................................................22
INDEX TO EXHIBITS.......................................................................23
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MICRO WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $136,470 $128,035
Marketable securities at market value 62,116 60,520
Accounts receivable, net of allowance for doubtful accounts ($10,540 and
$10,943 at September 30, 1999 and December 31, 1998,
respectively) 243,600 216,487
Inventories 92,604 129,852
Prepaid expenses and other current assets 15,589 14,379
Tax refunds 750 13,176
Deferred taxes 16,681 17,666
------------ ------------
TOTAL CURRENT ASSETS 567,810 580,115
------------ ------------
Property, plant and equipment, net 65,269 36,950
Goodwill, net 42,461 44,444
Non-current deferred taxes 2,175 3,422
Other assets 1,520 1,599
------------ ------------
TOTAL ASSETS $679,235 $666,530
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $182,319 $208,335
Accrued expenses 45,459 50,508
Deferred revenue 9,558 9,144
------------ ------------
TOTAL LIABILITIES 237,336 267,987
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; 35,781 and 35,413
shares at September 30, 1999 and December 31, 1998,
respectively 358 354
Additional paid-in capital 307,899 299,544
Deferred compensation (2,146) (3,123)
Retained earnings 147,814 110,568
Accumulated other comprehensive loss (12,026) (8,800)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 441,899 398,543
------------
============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $679,235 $666,530
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $601,797 $551,789 $1,782,653 $1,624,982
Cost of goods sold 509,110 462,051 1,505,891 1,362,653
------------- ------------ ------------- --------------
GROSS PROFIT 92,687 89,738 276,762 262,329
Selling, general and administrative expenses 74,042 72,648 223,219 214,673
Provision for shareholder litigation - - - 14,000
------------- ------------ ------------- --------------
INCOME FROM OPERATIONS BEFORE INTEREST
AND INCOME TAXES 18,645 17,090 53,543 33,656
Interest income, net 2,593 2,681 7,517 6,402
------------- ------------ ------------- --------------
INCOME BEFORE INCOME TAXES 21,238 19,771 61,060 40,058
Income tax provision 8,285 7,908 23,814 23,473
------------- ------------ ------------- --------------
NET INCOME $ 12,953 $ 11,863 $ 37,246 $ 16,585
============= ============ ============= ==============
BASIC NET INCOME PER SHARE $0.36 $0.34 $1.05 $0.48
============= ============ ============= ==============
DILUTED NET INCOME PER SHARE $0.36 $0.33 $1.03 $0.47
============= ============ ============= ==============
Shares used in per share calculation -
Basic 35,763 34,816 35,611 34,695
============= ============ ============= ==============
Diluted 35,798 35,591 36,104 35,081
============= ============ ============= ==============
</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, 1999 AND 1998
(IN THOUSANDS)
------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,246 $ 16,585
------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 13,632 10,043
Non-cash litigation settlement - 6,000
Non-cash compensation 568 828
Deferred taxes 1,688 14,696
Changes in assets and liabilities:
Accounts receivable, net (31,907) (4,447)
Inventories 35,669 54,901
Prepaid expenses and other current assets 11,093 6,191
Other assets (181) 97
Accounts payable (22,257) 36,390
Accrued expenses (1,772) (5,142)
Accrued litigation settlements - (16,100)
Deferred revenue 366 2,186
Other 842 63
------------- --------------
Total adjustments 7,741 105,706
------------- --------------
Net cash provided by operating activities 44,987 122,291
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net (1,651) (645)
Acquisition of property, plant and equipment (42,207) (12,636)
-------------- -------------
Net cash used by investing activities (43,858) (13,281)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 8,423 4,300
Repurchase of common stock - (4,677)
Repayments under lines of credit, net - (12,584)
Principal payments of obligations under capital leases - (368)
------------- --------------
Net cash provided (used) by financing activities 8,423 (13,329)
------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,117) 1,245
-------------- -------------
Net change in cash 8,435 96,926
CASH AND CASH EQUIVALENTS:
Beginning of period 128,035 58,051
-------------- -------------
End of period $136,470 $154,977
============= =============
</TABLE>
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)
- --------------------------------------------------------------------------------
1. FINANCIAL STATEMENTS
Our consolidated financial statements 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
United States generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although
we believe that the disclosures are adequate to make the information
presented not misleading, these financial statements should be read in
conjunction with the audited consolidated financial statements and the
notes thereto included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary
to present fairly our financial position at September 30, 1999 and
our results of operations for the three and nine months ended
September 30, 1999 and 1998. We have made certain reclassifications
to conform the prior year to the 1999 presentation.
2. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income, net of related tax, for the
three and nine month periods ended September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 12,953 $ 11,863 $ 37,246 $ 16,585
Unrealized gains (losses) on marketable securities
(19) -- (55) 7
Foreign currency translation adjustments 3,171 3,439 (3,171) 2,679
-------- -------- -------- --------
Comprehensive income $ 16,105 $ 15,302 $ 34,020 $ 19,271
======== ======== ======== ========
</TABLE>
The components of accumulated other comprehensive loss, net of related
tax, at September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- ----------------------
<S> <C> <C>
Unrealized gains (losses) on marketable securities
$ (53) $ 2
Foreign currency translation adjustments (11,973) (8,802)
----------------------- ----------------------
Accumulated other comprehensive loss $ (12,026) $ (8,800)
======================= ======================
</TABLE>
6
<PAGE>
3. LEGAL PROCEEDINGS
The SEC has completed its investigation relating to the facts
underlying our announcements in September and October, 1996 that we
intended to restate certain prior financial statements covering the
1992 through 1995 fiscal years. A consensual cease and desist order has
been entered pursuant to which the Company promises not to violate U.S.
securities laws. There were no fines or penalties imposed upon us or
any of our current officers and directors. There is no other pending
nor, to our knowledge, threatened litigation surrounding the matters
underlying our financial restatement.
4. BORROWING ARRANGEMENTS
We have entered into discretionary credit facilities with three
financial institutions that provide for unsecured borrowings of up to
$50,000 in the aggregate for working capital purposes. These credit
facilities were unused as of September 30, 1999 and expire according to
the following schedule:
<TABLE>
<CAPTION>
Amount Expiration Date
------ ---------------
<S> <C>
$15,000 June 30, 2000
$15,000 July 27, 2000
$20,000 September 30, 2000
</TABLE>
We have unused lines of credit in the United Kingdom and France that
provide for unsecured borrowings of up to 2,000 British pounds and
45,000 French francs ($3,294 and $7,334, respectively, based on the
applicable exchange rates on September 30, 1999) for working capital
purposes.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a $2.2 billion specialty catalog and online retailer and direct
marketer of brand name personal computers, computer software, accessories,
peripherals and networking products to commercial and consumer customers. We
market these products through frequent mailings of our distinctive, colorful
catalogs and our Internet sites. Additionally, we employ telemarketing account
managers who focus on building relationships with corporate, education and
government accounts. We offer brand name hardware and software from leading
vendors such as Adobe Systems Inc., Apple Computer Inc., 3Com Corp., Compaq
Computer Corp., Hewlett-Packard Co., International Business Machines Corp.,
Iomega Corp., Microsoft Corp., Seiko Epson Corp. and Toshiba Corp.
Through our four core catalogs, Micro Warehouse, Mac Warehouse, Data
Comm Warehouse and Inmac and various specialty catalogs we offer a broad
assortment of computer products at competitive prices. With colorful
illustrations, concise product descriptions and relevant technical information,
each catalog focuses on a specific section of the computer market. Our catalogs
are recognized as a leading source for computer hardware, software and other
products. During the first nine months of 1999 we distributed approximately 89
million catalogs worldwide, unchanged compared to the first nine months of 1998.
Through our domestic and international Warehouse.com Internet sites,
we feature descriptions and prices for the more than 20,000 products we offer
for sale online. Selected corporate customers can gain access to their own
online catalogs through our Micro Warehouse Corporate Advantage(TM) program,
complete with unique product selections and customized pricing. Our
Warehouse.com sites received approximately 57,000 daily visitors in September
1999 and had sales of $195.2 million in the first nine months of 1999,
compared to $93.9 million during the first nine months of 1998. During the
third quarter of 1999, we closed down operations of our internet-only
subsidiary Savebynet.com. These operations incurred operating losses and
closure costs of $1.5 million or $0.03 per share in the third quarter of
1999. Expenditures originally earmarked for Savebynet.com are expected to be
directed to promoting our core business and the Warehouse.com brand in the
fourth quarter of 1999.
International operations represented 27% of our sales during the first
nine months of 1999 compared to 28% for the same period in 1998. We have
full-service, direct marketing operations and publish catalogs in Canada,
France, Germany, the Netherlands, Sweden and the United Kingdom. During the
first nine months of 1999, we distributed approximately 14 million catalogs
internationally, a decrease of 7% from the first nine months of 1998.
During November 1999 we began to consolidate our three existing
warehouse facilities in Wilmington, Ohio totaling 288,000 square feet into our
new 230,000 square foot full service distribution center in
Wilmington, Ohio. We maintain telemarketing centers in Lakewood and Gibbsboro,
New Jersey and South Norwalk, Connecticut. We also
8
<PAGE>
maintain telemarketing and distribution facilities in each country in which we
operate internationally.
We employ both outbound and inbound telemarketing sales associates.
During the twelve months ended September 30, 1999, we have concentrated on
increasing the number and enhancing the training of our outbound sales
associates with the objective of both gaining a larger share of our existing
corporate customers' information technology ("IT") budgets and acquiring new
corporate customers. As a result, we have added over 200 domestic outbound
sales associates during the twelve months ended September 30, 1998. During
the fourth quarter we expect to hire and train approximately 160 additional
outbound sales associates. Our investment in this program should reduce
earnings per share by approximately $0.04 per share in the fourth quarter.
RESULTS OF OPERATIONS
The table below sets forth certain items expressed as a percent of
sales for each of the three and nine month periods ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 84.6 83.7 84.5 83.9
----------- ----------- ------------ --------------
Gross profit 15.4 16.3 15.5 16.1
Selling, general and administrative expenses 12.3 13.2 12.5 13.2
Litigation settlement - - - 0.8
----------- ----------- ------------ --------------
Income from operations before interest
and income taxes 3.1 3.1 3.0 2.1
Interest income, net 0.4 0.5 0.4 0.4
----------- ----------- ------------ --------------
Income before income taxes 3.5% 3.6% 3.4% 2.5%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
WORLDWIDE SALES
- - Worldwide sales increased $50.0 million or 9.1% to $601.8 million compared
to $551.8 million for the same period in 1998.
- - Worldwide Wintel sales increased approximately 12% and worldwide Macintosh
sales increased approximately 5% compared to the same period in 1998.
- - Macintosh business represented approximately 32% of our business for the
three months ended September 30, 1999, unchanged compared to the same
period in 1998.
- - Average order value was $659, an increase of 13.9% compared to the same
period in 1998, while our number of orders shipped decreased 4.8% compared
to the same period in 1998.
9
<PAGE>
- - At September 30, 1999 2.2 million customers had placed orders with us
during the last twelve months, an increase of 5% from September 30, 1998.
DOMESTIC SALES
- Domestic sales increased $35.9 million or 8.7% to $447.3 million
compared to $411.4 million for the same period in 1998.
- Domestic Wintel sales increased approximately 11% and domestic
Macintosh sales increased approximately 6% compared to the same period
in 1998.
- Macintosh sales represented approximately 36% of domestic sales,
unchanged compared to the same period in 1998.
- Wintel desktop computer sales decreased 15% and units sold decreased
22% compared to the same period in 1998.
- Wintel notebook sales increased 19% and units sold were unchanged
compared to the same period in 1998.
- Macintosh OS desktop sales increased 2% and units sold increased 9%
compared to the same period in 1998.
- Macintosh OS notebook sales increased 2% and unit volume decreased 12%
compared to the same period in 1998.
- Sales from Apple branded computers grew 7% in revenue and 17% in
units compared to the same period in 1998. Sales of Apple branded
products were impacted by shortages at the end of the quarter resulting
in approximately $5 million in backorders.
- Domestic average order value increased 16.2% to $685 compared to the
same period in 1998.
INTERNATIONAL SALES
- International sales increased $14.1 million or 10.0% to $154.5 million
compared to $140.4 million for the same period in 1998.
- On a currency-adjusted basis, international sales increased 14.3%
compared to the same period in 1998.
- International Wintel sales increased approximately 13% and
international Macintosh sales were unchanged compared to the same
period in 1998.
- Macintosh sales represented approximately 21% of international sales,
a decrease compared to approximately 23% in the same period in 1998.
- International average order value increased 8.1% to $593 compared to
the same period in 1998.
10
<PAGE>
WORLDWIDE INTERNET SALES
- Sales from Warehouse.com increased $26.9 million or 64.7% to $68.5
million compared to $41.6 million for the same period in 1998. On a
sequential basis, sales increased 10.3% from $62.1 million for the
three months ended June 30, 1999.
- Sales from Warehouse.com represented 11.4% of worldwide sales and 14.2%
of domestic sales compared to 7.5% of worldwide sales and 9.7% of
domestic sales for the same period in 1998. For the three months ended
June 30, 1999 Warehouse.com sales represented 10.8% of worldwide sales
and 13.9% of domestic sales.
- In September 1999 there were approximately 57,000 daily visitors to our
Internet sites, up 58.3% compared to approximately 36,000 in
September 1998 and up 21.3% compared to approximately 47,000 in
June 1999.
- Sales from our recently closed internet-only subsidiary, Savebynet.com,
were $3.3 million for the three months ended September 30, 1999.
GROSS PROFIT
- - Gross profit increased 3.3% to $92.7 million compared to $89.7 million for
the same period in 1998. As a percentage of sales, gross profit was 15.4%
compared to 16.3% for same period in 1998 and 15.7% for the three months
ended June 30, 1999.
- - These declines in gross profit percentage were primarily due to declines in
product gross margins due to pricing and promotional strategies, partially
offset by increased vendor rebates. Going forward, we expect downward
pressure on product gross margins due to product mix, pricing strategies
and market conditions. We can give no assurance that vendor support
programs, inventory price protection policies and other factors will offset
these declines since these components vary on a quarterly basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- - Selling, general and administrative expenses were $74.0 million, or 12.3%
of sales, compared to $72.6 million or 13.2% of sales for the same period
in 1998. Excluding Year 2000 readiness costs of $0.7 million or $0.01 per
share, selling, general and administrative expenses were 12.2% of sales for
the three months ended September 30, 1999.
- - The percentage decrease was principally due to lower net advertising costs,
which decreased to 0.3% of sales compared to 1.2% of sales for the same
period in 1998, partially offset by higher domestic depreciation costs and
costs associated with the relocation of our operations in France.
INCOME FROM OPERATIONS BEFORE INTEREST AND INCOME TAXES
- - Income from operations increased to $18.6 million or 3.1% of sales compared
to $17.1 million or 3.1% of sales for the same period in 1998.
11
<PAGE>
- - Domestic income from operations decreased to $17.1 million or 3.8% of
domestic sales compared to $18.6 million or 4.5% of domestic sales for the
same period in 1998. The decrease as a percentage of sales from the prior
year was primarily due to lower gross profit margins and higher
depreciation costs, partially offset by lower net advertising costs.
- - International income from operations was $1.5 million compared to a loss of
$1.5 million for the same period in 1998. The primary reason for the
improvement was lower overall operating costs, partially offset by a
reduction in gross profit margins and costs associated with the relocation
of our business in France.
- - Our recently closed internet-only subsidiary Savebynet.com incurred
operating losses and closure costs of $1.5 million or $0.03 per share
compared to operating losses of $1.2 million or $0.02 per share for the
same period in 1998.
NET INTEREST INCOME
- - Net interest income decreased 3.3% to $2.6 million compared to $2.7 million
during the three months ended September 30, 1998.
INCOME TAXES
- - The effective income tax rate was 39.0% compared to 40.0% for the same
period in 1998.
NET INCOME
- - Net income increased to $13.0 million or $0.36 per share compared to $11.9
million or $0.33 per share during the same period in 1998. Excluding
after-tax Year 2000 readiness costs of $0.4 million or $0.01 per share, net
income for the three months ended September 30, 1999 was $13.4 million or
$0.37 per share.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
SALES
- - Worldwide sales increased $157.7 million or 9.7% to $1,782.7 million
compared to $1,625.0 million for the nine months ended September 30, 1998.
- - Worldwide Wintel sales increased approximately 12% and worldwide Macintosh
sales increased approximately 6% compared to the nine months ended
September 30, 1998. Macintosh business represented approximately 33% of our
business, unchanged compared to the nine months ended September 30, 1998.
- - Average order value was $613, an increase of 9.5% compared to the nine
months ended September 30, 1998.
- - Domestic sales grew $123.1 million or 10.5% to $1,299.4 million compared to
$1,176.3 million for the nine months ended September 30, 1998.
- - International sales increased $34.6 million or 7.7% to $483.3 million
compared to $448.7 million for the nine months ended September 30, 1998. On
a currency-adjusted basis, international sales increased 12.4%.
12
<PAGE>
- - Sales from Warehouse.com increased $101.3 million or 107.9% to $195.2
million compared to $93.9 million for the nine months ended September 30,
1998.
- - Sales from our recently closed internet-only subsidiary, Savebynet.com were
$18.7 million for the nine months ended September 30, 1999.
GROSS PROFIT
- - Gross profit increased 5.5% to $276.8 million compared to $262.3 million
for the nine months ended September 30, 1998. As a percentage of sales,
gross profit declined to 15.5% from 16.1% for the nine months ended
September 30, 1998.
- - The decline was primarily due to a decline in product gross margins as a
result of increased competition and pricing and promotional strategies.
These declines were partially offset by lower inventory-related reserves
resulting from improved inventory management and increased vendor rebates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- - Selling, general and administrative expenses were $223.2 million or 12.5%
of sales, compared to $214.7 million or 13.2% of sales for the nine months
ended September 30, 1998.
- - The percentage decrease was principally due to lower net advertising costs,
which decreased to 0.4% of sales compared to 0.9% of sales for the nine
months ended September 30, 1999, lower fulfillment costs and lower domestic
non-sales payroll costs.
- - Excluding Year 2000 readiness costs of $4.0 million or $0.07 per share,
selling, general and administrative expenses were 12.3% of sales.
INCOME FROM OPERATIONS BEFORE INTEREST AND INCOME TAXES
- - Income from operations increased to $53.5 million or 3.0% of sales compared
to $33.7 million or 2.1% of sales for the nine months ended September 30,
1998.
- - Excluding the 1998 $14 million pre-tax charge for the settlement of
shareholder litigation brought by former shareholders of Inmac Corp.
relating to our financial restatement, income from operations increased
12.4% to $53.5 million or 3.0% of sales compared to $47.7 million or 2.9%
of sales for the nine months ended September 30, 1998.
- - Domestic income from operations increased to $47.3 million or 3.6% of
domestic sales compared to $43.2 million or 3.7% of domestic sales for the
nine months ended September 30, 1998. The decrease as a percentage of sales
was primarily due to lower gross profit margins, partially offset by lower
net advertising costs.
- - International income from operations increased to $6.2 million from $4.5
million for the nine months ended September 30, 1998. The primary reason
for the increase was lower overall operating costs as a percentage of
sales, partially offset by reductions in gross margins and Year 2000
readiness costs of $1.5 million.
13
<PAGE>
- - Our recently closed internet-only subsidiary Savebynet.com incurred
operating losses and closure costs of $5.2 million or $0.09 per share
compared to operating losses of $3.0 million or $0.05 per share during the
nine months ended September 30, 1998.
NET INTEREST INCOME
- - Net interest income increased 17.4% to $7.5 million for the nine months
ended September 30, 1999 compared to $6.4 million during the nine months
ending September 30, 1998. The principal reason for this increase was the
higher level of cash, cash equivalents and short-term investments on hand
during 1999, partially offset by a reduction in interest rates.
INCOME TAXES
- - The effective income tax rate for the nine months ended September 30, 1999
was 39.0%. The income tax rate for the nine months ended September 30, 1998
was unfavorably impacted by the provision for settlement of the Inmac Corp.
shareholder litigation. Excluding the after-tax charge of $15.8 million for
the litigation settlement, the income tax rate for the nine months ended
September 30, 1998 was 40.0%.
NET INCOME
- - Net income for the nine months ended September 30, 1999 increased to $37.2
million or $1.03 per share compared to $16.6 million or $0.47 per share
during the nine months ended September 30, 1998. Excluding after-tax Year
2000 readiness costs of $2.5 million or $0.07 per share during the nine
months ended September 30, 1999, net income was $39.7 million or $1.10 per
share.
- - Excluding the after-tax charge of $15.8 million or $0.45 per share in 1998
for the settlement of the Inmac Corp. shareholder litigation, net income
for the nine months ended September 30, 1999 increased 14.8% to $37.2
million or $1.03 per share compared to $32.4 million or $0.92 per share in
the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
ASSET MANAGEMENT
- - Cash and marketable securities increased by $10.0 million to $198.6 million
at September 30, 1999 compared to $188.6 million at December 31, 1998. Net
cash provided by operating activities was $45.0 million during the nine
months ended September 30, 1999 and was used for capital expenditures of
$42.2 million.
- - Inventory decreased $37.2 million to $92.6 million at September 30, 1999
compared to $129.9 million at December 31, 1998. Annualized inventory turns
for the quarter ended September 30, 1999 were 21 compared to 16 during the
fourth quarter of 1998.
- - Accounts receivable increased $27.1 million to $243.6 million at September
30, 1999 compared to $216.5 million at December 31, 1998. Days sales
outstanding increased to 46 days at September 30, 1999 from 45 at December
31, 1998.
14
<PAGE>
- - Overall, working capital increased 5.9% or $18.3 million to $330.5 million
at September 30, 1999 compared to $312.1 million at December 31, 1998.
- - We believe that our existing cash reserves and expected cash flow from
operations will be sufficient to satisfy our operating cash needs for at
least the next 12 months.
CAPITAL EXPENDITURES
- - Capital expenditures for the nine months ended September 30, 1999 were
$42.2 million compared to $12.6 million for the nine months ended September
30, 1998. Major expenditures were attributable to:
- The completion of the conversion of our domestic human resource
system to PeopleSoft Inc. application software, the conversion of
our United Kingdom financial system to PeopleSoft Inc. application
software and the upgrade of our primary domestic order fulfillment
system
- the upgrade of our Internet sites
- the purchase of our distribution facility in the United Kingdom
- the installation of systems and equipment in our new domestic
warehouse.
- - Construction was completed on our new 230,000 sq. ft. full-service
distribution center at the Airborne Express hub facility in Wilmington,
Ohio and installation of equipment and warehouse management systems
continued. The distribution center became operational during November,
1999. In order to minimize disruption to our business, we are phasing in
the consolidation of the three facilities we currently occupy. We have
entered into a 10-year lease of this facility that commenced on March 15,
1999.
- - We currently anticipate investing approximately $6 million during the
fourth quarter primarily on Internet site enhancements, additional
equipment and systems for the new domestic distribution center, our virtual
warehouse program and upgrades to our sales systems.
- - The capital expenditures described above have been and are anticipated
to be funded from existing cash and operating cash flows.
BORROWING ARRANGEMENTS
- - We have entered into discretionary credit facilities with three financial
institutions that provide for unsecured borrowings in the aggregate of up
to $50 million for working capital purposes. These credit facilities were
unused as of September 30, 1999 and expire according to the following
schedule:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION DATE
------ ---------------
<S> <C>
$15 million June 30, 2000
</TABLE>
15
<PAGE>
$15 million July 27, 2000
$20 million September 30, 2000
- - We have unused lines of credit in the United Kingdom and France that
provide for unsecured borrowings of up to 2 million British pounds and 45
million French francs ($3.3 million and $7.3 million respectively, based on
applicable exchange rates on September 30, 1999) for working capital
purposes.
FORWARD EXCHANGE CONTRACTS
- - We use forward exchange contracts to manage exposure to foreign currency
risk related to intercompany loans and investments in our foreign
subsidiaries. Outstanding agreements involve the exchange of one currency
for another at a fixed rate. Our credit exposure is limited to the
replacement cost, if any, of the instruments and we enter into such
agreements only with highly-rated counterparties. We match the term and
notional amount of the contracts to the underlying intercompany loans or
investments and do not enter into forward exchange contracts for trading or
speculative purposes.
- - At September 30, 1999 we had outstanding forward exchange contracts with
notional amounts of $3.0 million which mature in less than six months. The
single largest currency represented was the British pound.
SEASONALITY
- - Our business is subject to seasonal variations. These seasonal variations
particularly include lower demand in Europe during the summer months
attributable to vacations.
YEAR 2000 READINESS
We use a significant number of computer software programs and operating
systems in our internal operations including applications used in financial
business systems and various administrative functions that could be affected by
the Year 2000 problem common to most businesses. If these systems are unable to
properly recognize date sensitive information related to the Year 2000 they
could generate erroneous data or fail to operate. This in turn could cause
disruptions of our operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
YEAR 2000 READINESS PROGRAMS
To reduce the possibility of significant interruptions in normal
operations we have implemented a worldwide Year 2000 readiness program. We are
using both internal and external resources in our Year 2000 program. As part of
this program we have named a Year 2000 Director, established a project office
and formed a cross-functional task force to coordinate the program on a
worldwide basis.
In 1998 we performed a comprehensive review of our existing information
systems to determine which of our computer equipment and software might not
function properly with respect to dates referencing the Year 2000 and
thereafter. This review included systems commonly known as IT systems, including
accounting, data processing and other
16
<PAGE>
miscellaneous systems, as well as systems not commonly thought of as IT systems
such as alarm systems, fax machines and other similar systems.
In addition to the upgrades described in Liquidity and Capital
Resources, above, we have completed the process of modifying and replacing
systems that were identified as not being Year 2000 ready with final testing
to occur in the fourth quarter.
During the second quarter of 1998 we began a program for determining
the Year 2000 readiness of our business partners including our vendors, service
providers and major customers and the compatibility of system interfaces for
electronic business transactions. First we identified our business partners and
categorized them according to their significance to our operations. Then we
wrote to each business partner to determine its Year 2000 readiness status.
During the first quarter of 1999 we began to increase the frequency of our
correspondence and communication to and with those business partners that did
not respond to our initial communications or whose response identified an issue
requiring further clarification. During the second quarter of 1999 we updated
our inventory of business partners to insure that we were focusing on our most
critical vendors. In an effort to be more comfortable with these outside
companies we have started to visit and confer with the critical ones to review
their Year 2000 readiness status and share ours. These visits will continue
through the fourth quarter. We have implemented monthly business meetings to
review our findings and continue to develop contingency plans, including
securing alternative vendors and service providers if necessary. We have placed
extra attention on vendors with whom we exchange electronic data to insure both
parties have a mutual understanding of the Year 2000 readiness of our electronic
data transfers. Based on the results of these communications, we believe that
most of our significant business partners and our interfaces with their systems
will be Year 2000 ready. However, because of the complexity of the issues and
factors outside our control, we cannot give assurances that all such partners
and interfaces will be Year 2000 ready.
We estimate that our Year 2000 readiness programs as described above
were 97% complete at September 30, 1999 with business continuity and contingency
planning to occur over the balance of 1999.
COST OF YEAR 2000 READINESS PROGRAMS
Total after-tax charges related to the identification, assessment,
remediation and testing efforts related to the Year 2000 readiness program
are expected to be approximately $4.1 million. As of September 30, 1999, we
had incurred cumulative after-tax Year 2000 readiness costs of approximately
$3.9 million primarily for (1) outside consulting fees related to the
planning and analysis activities of the Year 2000 program and (2) European
remediation costs. Of this amount, $2.5 million or $0.07 per share was
incurred during the nine months ended September 30, 1999.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
If we or our significant business partners fail to address Year 2000
issues in an adequate and timely manner, our ability to process transactions
could be impeded. In addition, the failure of common carriers or other means
of shipping products to be able to transport shipments of our products to
customers in a timely basis during the first days or weeks of the new
millennium could cause the loss of a material amount of revenue. This may
result in a direct and material impact on our ability to generate revenue and
to attract and
17
<PAGE>
retain customers in the future, which in turn could have a material impact on
our business, financial condition and results of operations.
Among the factors that could cause our Year 2000 efforts to be less
than fully effective are the novelty and complexity of these issues and their
solutions and our dependence on the technical skills of employees and
independent contractors and on the representations and preparedness of third
parties. Moreover, Year 2000 issues present a number of risks that are beyond
our control. These include the failure of vendors or common carriers to deliver
merchandise to us or our customers, the failure of utility companies to deliver
electricity, the failure of telecommunications companies to provide voice and
data services, the failure of financial institutions to process transactions and
transfer funds and the collateral effects on us of the effects of Year 2000
issues on the economy in general or on our business partners and customers in
particular.
In addition, variability of definitions of "compliance with Year 2000"
and the variety of computer products we sell that may themselves contain a Year
2000 problem may lead to claims against us, including those arising out of the
failure of such products to be "compliant". Through our Year 2000 compliance
office we have received over 17,500 third party requests for documentation of
internal compliance and product compliance. We intend to rely upon the
warranties of the product manufacturers in case of any such claims but we have
not received assurance that such warranties will be sufficient to cover the
costs and expenses of any successful claims.
Assuming that governmental services, the banking system, common
carriers, telecommunications and utilities are operational and no material
adverse impact on the market for our products or the economy in general
occurs prior to or immediately following the new millennium, we believe that
the reasonably likely worst case scenario would be the requirement to incur
additional expense and resources needed to repair or replace additional
systems or subsystems, the potential loss or delay of customer orders, direct
and material impact on our ability to generate revenue and to attract and
retain customers in the future and a higher than anticipated influx of
customer returns and claims relating to products sold by us that were not
Year 2000 ready. Any of these things could have a material adverse effect on
our business, financial condition and results of operations.
CONTINGENCY PLANS
We have completed the review and development of our worldwide business
continuity plans. Each of our locations has identified its critical processes
and contingency plans are under development. We will update these plans
accordingly based on the results of our testing which will continue through the
end of the year. As part of our business continuity program we will simulate the
Year 2000 environment in November to determine whether any potential Year 2000
issues remain. In addition, our business continuity planning includes
implementing backup or alternative purchasing processes, print production
services, phone services relating to our sales function, shipping, information
technology and human resource functions critical to maintaining a safe
environment for our employees.
OUTLOOK
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<PAGE>
We depend in large part on sales of hardware and software products for
users of Apple Macintosh computers. These products represented approximately 33%
of our sales for the nine months ended September 30, 1999 and 34% for the year
ended December 31, 1998. Computers manufactured by Apple Computer Inc. itself
represented approximately 11% of our sales for the year ended December 31, 1998.
Apple has significantly restricted the number of authorized resellers of its
products and sells its products to end users in direct competition with us and
other resellers. If Apple were to withdraw our reseller authorization or limit
or delay the supply of their products, this would have an immediate adverse
impact on our business, financial condition and results of operations. In
addition, some of our other larger suppliers including Compaq Computer Corp.
and International Business Machines Corp. have announced that they have expanded
or intend to expand their direct sales efforts. The continuing impact of these
matters may adversely affect our business, financial condition and results of
operations.
We acquire products for resale both directly from manufacturers and
indirectly through distributors and other sources. Many manufacturers have
historically provided us 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 the 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 limiting the number of distributors
and resellers that are authorized to purchase products directly from them. These
trends are part of an overall effort by manufacturers to reduce their costs and
shift the burden of inventory risk to distributors and resellers which could
have a material adverse effect on our business, financial condition and results
of operations.
We have embarked on a program to expand our telemarketing sales force
and believe that our future success depends, in part, on our ability to recruit,
train and retain an adequate number of skilled sales associates.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information, this Report contains
"forward-looking statements" based on management's expectations. Factors that
could cause future results to differ from these expectations include, but are
not limited to, continued growth in the market for computer products; increased
competition from other catalog, retail store, online and other resellers and
manufacturers of computer products; reductions in manufacturers' incentive
programs; other competitive, pricing and supply issues; results of our foreign
operations; successful and timely integration of new systems; quarterly
fluctuations and seasonality of our business; and our ability to recruit, train
and retain sales account representatives and other key personnel. We discuss
these and other risks and contingencies in more detail in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
1998 Annual Report to Stockholders and more specifically in the paragraphs in
those sections captioned "Liquidity and Capital Resources," "Impact of Inflation
and Seasonality" and "Outlook"; and in the "Risk Factors" section of our
Registration Statement on Form S-3 dated January 25, 1999. You should not place
undue reliance on the forward-looking statements contained in this Report
because they speak only as of the date of this Report and we have no obligation
to update or revise them in the future.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of our business
operations due to our operations in different foreign currencies and our ongoing
investing activities. The risk of loss can be assessed from the perspective of
adverse changes in fair values, cash flows and future earnings. We have
established policies and procedures governing our management of market risks and
the use of financial instruments to manage exposure to these risks.
The primary purpose of our foreign currency hedging activities is to
manage currency risk related to intercompany loans and investments in our
foreign subsidiaries. The single largest hedged currency represented at
September 30, 1999 is the British pound. At September 30, 1999, we had
outstanding forward exchange contracts in notional amounts totaling $3.0 million
(fair value approximates notional amounts) which mature in six months or less.
We match the term and the notional amount of the contracts to the underlying
intercompany loans or investments and do not enter into any derivative financial
instruments for trading purposes. We believe that foreign currency hedging
activity is not material to our consolidated financial position, results of
operations or cash flow.
We are exposed to changes in interest rates primarily as a result of
our investing activities. The primary objective of our investing activities is
to preserve principal while at the same time maximizing yields without
significantly increasing risk. We primarily invest in highly liquid tax exempt
municipal bonds, floating rate bonds, commercial paper, money market funds and
corporate bonds which totaled $62.1 million at September 30, 1999. These
investment portfolios have a weighted average maturity of less than one year
with no individual investment having a maturity exceeding two years. We believe
that the market risk associated with investing activity is not material to our
consolidated financial position, results of operations or cash flow.
The interest rate risk evaluation noted above is based on a sensitivity
analysis performed on our marketable securities at September 30, 1999. If the
actual changes in interest rates are substantially different from expected
changes, the net impact of interest rate risk on our cash flows may be
materially different from that disclosed above.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The SEC has completed its investigation relating to the facts
underlying our announcements in September and October 1996 that we
intended to restate certain prior financial statements covering the
1992 through 1995 fiscal years. A consensual cease and desist order has
been entered pursuant to which we promise not to violate U.S.
securities laws. There were no fines or penalties imposed upon us or
any of our current officers and directors. There is no other pending
nor, to our knowledge, threatened litigation surrounding the matters
underlying our financial restatement.
We are and may be involved in other litigation relating to claims
arising out of our operations in the normal course of business. We do
not expect any pending litigation to have a material adverse effect on
our business, financial condition or results of operations.
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
Exhibit 27 FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
None
21
<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.
The Registrant
Date: November 12, 1999
By /s/ Wayne P. Garten
---------------------------------
WAYNE P. GARTEN
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer of the
Registrant, Principal Financial Officer and
Principal Accounting Officer)
22
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
23
<PAGE>
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $12,953 $11,863 $37,246 $16,585
=========== ============== ============ ============
Shares
Weighted average common shares outstanding - Basic 35,763 34,816 35,611 34,695
Common equivalent shares 35 775 493 386
----------- -------------- ------------ ------------
Weighted average common shares and common equivalent
shares outstanding - Diluted 35,798 35,591 36,104 35,081
=========== ============== ============ ============
Net income per share - Basic $0.36 $0.34 $1.05 $0.48
=========== ============== ============ ============
Net income per share - Diluted $0.36 $0.33 $1.03 $0.47
=========== ============== ============ ============
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 136,470
<SECURITIES> 62,116
<RECEIVABLES> 254,140
<ALLOWANCES> 10,540
<INVENTORY> 92,604
<CURRENT-ASSETS> 567,810
<PP&E> 126,781
<DEPRECIATION> 61,512
<TOTAL-ASSETS> 679,235
<CURRENT-LIABILITIES> 237,336
<BONDS> 0
0
0
<COMMON> 358
<OTHER-SE> 441,541
<TOTAL-LIABILITY-AND-EQUITY> 679,235
<SALES> 1,782,653
<TOTAL-REVENUES> 1,782,653
<CGS> 1,505,891
<TOTAL-COSTS> 1,505,891
<OTHER-EXPENSES> 223,219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> 61,060
<INCOME-TAX> 23,814
<INCOME-CONTINUING> 37,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,246
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.03
</TABLE>
