ITEM 1. BUSINESS
BUSINESS OVERVIEW
MicroAge, Inc. (the "Company"), was incorporated in the State of Arizona in 1976 and reincorporated in Delaware in 1987. The Company distributes and integrates information technology products and services through, and in partnership with, a network of resellers, including twelve Company-owned resellers (the "MicroAge Network" or the "Network"). The products and services the Company markets and sells include microcomputer systems; workstations; networking and telecommunications equipment; system solutions, including integration and installation services and various technical services and support; software; and related products and services.
The Company currently markets and distributes products for leading manufacturers, such as COMPAQ Computer Corporation ("COMPAQ"), Hewlett-Packard Company ("Hewlett-Packard"), International Business Machines Corporation ("IBM"), Apple Computer, Inc. ("Apple"), Toshiba America Information Systems, Inc. ("Toshiba"), Digital Equipment Corporation ("Digital"), NEC Technologies, Inc. ("NEC"), Microsoft Corporation ("Microsoft"), Novell, Inc. ("Novell"), and Banyan Systems Incorporated ("Banyan").
MicroAge Network resellers are primarily owned and managed by individuals resident in their respective markets and active in the daily operations of their businesses. This owner-managed reseller model eliminates the need for the Company to employ a large field-based sales and service force.
Unless the context otherwise requires, as used herein, the term the "Company" refers to MicroAge, Inc., its predecessors, and subsidiaries. The Company's headquarters is located at 2400 South MicroAge Way, Tempe, Arizona 85282-1896, and its telephone number is (602) 804-2000.
This document may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See "Products and Vendors" and "Competition" in this Item and "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Results of Operations" and "Potential Fluctuations in Operating Results" in Part II, Item 7 of this report for a discussion of important factors that could affect the validity of any such forward-looking statements.
BUSINESS STRATEGY
The Company's dual strategic focus is to pursue profit expansion and revenue growth. The Company's profit expansion strategy focuses on expense control, effective inventory management, the addition and expansion of higher-margin products, and new pricing programs. Revenue growth is driven by sales to new resellers, the Company's large account strategy, and same location sales growth. The Company implements its business strategy through customer-focused business units targeted to specific strategic market segments.
PROFIT EXPANSION. The Company's focus on profit expansion has caused the Company to implement new systems, policies and procedures designed to result in expense savings in areas such as inventory and accounts receivable management. During the fourth quarter of fiscal year 1995, the Company approved and began to implement actions targeted at reducing the Company's future cost structure and improving its profitability. These actions included, among other things, (i) the sale of the Company's memory distribution business, (ii) outsourcing certain unprofitable operations, and (iii) a reduction in the number of the Company's associates (employees). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations" and "Potential Fluctuations in Operating Results" in Part II, Item 7 of this report for a discussion of the economic implications of these actions. The Company's addition and expansion of higher-margin products and services is also designed to increase profit margins. See "Products and Vendors-- Product Strategy." The Company's profit expansion goal may be negatively affected by continuing market pricing pressure.
LARGE ACCOUNT SALES. Over the past several years, the Company has pursued a strategy of marketing products and services directly to large end-user customers in partnership with certain of its Network resellers. Large end-user customers are generally solicited by the Company's large account sales and service force in partnership with qualified Network resellers. Network resellers and large end-user customers may select from a broad array of Company-sponsored sales support programs, including specially-tailored product pricing alternatives; centralized integration services; multi-site direct product shipment; purchase price financing; and multiple location on-site sales, service and support (including central service dispatch and service call tracking).
The Company also offers a program to its resellers whereby the Company grants credit and assumes collection and administration responsibilities for large end-user customers. The continuing use of this program will provide increased revenue and profit opportunities for the Company but will continue to increase working capital requirements as accounts receivable for large end-user customers increase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part II, Item 7 of this report.
THE MICROAGE NETWORK. Resellers in the MicroAge Network purchase products and services from the Company generally at lower prices than could be obtained independently from vendors. The Company provides distribution and support services to resellers so that the Company and the resellers may realize operating efficiencies and benefit from economies of scale in product purchasing and distribution, financing, and working capital management. These services include multi-vendor aggregation and system integration, technical support, financing options, back-order management, direct shipping to end-user customers, support for electronic commerce, and complete order shipment. Due in part to "open sourcing" (see "Products and Vendors - Open Sourcing" below) and the expansion of the Company's product offerings to include products that have previously been offered primarily by wholesale distributors (see "Products and Vendors - Product Strategy"), sales to value added resellers ("VARs") have been one of the Company's fastest growing sales segments.
The Company offers all resellers (including VARs) the option of purchasing products on open credit terms of up to 30 days, subject to credit review and approval. If the Company is successful in achieving continued revenue growth, this reseller financing program will place increased demands on the Company's working capital requirements to fund the associated increase in accounts receivable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part II, Item 7 of this report.
The Company will continue to pursue Network expansion through the recruitment of established computer resellers that can use and benefit from the products and services offered by the Company. In addition, in order to establish or solidify its presence in strategic markets or in response to competitive pressures, the Company has made, and in the future may make, acquisitions of or investments in additional reseller locations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part II, Item 7 of this report.
MICROAGE SERVICES
The Company provides a broad array of services to its resellers and end-user customers. These services are generally provided on a fee-for-service basis.
DISTRIBUTION SERVICES. Orders are fulfilled and shipped from distribution centers located in Tempe, Arizona and Cincinnati, Ohio for delivery in one to three business days to a reseller or end-user anywhere in the continental United States. In conjunction with product ordering and shipment, the Company offers various services to end-user customers and resellers, including expedited delivery, vendor direct shipment, deferred shipment, and the following special services:
Back-order Management. Network resellers may elect to receive notification of the receipt by the Company of products that were not available for shipment within three days of order placement, rather than having the product shipped to them automatically, thereby avoiding costly product returns.
Multi-site Direct Shipment. Product shipments, including configured system orders, may be specified for delivery directly to multiple end-user customer locations from the Company's distribution centers. This allows resellers to reduce freight expense, product handling costs, and delivery times to end-user customers.
Complete Order Shipment. Resellers and end-user customers may elect to defer shipment of orders until all products and services specified in the order are fulfilled, thereby eliminating the costs associated with multiple shipments and the storage of inventory.
QUALITY INTEGRATION CENTER. Technicians at the Company's Quality Integration Center, located in Tempe, Arizona, perform integration services, including systems set-up; local area network integration and testing; board-level enhancement; disk or tape drive installation; device testing; and software loading, including complex operating systems. The Quality Integration Center also direct-ships configured systems to end-user customers, allowing resellers to service these customers more profitably by reducing inventory levels, carrying costs, and freight expense, and by freeing up technical staff.
FINANCIAL SERVICES. The Company has developed numerous financial services that are designed to improve the ability of qualifying resellers to purchase products from the Company in a cost-effective manner. See "Business Strategy - Large Account Sales," "Business Strategy - The MicroAge Network," and "Products and Vendors - Vendor Relationships" for a discussion of some of these financial services. The Company also sponsors payment programs with commercial credit companies to facilitate reseller purchases of products from vendors that do not offer their own payment programs; under these programs, the Company receives payment for product sales within three to five business days and pays the commercial credit company a fee based on a percentage of the products sold.
TECHNICAL SERVICES. The Company provides resellers and certain end-user customers with various technical services, including telephone hotline support, technical publications, on-line technical services, training programs, product evaluation, and on-site consultation.
MICROAGE ZDATA. MicroAge ZDATA, a proprietary, electronic ordering and product inquiry system, allows a participating Network reseller to electronically create, modify, send, and verify orders, check inventory on hand at the Company's distribution centers, and review the status of its account with the Company.
PRODUCT INFORMATION CENTER. The Company provides new product information and existing product compatibility assistance to help end-user customers and resellers evaluate the effectiveness of a potential system solution. These customers and resellers may use this service to improve product knowledge and awareness and to avoid improper integration.
INFORMATION SERVICES. Through the creation, packaging, and dissemination of information to its vendors, resellers, and end-user customers, the Company centralizes relevant market data for use by its constituencies. The Company can also provide end-user customers with asset tracking services to assist in the administration of large system installations and service. In addition, the Company has been a leader in providing electronic commerce services in conjunction with the Network. These services include electronic data interchange ("EDI") support, Internet hosting, and multimedia. Other services include technical information publications, product evaluation and market surveys, marketing periodicals, and product catalogs.
PRODUCTS AND VENDORS
PRODUCT STRATEGY. The Company sells a broad selection of products with a predominant focus on the products of major microcomputer and peripheral manufacturers, such as COMPAQ, Hewlett-Packard, and IBM. Sales of these three manufacturers' products represented approximately 56% of the Company's revenue from product sales during fiscal 1995, compared to approximately 60% during fiscal 1994. The Company's agreements with these vendors generally are renewed periodically and permit termination by the vendor without cause, generally upon 30 to 90 days' notice, depending on the vendor. The Company believes that these provisions are standard in the computer reseller industry. In addition, the Company's business is dependent upon price and related terms and product availability provided by its key vendors. Although the Company considers its relationships with COMPAQ, Hewlett-Packard, and IBM to be good, there can be no assurance that these relationships will continue as presently in effect or that changes by one or more of these key vendors in their volume discount schedules or other marketing programs would not adversely affect the Company. Termination or nonrenewal of the Company's agreements with COMPAQ, Hewlett-Packard, or IBM would have a material adverse effect on the Company's business.
The Company continually evaluates its product assortment based on technological advances, the market for information technology products, and the Network's requirements related to technological capability, product availability, and marketability. Over the last several years, the Company has expanded its product offerings in response to market conditions and has established relationships with new vendors to distribute, service, and support both high-end, higher-priced workstation products, as well as complementary computer peripheral products and software. These products generally carry higher profit margins than the Company's traditional brand name products and have historically been distributed primarily by wholesale distributors or sold directly to end-users by manufacturers. Sales of these products generally require the extension of credit by the Company, resulting in increased working capital requirements.
PRODUCT SUPPLY. The computer reseller industry continues to experience product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply certain products. In addition, certain vendors have initiated new channels of distribution that increase competition for the available product supply. There can be no assurance that vendors will be able to maintain an adequate supply of products to fulfill all of the Company's customer orders on a timely basis. Failure to obtain adequate product supplies could have a material adverse effect on the Company's results of operations.
OPEN SOURCING. In the past, certain of the Company's vendors required resellers to purchase their products and services exclusively from one source. Vendors have generally removed this requirement, resulting in "open sourcing" of their products. To date, open sourcing has significantly contributed to the rapid growth of the Company's sales to VARs. However, competitive pricing pressures throughout the industry have intensified; these competitive pressures have been particularly evident in the Company's Network distribution business. While the Company believes that it can effectively compete for sales of those products available under open sourcing, there can be no assurance that open sourcing will not adversely affect the Company's business.
VENDOR RELATIONSHIPS. Because of its quantity purchasing capabilities, the Company generally obtains volume discounts from its vendors, enabling it to sell products to resellers on more favorable terms than the typical reseller could obtain on its own from such vendors. In general, the Company's agreements have price protection provisions to protect the Company in the event of price reductions by its vendors on eligible products in the Company's inventory and to permit the return of slow-moving and other products for credit (generally at cost minus a restocking fee). Subject to product availability, the Company carries inventory at levels that it believes will enable it to meet the anticipated needs of its resellers and end-user customers and, to a lesser extent, to take advantage of certain vendor discounts and promotions.
Several major vendors sponsor payment programs with commercial credit companies to facilitate product sales to and through the Network. Such programs generally provide Network resellers with payment terms ranging from 30 to 60 days, depending on the vendor. Under these programs, the Company generally receives payment for product sales within three to five business days, thus significantly reducing the Company's working capital requirements and credit exposure. See "MicroAge Services - Financial Services" for a discussion of payment programs that the Company sponsors with commercial credit companies to facilitate reseller purchases of products from vendors that do not offer their own payment programs.
COMPETITION
The computer reseller industry is characterized by intense competition, based primarily on product availability, price, speed of delivery, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines, service and post-sale support, and quality of customer training. In addition, the Company faces competition in the recruitment and retention of resellers for the MicroAge Network. The Company and MicroAge Network locations compete for sales with numerous resellers, including (i) master resellers; (ii) direct resellers; (iii) wholesalers (resellers that do not sell to end-users); (iv) vendors that sell directly to large purchasers; and (v) parties that implement other sales methods, such as direct mail, computer "superstores," and mass merchandisers. See "Products and Vendors -- Open Sourcing" for a discussion of the competitive pressures associated with open sourcing.
EMPLOYEES
As of October 29, 1995, the Company employed approximately 2,088 persons, 436 of whom were employed at the twelve Company-owned reseller locations. No employees are represented by labor unions. The Company considers its employee relations to be good.
GOVERNMENT REGULATION
The Company is subject to a substantial number of state laws regulating franchise operations. In general, these laws impose registration and disclosure requirements on franchisors in the offering and sale of franchises. Also, in certain cases, statutes and court-created doctrines apply substantive standards to the relationship between franchisor and franchisee, including restrictions on the Company's ability to terminate or refuse to renew a franchise agreement. The Company is also subject to Federal Trade Commission regulations governing disclosure requirements in the sale of franchises. The Company believes it is in substantial compliance with all such regulations. See Note 2 of the Company's Consolidated Financial Statements in Part II, Item 8 for additional information regarding the Company's franchising activities.
TRADEMARKS AND SERVICE MARKS
The Company holds various trademarks and service marks, including, among others, MicroAge,(R) The Solution Store,(R) The Solution Center,(R) Solutions,(R) MicroSource,(R) MicroAge 2000,(R) The Franchise Program for the 90's and Beyond,(R) and ZDATA.(R) All trademarks and service marks are registered in the United States, and certain trademarks and service marks are registered in various foreign countries. The marks are not otherwise registered with any states; however, the Company also claims common law rights to the marks based on adoption and use. Management believes that the value of the Company's marks is increasing with the development of its business, but that the business of the Company as a whole is not materially dependent on such marks.
SEASONALITY
Although the Company's financial performance has not exhibited significant seasonality in the past, the Company and the computer industry in general tend to follow a sales pattern with peaks occurring near the end of the calendar year, due primarily to special vendor promotions and year-end business purchases.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive officers of the Company as of December 31, 1995:
- --------------- * Mr. Kenneth R. Waters was the Company's President at December 31, 1995, but will be leaving the Company effective January 31, 1996 due to a medical condition. Mr. McKeever assumed Mr. Waters' responsibilities after Mr. Waters underwent heart surgery in June 1995.
JEFFREY D. MCKEEVER has served as Chief Executive Officer since February 1987, and as Chairman of the Board since October 1991. In June 1995, Mr. McKeever also assumed the duties of President of the Company because Mr. Waters went on leave from the Company at that time due to a medical condition. Mr. McKeever co-founded the Company in August 1976 and has served as a director of the Company since October 1976. He also served as President from January 1993 to February 1993 and from February 1987 to October 1991, Chairman of the Board and Secretary from October 1976 to February 1987 and Treasurer from October 1976 to February 1983 and from February 1987 to December 1988.
ALAN P. HALD has served as Vice-Chairman of the Board since October 1991, and as Secretary since February 1987. He co-founded the Company in August 1976 and has served as a director of the Company since October 1976. He also served as President from February 1993 to August 1993 and from October 1976 to February 1987, Chairman of the Board from February 1987 to October 1991 and Treasurer from February 1983 to February 1987.
JAMES R. DANIEL has served as Senior Vice President and Chief Financial Officer of the Company since January 1993, and as Treasurer of the Company from January 1993 until December 1994, at which time he assumed the additional position of President, Headquarter Services, MCCI. He reassumed the title of Treasurer in September 1995. Prior to joining MicroAge, he served as Chief Financial Officer and Treasurer of Dell Computers from 1991 to 1993. Prior to Dell, he served as Chief Financial Officer and Treasurer for SCI Systems, an electronics contract manufacturer, from 1984 to 1991. Mr. Daniel is a certified public accountant.
WARREN T. MILLS has served as Senior Vice President - Sales of the Company since December 1994. He served as Vice President - Sales of the Company from October 1989 until December 1994 and as President of MicroAge Solutions, Inc. from September 1988 until December 1994. From April 1987 through September 1988, he owned a franchised MicroAge location in Burlington, Massachusetts.
ROBERT G. O'MALLEY has served as Vice President - Services Marketing of the Company since January 1996 and as President, MicroAge Data Services, MCCI, since May 1995. Prior to joining the Company, he held various positions with IBM Corporation since January 1976, including General Manager, PC Desktop Systems from September 1994 to February 1995; Vice President of Marketing & Brand Management - Americas from February 1994 to September 1994; Managing Director, Asia Pacific PC Operations from January 1992 to January 1994; Vice President, National Distribution Division, from August 1990 to December 1991; and Director, US Finance and Planning, from February 1988 to July 1990.
JOHN H. ANDREWS has served as Vice President - Logistics of the Company since December 1995 and as President, MicroAge Logistics Services, MCCI, since July 1993. He served as Vice President - Operations from July 1993 to December 1995; Group Vice President, Operations from January 1993 to July 1993; Vice President and Chief Financial Officer from June 1990 to January 1993; and as Treasurer from June 1991 to January 1993. Mr. Andrews joined the Company in 1984 and served as Principal Accounting Officer from December 1988 to June 1990. Mr Andrews is a certified public accountant.
WESLEY D. RICHARDS has served as Vice President - Development of the Company since December 1994, and as President of MicroAge Channel Services, MCCI, since August 1995. He served as President of MicroAge Enterprises, Inc. from August 1994 to August 1995. Mr. Richards joined the Company in June 1994 as a consultant on special projects. Prior to joining MicroAge, he operated a consulting business, specializing in computer software, from August 1990 to June 1994. Prior to operating the consulting business, Mr. Richards served as Vice President of Sales and Marketing at Ashton-Tate, a software company, from January 1989 to June 1990.
CHRISTOPHER J. KOZIOL has served as President, MicroAge Infosystems Services, Inc. since October 1995. He served as President, MicroAge Infosystems Services, MCCI, from July 1993 to October 1995 and as Vice President, Sales, MCCI, from January 1992 to July 1993. He joined the Company in September 1985 and served as Director-Regional Support from March 1988 to December 1991.
JEFFREY M. SWANSON has served as President, MicroAge Solutions, Inc. since December 1994 and served as General Manager of MCSB, Inc., a Company-owned location in Plymouth, Minnesota from October 1991 to November 1994. Prior to joining MicroAge, he served as Executive Vice President of AmeriData Incorporated from 1981 to 1991.
HARMAN D. CADIS has served as Chief Technical Officer, MCCI since December 1994 and as President, MicroSource Technologies, Inc. since January 1991. He served as President, MicroAge Technologies, MCCI, from July 1993 to April 1995. Mr. Cadis joined the Company in January 1991 when the Company acquired ICT, a wholesale supplier of computer graphics products. Mr. Cadis founded ICT in September 1983 and served as President and Chairman of the Board from October 1984 through January 1991.
RAYMOND L. STORCK has served as Vice President - Controller of the Company since July 1993, and as Controller and Assistant Treasurer since October 1991. He joined the Company in 1986 and served in positions in accounting, reporting and analysis, including Director of Planning and Analysis from June 1990 to July 1991.
JEFFREY A. H. FRANKEL has served as Vice President - Legal of the Company and Vice President of MicroAge International, Inc. since July 1993 and as Assistant Secretary of the Company since February 1993. From October 1992 through July 1993, he served as Corporate Counsel and as Managing Director of the International Department. Mr. Frankel joined the Company in September 1986 and served as Associate Corporate Counsel from September 1986 to September 1992.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located in Tempe, Arizona and occupy approximately 135,000 square feet of commercial office space. The Company operates automated distribution and logistics centers in Tempe, Arizona and Cincinnati, Ohio which occupy approximately 300,000 and 304,000 square feet, respectively. The Company also maintains a 124,000 square foot Technical Services Center in Tempe, Arizona, adjacent to a 133,000 square foot Quality Integration Center.
The Company also operates twelve Company-owned reseller locations (one each in Tempe, Arizona; Plymouth, Minnesota; Chicago, Illinois; Westminster, Colorado; Burlington, Massachusetts; Wilton, Connecticut; Novi, Michigan; St. Louis, Missouri; Oklahoma City, Oklahoma; Tulsa, Oklahoma; Houston, Texas; and Irving, Texas) which occupy an aggregate of approximately 146,000 square feet.
All facilities are leased. The Company believes that its properties and equipment are well-maintained, in good operating condition, and adequate for its present foreseeable needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 14 through July 19, 1994, seven class action complaints were filed in the United States District Court for the District of Arizona against the Company, certain of its officers and directors, and, in three of the lawsuits, one of the underwriters of the Company's June 16, 1994 public offering of common stock. On December 5, 1994, the Court consolidated the seven actions into a single action. On February 16, 1995, plaintiffs filed and served an amended, consolidated complaint against the Company, certain officers and directors of the Company, and three of the underwriters of the Company's June 16, 1994 public offering of common stock (the "Complaint"). The Complaint purports to be brought on behalf of a class of purchasers of the Company's common stock during the period April 13, 1994 through July 14, 1994. The Complaint alleges, among other things, that the Company violated federal securities laws by making misleading public statements and omitting material facts regarding the Company's operations and financial results, which the plaintiffs contend to have artificially inflated the price of the Company's common stock during the alleged class period. The Complaint seeks unspecified compensatory damages as well as fees and costs. On April 28, 1995, the Company filed a motion to dismiss the Complaint in its entirety. The motion was heard on July 31, 1995; no decision has yet been issued. Discovery is ongoing. The Company and the individual defendants deny the plaintiffs' allegations of wrongdoing and intend to vigorously defend themselves in these actions. The proceeding is in its early stage, however, and its outcome cannot be predicted with certainty at this time.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market under the symbol MICA and has been quoted on the Nasdaq National Market since July 1, 1987. The following table sets forth the quarterly high and low sale prices for the common stock as reported by the Nasdaq National Market for the two most recent fiscal years:
As of December 31, 1995, there were approximately 447 stockholders of record of the common stock. The Company believes that as of such date there were approximately 6,900 beneficial holders of the common stock.
The Company has never declared or paid a cash dividend on its common stock and does not presently intend to do so. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors.
- ------------- (1) On December 8, 1993, the Company's Board of Directors declared a 3- for-2 stock split effected in the form of a Common Stock dividend that was paid on January 13, 1994. All prices in this table give effect to the stock split.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five fiscal year periods ended October 29, 1995 are derived from the Company's Consolidated Financial Statements. The selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and related notes included elsewhere in this report. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
INCOME STATEMENT DATA: (1)
- ----------- (1) Effective for the Company's 1994 fiscal year, the Company changed its fiscal year end from September 30 to the Sunday nearest October 31 in each calendar year. See Note 3 to the Company's Consolidated Financial Statements in Part II, Item 8.
(2) The fiscal year ended October 29, 1995 included $9,029,000 of restructuring and other one-time charges. See "Managements's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, data as percentages of total revenue:
FISCAL YEAR ENDED OCTOBER 29, 1995 VERSUS FISCAL YEAR ENDED OCTOBER 30, 1994
Total Revenue. Total revenue increased $720 million, or 32%, to $2.9 billion for the fiscal year ended October 29, 1995 as compared to the fiscal year ended October 30, 1994. This revenue increase included a $320 million, or 41%, increase in sales to large accounts and a $341 million, or 26%, increase in sales to resellers.
These revenue increases were primarily due to sales to resellers added since October 30, 1994, the Company's focus on large account sales, increased demand for the Company's major vendors' products, the Company's addition of new product lines and same location sales growth (including sales to large accounts).
The Company experienced quarterly revenue growth rates in excess of 40% (when compared to the same quarters of the prior years) during the fiscal years ended September 30, 1993 and October 30, 1994 as well as for the first two quarters of fiscal 1995. Quarter over quarter revenue growth decreased to 30% and 20% for the last two quarters of fiscal 1995. In fiscal 1996, the Company will emphasize increased profitability rather than revenue growth. See "Business Strategy" in Part I, Item 1 for a discussion of the Company's strategic focus.
Gross Profit Percentage. The Company's gross profit percentage was 5.2% for the fiscal year ended October 29, 1995 and for the fiscal year ended October 30, 1994.
Future gross profit percentages may be affected by market pressures, the introduction of new Company programs, changes in revenue mix, the Company's utilization of early payment discount opportunities, vendor pricing actions and other competitive and economic factors. See "Potential Fluctuations in Operating Results" below for information regarding industry trends that may affect future gross profit percentages.
Operating Expense Percentage. As a percentage of revenue, operating expenses increased to 4.3% for the fiscal year ended October 29, 1995, from 3.7% for the fiscal year ended October 30, 1994. Operating expenses increased from $83.2 million for fiscal 1994 to $126.4 million for fiscal 1995. The increase was primarily due to increased costs as a result of higher volumes, capacity expansion in both personnel and facilities added in anticipation of revenue growth and increased depreciation as a result of expenditures for automation initiatives and facility expansion.
Restructuring and Other One-time Charges. During the fourth quarter of fiscal 1995, the Company approved and implemented actions targeted at reducing the Company's future cost structure and improving its profitability. These actions included, among other things, (i) the sale of the Company's memory distribution business, (ii) outsourcing a certain business function and (iii) a reduction in the number of the Company's employees. The Company's consolidated statement of income for fiscal 1995 includes $9.0 million of pretax charges ($5.4 million net of tax benefits, or $0.38 per share) for restructuring and other one-time charges.
If the restructuring and other one-time charges are calculated as though all of the actions targeted at reducing expenses and improving profitability had been implemented on the first day of the fourth fiscal quarter, the total of these charges would have been $10.8 million before tax, or $0.45 per share. The Company reported a loss of $0.40 per share for its fourth fiscal quarter of 1995, including restructuring and other one-time charges. Excluding the $10.8 million in charges, the Company's fourth quarter net income would have been $744,000, or $0.05 per share, up slightly from the $662,000, or $0.05 per share reported for the third quarter of fiscal 1995, and net income for the year would have been $6.7 million, or $0.47 per share.
Other Expenses - Net. Other expenses - net increased to $15.6 million for the fiscal year ended October 29, 1995 from $5.6 million for the fiscal year ended October 30, 1994. The increase is primarily attributable to an increase in net financing costs during the year. These financing costs included expenses from the sale of receivables under an agreement with a commercial lender, costs from flooring subsidies provided to lenders who floor product purchases from the Company's customers and increased interest expense due to higher average borrowings during the fiscal year.
Effective tax rate. The Company's effective tax rate increased from 39.4% for the fiscal year ended October 30, 1994 to 78.3% for the fiscal year ended October 29, 1995. This increase is a result of the impact of certain state taxes not based on income and non-deductible expenses, such as meals and entertainment and goodwill amortization, on a lower pretax income amount.
Marketing Development Funds. The Company receives funds from certain vendors which are earned through marketing programs, meeting established purchasing objectives or meeting other objectives determined by the vendor. There can be no assurance that these programs will be continued by the vendors. A substantial reduction in the vendor funds available to the Company would have an adverse effect on the Company's results of operations.
FISCAL YEAR ENDED OCTOBER 30, 1994 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1993
Total Revenue. Total revenue increased $711 million, or 47%, to $2.2 billion for the fiscal year ended October 30, 1994 as compared to the fiscal year ended September 30, 1993. This revenue increase included a $264 million, or 46%, increase in sales to large accounts and a $447 million, or 48%, increase in sales to resellers.
These revenue increases were primarily due to sales to resellers added since September 30, 1993, same location sales growth (including sales to large accounts), the Company's focus on large account sales, increased demand for the Company's major vendors' products and the Company's addition of new product lines.
Gross Profit Percentage. The Company's gross profit percentage increased to 5.2% for the fiscal year ended October 30, 1994 from 5.1% for the fiscal year ended September 30, 1993.
During the fiscal year, the Company's gross profit percentage decreased from 5.5% for the quarter ended May 1, 1994 to 4.9% for the quarter ended July 31, 1994. The gross profit percentage increased slightly to 5.1% for the quarter ended October 30, 1994. The gross profit percentage decrease between the quarters ended May 1, 1994 and July 31, 1994 was primarily attributable to general market pricing pressure and costs associated with actions taken to reduce inventory levels.
Operating Expense Percentage. As a percentage of revenue, operating expenses decreased from 3.9% for the fiscal year ended September 30, 1993 to 3.7% for the fiscal year ended October 30, 1994.
Other Expenses - Net. Other expenses - net increased to $5.6 million for the fiscal year ended October 30, 1994 from $1.2 million for the fiscal year ended September 30, 1993. The increase is primarily attributable to an increase in net financing costs incurred during the year.
These financing costs included expenses from the sale of receivables under an agreement with a commercial lender, costs from flooring subsidies provided to lenders who floor product purchases from the Company's customers and increased interest expense due to higher average borrowings during the fiscal year.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from quarter to quarter depending on certain factors, including, but not limited to, demand for the Company's information technology products and services, product availability, competitive conditions, and general economic conditions. See "Products and Vendors" and "Competition" in Part I, Item 1 for additional information regarding certain of these factors. Although the Company attempts to control its expense levels, these levels are based, in part, on anticipated revenues. Therefore, the Company may not be able to control spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, quarterly period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs to date primarily through working capital financing facilities, bank credit lines, common stock offerings and cash generated from operations. The primary uses of cash have been to fund increases in inventory and accounts receivable resulting from increased sales. If the Company is successful in achieving continued revenue growth (see "Business Strategy - Large Account Sales" in Part I, Item 1), its working capital requirements will continue to increase.
During the fiscal year ended October 29, 1995, the Company used $6 million of cash for a business purchase. In order to establish or solidify its presence in strategic markets or to respond to competitive pressures, the Company may make acquisitions of, or investments in, reseller locations. These acquisitions or investments may be made utilizing cash, stock or a combination of cash and stock. See "Competition" in Part I, Item 1 for information regarding competitive pressures.
For the fiscal year ended October 29, 1995, $32 million of cash was provided by operating activities. Net cash provided by operating activities included a decrease in inventory of $9 million, an increase in accounts payable of $51 million, non-cash depreciation, amortization and bad debt charges of $21 million and non-cash restructuring and other one-time charges of $7 million offset by an increase in accounts receivable of $53 million and increases in other assets of $7 million. The number of days sales in ending accounts receivable increased from 20 days at October 30, 1994 to 22 days at October 29, 1995. The Company's annualized inventory turnover rate increased from 8 times at October 30, 1994 to 10 times at October 29, 1995. The number of days cost of sales in ending accounts payable remained constant at 47 days at October 30, 1994 and October 29, 1995. For fiscal year 1995, net cash of $29 million used in investing activities consisted primarily of $23 million for the purchase of property and equipment and $6 million for a business purchase.
In August 1995, the Company amended its primary financing agreement (the "Agreement") to increase its financing facility from $250 million to $400 million. The Agreement includes two major components: an accounts receivable facility (the "A/R Facility") and an inventory facility (the "Inventory Facility"). The Agreement expires in August 1997.
Under the A/R Facility, the Company has the right to sell certain accounts receivable from time to time, on a limited recourse basis, up to an aggregate amount of $250 million sold at any given time. At October 29, 1995, the net amount of sold accounts receivable was $125 million.
The Inventory Facility provides for borrowings up to $150 million. Within the Inventory Facility, the Company has a line of credit for the purchase of inventory from selected product suppliers ("Inventory Line of Credit") of $50 million and a line of credit for general working capital requirements ("Supplemental Line of Credit") of $100 million. Payments for products purchased under the Inventory Line of Credit vary depending upon the product supplier, but generally are due between 45 and 60 days from the date of the advance. No interest or finance charges are payable on the Inventory Line of Credit if payments are made when due. At October 29, 1995, the Company had $3 million outstanding under the Inventory Line of Credit and had no amounts outstanding under the Supplemental Line of Credit.
Of the $400 million of financing capacity represented by the Agreement, $272 million was unused as of October 29, 1995. Utilization of the unused $272 million is dependent upon the Company's collateral availability at the time the funds would be needed.
Borrowings under the Agreement are secured by substantially all of the Company's assets, and the Agreement contains certain restrictive covenants, including working capital and tangible net worth requirements, and ratios of debt to tangible net worth and current assets to current liabilities. At October 29, 1995, the Company was in compliance with these covenants.
The Company also maintains trade credit arrangements with its vendors and other creditors to finance product purchases. Several major vendors maintain security interests in their products sold to the Company.
The unavailability of a significant portion of, or the loss of, the Agreement or trade credit from vendors would have a material adverse effect on the Company.
INFLATION
The Company believes that inflation has generally not had a material impact on its operations or liquidity to date.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in the index appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on Form 10-K and are hereby incorporated by reference in this Item 8. See also "Index to Financial Statements" on page hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors is incorporated herein by reference to the information furnished under the captions "Election Of Directors" and "Section 16 Requirements" in the Company's Proxy Statement relating to its 1996 Annual Meeting of Stockholders (the "1996 Proxy Statement").
Information regarding executive officers of the Company is included in Part I, Item 1 hereof, furnished under the caption "Executive Officers of the Registrant."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by reference to the information furnished under the captions "Executive Compensation" (other than the information furnished under the heading "Report of the Compensation Committee on Executive Compensation") and "Other Information Regarding the Board of Directors" in the 1996 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management of the Company is incorporated herein by reference to the information furnished under the captions "Security Ownership of Management" and "Principal Stockholders" in the 1996 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated herein by reference to the information furnished under the caption "Certain Relationships and Related Transactions" in the 1996 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(b) Reports filed on Form 8-K during the quarter ended October 29, 1995:
None.
(c) See Item 14(a)(3) above.
(d) See "Index to Consolidated Financial Statements" included under Item 8 to this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICROAGE, INC. (Registrant)
By:/s/ Jeffrey D. McKeever --------------------------------- Jeffrey D. McKeever Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) AND (2), (c) AND (d)
----------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
----------------------------------
YEAR ENDED OCTOBER 29, 1995
MICROAGE, INC. AND SUBSIDIARIES
TEMPE, ARIZONA
MICROAGE, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MicroAge, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 17 present fairly, in all material respects, the financial position of MicroAge, Inc. and its subsidiaries at October 29, 1995 and October 30, 1994, and the results of their operations and their cash flows for the fiscal years ended October 29, 1995, October 30, 1994 and September 30, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Phoenix, Arizona December 5, 1995
MICROAGE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
ASSETS
The accompanying notes are an integral part of these financial statements.
MICROAGE, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
MICROAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Supplemental disclosure to cash flows - See Note 14
The accompanying notes are an integral part of these financial statements.
MICROAGE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
The accompanying notes are an integral part of these financial statements.
MICROAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS
MicroAge, Inc. ("MicroAge") distributes and integrates information technology products and services through, and in partnership with, a network of resellers, including twelve Company-owned resellers (the "MicroAge Network" or the "Network"). The products and services the Company markets and sells include microcomputer systems; workstations; networking and telecommunications equipment; system solutions, including integration and installation services and various technical services and support; software and related products and services. Unless the context otherwise requires, references to the "Company" include MicroAge, Inc. and its consolidated subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements of the Company include the accounts of companies more than 50% owned. Investments in affiliates owned 50% or less are accounted for by the equity method. All material intercompany accounts and transactions have been eliminated.
Disclosures about fair value of financial instruments
Financial instruments that are subject to fair value disclosure requirements are carried in the consolidated financial statements at amounts that approximate fair value.
Cash equivalents
All highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. The Company did not have any cash equivalents at October 29, 1995 or October 30, 1994.
Cash overdrafts
Under the Company's cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes. Such amounts, aggregating $38.5 million and $21.5 million at October 29, 1995 and October 30, 1994, respectively, are included as a component of accounts payable in the accompanying balance sheets.
Accounts and notes receivable
Accounts and notes receivable are comprised of amounts due from financing companies, end-users, and resellers and are net of an allowance for doubtful accounts of $12,255,000 and $6,833,000 at October 29, 1995 and October 30, 1994, respectively.
Inventory
Inventory consisting of resale merchandise is stated at lower of cost (first-in, first-out method) or market. International Business Machines Corporation ("IBM") products totaling $54,083,000 and $48,375,000 included in inventory at October 29, 1995 and October 30, 1994, respectively, are subject to a reservation of the title in IBM for the purpose of assuring that such products are sold and delivered only to IBM-authorized personal computer dealers; such reservation does not prohibit the Company from granting security interests to other parties.
During the fiscal year ended October 29, 1995, sales of COMPAQ Computer Corporation, Hewlett-Packard Company and IBM products accounted for approximately 21%, 20% and 15%, respectively, of the Company's revenue from sales of merchandise. The sales of no other individual vendor's products accounted for more than 10% of such revenue during the fiscal year ended October 29, 1995.
Property and equipment
Property and equipment are recorded at cost and are depreciated on the straight-line method over their estimated useful lives. Equipment under capital lease is recorded at the lower of fair market value or the present value of future lease payments and is amortized on the straight-line method over the estimated useful life or the term of the lease, whichever is less.
The following reflects the estimated lives by category of property and equipment:
Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred.
Intangible assets
Intangible assets are amortized over their economic lives ranging from three to fifteen years using the straight-line method. The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent reduction in value were to occur. The excess of cost over the fair value of net identifiable assets acquired is classified as goodwill and is included in intangible assets. Intangible assets are net of $4,573,000 and $4,830,000 of accumulated amortization at October 29, 1995 and October 30, 1994, respectively.
Revenue recognition
Revenue from product sales is recognized at the time of shipment. Revenue associated with service contracts is initially recorded as deferred income (included in other liabilities) and amortized on the straight-line method over the service period of the contract.
Marketing development funds
In general, vendors provide the Company with various incentive programs. The funds received under these programs are determined based on the Company's purchases and/or sales of the vendor's product. The funds are earned by the performance of specific marketing programs or upon completion of predetermined objectives dictated by the vendor. Once earned, the funds are applied against product cost or operating expenses.
Income taxes
In addition to charging income for taxes paid or payable, the provision for income taxes reflects deferred income taxes resulting from changes in temporary differences between the tax bases of assets and liabilities and their reported amounts in the accompanying financial statements.
Income per common share
Income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants using the treasury stock method. The weighted average common and common equivalent shares consist of the following:
Fully diluted earnings per share includes the exercise of all outstanding dilutive options and warrants and results in a dilution of less than 3%. The number of common and common equivalent shares used to compute fully diluted earnings per share was 14,342,326 in fiscal 1995, 13,385,091 in fiscal 1994 and 9,345,456 in fiscal 1993.
Franchising Activities
MicroAge distributes its products and services through a network of franchised and affiliated resellers and Company-owned locations. In fiscal 1995, 325 franchised resellers were added and 289 were eliminated due to transferring to an affiliate agreement, closing or terminating their agreement, resulting in 789 franchised reseller locations at October 29, 1995. In fiscal 1995, one business was purchased, resulting in an increase of three Company-owned locations. There were twelve Company-owned locations at October 29, 1995. In fiscal 1995, total revenue and total cost of sales from Company-owned locations were $305,265,000 and $273,936,000, respectively.
Postemployment Benefits
During 1994, the Company adopted Financial Accounting Standards Board Statement No. 112 ("SFAS 112"), "Employers Accounting for Postretirement Benefits." SFAS 112 established standards of financial accounting and reporting for the estimated cost of benefits provided by an employer to current and former employees pursuant to the terms of an employer's agreement to provide those benefits. The adoption of this statement did not have a material impact on the Company's operating results.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year financial statement presentation.
NOTE 3 - CHANGE IN FISCAL YEAR
Effective for the 1994 fiscal year, the Company changed its fiscal year end from September 30 to the Sunday nearest October 31 in each calendar year. The consolidated statements of income are presented for the 52 weeks ended October 29, 1995 and October 30, 1994, exclusive of October 1993 results, and the fiscal period ended September 30, 1993. The Company's financial performance has not exhibited significant seasonality in the past; therefore, the results of operations presented for the fiscal 1995 and 1994 periods are comparable to the results for the fiscal 1993 period.
The Company's results of operations for the month of October 1993 reflected revenue of $135.1 million, gross profit of $6.1 million, income tax expense of $73,000, net income of $81,000 and net income per common share of $0.01. During the month of October 1993, net cash of $5.0 million, $696,000 and $85,000 was used in operating, investing and financing activities, respectively. Cash decreased from $20.2 million to $14.5 million during October 1993.
NOTE 4 - PROPERTY AND EQUIPMENT
NOTE 5 - LEASES
The following is a schedule by year of future minimum lease obligations under noncancelable leases together with the present value of the net minimum capital lease obligations as of October 29, 1995:
None of the leases contain significant restrictive provisions; however, some of the leases contain renewal options and provisions for payment by the Company of real estate taxes, insurance and maintenance costs. Total rent expense was (in thousands):
NOTE 6 - FINANCING ARRANGEMENTS
In August 1995, the Company amended its financing agreement (the "Agreement") to increase its financing facility from $250 million to $400 million. The Agreement includes two major components: an accounts receivable facility (the "A/R Facility") and an inventory facility (the "Inventory Facility"). The Agreement expires in August 1997.
Under the A/R Facility, the Company has the right to sell certain accounts receivable from time to time, on a limited recourse basis, up to an aggregate amount of $250 million sold at any given time. At October 29, 1995, the net amount of sold accounts receivable was $125 million.
The Inventory Facility provides for borrowings up to $150 million. Within the Inventory Facility, the Company has a line of credit for the purchase of inventory from selected product suppliers ("Inventory Line of Credit") of $50 million and a line of credit for general working capital requirements ("Supplemental Line of Credit") of $100 million. Payments for products purchased under the Inventory Line of Credit vary depending upon the product supplier, but generally are due between 45 and 60 days from the date of the advance. No interest or finance charges are payable on the Inventory Line of Credit if payments are made when due. At October 29, 1995, the Company had $3 million outstanding under the Inventory Line of Credit (included in the accounts payable in the accompanying Balance Sheet), and no amounts outstanding under the Supplemental Line of Credit.
Borrowings under the Agreement are secured by substantially all of the Company's assets, and the Agreement contains certain restrictive covenants, including working capital and tangible net worth requirements, and ratios of debt to tangible net worth and current assets to current liabilities. At October 29, 1995, the Company was in compliance with these covenants.
The Company also maintains trade credit arrangements with its vendors and other creditors to finance product purchases. Several major vendors maintain security interests in their products sold to the Company.
NOTE 7 - LONG-TERM OBLIGATIONS
Following are the annual maturities of long-term obligations (in thousands):
NOTE 8 - STOCKHOLDERS' EQUITY
Stock Split
On December 8, 1993, the Company's Board of Directors declared a 3-for-2 stock split effected in the form of a common stock dividend. The dividend was paid on January 13, 1994, to stockholders of record on December 20, 1993, in the amount of 0.5 shares of common stock for each share of common stock held by such stockholders. All data in the accompanying financial statements and related notes have been restated to give effect to the stock split effected in the form of a common stock dividend.
Public offering
On June 16, 1994, the Company completed a public offering of 2,000,000 shares of common stock. The proceeds from the sale, net of issuance costs, were approximately $39,502,000.
Increase in Authorized Common Shares
In March 1994, the Company's stockholders approved an increase in the number of authorized common shares, par value $.01 per share, from 20,000,000 shares to 40,000,000 shares.
Warrants
During fiscal 1985, the Company granted stock purchase warrants for 95,958 shares of common stock at $4.35 per share. During fiscal 1995, 47,979 warrants were exercised, and at October 29, 1995, there were no unexercised warrants. No additional shares may be granted under these warrant agreements.
Employee stock option and award plans
During fiscal 1994, the Board of Directors and stockholders of the Company approved the adoption of the MicroAge Inc. Long-Term Incentive Plan (the "Incentive Plan") for officers and other key employees of the Company. The Incentive Plan authorizes grants of Incentive Stock Options, Non-Qualified Stock Options (NQSOs), Stock Appreciation Rights, Performance Shares, Restricted Stock, Dividend Equivalents and other Common Stock based awards. The total number of shares of common stock available for awards under the Incentive Plan is 1,800,000.
The Company has issued NQSOs under the Incentive Plan at prices representing the fair market value of the Company's common stock on the date of the grant. The NQSOs are granted for terms of five years and become exercisable on a pro-rata basis on each anniversary of the grant over a five-year period as long as the holder remains an employee of the Company. NQSOs under the Incentive Plan were granted in fiscal 1994 to selected employees in exchange for the employee's irrevocable waiver of a specific amount of base salary or bonus otherwise payable by the Company during a specific period. The options will vest in one-third increments beginning on the January 1 which is three years following the January 1 of the calendar year in which the participant elects to waive compensation. Subsequent to the 1995 fiscal year end, the NQSOs granted during 1994 under the Incentive Plan were amended whereby the exercise price was reduced to reflect the fair market value of the Company's common stock at the date of the amendment. No other awards have been made under the Incentive Plan.
In addition to the Incentive Plan, stock options are available under four plans for grant to certain officers and employees of the Company at prices representing the fair market value of the Company's common stock on the date of the grant. Options under these plans are granted for terms of five years and become exercisable on a pro-rata basis on each anniversary date of the grant over a five-year period as long as the holder remains an employee of the Company.
Changes during fiscal 1993, 1994 and 1995 in options outstanding under the employee stock option plans (including the Incentive Plan) were as follows:
Franchisee stock option plans
Stock options were granted in 1989 and 1990 under two plans to certain franchisees of the Company at prices representing the fair market value of the Company's common stock on the date of grant. As of October 29, 1995, all options granted in 1989 had been exercised or forfeited. Outstanding options granted in 1990 were granted at $6.38 per share.
Options under these plans were granted for terms of six years and become exercisable on a pro-rata basis on each anniversary date of the grant over a five-year period as long as the holder remains a franchisee in good standing of the Company. At October 29, 1995, 9,602 options were outstanding under the remaining stock option plan and all options were exercisable.
Director stock plans
During fiscal 1989, the Board of Directors and stockholders approved a stock option plan for those Directors who are not officers or employees of the Company or its subsidiaries (the "Directors' Plan"). Under the Directors' Plan, on or before December 7, 1998, options to purchase 1,000 shares of common stock will be automatically granted, immediately following each annual meeting of stockholders, to eligible Directors. The option price will be the fair market value of the Company's common stock on the date of the grant. Options granted pursuant to this plan are exercisable, in full, during the period between three months from the date of grant and three years from the date of grant, and terminate on the earlier of the expiration date or six months after the date that an optionee ceases to be a Director of the Company for any reason other than death or permanent disability. The aggregate number of shares of the Company's common stock which may be sold pursuant to the Directors' Plan may not exceed 75,000 shares. As of October 29, 1995, 27,000 options had been granted under this plan at prices ranging from $8.42 to $31.88 per share. There were 12,000 options exercisable as of October 29, 1995. Options to eligible Directors will no longer be granted under the Directors' Plan. Instead, eligible Directors will be granted options under the 1995 Director Plan (see below).
In March 1995, the Board of Directors and stockholders approved an incentive plan for those Directors who are not officers or employees of the Company or its subsidiaries (the "1995 Director Plan"). Under the 1995 Director Plan, on November 1 of each year, commencing in 1995 and ending in 2004, each eligible Director will automatically be granted (i) 1,000 shares of the Company's common stock subject to certain restrictions and (ii) options to purchase 1,000 shares of the Company's common stock.
The aggregate number of shares of the Company's common stock available for awards under the 1995 Director Plan is 80,000.
Restricted stock plan
In accordance with the provisions of a restricted stock plan approved in fiscal 1982, 45,000 shares of common stock were reserved for issuance. At October 29, 1995, 39,938 shares had been awarded under the plan, and 5,062 additional shares may be awarded under the plan.
Preferred stock purchase rights
In February 1989, as amended in November 1994, the Company's Board of Directors adopted a Stockholder Rights Agreement (the "Rights Plan") and declared a dividend distribution of one Right for each share of the Company's common stock outstanding as of the close of business on March 7, 1989 and intends to issue one Right for each share of common stock issued between March 7, 1989 and the date of the distribution of the Rights. As amended, the Rights Plan provides that when exercisable, each Right will entitle its holder to purchase from the Company one one-hundredth (.01) of a share of Series C Junior Participating Preferred stock at a price of $19.90. The Company has reserved 500,000 preferred
shares for issuance upon exercise of the Rights. Generally, the Rights become exercisable on the earlier of the date a person or group of affiliated or associated persons acquires or obtains the rights to acquire securities representing fifteen percent (15%) or more of the common stock of the Company or on the tenth day following the commencement of a tender or exchange offer which would result in the offeror beneficially owning fifteen percent (15%) or more of the Company's common stock without the prior consent of the Company. In the event that an unauthorized person or group of affiliated persons becomes the beneficial owner of fifteen percent (15%) or more of the common stock of the Company, proper provision shall be made so that each holder of a Right will have the right to receive, upon exercise thereof and the payment of the exercise price, that number of shares of common stock having a market value of two times the exercise price of the Right. The Rights will expire on February 23, 1999, unless redeemed earlier by the Company pursuant to authorization by the Board of Directors.
Generally, in the event that the Company is involved in a merger or other business combination transaction after the Rights become exercisable, provision shall be made so that each holder of a Right shall have the right to receive, upon the exercise thereof and the payment of the exercise price, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the Right.
Associate Stock Purchase Plan
In March 1995, the Board of Directors and stockholders approved an associate stock purchase plan (the "Associate Plan"). The Associate Plan provides a means for the Company's employees to authorize payroll deductions up to 10% of their earnings to be used for the periodic purchase of the Company's common stock. Under the Associate Plan, the Company will initially sell shares to participants at a price equal to the lesser of 85% of the fair market value of the common stock at the beginning of a six month subscription period or 85% of fair market value at the end of the subscription period. The Associate Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The maximum number of shares that may be purchased under the Associate Plan is 500,000. The initial subscription period began July 1, 1995.
NOTE 9 - OTHER EXPENSES - NET
Other expenses - net consists of the following:
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
The components of deferred income tax expense (benefit) from operations are as follows:
Net deferred tax assets, which are recorded as a component of other assets or other current assets, are comprised of the following:
In light of the Company's history of profitable operations, management has concluded that it is more likely than not that the Company will ultimately realize the full benefit of its deferred tax assets related to future deductible items. Accordingly, the Company believes that no valuation allowance is required for the deferred tax assets in excess of deferred tax liabilities.
The effective tax rate applied to income before income taxes differs from the expected federal statutory rate as follows:
During fiscal 1994, the Company adopted Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach for financial accounting and reporting of income taxes. Adoption of this statement did not have a material impact on the Company's operating results.
NOTE 11 - COMMITMENTS
The Company has arrangements with major vendors and certain financing companies to develop inventory and accounts receivable financing facilities for certain reseller customers. These arrangements include repurchase agreements that would require the Company to repurchase inventory which might be repossessed from a reseller by the vendor or the financing company. As of October 29, 1995, such repurchases have been insignificant.
NOTE 12 - EMPLOYEE BENEFIT PLAN
In July 1988, a deferred compensation plan (the "Savings Plan") became effective for all eligible employees of the Company under the provisions of Section 401(k) of the Internal Revenue Code. Employees are eligible to participate after one year of service and may contribute a percentage of their salary subject to certain limitations. Subject to certain profitability requirements, the Company has historically matched 25% of the employee contribution up to a maximum employee contribution of 6%, as defined in the Savings Plan. Participants are at all times fully vested in their contributions, and the Company contributions, if any, become fully vested to the participant after five years of employment.
In April 1989, the Company amended and restated the Savings Plan to include a leveraged Employee Stock Ownership Plan and Trust (the "ESOT") for eligible employees. The ESOT used proceeds of loans from the Company to purchase 312,500 shares and 157,827 shares of the Company's common stock for $2,396,000 and $1,105,000 during the years ended September 30, 1990 and 1989, respectively.
The Company's stock is held by the ESOT trustee as collateral for the loans from the Company. The Company makes periodic contributions to the ESOT which are used to make loan principal and interest payments. A portion of the common stock is allocated to the accounts of participating employees annually based upon principal and interest payments. The Company, using the shares allocated method, recognized contribution expenses of $675,000, $694,000, and $731,000 during the fiscal years ended October 29, 1995, October 30, 1994 and September 30, 1993, respectively.
The loans from the Company to the ESOT are payable in quarterly installments ending March 31,1997. Interest is payable quarterly at rates equal to 85% of prime and prime plus 0.75%. The Company's receivable from the ESOT is recorded as a separate reduction of the Company's stockholders' equity.
NOTE 13 - NOTE RECEIVABLE - STOCK PURCHASE AGREEMENT
During fiscal 1994, the Company exchanged 72,728 shares of common stock for a $2,000,000 convertible subordinated debenture. The debenture is payable on February 8, 1998, and accrues interest at the rate of 9% per annum, payable on a quarterly basis. The note is secured by the Company's common shares issued in exchange for the note as well as certain other rights.
NOTE 14 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows:
NOTE 15 - LITIGATION
On July 14 through July 19, 1994, seven class action complaints were filed in the United States District Court for the District of Arizona against the Company, certain of its officers and directors, and, in three of the lawsuits, one of the underwriters of the Company's June 16, 1994 public offering of common stock. On December 5, 1994, the Court consolidated the seven actions into a single action. On February 16, 1995, plaintiffs filed and served an amended, consolidated complaint against the Company, certain officers and directors of the Company, and three of the underwriters of the Company's June 16, 1994 public offering of common stock ("the Complaint"). The Complaint purports to be brought on behalf of a class of purchasers of the Company's common stock during the period April 13, 1994 through July 14, 1994. The Complaint alleges, among other things, that the Company violated federal securities laws by making misleading public statements and omitting material facts regarding the Company's operations and financial results, which the plaintiffs contend to have artificially inflated the price of the Company's common stock during the alleged class period. The Complaint seeks unspecified compensatory damages as well as fees and costs. On April 28, 1995, the Company filed a motion to dismiss the Complaint in its entirety. The motion was heard on July 31, 1995; no decision has yet been issued. Discovery is ongoing. The Company and the individual defendants deny the plaintiffs' allegations of wrongdoing and intend to vigorously defend themselves in these actions. The proceeding is in its early stages, however, and its outcome cannot be predicted with certainty at this time.
NOTE 16 - RESTRUCTURING AND OTHER ONE-TIME CHARGES
During the fourth fiscal quarter of 1995, the Company approved and implemented actions targeted at reducing expenses and improving profitability. The Company's consolidated statement of income for fiscal 1995 includes $9.0 million of pretax charges ($5.4 million net of tax benefits, or $0.38 per share) for restructuring and other one-time charges, consisting of the following (in thousands):
All actions related to the restructuring were implemented as of October 29, 1995, and the liability for restructuring activities at October 29, 1995 was not material.
NOTE 17 - RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective for fiscal years beginning after December 15, 1995, the standard establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does not believe that adoption of this Statement will have a material impact on its financial position or results of operations.
Statement of Financial Accounting Standards No. 123 - Accounting for Stock-Based Compensation. The accounting requirements are effective for transactions entered into in fiscal years beginning after December 15, 1995. The disclosure requirements are effective for fiscal years beginning after December 31, 1995. Pro forma disclosures required for entities that elect to continue to measure compensation cost using APB Opinion No. 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. This Statement defines the fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has not completed an evaluation of the effect of this Statement.
Statement of Position 94-6 - Disclosure of Certain Significant Risks and Uncertainties. Effective for fiscal years ending after December 15, 1995, the statement of position provides guidance on financial statement disclosures of risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term. Such risks and uncertainties can stem from the nature of the Company's operations, from the necessary use of estimates in the preparation of the Company's financial statements, and from significant concentrations in certain aspects of the Company's operations. The Company expects to adopt this statement during fiscal 1996. Management will continue to assess the impact of implementation.
MicroAge, Inc. Schedule VIII Valuation and Qualifying Accounts and Reserves (in thousands) Years ended October 29, 1995, October 30, 1994 and September 30, 1993
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(1) Management contract for compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
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