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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 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: 1-12203
INGRAM MICRO INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 62-1644402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 E. ST. ANDREW PLACE., SANTA ANA, CALIFORNIA 92799-5125
(Address, including zip code, of principal executive offices)
(714) 566-1000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 16, 1999 was $849,177,318 based on the closing sale
price on such date of $18.75 per share.
The Registrant had 68,332,803 shares of Class A Common Stock, par value
$.01 per share, and 74,722,166 shares of Class B Common Stock, par value $.01
per share, outstanding at March 16, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareowners for the fiscal year ended January 2, 1999 are incorporated by
reference into Parts I and II of this Annual Report on Form 10-K. Portions of
the Proxy Statement for the Registrant's Annual Meeting of Shareowners to be
held May 19, 1999 are incorporated by reference into Part III of this Annual
Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
In evaluating the business of Ingram Micro Inc., readers should carefully
consider the important factors discussed under Exhibit 99.01 hereto and under
"--Safe Harbor for Forward-Looking Statements."
OVERVIEW
Ingram Micro Inc. ("Ingram Micro" or the "Company") is the leading
wholesale distributor of computer-based technology products and services
worldwide. The Company markets computer hardware, networking equipment, and
software products to more than 140,000 reseller customers in more than 130
countries. As a wholesale distributor, the Company markets its products to
resellers as opposed to marketing directly to end-user customers.
Ingram Micro offers one-stop shopping to its reseller customers by
providing a comprehensive inventory which, in the aggregate on a global basis,
consists of more than 200,000 products (as measured by distinct manufacturer's
part numbers) from over 1,500 suppliers, including most of the computer
industry's leading hardware manufacturers, networking equipment suppliers, and
software publishers. The Company's broad product offerings include: desktop and
notebook personal computers, servers, and workstations; mass storage devices;
CD-ROM drives; monitors; printers; scanners; modems; networking hubs, routers,
and switches; network interface cards; business application software;
entertainment software; and computer supplies. In addition, to enhance sales and
to support its suppliers and reseller customers, the Company provides a wide
range of outsourcing and value-added programs, such as order fulfillment,
tailored financing programs, channel assembly, systems configuration, assembly
of private label or unbranded systems, and marketing programs. The Company also
provides virtual warehouse and distribution services for a number of resellers
(internet and otherwise).
The Company is focused on providing a broad range of products and services,
quick and efficient order fulfillment, and consistent on-time and accurate
delivery to its reseller customers around the world. The Company believes that
IMpulse, the Company's on-line information system, provides a competitive
advantage through real-time worldwide information access and processing
capabilities. IMpulse is a single, standardized, real-time information system
and operating environment, used across substantially all of the Company's
worldwide operations. This on-line information system, coupled with the
Company's exacting operating procedures in telesales, credit support, customer
service, purchasing, technical support, and warehouse operations, enables the
Company to provide its reseller customers with superior service in an efficient
and low cost manner.
The Company's earliest predecessor began business in 1979 as a California
corporation named Micro D, Inc. This company and its parent, Ingram Micro
Holdings Inc. ("Holdings"), grew through a series of acquisitions, mergers, and
internal growth to encompass the Company's current operations. Ingram Micro Inc.
was incorporated in Delaware on April 29, 1996, in order to effect the
reincorporation of the Company in Delaware. The successor to Micro D, Inc. and
Holdings were merged into Ingram Micro Inc. in October 1996.
In November 1996, the Company completed the sale of 23,200,000 shares of
its Class A Common Stock pursuant to an initial public offering (the "IPO") at
an offering price of $18.00 per share. Immediately prior to the closing of the
IPO, the Company was split-off from its then parent, Ingram Industries Inc.
("Ingram Industries"), in a tax-free reorganization (the "Split-Off").
THE INDUSTRY
The worldwide computer-based technology products and services distribution
industry generally consists of suppliers, which sell directly to wholesalers,
resellers, and end-users; wholesale distributors, which sell to resellers; and
resellers, which sell to other resellers and directly to end-users. A variety of
reseller categories exists, including corporate resellers, value-added resellers
or "VARs," systems integrators, original equipment manufacturers, direct
marketers, independent dealers, owner-operated chains, franchise chains, and
computer retailers. Different types of resellers are defined and distinguished
by the end-user market they serve, such as large corporate accounts, small
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and medium-sized businesses, or home users, and by the level of value they add
to the basic products they sell. Wholesale distributors generally sell only to
resellers and purchase a wide range of products in bulk directly from
manufacturers. Different wholesale distribution models have evolved in
particular countries and geographies depending on the characteristics of the
local reseller environment, as well as other factors specific to a particular
country or region.
Based on data compiled by market researcher International Data Corp., the
growth of the computer-based technology products and services wholesale
distribution industry continues to exceed the growth of the computer industry as
a whole. To minimize costs and focus on their core capabilities in
manufacturing, product development, and marketing, many suppliers are seeking to
outsource an increasing portion of certain functions such as distribution,
service, and technical support to the wholesale distribution channel. Growing
product complexity, shorter product life cycles, and an increasing number of
computer-based technology products due to the emergence of open systems
architectures and the recognition of certain industry standards have led
resellers to depend on wholesale distributors for more of their product,
marketing, and technical support needs. In addition, resellers are relying to an
increasing extent on wholesale distributors for inventory management and credit
to avoid stocking large inventories and maintaining credit lines to finance
their working capital needs. The Company believes that new opportunities for
growth in the computer-based technology products and services wholesale
distribution industry will emerge as new product categories, such as computer
telephone integration ("CTI") and the digital video disc format, arise from the
ongoing convergence of computing, communications, and consumer electronics.
Markets outside the United States, which represent over half of the
computer-based technology industry's sales, are characterized by a more
fragmented wholesale distribution channel than in the United States.
Increasingly, suppliers and resellers pursuing global growth are seeking
wholesale distributors with international sales and support capabilities.
A number of emerging industry trends are providing new opportunities and
challenges for wholesale distributors of computer-based technology products and
services. For example, the emergence of the internet provides distributors with
an additional means to serve both suppliers and reseller customers through the
development and use of effective electronic commerce tools. The growing presence
and importance of such electronic commerce capabilities also provides
distributors with new business opportunities as new categories of products,
customers, and suppliers develop.
The Company believes that the chain of relationships between suppliers,
manufacturers, distributors, resellers and end-users is transforming from a
manufacturer-push business model to one that is governed by end-user demand. In
the traditional industry model, distributors simply moved product from
manufacturers to resellers who in turn service end-user businesses or customers.
In contrast, the "demand chain" management model reverses these steps as
follows: (1) the Company starts by listening to the needs of the end-user
business or consumer, (2) with a clear understanding of these needs, the Company
works with resellers who design, sell and support solutions to arrive at
solutions that address the needs of the end-user business or consumer, and (3)
the Company works closely with suppliers and manufacturers to ensure that these
solutions can be delivered through or on behalf of the resellers in a cost
effective and timely manner.
The challenges for this new model include the extent to which reseller and
manufacturer partners of the Company embrace the model and the speed with which
the Company's partners choose to make changes to their traditional way of doing
business so as to support demand chain management. Some of these challenges
within the last year have been the slower than anticipated speed of PC
manufacturers to fully develop their channel assembly programs and the effort by
some manufacturers to duplicate the success of the direct sales business model
by launching limited direct sales initiatives focused on specific types of
customers. However, the Company believes that this direct sales model presents
vendor partnership opportunities for the Company. Overall, the Company believes
that, with the largest global distribution network for computer-based technology
products and services, it is well positioned in the long term to lead in the
customer-driven marketplace.
The Company further believes that the dynamics of the computer-based
technology products and services wholesale distribution business favor the
largest distributors, which have access to financing and are able to achieve
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economies of scale, breadth of geographic coverage, and the strongest vendor
relationships. Consequently, the distributors with these characteristics are
tending to take share from smaller distributors as the industry undergoes a
process of consolidation. However, smaller high value-added niche distributors
may continue to compete successfully in the consolidated market. The Company
also believes that the need for wholesale distributors to implement high
volume/low cost operations on a worldwide basis is continuing to grow due to
ongoing price competition, the increasing demand for value-added services, the
increasing utilization of electronic commerce, and the increasing globalization
of the computer-based technology products and services industry. In summary, the
computer-based technology products and services wholesale distribution industry
is growing rapidly while simultaneously consolidating, creating an industry
environment in which market share leadership and cost efficiency are of
paramount importance.
BUSINESS STRATEGY
The Company's strategic decisions and activities are guided by the
following Vision and Mission statements:
OUR VISION. We will always exceed expectations . . . with every partner,
every day.
OUR MISSION. To maximize shareowner value by being the best distributor of
technology for the world.
In addition, the Company's values encourage teamwork, respect,
accountability, integrity, and innovation.
The Company believes that it is the leading worldwide wholesale distributor
of computer-based technology products and services and that it has developed the
capabilities and scale of operations critical for long-term success in the
computer-based technology products and services distribution industry.
The Company's strategy of offering a broad line of products and services
provides reseller customers with one-stop shopping. The Company generally is
able to purchase products in large quantities and to avail itself of special
purchase opportunities from a broad range of suppliers. This allows the Company
to take advantage of various discounts from its suppliers, which in turn enables
the Company to provide competitive pricing to its reseller customers. The
Company's global market presence provides suppliers with access to a broad base
of geographically dispersed resellers, serviced by the Company's extensive
network of distribution centers and support offices. The Company's size has
permitted it to attract highly qualified associates and increase investment in
personnel development and training. Also, the Company benefits from being able
to make large investments in information systems, warehousing systems, and
infrastructure. Further, the Company is able to spread the costs of these
investments across its worldwide operations.
The Company is pursuing a number of strategies to further enhance its
leadership position within the computer-based technology products and services
marketplace, including the following:
EXPAND WORLDWIDE MARKET AND PRODUCT COVERAGE. Ingram Micro is committed to
expanding its already extensive worldwide market coverage through internal
growth in all markets in which it currently participates. In addition, the
Company intends to pursue acquisitions, joint ventures, and strategic
relationships in order to take advantage of growth opportunities and to leverage
its strong systems, infrastructure, and global management skills.
By providing greater worldwide market coverage, Ingram Micro also increases
the scale of its business, which results in greater cost economies. In addition,
as it increases its global reach, the Company diversifies its business across
different markets, reducing its exposure to individual market downturns. In
1998, the Company acquired Macrotron AG, a Germany-based distributor with 1997
sales of approximately $1.2 billion; the assembly facilities of Tulip Computer
N.V. in The Netherlands; and Nordemaq Comercial de Maquinas Nordeste Ltda. in
Brazil. Effective September 1998, the Company purchased the remaining 30% of its
Mexican subsidiary, Ingram Dicom, from the minority shareholders. As of February
19, 1999, the Company increased its ownership of Electronic Resources Ltd.
("ERL"), a leading distributor of electronic components and computer peripherals
in Asia, from 21% to 95% (on a fully diluted basis). ERL will be subsequently
renamed Ingram Micro Asia Ltd. In 1998, the Company also entered into strategic
alliances with SOFTBANK Corp. ("SOFTBANK"), Japan's leading provider of
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information and distribution services for the digital information industry, and
with Solectron Corporation ("Solectron"), a worldwide provider of electronics
manufacturing services to leading original equipment manufacturers ("OEMs"). The
overall goal of the Ingram Micro-SOFTBANK alliance is to provide global account
services to value-added resellers, with Ingram Micro serving as SOFTBANK's
exclusive supplier in markets outside Japan and Korea, and SOFTBANK fulfilling
Ingram Micro's sales to the Japanese and Korean markets. The Ingram
Micro-Solectron alliance enables both companies to leverage their combined
resources, including existing facilities, systems and personnel, to provide
global build-to-order and configure-to-order assembly services for personal
computers, servers, and other related products in the United States, Canada,
Europe, Asia, and Latin America.
The Company has grown its operations outside the United States principally
through acquisitions, and currently has subsidiaries or offices in 28 countries
and sales representatives in another five countries, including Argentina,
Australia, Brazil, Canada, China, Colombia, Costa Rica, Chile, Ecuador, India,
Indonesia, Japan, Malaysia, Mexico, New Zealand, Norway, Peru, Singapore,
Switzerland, Thailand, Venezuela, and 11 countries of the European Union. The
Company believes that it is the market share leader in the United States,
Canada, and Mexico, the third largest full-line distributor in Europe, the
second largest distributor in Asia (excluding Japan), and the second largest
Pan-Latin America distributor, based on publicly available data and management's
knowledge of the industry. The Company's objective is to achieve the number one
market share position in each of the markets in which it operates either through
operations or strategic alliances. In keeping with this objective, Ingram Micro
continues efforts aimed at providing resellers of all sizes and types the means
to meet their end-user requirements for products and support worldwide. To that
end, Ingram Micro continues to strengthen its alliance with Allied Computing
Services Ltd. ("ACSL"), an international network of computer resellers in North
America, Europe, Latin America, and Asia. Within the alliance, Ingram Micro acts
as a coordination center and, in some cases, as product supplier for the network
while the ACSL resellers provide the local support and service.
The Company continues to pursue initiatives to expand its global product
and service offerings in various categories, some of which include enterprise
solutions, CTI, imaging, and computer consumable supplies and accessories. For
example, in order to meet corporate resellers' increasing demand for enterprise
solutions on a worldwide basis, Ingram Micro formed a global Enterprise
Solutions Group ("ESG") in 1998. Through ESG, Ingram Micro provides reseller
partners with enterprise solutions from multiple platforms, major operating
systems, and advanced software providers, as well as customizes these solutions
with a wide range of storage and connectivity options, and professional
services. In the area of computer telephony integration, the Telecom Integration
Division is focused on becoming a one-stop shop for CTI solutions. The Supplies
and Accessories Division continues its initiatives to provide a broad line of
computer consumable supplies and computer accessories to the Company's reseller
customers on a global basis. The recently formed Imaging Division will provide a
focused and dedicated approach to the consumer, professional, printing and
publishing, and applied imaging markets.
LEAD IN STREAMLINING THE DEMAND CHAIN. The computer-based technology
products and services distribution industry is changing at a rapid pace. The
chain of relationships that spans across component suppliers, manufacturers,
distributors, resellers and end-users is transforming from a manufacturer-push
business model to one that is governed by end-user demand. The Company believes
that the term "demand chain" describes the build-to-demand model to which the
channel is evolving. In this industry model, the role of distributors is
expanded from the traditional movement of products from manufacturers to
resellers, to one that encompasses almost all aspects of demand chain
management, including assembly, configuration, inventory management, order
management, and end-user fulfillment. Ingram Micro believes that distributors
with strong execution and broad product offerings will be best able to lead the
movement to the demand chain model. The Company is committed to leading this
industry evolution from a build-to-supply to a build-to-demand model, which is a
customer-centric, multi-vendor channel model that enables the most efficient
commerce between end-users and the developers of technology solutions.
The Company's commitment to streamlining the demand chain is evident in its
investment in infrastructure and programs that enable the most efficient flow of
products, services, and information up and down the demand chain. Frameworks(TM)
Total Integration Services(TM) ("Frameworks") is the Company's vehicle to
deliver world-class channel assembly, reconfiguration, contract manufacturing,
and private label/unbranded solutions. Ingram Micro is rapidly enhancing and
expanding electronic commerce tools that facilitate reseller to end-user
commerce. Another
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key element of the Company's demand chain focus is Affiniti(TM) ("Affiniti"), a
comprehensive suite of value-added services matched precisely to the needs of
its supplier and reseller partners. Equally important to streamlining the demand
chain is the development of industry-wide performance metrics and standards that
enable close collaboration among demand chain partners through better
information management. Ingram Micro has spearheaded this effort through its key
role in the formation of RosettaNet, an independent, self-funded, non-profit
organization dedicated to promoting an industry-wide initiative to adopt common
electronic business interfaces worldwide.
EXPLOIT INFORMATION SYSTEMS LEADERSHIP AND ENHANCE ELECTRONIC COMMERCE
CAPABILITIES. Ingram Micro continually invests in its information systems, which
are crucial in supporting the Company's growth and its ability to maintain high
service and performance levels. The Company has a scalable, full-featured
information system, IMpulse, which the Company believes is critical to its
ability to deliver worldwide, real-time information to both suppliers and
reseller customers. IMpulse is an industry-leading information system, used
across substantially all of the Company's markets worldwide, which has been
customized to suit local market requirements. The Company believes that it is
the only full-line wholesale distributor of computer-based technology products
and services in the world with such a centralized global system that is capable
of supporting future growth and new business ventures.
The Company's information systems provide the infrastructure that allows
the implementation of a customer-centric channel model. It provides the
information necessary for Ingram Micro to act as the agent of commerce among
suppliers, resellers, and end-users. The Company is rapidly enhancing and
deploying seamless, easy-to-use electronic commerce solutions that provide
resellers with the ability to do business with Ingram Micro and with end-users
with greater ease and at lower cost. The Company's electronic commerce
capabilities have expanded to include: SpeedSource, an electronic commerce
ordering tool which gives resellers quick access to real-time ordering, product
allocation, order status, product search, pricing and availability; InsideLine,
a direct communication link, currently in selected use, which furnishes
resellers with real-time access to the Company's mainframe inventory systems;
and Prime Access, currently in production, which, upon completion of rollout to
resellers, will equip them with personalized Web storefronts that are linked
directly to Ingram Micro's order processes and inventory systems.
PROVIDE SUPERIOR EXECUTION FOR RESELLER CUSTOMERS. Consistent with its
overall emphasis on "winning customers for life," Ingram Micro continually
refines and integrates its systems and business processes to provide superior
execution and service to resellers. The Company's electronic commerce tools will
enable resellers to do business with their end-user customers quickly, easily,
and at lower cost. To ensure efficient product delivery, the Company continues
to expand and upgrade its distribution network. For example, the Company has
begun construction of new distribution centers in Lickdale, Pennsylvania
(600,000 square feet), Ontario, Canada (500,000 square feet) and Straubing,
Germany (400,000 square feet); and plans have been announced for a 550,000
square foot Pan-European facility in Heerlen, The Netherlands, which will be one
of the largest and most technologically advanced distribution centers in Europe.
Also, Ingram Micro has implemented processes that will allow most of its U.S.
distribution centers to increase operating capacity from 20 hours a day to 24
hours a day. The Company works continuously to improve its formal systems for
evaluating and tracking key performance metrics such as responsiveness to
customers, processing accuracy, and order fulfillment. Ingram Micro uses these
metrics as well as customer satisfaction surveys to measure improvements on all
the key elements that are believed to be important to the customer.
Ingram Micro strives to maximize order fill rates by maintaining optimum
quantities of product in its 54 distribution centers worldwide. Together with
the Company's control systems and processes, this results in substantially all
orders in the United States received by 5:00 p.m. being shipped on the same day,
with highly accurate shipping performance. Another indication of the quality of
Ingram Micro's processes is the ISO 9002 certification of all its distribution
centers in the U.S. and a number of locations outside the U.S., as well as its
customer service, configuration, returns operation and consolidation center. In
addition, the Company has implemented a number of programs that significantly
reduce the time required for resellers to obtain product. For example, Delivery
Plus is an enhanced direct shipment program in which Ingram Micro sets up a
permanent location either on site or adjacent to a supplier's manufacturing
facility. Ingram Micro takes possession of product at the supplier's location
and then ships it to the reseller or end-user, depending on the reseller's
specification.
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DELIVER WORLD-CLASS OUTSOURCING AND VALUE-ADDED PROGRAMS TO SUPPLIERS AND
RESELLERS. As a global service-focused organization, Ingram Micro strives to
compete on the basis of total value rather than solely on price. By
understanding and anticipating customer needs, the Company continually develops
and provides innovative business solutions that provide full back-room
outsourcing services to resellers and suppliers. The Affiniti program aims to
transform the Company's relationships with its customers from pure transactional
relationships to consultative partnerships where Ingram Micro satisfies not only
the customers' product needs but also their service requirements. Such
relationships will enable the Company to transition from a commodity business to
a full solution provider, with expected benefits in revenue generation and
margin enhancement. Under the Affiniti initiative, the Company identifies and
deploys value-added services to its supplier and reseller partners such as
co-location, product reconfiguration, channel assembly, electronic commerce
tools, outsourcing services, financing programs, etc. Together, these services
are intended to link reseller customers and suppliers to Ingram Micro as a
one-stop provider of computer-based technology products and related services,
while meeting demand by suppliers and resellers to outsource their non-core
business activities and thereby lower their operating costs.
MAINTAIN LOW COST LEADERSHIP THROUGH CONTINUOUS IMPROVEMENTS IN SYSTEMS AND
PROCESSES. Intense competition and narrow margins characterize the
computer-based technology products and services distribution industry, and as a
result, achieving economies of scale and controlling operating expenses are
critical to achieving and maintaining profitable growth. Over the past five
years, the Company has been successful in reducing SG&A expenses (including
expenses allocated from Ingram Industries prior to the Split-Off) as a
percentage of net sales, to 4.1% in 1998 from 5.1% in 1994.
The Company initiated a number of new programs in 1998 that are designed
to continue reducing operating expenses as a percentage of net sales. Many
U.S.-developed programs are slated for implementation in the Company's
international operations, while other programs are region-specific. Current
productivity improvement programs include: (i) system enhancements to
automatically route orders to the most cost-efficient warehouse based on
customer needs and warehouse capacity; (ii) increased utilization of most of the
Company's existing warehouse locations resulting from the expansion of operating
hours from 20 to 24 hours per day; (iii) automated proof-of-delivery
notifications to improve collection on past due invoices; (iv) creation of
"co-location" programs with key vendors to ship product directly from the vendor
to the end user; and (v) the expansion of the Company's electronic commerce
tools, including deployment of Internet ordering capabilities in 13 countries to
date, to increase the number of orders placed without the assistance of a
telesales representative. See "--Information Systems."
The Company will, on an ongoing basis, examine its business processes and
systems to determine how it can continue to improve, while simultaneously
lowering costs.
DEVELOP HUMAN RESOURCES FOR EXCELLENCE AND TO SUPPORT FUTURE GROWTH. Ingram
Micro's growth to date is a result of the talent, dedication, and teamwork of
its associates. Future growth and success will be substantially dependent upon
the retention and development of existing associates, as well as the recruitment
of additional associates with superior talent.
Transferring functional skills and implementing cross-training programs
across all Ingram Micro locations have proven to be important factors in the
Company's growth and global expansion. The Ingram Micro Leadership Institute has
been established as the vehicle for defining the required, recommended, and
elective training opportunities for all levels of management in the Company. In
conjunction with these programs, the Company is expanding its human resource
systems worldwide to provide enhanced applicant tracking, hiring screens, career
and succession planning, education assistance, stock ownership participation,
and benefits administration. Also, the Company continues to seek top quality
associates worldwide through local, professional, and college recruiting
programs. Recognizing that hiring and retaining associates hinges, in part, on
providing a competitive salary and benefits package, the Company has developed a
global salary structure based on a comprehensive review of competitive salaries
and benefits by region. Based on feedback from the Company's annual associate
surveys and leadership behavior questionnaires, Ingram Micro has modified many
aspects of its programs and processes. This continual improvement process
contributed to Ingram Micro earning a place on Fortune magazine's 1999 list of
the "100 Best Companies to Work for in America."
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Continued development of the Company's values-based management program,
which includes the Company's Partners in Excellence initiative, continues to be
a top priority. Partners in Excellence serves as a guidepost for all associates
that links individual rewards and incentive programs to the Company's values. As
program rollout continues, more emphasis will be placed on global integration
and best practices replication.
CUSTOMERS
Ingram Micro sells to more than 140,000 reseller customers in more than 130
countries worldwide. No single customer accounted for more than 4% of Ingram
Micro's net sales in 1998, 1997, or 1996.
The Company conducts business with most of the leading resellers of
computer-based technology products around the world including, in the United
States, CDW Computer Centers, CompuCom/Dataflex, CompUSA/Computer City, Elcom
Services Group, En Pointe Technologies, Entex Information Services, Micro
Warehouse, Office Max, and Staples. The Company's reseller customers outside the
United States include DGS Retail Limited, Future Shop, IMS, Info Products UK
PLC, Laboratorios Magneticos, Nueva Wall Mart, Price Club (Mexico), SHL
Computer, and Telenor. The Company has certain limited contracts with its
reseller customers, most of which have a short term, or are terminable at will,
and have no minimum purchase requirements. The Company's business is not
substantially dependent on any such contracts.
SALES AND MARKETING
As of the end of fiscal 1998, Ingram Micro's telesales department had
approximately 2,700 telesales representatives worldwide, of whom more than 1,380
representatives are located in the United States, 800 representatives are
located in Europe, 240 representatives are located in Canada and 200
representatives are located in Latin America. These telesales representatives
assist resellers with product specifications, system configuration, new
product/service introductions, pricing, and availability. The Company's two main
United States telesales centers are located in Santa Ana, California and
Williamsville (Buffalo), New York and are supported by an extensive national
field sales organization. Ingram Micro also had approximately 200 field sales
representatives worldwide, including more than 50 in the United States, at
fiscal year end 1998.
The sales organization is organized to focus on resellers who comprise the
VAR (consisting of value-added resellers, system integrators, network
integrators, application VARs, original equipment manufacturers and Internet
service providers), Commercial (consisting of corporate resellers, direct
marketers, independent dealers and owner-operated chains), Consumer (consisting
of consumer electronics stores, computer superstores, mass merchants, office
product superstores, software only stores and warehouse clubs), and
Telecommunications (consisting of telephone companies, telecommunications
contractors and interconnect value-added resellers) market sectors. In addition,
the Company utilizes a variety of product-focused groups specializing in
specific product types. Specialists in mass storage, memory, networks,
processors, telephony, UNIX workstations and servers, and other product
categories promote sales growth and facilitate customer contacts for their
particular product group. Ingram Micro also offers a variety of marketing
programs tailored to meet specific supplier and reseller customer needs.
Services provided by the Company's in-house marketing services group include
advertising, direct mail campaigns, market research, on-line marketing, retail
programs, sales promotions, training, and assistance with trade shows and other
events.
SELLING ARRANGEMENTS. The Company offers various credit terms to qualifying
customers as well as prepay, credit card, and COD terms. The Company closely
monitors customers' credit worthiness through its on-line computer system, which
contains detailed information on each customer's payment history and other
relevant information. In addition, the Company participates in a national credit
association whose members exchange credit rating information on customers. In
most markets, the Company utilizes various levels of credit insurance to allow
sales expansion and control credit risks. The Company establishes reserves for
estimated credit losses in the normal course of business. Historically, the
Company has not experienced credit losses materially in excess of established
credit loss reserves. However, if the Company's receivables experience a
substantial deterioration in their collectibility or if the Company cannot
obtain credit insurance at reasonable rates, the Company's financial
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condition and results of operations may be adversely impacted.
The Company also sells to certain customers in the United States through
master reseller arrangements that involve higher volume sales on limited lines
of product. These sales are generally funded by floor plan financing companies
whose fees are subsidized by the Company's suppliers. Historically, the Company
received payment from these financing institutions within three business days
from the date of the sale, allowing the Company's master reseller business to
operate at much lower relative working capital levels than the Company's
wholesale distribution business. Starting in the second half of 1998, certain of
the industry's leading hardware manufacturers reduced their flooring fee
subsidies. As a result, payments from institutions that finance master reseller
sales with these reduced subsidies are now received within 15 days. This delay
in payment has increased the Company's average borrowing levels and interest
costs.
PRODUCTS AND SUPPLIERS
Ingram Micro believes that it has the largest inventory of products in the
industry, based on a review of publicly available data with respect to its major
competitors. The Company distributes and markets more than 200,000 products from
the industry's premier computer hardware manufacturers, networking equipment
suppliers, and software publishers worldwide. Product assortments vary by
market, and the relative importance of manufacturers to Ingram Micro varies from
country to country. On a worldwide basis, the Company's sales mix is more
heavily weighted toward hardware products and networking equipment than software
products. Net sales of software products have decreased as a percentage of total
net sales in recent years due to a number of factors, including bundling of
software with microcomputers and declines in software prices. The Company
believes that this is a trend that applies to the computer-based technology
products distribution industry as a whole, and the Company expects it to
continue.
Ingram Micro's worldwide supplier list includes almost all of the leading
computer hardware manufacturers, networking equipment manufacturers, and
software publishers such as Apple Computer, Cisco Systems, Compaq Computer,
Corel, Epson, Hewlett-Packard, IBM, Intel, Iomega, Microsoft, NEC Technologies,
Novell, Seagate, Sun Microsystems, Quantum, Symantec, 3Com, Toshiba, Viewsonic,
and Western Digital.
The Company's suppliers generally warrant the products distributed by the
Company and allow the Company to return defective products, including those that
have been returned to the Company by its customers. The Company does not
independently warrant the products it distributes; however, the Company does
warrant the following: (i) its services with regard to products which it
configures for its customers, and (ii) products which it builds to order from
components purchased from other sources.
The Company has written distribution agreements with many of its suppliers;
however, these agreements usually provide for nonexclusive distribution rights
and often include territorial restrictions that limit the countries in which
Ingram Micro is permitted to distribute the products. The agreements are also
generally short term, subject to periodic renewal, and often contain provisions
permitting termination by either party without cause upon relatively short
notice. A supplier who elects to terminate a distribution agreement generally
will repurchase from the distributor the supplier's products carried in the
distributor's inventory. The Company does not believe that its business is
substantially dependent on the terms of any such agreements.
The Company's business, like that of other wholesale distributors, is
subject to the risk that the value of its inventory will be affected adversely
by suppliers' price reductions or by technological changes affecting the
usefulness or desirability of the products comprising the inventory. It is the
policy of most suppliers of technology products to protect distributors, such as
the Company, who purchase directly from such suppliers from the loss in value of
inventory due to technological change or the supplier's price reductions. Under
many such agreements, the distributor has the right to return for credit or
exchange for other products a portion of those inventory items purchased, within
a designated period of time. In addition, under the terms of many distribution
agreements, suppliers will credit the distributor for declines in inventory
value resulting from the supplier's price reductions if the distributor complies
with certain conditions. However, major PC suppliers in the last year have
decreased the
8
<PAGE> 10
availability of price protection for distributors. The shorter time periods
during which distributors may receive rebates or credit for decreases in
manufacturer prices on unsold inventory have made it more difficult for the
Company to match its inventory levels with the price protection periods.
Consequently, the Company's risk of loss due to declines in value of inventory
held by the Company after such price protection periods have passed has
increased. The Company is taking various actions, including closer monitoring of
its inventory levels and decreased purchases, to lessen such risk.
While the industry practices discussed above are sometimes not embodied in
written agreements and do not protect the Company in all cases from declines in
inventory value, management believes that these practices provide a significant
level of protection from such declines. No assurance can be given, however, that
such practices will continue or that they will adequately protect the Company
against declines in inventory value. The Company's risk of inventory loss could
be greater outside the United States, where agreements with suppliers are more
restrictive with regard to price protection and the Company's ability to return
unsold inventory. The Company establishes reserves for estimated losses due to
obsolete inventory in the normal course of business. Historically, the Company
has not experienced losses due to obsolete inventory materially in excess of
established inventory reserves.
FRAMEWORKS
To better serve both global and regional customers, the Company introduced
Frameworks, worldwide channel assembly and configuration initiative, in 1997, to
deliver customized, fully tested computer systems to its reseller customers and
to assist with reducing manufacturers' inventory overhead. Frameworks currently
provides the Company with four distinct business opportunities: reconfiguration;
channel assembly; private label and unbranded offerings; and OEM manufacturing.
Reconfiguration consists of opening "name" brand finished product, already
assembled and packaged by a vendor, and upgrading it with features such as
memory, components, accessories, and third party software. Channel assembly
consists of assembling individual OEM components into a manufacturer-authorized
computer. Private label or unbranded systems are computers specially assembled
for resellers at the Frameworks facility, using components, accessories, and
software from various manufacturers. Private label systems display the
reseller's brand on the box, system, and monitor. Unbranded systems, with no
resellers' name or brand on the box, system and monitor, were developed at the
request of reseller customers who build unbranded or private label systems
themselves. By participating in this unbranded systems program, customers can
outsource assembly operations that they currently perform, allowing them to
focus on selling, servicing and supporting their customers. Finally, the Company
also provides manufacturing services to OEMs.
Frameworks has the capability to produce over 2.5 million units annually
from facilities in Memphis, Tennessee and `s-Hertogenbosch, The Netherlands. In
addition, the Company entered into a strategic alliance with Solectron
Corporation in June 1998 to provide assembly services in the United States,
Canada, Europe, Asia and Latin America. This alliance is expected to allow
Frameworks eventually to deliver customized, fully tested computer systems to
customers from up to 10 locations worldwide.
INFORMATION SYSTEMS
Ingram Micro's systems are primarily mainframe-based and provide the high
level of scalability and performance required to manage such a large and complex
business operation. IMpulse, Ingram Micro's enterprise wide system, is a single,
standardized, real-time information system and operating environment, used
across substantially all of the Company's worldwide operations. It has been
customized as necessary for use in all countries in which the Company operates
and has the capability to handle multiple languages and currencies. On a daily
basis, the Company's systems typically handle 50 million on-line transactions,
80,000 orders, and 150,000 shipments. This compares to 12 million on-line
transactions, 26,000 orders, and 37,000 shipments handled on a daily basis by
IMpulse in 1996. The Company has designed IMpulse as a scalable system that has
the capability to support increased transaction volume. The overall on-line
response time for the Company's network of over 14,000 user stations (terminals,
printers, personal computers, and radio frequency hand held terminals) is less
than one second.
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Worldwide, Ingram Micro's centralized processing system supports more than
40 operational functions including receiving, customer management, order
processing, shipping, inventory management, and accounting. At the core of the
IMpulse system is on-line, real-time distribution software to which considerable
enhancements and modifications have been made to support the Company's growth
and its low cost business model. The Company makes extensive use of advanced
telecommunications technologies with customer service-enhancing features, such
as Automatic Call Distribution to route customer calls to the telesales
representatives. The Telesales Department uses its Sales Wizard system for
on-line, real-time tracking of all customer calls, for proactive outbound
calling, and for status reports on sales statistics such as number of customer
calls, customer call intentions, and total sales generated. IMpulse allows the
Company's telesales representatives to deliver real-time information on product
pricing, inventory availability, and order status to reseller customers. The
Sales Adjusted Gross Profit pricing system enables telesales representatives to
make informed pricing decisions through access to specific product and
order-related costs for each sales opportunity.
In the United States, the Company has implemented CTI technology, which
provides the telesales representatives with Automatic Number Identification
capability and advanced telecommunications features such as on-screen call
waiting and automatic call return, thereby reducing the time required to process
customer orders.
To complement Ingram Micro's telesales, customer service, and technical
support capabilities, IMpulse offers a number of different electronic products
and services through which customers can conduct business with the Company, such
as the Customer Automated Purchasing System, Electronic Data Interchange, the
Bulletin Board Service, the Ingram Micro Web site "www.ingrammicro.com,"
internet-based Electronic Catalog, In-Depth Library, and Auction Block. The
Electronic Catalog provides reseller customers with access to product pricing
and availability, with the capability to search by product category, name, or
manufacturer. The In-Depth Library is a comprehensive multi-manufacturer
database of timely and accurate product, sales, marketing, and technical
information, which is updated nightly for new information. Auction Block is a
real-time, on-line bidding service that allows reseller customers to
competitively bid on unopened products that are not returnable to suppliers
(e.g., discontinued products, products with cosmetic damage to their packaging,
returned products not conforming to the supplier's return policies; etc.).
The Company's information systems provide the infrastructure that allows
the implementation of a customer-centric channel model. It provides the
information necessary for Ingram Micro to act as the agent of commerce among
suppliers, resellers, and end-users. The Company is rapidly enhancing and
deploying seamless, easy-to-use electronic commerce solutions that provide
resellers with the ability to do business with Ingram Micro and with end-users
with greater ease and at lower cost. The Company's electronic commerce
capabilities have expanded to include: SpeedSource, an electronic commerce
ordering tool which gives resellers quick access to real-time ordering, product
allocation, order status, product search, pricing and availability; InsideLine,
a direct communication link, currently in selected use, which furnishes
resellers with real-time access to the Company's mainframe inventory systems;
and Prime Access, currently in production, which, upon completion of rollout to
resellers, will equip them with personalized Web storefronts that are linked
directly to Ingram Micro's order processes and inventory systems.
The Company's warehouse operations use extensive bar-coding technology and
radio frequency technology for receiving and shipping, and real-time links to
United Parcel Service and Federal Express for freight processing and shipment
tracking. The Customer Service Department uses the POWER System for on-line
documentation and faster processing of customer product returns. To ensure that
adequate inventory levels are maintained, the Company's buyers depend on the
purchasing system to track inventory on a continual basis. Many other features
of IMpulse help to expedite the order processing cycle and reduce operating
costs for the Company as well as its reseller customers and suppliers.
The Company employs various security measures and backup systems designed
to protect against unauthorized use or failure of its information systems.
Access to the Company's information systems is controlled through the use of
passwords and additional security measures are taken with respect to sensitive
information. The Company has a contract with Sungard Recovery Services for
disaster recovery and twice per year performs a complete
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<PAGE> 12
systems test, including applications and database integrity. In addition, the
Company has backup power sources for emergency power and also has the capability
to automatically reroute incoming calls, such as from its Santa Ana (West Coast
sales) facility to its Buffalo (East Coast sales) facility. The Company has not
in the past experienced significant failures or downtime of IMpulse or any of
its other information systems, but any such failure or significant downtime
could prevent the Company from taking customer orders, printing product
pick-lists and/or shipping product, and could prevent customers from accessing
price and product availability information from the Company.
The Company believes that in order to remain competitive, it will be
necessary to upgrade its information systems on a continuing basis. The Company
has begun to migrate its IMpulse system from a mainframe-based system using
Cobol language to a client-server based system using Oracle database management
systems. The Company believes that this new information system architecture will
address the Company's need for a distributed computing environment and will
increase system scalability and fault tolerance.
EURO CONVERSION AND YEAR 2000
See "--Euro Conversion" and "--Year 2000 Matters" under "Item 7. --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for discussion relating to the impact of the euro conversion and
Year 2000 matters.
NON-U.S. OPERATIONS AND EXPORT SALES
OPERATIONS OUTSIDE THE UNITED STATES. The Company has subsidiaries or
offices in 28 countries and sales representatives in another five countries,
including Argentina, Australia, Brazil, Canada, China, Colombia, Costa Rica,
Chile, Ecuador, India, Indonesia, Japan, Malaysia, Mexico, New Zealand, Norway,
Peru, Singapore, Switzerland, Thailand, Venezuela, and 11 countries of the
European Union. In 1998, 1997, and 1996, 34.7%, 30.4%, and 33.0%, respectively,
of the Company's net sales were derived from operations outside of the United
States. The Company expects its net sales from operations outside the United
States to increase as a percentage of total net sales in the future due to both
organic growth and growth from acquisitions, including the mid-1998 acquisitions
of Macrotron in Germany and an assembly facility and related business acquired
from Tulip Computer N.V. in The Netherlands.
In February 1999, the Company completed a tender offer for the remaining
outstanding shares of common stock and warrants for ERL. Ingram Micro's
ownership in ERL has increased to approximately 95% of the issued shares (on a
fully diluted basis). The Company's net sales from operations outside the United
States are primarily denominated in currencies other than the U.S. dollar.
Accordingly, the Company's operations outside the United States impose risks
upon its business as a result of exchange rate fluctuations. Although the
Company attempts to mitigate the effect of exchange rate fluctuations on its
business, primarily by attempting to match the currencies of sales and costs, as
well as through the use of foreign currency borrowings and derivative financial
instruments such as forward exchange contracts, the Company does not seek to
remove all risk associated with such fluctuations. See "Item 7. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EXPORT MARKETS. The Company's Export operations continue to serve those
markets where the Company does not have a stand-alone, in-country presence. The
Miami, Florida; Santa Ana, California; and Brussels, Belgium Export operations
(which have been reorganized as part of the Latin America, U.S. and European
operations, respectively) serve more than 1,750 resellers in approximately 100
countries. In addition, the Export branch in Latin America has field sales
representatives based in Buenos Aires, Argentina; Bogota, Colombia; San Jose,
Costa Rica; Caracas, Venezuela; and Quito, Ecuador.
For segment information regarding the Company's United States and non-U.S.
operations, see Note 10 of Notes to Consolidated Financial Statements.
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COMPETITION
The Company operates in a highly competitive environment, both in the
United States and internationally. The computer-based technology products
distribution industry is characterized by intense competition, based primarily
on price, product availability, speed and accuracy of delivery, effectiveness of
sales and marketing programs, credit availability, ability to tailor specific
solutions to customer needs, quality and breadth of product lines and service,
and availability of technical and product information. The Company believes it
competes favorably with respect to each of these factors. In addition, the
Company believes that as customers move their back-room operations to
distribution partners, outsourcing and value-added capabilities (such as channel
assembly, configuration, innovative financing programs, and order fulfillment
programs) will become more important competitive factors. With the emergence of
the Internet reseller storefronts, the Company seeks to provide virtual
warehouse and distribution operations.
Ingram Micro's U.S. competitors include full-line distributors Tech Data,
Merisel and Pinacor (MicroAge's distribution arm), as well as specialty
distributors such as Gates/Arrow (desktop and enterprise products), Daisytek
(consumables), Access Graphics (enterprise products) and Avnet (industrial and
enterprise products). Ingram Micro competes internationally with a variety of
national and regional distributors. In the European market, competitors include
international distributors such as CHS Electronics and Tech Data (which acquired
C2000, a European competitor), and several regional and local distributors,
including Actebis, Raab Karcher and Scribona. In Canada, Ingram Micro competes
with Merisel, Globelle, Beamscope and Tech Data. In Latin America, Ingram Micro
competes with international distributors including CHS Electronics and Tech
Data, and several regional and local distributors including MPS Mayorista,
Alvimer and Sonda-Beamscope S.A. In the Asia Pacific market, Ingram Micro
(through a majority interest in ERL and a strategic agreement with SOFTBANK),
faces both regional and local competitors, of whom the largest are Tech Pacific,
a broadline distributor which operates in eight countries, and SiS Distribution
Ltd., a Hong Kong-based distributor of microcomputer products which is 80% owned
by CHS Electronics.
The Company is constantly seeking to expand its business into areas closely
related to its core computer-based technology products distribution business. As
the Company enters new business areas, including value-added services, it may
encounter increased competition from current competitors and/or from new
competitors, some of which may be current customers of the Company. For example,
as the Company continues to develop the Frameworks unbranded systems program,
there may be competition from current vendors and customers in addition to other
distributors. Also, as electronic purchases of software become more prevalent in
the industry, electronic software distributors may become significant
competitors of the Company.
Ingram Micro also competes with hardware manufacturers and software
publishers that sell directly to reseller customers and end-users. As hardware
manufacturers look to increase direct sales volumes while tightening terms and
conditions, some customers are buying more products directly from the
manufacturer rather than through distribution. Together with the risk of
decreased purchase discounts and rebates, the Company's sales volumes and profit
margins may be adversely affected.
ASSET MANAGEMENT
The Company maintains sufficient quantities of product inventories to
achieve high order fill rates. The Company believes that the risks associated
with slow moving and obsolete inventory are substantially mitigated by price
protection and stock return privileges provided by suppliers. In the event of a
supplier price reduction, the Company generally receives a credit for products
in its inventory. In addition, the Company has the right to return a certain
percentage of purchases, subject to certain limitations. Historically, price
protection, stock return privileges, and inventory management procedures have
helped to reduce the risk of decline in the value of inventory. However, major
PC suppliers have stated that it is their intention to reduce the amount of
inventory in the channel, particularly in light of the growth of vendor direct
and channel assembly strategies. In the last year, these suppliers have
decreased the availability of price protection for distributors. The shorter
time periods during which distributors may receive rebates or credit for
decreases in manufacturer prices on unsold inventory have made it more difficult
for the Company to match its inventory levels with the price protection periods.
Consequently, the
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<PAGE> 14
Company's risk of loss due to declines in value of inventory held by the Company
after such price protection periods have passed has increased. The Company is
taking various actions, including closer monitoring of its inventory levels and
decreased purchases, to lessen such risk. The Company's risk of decline in the
value of inventory could also be greater outside the United States, where
agreements with suppliers are more restrictive with regard to price protection
and the Company's ability to return unsold inventory.
The Company establishes reserves for estimated losses due to obsolete
inventory in the normal course of business. Historically, the Company has not
experienced losses due to obsolete inventory materially in excess of established
inventory reserves. Inventory levels may vary from period to period, due in part
to the addition of new suppliers or new lines with current suppliers and large
cash purchases of inventory due to advantageous terms offered by suppliers. In
addition, payment terms with inventory suppliers may vary from time to time, and
could result in less inventory being financed by vendors and a greater amount of
inventory being financed by the Company's debt.
EMPLOYEES
As of January 2, 1999, the Company employed over 14,400 associates located
as follows: United States--8,620, Europe--3,965, all other regions--1,832. As a
result of the Company's acquisition of ERL in February 1999, the Company has
approximately 880 additional associates in Asia. Ingram Micro believes that its
success depends on the skill and dedication of its associates. The Company
strives to attract, develop, and retain outstanding personnel. Certain of the
Company's operations in Europe, Latin America and Canada are subject to
collective bargaining or similar arrangements. The Company considers its
employee relations to be good.
On March 11, 1999, the Company announced that the Company is accelerating a
number of actions to increase flexibility and service and maximize cost savings
and efficiencies. Outside of the United States, the Company has been increasing
its cost effectiveness through attrition and personnel redeployment since late
1998. In the United States, the Company is instituting many structural changes,
including the closing of its California-based consolidation center, re-alignment
of its sales forces and the creation of a merchandising organization that
integrates its purchasing, vendor sales and product marketing functions. In
addition, new programs and process improvements to increase productivity are
being deployed in the Company's distribution centers. These and other changes
are reducing the Company's worldwide work force by approximately 1,400 full-time
employee equivalents.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each
person who is an executive officer of the Company as of March 16, 1999:
<TABLE>
<CAPTION>
NAME AGE PRESENT AND PRIOR POSITIONS HELD(1) YEARS POSITIONS HELD
- ---- --- ----------------------------------- --------------------
<S> <C> <C> <C>
Jerre L. Stead(2) 56 Chairman of the Board and Aug. 1996-Present
Chief Executive Officer
Chief Executive Officer and Chairman Jan. 1995-Aug. 1995
of the Board, Legent Corporation, a
software development company
Executive Vice President, Chairman May 1993-Dec. 1994
and Chief Executive Officer, AT&T
Corp. Global Information Solutions
(NCR Corp.), a computer manufacturer
President and Chief Executive Officer, AT&T Sept. 1991-Apr. 1993
Corp. Global Business Communication
Systems, a communications company
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
NAME AGE PRESENT AND PRIOR POSITIONS HELD(1) YEARS POSITIONS HELD
- ---- --- ----------------------------------- --------------------
<S> <C> <C> <C>
Jeffrey R. Rodek(3) 45 President; Worldwide Chief Operating Officer Dec. 1994-Present
Senior Vice President, Americas and July 1991-Sept. 1994
Caribbean, Federal Express,
an express shipping firm
Michael J. Grainger 46 Executive Vice President; Worldwide Chief Oct. 1996-Present
Financial Officer
Chief Financial Officer May 1996-Oct. 1996
Vice President and Controller, Ingram July 1990-Oct. 1996
Industries
Douglas R. Antone 46 Executive Vice President; President, July 1998-Present
Frameworks Worldwide
Senior Vice President, Marketing July 1997-July 1998
Senior Vice President; President, June 1994-July 1997
Ingram Alliance
Senior Vice President, Worldwide Sales Nov. 1993-May 1994
and Marketing, Borland International,
a software development company
Philip D. Ellett 44 Executive Vice President; President, Mar. 1999-Present
Ingram Micro North America
Executive Vice President; President, June 1998-Feb. 1999
Ingram Micro Europe
Senior Vice President; President, May 1997-June 1998
Ingram Micro Europe
Senior Vice President; Chief Operating Jan. 1997-April 1997
Officer, Ingram Micro Europe
Senior Vice President; General Manager, Jan. 1996-Jan. 1997
U.S. Consumer Markets Division
President, Gates/Arrow, an electronics Aug. 1994-Dec. 1995
distributor
President and Chief Executive Officer, Oct. 1991-Aug. 1994
Gates/F.A. Distributing, Inc., an
electronics distributor
Robert D. Grambo 34 Executive Vice President; President, Feb. 1999-Present
Ingram Micro Europe
Senior Vice President; Chief Operating July 1998-Feb. 1999
Officer, Ingram Micro Europe
Senior Vice President, Sales, Ingram Micro U.S. Sept. 95-July 1998
Vice President, Sales, Ingram Micro U.S. Apr. 94-Sep. 1995
Vice President, Product Marketing Apr. 93-Apr. 1994
Guy P. Abramo 37 Senior Vice President, Marketing, Worldwide Sept. 1998-Present
Partner, Yankelovich Partners, a marketing May 1998-Oct. 1998
professional services company
Managing Director, Marketing Intelligence, Feb. 1995-May 1998
Peat Marwick LLP, an accounting
and professional services company
Manager, Marketing, Mobil Corporation June 1984-Feb. 1995
an international oil company
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
NAME AGE PRESENT AND PRIOR POSITIONS HELD(1) YEARS POSITIONS HELD
- ---- --- ----------------------------------- --------------------
<S> <C> <C> <C>
James E. Anderson, Jr. 51 Senior Vice President, Secretary and Jan. 1996-Present
General Counsel
Vice President, Secretary and General Sept. 1991-Nov. 1996
Counsel, Ingram Industries
David M. Carlson 58 Senior Vice President, Chief Feb. 1997-Present
Technology Officer
President, Consumer Focused Jan. 1996-Feb. 1997
Technology, a consulting firm
Vice President, Technology and Mar. 1995-Dec. 1995
Network Services, Florist
Transworld Delivery Corp.
Senior Vice President, Corporate July 1985-Jan. 1995
Information Systems, Kmart
Corporation, a retail company
David M. Finley 58 Senior Vice President, Human Resources, July 1996-Present
Worldwide
Senior Vice President, Human Resources, May 1995-July 1996
Budget Rent a Car, a car rental company
Vice President, Human Resources, The Southland Jan. 1977-May 1995
Corporation, a convenience retail company
Henri T. Koppen 56 Senior Vice President; President, Ingram Micro Jan. 1998-Present
Latin America
President, Latin America, General Electric July 1996-Dec. 1997
Capital Information Technology Solutions, a
systems integrator/reseller company
Vice President, Latin America, Ameridata Global May 1995-July 1996
Inc., a systems integrator/reseller company
General Manager, Mexico, Control Data Systems May 1994-May 1995
Inc., a systems manufacturer and integrator
Director, North America Marketing, Control Data May 1992-April 1994
Systems Inc., a systems manufacturer and integrator
Gregory M.E. Spierkel 42 Senior Vice President; President, July 1998-Present
Ingram Micro Asia-Pacific
Vice President, Global Sales & Marketing, March
1996-June 1997 Mitel Inc., a manufacturer of
telecommunications and semiconductor products
President, North America, Mitel Inc., a April 1992-March 1996
manufacturer of telecommunications and
semiconductor products
James F. Ricketts 52 Vice President; Worldwide Treasurer Sept. 1996-Present
Vice President; Treasurer Feb. 1992-Sept. 1996
Sundstrand Corporation, a manufacturer
of aerospace and related technology systems
</TABLE>
- -------------
(1) The first position and any other positions not given a separate corporate
identification are with the Company.
(2) Mr. Stead is a director of Armstrong World Industries, Inc., Thomas &
Betts, and Conexant Systems, Inc.
(3) Mr. Rodek is a director of Hyperion Solutions and a member of its
Compensation Committee; and a director of EXE Technologies and a member of
its Audit Committee.
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<PAGE> 17
TRADEMARKS AND SERVICE MARKS
The Company owns or is the licensee of various trademarks and service
marks, including, among others, "Ingram Micro," "IMpulse," the Ingram Micro
logo, "Partnership America," "Leading the Way in Worldwide Distribution, "
"Frameworks Total Integration Services," and "Affiniti." Certain of these marks
are registered, or are in the process of being registered, in the United States
and various other countries. Even though the Company's marks may not be
registered in every country where the Company conducts business, in many cases
the Company has acquired rights in those marks because of its continued use of
them. 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.
SAFE HARBOR FOR FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for "forward-looking statements" to encourage companies to provide
prospective information, so long as such information is identified as forward
looking and is accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed in the statement. Except for historical information, certain
statements contained in this Annual Report on Form 10-K may be "forward-looking
statements" within the meaning of the Act. In order to take advantage of the
"safe harbor" provisions of the Act, the Company identifies the following
important factors which could affect the Company's actual results and cause such
results to differ materially from those projected, forecasted, estimated,
budgeted or otherwise expressed by the Company in forward-looking statements
made by or on behalf of the Company:
(1) Intense competition may lead to reduced prices, lower sales or reduced
sales growth, and lower gross margins.
(2) The Company's narrow margins magnify the impact on operating results
of variations in operating costs. A number of factors may reduce the
Company's margins even further. For example, if PC manufacturers
substantially reduce or terminate price protection programs, if PC
manufacturers substantially raise the threshold on sales volume before
distributors may qualify for discounts and/or rebates, if the
Company's receivables experience a substantial deterioration in their
collectibility or if the Company cannot obtain credit insurance at
reasonable rates, the Company's financial condition and results of
operations may be adversely impacted.
(3) Seasonal variations in the demand for products and services, as well
as the introduction of new products, may cause variations in the
Company's quarterly results.
(4) The availability (or lack thereof) of capital on acceptable terms may
hamper the Company in its efforts to fund its increasing working
capital needs.
(5) The failure of the Company to adequately manage its growth may
adversely impact the Company's results of operations.
(6) A failure of the Company's information systems may adversely impact
the Company's results of operations. In addition, the failure of the
Company or its vendors, resellers, customers, shipping companies, and
other third party systems to achieve substantial Y2K readiness may
adversely impact the Company's financial condition and results of
operations.
(7) Devaluation of a foreign currency, or other disruption of a foreign
market, may adversely impact the Company's operations in that country
or globally.
(8) The loss of a key executive officer or other key employee may
adversely impact the Company's operations.
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<PAGE> 18
(9) The inability of the Company to obtain products on favorable terms may
adversely impact the Company's results of operations.
(10) The Company's operations may be adversely impacted by an acquisition
that (i) is not suited for the Company, (ii) is improperly executed,
or (iii) substantially increases the Company's debt.
(11) The Company's financial condition may be adversely impacted by a
decline in value of a portion of the Company's inventory.
(12) The failure of certain shipping companies to deliver product to the
Company, or from the Company to its customers, may adversely impact
the Company's results of operations.
(13) Rapid technological change may alter the market for the Company's
products and services, requiring the Company to anticipate such
technological changes, to the extent possible.
(14) If the Company's inventory suppliers terminate or substantially reduce
the subsidies relating to floor planning financing for the Company's
master reseller business, such change in policy may adversely impact
the Company's financial condition and results of operations.
Reference is made to Exhibit 99.01 hereto for additional discussion of the
foregoing factors, as well as additional factors which may affect the Company's
actual results and cause such results to differ materially from those projected,
forecasted, estimated, budgeted or otherwise expressed in forward-looking
statements.
ITEM 2. PROPERTIES
Ingram Micro's worldwide executive headquarters, as well as its West Coast
sales and support offices, are located in a three-building office complex in
Santa Ana, California. The Company also maintains an East Coast operations
center in Williamsville (Buffalo), New York.
As of March 22, 1999, the Company operates seven distribution centers in
the continental United States located in Carrollton, Texas, Carol Stream,
Illinois, Fremont, California, Fullerton, California, Harrisburg, Pennsylvania,
Millington, Tennessee, and Miami, Florida. The Company also operates 71
distribution centers outside of the U.S.--in Australia, Brazil, Canada, Chile,
China, India, Hong Kong, Malaysia, Mexico, New Zealand, Norway, Peru, Singapore,
Switzerland, Thailand and most countries of the European Union.
As of March 22, 1999, the Company operates two integration centers located
in Memphis, Tennessee and `s-Hertogenbosch, The Netherlands in addition to three
returns centers, two in Santa Ana, California and one in Toronto, Canada. As of
the same date, the Company operates a freight consolidation center in Fremont,
California, which, along with one of the Company's Santa Ana returns centers,
will be closed by the second quarter of 1999.
As of March 22, 1999, all of the Company's facilities are leased, with the
exception of the distribution center in Roncq, France. These leases have varying
terms. The Company does not anticipate any material difficulty in renewing any
of its leases as they expire or securing replacement facilities, in each case on
commercially reasonable terms. In addition, the Company owns two undeveloped
properties in Santa Ana, California totaling approximately 16.27 acres, and has
options on approximately 60 acres in Millington, Tennessee.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject.
As a result of an internal review by the Company of export shipments made
from its United States distribution facilities, the Company has determined that
certain of these shipments and related documentation were not in compliance with
U.S. export regulations. The Company has notified the appropriate federal
government agencies
17
<PAGE> 19
pursuant to applicable voluntary self-disclosure procedures (the "Disclosure").
The reported shipments consisted of modems and other telecommunications products
and shrink-wrapped, commercial software readily available through normal retail
outlets which contained encryption features controlled under export regulations.
These shipments had a total value of approximately $673,240. Violations of
export laws and regulations are subject to both civil and criminal penalties,
including in appropriate circumstances suspension or loss of export privileges.
Since the Disclosure, a representative of the Department of Commerce has
requested additional documents relating to the Disclosure, but the Company does
not know what position the Department will take upon further review of the
Disclosure. The Company is not able to estimate at this time the amount or
nature of penalties, if any, that might be sought against the Company as a
result of the reported violations; however, penalties to which the Company
potentially may be subject could be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 29, 1999, there were 578 holders of record of the Class A
Common Stock and 140 holders of record of the Class B Common Stock. The Company
believes that there are approximately 27,000 beneficial holders of the Class A
Common Stock.
Information as to the Company's quarterly stock prices is included on the
inside back cover of the Company's 1998 Annual Report to Shareowners, which is
included as part of Exhibit 13.01 and is incorporated in this Annual Report on
Form 10-K.
Information as to the principal market on which the Class A Common Stock is
traded is included on the inside back cover of the Company's 1998 Annual Report
to Shareowners, which is included as part of Exhibit 13.01 and is incorporated
in this Annual Report on Form 10-K.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its Class A or Class
B Common Stock in the preceding two fiscal years. The Company currently intends
to retain its future earnings to finance the growth and development of its
business and, therefore, does not anticipate declaring or paying cash dividends
on its Class A or Class B Common Stock for the foreseeable future. Any future
decision to declare or pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements, and such other factors as the Board of
Directors deems relevant. In addition, certain of the Company's debt facilities
contain restrictions on the declaration and payment of dividends.
18
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information of Ingram Micro for the five year period
ended January 2, 1999 is included on page 18 of the Company's 1998 Annual Report
to Shareowners, which is included as part of Exhibit 13.01 and is incorporated
in this Annual Report on Form 10-K. It should be read in conjunction with the
consolidated financial statements included on pages 30 through 50 of the
Company's 1998 Annual Report to Shareowners which are also included as part of
Exhibit 13.01 and incorporated in this Annual Report on Form 10-K and the
financial statement schedule below in Item 14 of this Annual Report on Form
10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included on pages 19 through 29 of the Company's 1998 Annual
Report to Shareowners, which are also included as part of Exhibit 13.01 and are
incorporated in this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required disclosure is included on page 26 of the Company's 1998 Annual
Report to Shareowners, which are also included as part of Exhibit 13.01 and
incorporated in this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are included on pages 30
through 50 of the Company's 1998 Annual Report to Shareowners, which are also
included as part of Exhibit 13.01 and incorporated in this Annual Report on Form
10-K. Reference is made to the Index to the Financial Statements in Item 14
below.
A financial statement schedule for the Company, and report thereon, are
included on pages 24 and 25, respectively, of this Annual Report on Form 10-K.
Reference is made to the Index to Financial Statements in Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Company's independent accountants or
disagreements with such accountants on accounting principles or practices or
financial statement disclosures.
PART III
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure in Part I of this report because the
Company will not furnish such information in its definitive Proxy Statement
prepared in accordance with Schedule 14A.
The Notice and Proxy Statement for the 1999 Annual Meeting of Shareowners,
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, which is incorporated by reference in this Annual Report on
Form 10-K pursuant to General Instruction G(3) of Form 10-K, will provide the
remaining information required under Part III (Items 10, 11, 12, and 13).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements, together with the report thereon
of PricewaterhouseCoopers LLP dated February 10, 1999, except as to Note
14, which is as February 19, 1999 all appearing on pages 30 through 51 in
the 1998 Annual Report to Shareowners, are incorporated in this Annual
Report on Form 10-K. With the exception of the aforementioned information
and
19
<PAGE> 21
the information incorporated in Items 5, 6, 7, and 8, the 1998 Annual
Report to Shareowners is not deemed filed as part of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
INGRAM MICRO INC. PAGE NO. IN
----------------- ANNUAL REPORT
TO SHAREOWNERS
--------------
<S> <C>
Index to Financial Information 17
Consolidated Balance Sheet at January 2, 1999 and January 3, 1998 30
Consolidated Statement of Income for the years ended January 2, 1999,
January 3, 1998, and December 28, 1996 31
Consolidated Statement of Stockholders' Equity for the years ended
January 2, 1999, January 3, 1998, and December 28, 1996 32
Consolidated Statement of Cash Flows for the years ended
January 2, 1999, January 3, 1998, and December 28, 1996 33
Notes to Consolidated Financial Statements 34-50
Report of Independent Accountants 51
</TABLE>
Pages 18 through 52 and the inside back cover page of the 1998 Annual
Report to Shareowners of Ingram Micro Inc. include the Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Consolidated Financial Statements and related notes thereto, the
Independent Accountants' Report, Shareholder Information and Quarterly Stock
Prices. These pages are filed with the Securities and Exchange Commission as
Exhibit 13.01 to this Annual Report on Form 10-K.
2. Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
3. List of Exhibits:
<TABLE>
<S> <C>
3.01 -- Form of Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.01 to the Company's
Registration Statement on Form S-1 (File No. 333-08453) (the
"IPO S-1"))
3.02 -- Amended and Restated Bylaws of the Registrant (incorporated
by reference to Exhibit 3.02 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998)
10.01 -- Ingram Micro Inc. Executive Incentive Bonus Plan
(incorporated by reference to Exhibit 10.01 to the IPO S-1)
10.02 -- Ingram Micro Inc. Management Incentive Bonus Plan
(incorporated by reference to Exhibit 10.02 to the IPO S-1)
10.03 -- Ingram Micro Inc. General Employee Incentive Bonus Plan
(incorporated by reference to Exhibit 10.03 to the IPO S-1)
10.04 -- Agreement dated as of December 21, 1994 between the Company
and Jeffrey R. Rodek (incorporated by reference to Exhibit
10.04 to the IPO S-1)
10.05 -- Agreement dated as of April 25, 1988 between the Company and
Sanat K. Dutta (incorporated by reference to Exhibit 10.05
to the IPO S-1)
10.06 -- Amendment No. 1 to the Ingram Micro Inc. Amended and
Restated 1996 Equity Incentive Plan (incorporated by
reference to Exhibit 10.06 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.07 -- Ingram Micro Inc. Rollover Stock Option Plan (incorporated
by reference to Exhibit 10.07 to the IPO S-1)
10.08 -- Ingram Micro Inc. Key Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.08 to the IPO S-1)
10.09 -- Ingram Micro Inc. 1996 Equity Incentive Plan (incorporated
by reference to Exhibit 10.09 to
</TABLE>
20
<PAGE> 22
<TABLE>
<S> <C>
the IPO S-1)
10.10 -- Ingram Micro Inc. Amended and Restated 1996 Equity Incentive
Plan (incorporated by reference to Exhibit 10.10 to the IPO
S-1)
10.11 -- Severance Agreement dated as of June 1, 1996 among the
Company, Ingram Industries, Linwood A. Lacy, Jr., and
NationsBank, N.A., as trustee of the Linwood A. Lacy, Jr.
1996 Irrevocable Trust dated February 1996 (incorporated by
reference to Exhibit 10.11 to the IPO S-1)
10.12 -- Credit Agreement dated as of October 30, 1996 among the
Company and Ingram European Coordination Center N.V., Ingram
Micro Singapore Pte Ltd., and Ingram Micro Inc., as
Borrowers and Guarantors, certain financial institutions, as
the Lenders, NationsBank of Texas, N.A., as Administrative
Agent for the Lenders and The Bank of Nova Scotia as
Documentation Agent for the Lenders (incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (File No. 333-16667) (the "Thrift Plan
S-1"))
10.13 -- Amended and Restated Reorganization Agreement dated as of
October 17, 1996 among the Company, Ingram Industries, and
Ingram Entertainment (incorporated by reference to Exhibit
10.13 to the Thrift Plan S-1)
10.14 -- Registration Rights Agreement dated as of November 6, 1996
among the Company and the persons listed on the signature
pages thereof (incorporated by reference to Exhibit 10.14 to
the Thrift Plan S-1)
10.15 -- Board Representation Agreement dated as of November 6, 1996
(incorporated by reference to Exhibit 10.15 to the Thrift
Plan S-1)
10.16 -- Thrift Plan Liquidity Agreement dated as of November 6, 1996
among the Company and the Ingram Thrift Plan (incorporated
by reference to Exhibit 10.16 to the Thrift Plan S-1)
10.17 -- Tax Sharing and Tax Services Agreement dated as November 6,
1996 among the Company, Ingram Industries, and Ingram
Entertainment (incorporated by reference to Exhibit 10.17 to
the Thrift Plan S-1)
10.18 -- Agreement with Douglas R. Antone dated May 15, 1998, as
amended October 28, 1998
10.19 -- Employee Benefits Transfer and Assumption Agreement dated as
of November 6, 1996 among the Company, Ingram Industries,
and Ingram Entertainment (incorporated by reference to
Exhibit 10.19 to the Thrift Plan S-1)
10.20 -- Data Center Services Agreement dated as of November 6, 1996
among the Company, Ingram Book Company, and Ingram
Entertainment Inc. (incorporated by reference to Exhibit
10.20 to the Thrift Plan S-1)
10.21 -- Amended and Restated Exchange Agreement dated as of November
6, 1996 among the Company, Ingram Industries, Ingram
Entertainment and the other parties thereto (incorporated by
reference to Exhibit 10.21 to the Thrift Plan S-1)
10.22 -- Agreement dated as of August 26, 1996 between the Company
and Jerre L. Stead (incorporated by reference to Exhibit
10.22 to the IPO S-1)
10.23 -- Definitions for Ingram Funding Master Trust Agreements
(incorporated by reference to Exhibit 10.23 to the IPO S-1)
10.24 -- Asset Purchase and Sale Agreement dated as of February 10,
1993 between Ingram Industries and Ingram Funding Inc.
(incorporated by reference to Exhibit 10.24 to the IPO S-1)
10.25 -- Pooling and Servicing Agreement dated as of February 10,
1993 among Ingram Funding, Ingram Industries and Chemical
Bank (incorporated by reference to Exhibit 10.25 to the IPO
S-1)
10.26 -- Amendment No. 1 to the Pooling and Servicing Agreement dated
as of February 12, 1993, the Asset Purchase and Sale
Agreement dated as of February 12, 1993, and the Liquidity
Agreement dated as of February 12, 1993 (incorporated by
reference to Exhibit 10.26 to the IPO S-1)
10.27 -- Certificate Purchase Agreement dated as of July 23, 1993
(incorporated by reference to Exhibit 10.27 to the IPO S-1)
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C>
10.28 -- Schedule of Certificate Purchase Agreements (incorporated by
reference to Exhibit 10.28 to the IPO S-1)
10.29 -- Series 1993-1 Supplement to Ingram Funding Master Trust
Pooling and Servicing Agreement dated as of July 23, 1993
(incorporated by reference to Exhibit 10.29 to the IPO S-1)
10.30 -- Schedule of Supplements to Ingram Funding Master Trust
Pooling and Servicing Agreement dated as of July 23, 1993
(incorporated by reference to Exhibit 10.30 to the IPO S-1)
10.31 -- Letter of Credit Reimbursement Agreement dated as of
February 10, 1993 (incorporated by reference to Exhibit
10.31 to the IPO S-1)
10.32 -- Liquidity Agreement dated as of February 10, 1993
(incorporated by reference to Exhibit 10.32 to the IPO S-1)
10.33 -- Amendment No. 2 to the Pooling and Servicing Agreement dated
as of February 12, 1993, the Asset Purchase and Sale
Agreement dated as of February 12, 1993, and the Liquidity
Agreement dated as of February 12, 1993 (incorporated by
reference to Exhibit 10.33 to the IPO S-1)
10.34 -- Agreement dated as of October 10, 1996 between the Company
and Michael J. Grainger (incorporated by reference to
Exhibit 10.34 to the IPO S-1)
10.35 -- Form of Repurchase Agreement (incorporated by reference to
Exhibit 10.35 to the IPO S-1)
10.36 -- First Amendment to the Credit Agreement dated as of October
28, 1997 (incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-3 (File No.
333-39457) (the "Rollover/Thrift Plan S-3"))
10.37 -- European Credit Agreement dated as of October 28, 1997 among
the Company and Ingram European Coordination Center N.V., as
Borrowers and Guarantors, certain financial institutions, as
the Lenders, The Bank of Nova Scotia, as Administrative
Agent for the Lenders and NationsBank of Texas, N.A. as
Documentation Agent for the Lenders, as arranged by The Bank
of Nova Scotia and NationsBanc Capital Markets, Inc., as the
Arrangers (incorporated by reference to Exhibit 10.37 to the
Rollover/Thrift Plan S-3)
10.38 -- Canadian Credit Agreement dated as of October 28, 1997 among
the Company and Ingram Micro Inc. (Canada), as Borrowers and
Guarantors, certain financial institutions, as the Lenders,
The Bank of Nova Scotia., as Administrative Agent for the
Lenders, Royal Bank of Canada as the Syndication Agent for
the Lenders, and Bank of Tokyo-Mitsubishi (Canada) as the
Co-Agent (incorporated by reference to Exhibit 10.38 to the
Rollover/Thrift Plan S-3)
10.39 -- Retirement Agreement between the Company and David P. Dukes
(incorporated by reference to Exhibit 10.39 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
July 4, 1998)
10.40 -- Second Amendment to Credit Agreement dated as of September
25, 1998, among the Company, Ingram European Coordination
Center N.V. ("IECC"), and Ingram Micro Inc. (Canada), as
Borrowers and Guarantors, and certain financial institutions
as the Relevant Required Lenders, amending the US
$1,000,000,000 Credit Agreement dated as of October 30,
1996, also among certain financial institutions, as the
Lenders, NationsBank, N.A (successor in interest by merger
with NationsBank of Texas, N.A.), as Administrative Agent
for the Lenders, and The Bank of Nova Scotia, as
Documentation Agent for the Lenders and certain named
Co-Agents (incorporated by reference to Exhibit 10.40 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 3, 1998 ("the Q3 98 10-Q"))
10.41 -- First Amendment to European Credit Agreement dated as of
September 25, 1998, among the Company and IECC as the
Primary Borrowers and Guarantors, and certain financial
institutions as the Relevant Required Lenders, amending the
US $500,000,000 European Credit Agreement dated as of
October 28, 1997, also among the Company and IECC, as the
Primary Borrowers and Guarantors, certain financial
institutions as the Lenders, The Bank of Nova Scotia, as
Administrative Agent for the Lenders and NationsBank, N.A.
(successor in interest by merger to NationsBank of Texas,
N.A.), as Documentation Agent for the Lenders, as arranged
by The Bank of Nova Scotia and NationsBanc Capital Markets,
Inc., as the Arrangers (incorporated by reference to Exhibit
10.41 to the Q3 98 10-Q)
</TABLE>
22
<PAGE> 24
<TABLE>
<S> <C>
10.42 -- First Amendment to Canadian Credit Agreement dated as of
September 25, 1998, among the Company and Ingram Micro Inc.
(Canada) as the Borrowers and Guarantors, and certain
financial institutions as the Relevant Required Lenders,
amending the US $150,000,000 Canadian Credit Agreement dated
as of October 28, 1997, also among the Company, Ingram Micro
Inc. (Canada) as the Borrowers and Guarantors, certain
financial institutions as the Lenders, The Bank of Nova
Scotia, as Administrative Agent for the Lenders, Royal Bank
of Canada, as Syndication Agent for the Lenders, and Bank of
Tokyo-Mitsubishi (Canada) as the Co-Agent (incorporated by
reference to Exhibit 10.42 to the Q3 98 10-Q)
10.43 -- Ingram Micro Inc. 1998 Equity Incentive Plan
13.01 -- Portions of Annual Report to Shareowners for the year ended
January 2, 1999
21.01 -- Subsidiaries of the Registrant
23.01 -- Consent of Independent Accountants regarding certain
Registration Statements on Form S-8
23.02 -- Consent of Independent Accountants regarding Registration
Statements on Form S-3
27.01 -- Financial Data Schedule (included in electronic version
only)
99.01 -- Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended January 2,
1999.
23
<PAGE> 25
INGRAM MICRO INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and at end of
Description of year expenses Deductions Other(*) year
- ----------- ------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts receivable
& sales returns:
1998 $ 48,541 $ 32,534 $(31,200) $ 6,029 $ 55,904
1997 38,622 31,652 (27,102) 5,369 48,541
1996 30,791 28,619 (25,394) 4,606 38,622
Inventory obsolescence:
1998 $ 18,886 $ 26,129 $(27,554) $ 933 $ 18,394
1997 13,326 21,524 (20,201) 4,237 18,886
1996 12,245 13,836 (12,602) (153) 13,326
</TABLE>
* Other includes recoveries, acquisitions and the effect of fluctuation in
foreign currency.
24
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Ingram Micro Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 10, 1999, except as to Note 14, which is as of February 19, 1999
appearing in the 1998 Annual Report to Shareowners of Ingram Micro Inc. (which
report and consolidated financial statements are incorporated by reference in
this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
February 10, 1999, except as to Note 14,
which is as of February 19, 1999
25
<PAGE> 27
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.
INGRAM MICRO INC.
By: /s/ James E. Anderson, Jr.
----------------------------------
Name: James E. Anderson, Jr.
Title: Senior Vice President, Secretary
and General Counsel
April 1, 1999
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jerre L. Stead Chief Executive Officer (Principal April 1, 1999
- ------------------------------------------ Executive Officer); Chairman of the
Jerre L. Stead Board
/s/ Michael J. Grainger Executive Vice President and Worldwide April 1, 1999
- ------------------------------------------ Chief Financial Officer (Principal
Michael J. Grainger Financial Officer and Principal
Accounting Officer)
/s/ Martha R. Ingram Director April 1, 1999
- ------------------------------------------
Martha R. Ingram
/s/ John R. Ingram Director April 1, 1999
- ------------------------------------------
John R. Ingram
/s/ Philip M. Pfeffer Director April 1, 1999
- ------------------------------------------
Philip M. Pfeffer
/s/ Don H. Davis, Jr. Director April 1, 1999
- ------------------------------------------
Don H. Davis, Jr.
/s/ J. Phillip Samper Director April 1, 1999
- ------------------------------------------
J. Phillip Samper
/s/ Joe B. Wyatt Director April 1, 1999
- ------------------------------------------
Joe B. Wyatt
</TABLE>
26
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.01 -- Form of Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.01 to the Company's
Registration Statement on Form S-1 (File No. 333-08453) (the
"IPO S-1"))
3.02 -- Amended and Restated Bylaws of the Registrant (incorporated
by reference to Exhibit 3.02 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998)
10.01 -- Ingram Micro Inc. Executive Incentive Bonus Plan
(incorporated by reference to Exhibit 10.01 to the IPO S-1)
10.02 -- Ingram Micro Inc. Management Incentive Bonus Plan
(incorporated by reference to Exhibit 10.02 to the IPO S-1)
10.03 -- Ingram Micro Inc. General Employee Incentive Bonus Plan
(incorporated by reference to Exhibit 10.03 to the IPO S-1)
10.04 -- Agreement dated as of December 21, 1994 between the Company
and Jeffrey R. Rodek (incorporated by reference to Exhibit
10.04 to the IPO S-1)
10.05 -- Agreement dated as of April 25, 1988 between the Company and
Sanat K. Dutta (incorporated by reference to Exhibit 10.05
to the IPO S-1)
10.06 -- Amendment No. 1 to the Ingram Micro Inc. Amended and
Restated 1996 Equity Incentive Plan (incorporated by
reference to Exhibit 10.06 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.07 -- Ingram Micro Inc. Rollover Stock Option Plan (incorporated
by reference to Exhibit 10.07 to the IPO S-1)
10.08 -- Ingram Micro Inc. Key Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.08 to the IPO S-1)
10.09 -- Ingram Micro Inc. 1996 Equity Incentive Plan (incorporated
by reference to Exhibit 10.09 to the IPO S-1)
10.10 -- Ingram Micro Inc. Amended and Restated 1996 Equity Incentive
Plan (incorporated by reference to Exhibit 10.10 to the IPO
S-1)
10.11 -- Severance Agreement dated as of June 1, 1996 among the
Company, Ingram Industries, Linwood A. Lacy, Jr., and
NationsBank, N.A., as trustee of the Linwood A. Lacy, Jr.
1996 Irrevocable Trust dated February 1996 (incorporated by
reference to Exhibit 10.11 to the IPO S-1)
10.12 -- Credit Agreement dated as of October 30, 1996 among the
Company and Ingram European Coordination Center N.V., Ingram
Micro Singapore Pte Ltd., and Ingram Micro Inc., as
Borrowers and Guarantors, certain financial institutions, as
the Lenders, NationsBank of Texas, N.A., as Administrative
Agent for the Lenders and The Bank of Nova Scotia as
Documentation Agent for the Lenders (incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (File No. 333-16667) (the "Thrift Plan
S-1"))
10.13 -- Amended and Restated Reorganization Agreement dated as of
October 17, 1996 among the Company, Ingram Industries, and
Ingram Entertainment (incorporated by reference to Exhibit
10.13 to the Thrift Plan S-1)
10.14 -- Registration Rights Agreement dated as of November 6, 1996
among the Company and the persons listed on the signature
pages thereof (incorporated by reference to Exhibit 10.14 to
the Thrift Plan S-1)
10.15 -- Board Representation Agreement dated as of November 6, 1996
(incorporated by reference to Exhibit 10.15 to the Thrift
Plan S-1)
10.16 -- Thrift Plan Liquidity Agreement dated as of November 6, 1996
among the Company and the Ingram Thrift Plan (incorporated
by reference to Exhibit 10.16 to the Thrift Plan S-1)
10.17 -- Tax Sharing and Tax Services Agreement dated as November 6,
1996 among the Company, Ingram Industries, and Ingram
Entertainment (incorporated by reference to Exhibit 10.17 to
the Thrift Plan S-1)
</TABLE>
<PAGE> 29
EXHIBIT INDEX (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.18 -- Agreement with Douglas R. Antone dated May 15, 1998, as
amended October 28, 1998
10.19 -- Employee Benefits Transfer and Assumption Agreement dated as
of November 6, 1996 among the Company, Ingram Industries,
and Ingram Entertainment (incorporated by reference to
Exhibit 10.19 to the Thrift Plan S-1)
10.20 -- Data Center Services Agreement dated as of November 6, 1996
among the Company, Ingram Book Company, and Ingram
Entertainment Inc. (incorporated by reference to Exhibit
10.20 to the Thrift Plan S-1)
10.21 -- Amended and Restated Exchange Agreement dated as of November
6, 1996 among the Company, Ingram Industries, Ingram
Entertainment and the other parties thereto (incorporated by
reference to Exhibit 10.21 to the Thrift Plan S-1)
10.22 -- Agreement dated as of August 26, 1996 between the Company
and Jerre L. Stead (incorporated by reference to Exhibit
10.22 to the IPO S-1)
10.23 -- Definitions for Ingram Funding Master Trust Agreements
(incorporated by reference to Exhibit 10.23 to the IPO S-1)
10.24 -- Asset Purchase and Sale Agreement dated as of February 10,
1993 between Ingram Industries and Ingram Funding Inc.
(incorporated by reference to Exhibit 10.24 to the IPO S-1)
10.25 -- Pooling and Servicing Agreement dated as of February 10,
1993 among Ingram Funding, Ingram Industries and Chemical
Bank (incorporated by reference to Exhibit 10.25 to the IPO
S-1)
10.26 -- Amendment No. 1 to the Pooling and Servicing Agreement dated
as of February 12, 1993, the Asset Purchase and Sale
Agreement dated as of February 12, 1993, and the Liquidity
Agreement dated as of February 12, 1993 (incorporated by
reference to Exhibit 10.26 to the IPO S-1)
10.27 -- Certificate Purchase Agreement dated as of July 23, 1993
(incorporated by reference to Exhibit 10.27 to the IPO S-1)
10.28 -- Schedule of Certificate Purchase Agreements (incorporated by
reference to Exhibit 10.28 to the IPO S-1)
10.29 -- Series 1993-1 Supplement to Ingram Funding Master Trust
Pooling and Servicing Agreement dated as of July 23, 1993
(incorporated by reference to Exhibit 10.29 to the IPO S-1)
10.30 -- Schedule of Supplements to Ingram Funding Master Trust
Pooling and Servicing Agreement dated as of July 23, 1993
(incorporated by reference to Exhibit 10.30 to the IPO S-1)
10.31 -- Letter of Credit Reimbursement Agreement dated as of
February 10, 1993 (incorporated by reference to Exhibit
10.31 to the IPO S-1)
10.32 -- Liquidity Agreement dated as of February 10, 1993
(incorporated by reference to Exhibit 10.32 to the IPO S-1)
10.33 -- Amendment No. 2 to the Pooling and Servicing Agreement dated
as of February 12, 1993, the Asset Purchase and Sale
Agreement dated as of February 12, 1993, and the Liquidity
Agreement dated as of February 12, 1993 (incorporated by
reference to Exhibit 10.33 to the IPO S-1)
10.34 -- Agreement dated as of October 10, 1996 between the Company
and Michael J. Grainger (incorporated by reference to
Exhibit 10.34 to the IPO S-1)
10.35 -- Form of Repurchase Agreement (incorporated by reference to
Exhibit 10.35 to the IPO S-1)
10.36 -- First Amendment to the Credit Agreement dated as of October
28, 1997 (incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-3 (File No.
333-39457) (the "Rollover/Thrift Plan S-3"))
</TABLE>
<PAGE> 30
EXHIBIT INDEX (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.37 -- European Credit Agreement dated as of October 28, 1997 among
the Company and Ingram European Coordination Center N.V., as
Borrowers and Guarantors, certain financial institutions, as
the Lenders, The Bank of Nova Scotia, as Administrative
Agent for the Lenders and NationsBank of Texas, N.A. as
Documentation Agent for the Lenders, as arranged by The Bank
of Nova Scotia and NationsBanc Capital Markets, Inc., as the
Arrangers (incorporated by reference to Exhibit 10.37 to the
Rollover/Thrift Plan S-3)
10.38 -- Canadian Credit Agreement dated as of October 28, 1997 among
the Company and Ingram Micro Inc. (Canada), as Borrowers and
Guarantors, certain financial institutions, as the Lenders,
The Bank of Nova Scotia., as Administrative Agent for the
Lenders, Royal Bank of Canada as the Syndication Agent for
the Lenders, and Bank of Tokyo-Mitsubishi (Canada) as the
Co-Agent (incorporated by reference to Exhibit 10.38 to the
Rollover/Thrift Plan S-3)
10.39 -- Retirement Agreement between the Company and David P. Dukes
(incorporated by reference to Exhibit 10.39 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
July 4, 1998)
10.40 -- Second Amendment to Credit Agreement dated as of September
25, 1998, among the Company, Ingram European Coordination
Center N.V. ("IECC"), and Ingram Micro Inc. (Canada), as
Borrowers and Guarantors, and certain financial institutions
as the Relevant Required Lenders, amending the US
$1,000,000,000 Credit Agreement dated as of October 30,
1996, also among certain financial institutions, as the
Lenders, NationsBank, N.A (successor in interest by merger
with NationsBank of Texas, N.A.), as Administrative Agent
for the Lenders, and The Bank of Nova Scotia, as
Documentation Agent for the Lenders and certain named
Co-Agents (incorporated by reference to Exhibit 10.40 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 3, 1998 ("the Q3 98 10-Q"))
10.41 -- First Amendment to European Credit Agreement dated as of
September 25, 1998, among the Company and IECC as the
Primary Borrowers and Guarantors, and certain financial
institutions as the Relevant Required Lenders, amending the
US $500,000,000 European Credit Agreement dated as of
October 28, 1997, also among the Company and IECC, as the
Primary Borrowers and Guarantors, certain financial
institutions as the Lenders, The Bank of Nova Scotia, as
Administrative Agent for the Lenders and NationsBank, N.A.
(successor in interest by merger to NationsBank of Texas,
N.A.), as Documentation Agent for the Lenders, as arranged
by The Bank of Nova Scotia and NationsBanc Capital Markets,
Inc., as the Arrangers (incorporated by reference to Exhibit
10.41 to the Q3 98 10-Q)
10.42 -- First Amendment to Canadian Credit Agreement dated as of
September 25, 1998, among the Company and Ingram Micro Inc.
(Canada) as the Borrowers and Guarantors, and certain
financial institutions as the Relevant Required Lenders,
amending the US $150,000,000 Canadian Credit Agreement dated
as of October 28, 1997, also among the Company, Ingram Micro
Inc. (Canada) as the Borrowers and Guarantors, certain
financial institutions as the Lenders, The Bank of Nova
Scotia, as Administrative Agent for the Lenders, Royal Bank
of Canada, as Syndication Agent for the Lenders, and Bank of
Tokyo-Mitsubishi (Canada) as the Co-Agent (incorporated by
reference to Exhibit 10.42 to the Q3 98 10-Q)
10.43 -- Ingram Micro Inc. 1998 Equity Incentive Plan
13.01 -- Portions of Annual Report to Shareowners for the year ended
January 2, 1999
21.01 -- Subsidiaries of the Registrant
23.01 -- Consent of Independent Accountants regarding certain
Registration Statements on Form S-8
23.02 -- Consent of Independent Accountants regarding Registration
Statements on Form S-3
27.01 -- Financial Data Schedule (included in electronic version
only)
99.01 -- Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
</TABLE>
<PAGE> 1
EXHIBIT 10.18
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT is entered into between Douglas R. Antone
("Associate") and Ingram Micro Inc., a Delaware corporation ("Ingram"),
in recognition of Associate's service to Ingram and in order to induce
Associate to continue in his position as an officer and employee of
Ingram. In consideration of the mutual promises and agreements
contained in this document, intending to be legally bound, Associate
and Ingram contract and agree as follows:
1. Continued Employment. Subject to the conditions set forth in this
Agreement, Ingram will provide Associate with the benefits provided
herein if Associate elects to resign as an officer of Ingram at any
time on or after December 31, 1998 or Ingram removes Associate as an
officer of Ingram for any reason other than cause at any time after the
date hereof. The date of any such resignation or removal is hereinafter
referred to as the "Separation Date". Nothing herein shall require
Associate to resign, or refrain from resigning, as an officer of Ingram
at any time, nor shall anything herein be construed as giving Associate
the right to be retained as an officer or employee of Ingram for any
period of time. As used herein, "cause" shall exist if the Board of
Directors of Ingram, or a committee thereof, determines, in its sole
discretion, that Associate has committed acts of dishonesty or
disloyalty, or acts substantially detrimental to the welfare of Ingram.
2. Health Plan Coverage. Subject to Paragraph 12 hereof, if Associate is
eligible and elects to obtain continuation of medical and dental
insurance coverage from Ingram after the Separation Date under COBRA,
during the period from the Separation Date through June 30, 1999,
Ingram will charge Associate for such coverage only the amount which it
charges its employees for the same type of coverage.
3. 1998 Incentive Bonus. Subject to Paragraph 12 hereof, in March 1999,
Associate will receive an incentive payment per the 1998 Executive
Incentive Plan calculated on the terms of Associate's award letter
dated March 31, 1998, and prorated to reflect the period in 1998 in
which Associate was an officer of Ingram.
4. Stock Options. Subject to Paragraph 12 hereof and notwithstanding any
contrary provisions in any plan or relevant agreement, Associate's
currently existing stock options and grants will continue to vest as
scheduled after the Separation Date through June 30, 1999, but not
thereafter. Associate shall have the right to exercise all such vested
stock options and grants through August 31, 1999, unless options or
grants expire at an earlier date per the terms of the underlying
agreements for such options and grants. A list of all of Associate's
current stock options is attached as Exhibit A hereto.
1
<PAGE> 2
5. Key Employee Stock Purchase Plan. Subject to Paragraph 12 hereof,
notwithstanding the provisions of Section 6(b)(i) of the Acquisition
Agreement dated June 27, 1996 between Ingram and Associate relating to
Associate's purchase of 60,000 shares of Ingram Class B Common Stock
under the Ingram Key Employee Stock Purchase Plan (the "Acquisition
Agreement"), Ingram shall not exercise any right it may have to
repurchase the 25% of the Shares (as such term is defined in the
Acquisition Agreement) that become Unrestricted Shares (as such term is
defined in the Acquisition Agreement) on April 1, 1999 . Ingram shall
repurchase the remaining 25% of the Shares promptly after the
Separation Date. Except as modified hereby, the Acquisition Agreement
shall continue in full force and effect in accordance with its terms.
6. Non-disclosure. Associate acknowledges his obligation not to disclose,
during or after employment, any trade secrets or proprietary and/or
confidential data or records of Ingram or its Affiliates or to utilize
any such information for private profit. Each of the parties hereto
agrees that such party will not release, publish, announce or otherwise
make available to the public in any manner whatsoever any information
or announcement regarding this Agreement or the transactions
contemplated hereby without the prior written consent of the other
party hereto, except as required by law or legal process, including, in
the case of Ingram, filings with the Securities and Exchange
Commission. Associate agrees not to communicate with, including
responding to questions or inquiries presented by, the media, employees
or investors of Ingram, its Affiliates or any third party relating to
the terms of this Agreement, without first obtaining the prior written
consent of Ingram. Notwithstanding the foregoing, Associate may make
disclosure to his spouse, attorneys and financial advisors of the
existence and terms of this Agreement provided that they agree to be
bound by the provisions of this Paragraph 6. Each party agrees not to
make statements or take any action to disparage, dissipate or
negatively affect the reputation of the other with employees,
customers, suppliers, competitors, vendors, stockholders or lenders of
Ingram, its Affiliates or any third party.
7. Return of Property. Associate acknowledges his obligation to promptly
return to Ingram all property of Ingram and its Affiliates in his
possession, including without limitation all keys, credit cards,
computers, office equipment, documents, files and instruction manuals
on or before the Separation Date, or earlier if Ingram so requests it.
8. Associate's Obligations. In consideration of the benefits and stock
ownership rights to be received by Associate hereunder, Associate and
Ingram have further agreed as follows:
a. Associate will not directly or indirectly make known to any person,
firm, corporation, partnership or other entity any list, listing or
other compilation, whether prepared or maintained by Associate, Ingram
or any of Ingram's Affiliates, which contains information that is
confidential to Ingram or any of its Affiliates about their customers
2
<PAGE> 3
("Ingram Customers"), including but not limited to names and addresses,
or, at any time on or before June 30, 1999, call on or solicit, or
attempt to call on or solicit, in either case with the intent to divert
business or potential business from Ingram or any of its Affiliates,
any of the Ingram Customers with whom he has become acquainted during
his employment with Ingram or any of its Affiliates, either for his own
benefit or for the benefit of any other person, firm, corporation,
partnership or other entity.
b. Through June 30, 1999, Associate will not (i) knowingly solicit,
entice, or persuade any associates of Ingram or any of its Affiliates
("Ingram Associates") to leave the services of Ingram or any of its
Associates for any reason, or (ii) solicit for employment, hire, or
engage any Ingram Associate as an employee, independent contractor or
consultant; provided, however, that Associate shall not be prohibited
hereby from hiring, either himself or on behalf of his employer, an
Ingram Associate who independently initiates contact with Associate for
the purpose of seeking new employment.
c. Associate acknowledges that he has unique knowledge of Ingram and its
Affiliates and unique knowledge of the computer and software sales and
distribution industry. Based on his unique status, he agrees that
through June 30, 1999, he will not be employed or hired as an employee
or consultant by, or otherwise directly or indirectly provide services
for, any of Tech Data, Merisel, Inacom, Computer 2000, MicroAge,
Ameriquest, Globelle, Gates Arrow, CHS Electronics, Trilogy, PC Order,
Marshall, Hallmark, Hamilton Avnet, Daisytek, Azerti, Azlan,
Northamber, Tech Pacific, Synnex, GE Capital Information Technology
Solutions-North America, Inc. and/or Softbank, and any subsidiary or
affiliate of these entities in a business or line of business conducted
by any such entity which competes with any line of business conducted
by Ingram or any of its Affiliates. Notwithstanding the foregoing,
should Associate be employed by an entity that is not a subsidiary or
affiliate of one of these entities at the time he commences such
employment, but subsequently becomes a subsidiary or affiliate of, or
becomes merged into, one of these entities on or before June 30, 1999,
he shall not be deemed to be in breach of the provisions of this
Paragraph 8.c due to such employment provided that at the time he
commenced his employment there had been no public announcement of an
agreement pursuant to which his employer would become a subsidiary or
affiliate of, or merged into, one of these entities or discussions that
could lead to such an agreement and Associate had no knowledge of the
existence of any such agreement or discussions. Associate further
agrees that he will not own any interest in, provide financing to, be
connected with, or be a principal, partner or agent of such competitive
distributor or aggregator; provided, he may own less than 1% of the
outstanding shares of any such entity whose shares are traded in the
public market.
d. Subject to Associate's other commitments, upon request of Ingram or any
of its Affiliates through June 30, 1999, Associate will make himself
available to provide reasonable assistance to Ingram or any such
Affiliate up to a maximum of 15 hours per month and will use reasonable
efforts to arrange his commitments so as to make
3
<PAGE> 4
himself available for such assistance on a basis which is consistent
with the requests of Ingram or any of its Affiliates. Such assistance
may include telephone conversations, correspondence, attendance and
participation in meetings, transfer of knowledge or information
regarding operational or other issues, litigation preparation and
trials. During such period, such assistance shall be treated, and
compensated, as Consulting Services and Ingram shall reimburse
Associate for any out-of-pocket expenses he may incur in connection
with such assistance in accordance with Ingram's reimbursement
policies. After June 30, 1999, Associate shall continue to provide such
assistance as requested by Ingram and, in such event, shall be
compensated at a rate per day (minimum charge, one half day)
commensurate with the daily rate he was earning based on his current
monthly base salary.
The running of the periods prescribed in this Paragraph shall be tolled
and suspended by the length of time Associate works in circumstances
that a court of competent jurisdiction subsequently finds to violate
the terms of this partial restraint.
9. Rights in Event of Breach. In the event of Associate's breach of this
Agreement, excluding breach of this Agreement due to death or total
disability and provided that in the event of a breach of Paragraph 8.c
or 8.d such breach shall have continued for 15 days after the sooner of
Associate's discovery thereof or receipt of notice from Ingram thereof,
Ingram shall have no obligation to make any further payments hereunder
or permit any stock options to continue to vest or any vested stock
options to be exercised, and may purchase any remaining Restricted
Shares under the Acquisition Agreement. In the event that Ingram elects
to terminate such obligations, Associate's obligations under Paragraph
8.c and 8.d also will terminate.
10. Confidential Information. This Agreement will in no way void or
diminish Associate's obligation to protect and keep confidential any
and all proprietary and/or confidential information of Ingram and its
Affiliates which Associate may have or acquire in the future.
11 Injunctive Relief. Irreparable harm will be presumed if Associate
breaches any covenant in this Agreement and damages may be very
difficult to ascertain. In light of these facts, Associate agrees that
any court of competent jurisdiction should immediately enjoin any
breach of this Agreement upon the request of Ingram, and Associate
specifically releases Ingram from the requirement of posting any bond
in connection with temporary or interlocutory injunctive relief, to the
extent permitted by law. The granting of injunctive relief by any court
shall not limit Ingram's right to recover any amounts previously paid
to Associate under this Agreement or any damages incurred by it due to
a breach of this Agreement by Associate.
4
<PAGE> 5
12. Release by Associate. As a condition to Ingram's obligations pursuant
to Paragraphs 2, 3, 4 and 5, Associate shall deliver an executed
release and waiver as of the Separation Date in the form of Exhibit B
hereto.
13. Right to Revoke. Associate acknowledges that he has the right to seek
legal counsel, and was advised to seek such counsel, before entering
into this Agreement. Associate shall have 21 days from the date on
which this Agreement was delivered to him in which to execute and
return this Agreement to Ingram. In the event that Associate does not
execute and return this Agreement within such 21 day period, the offer
contained in this Agreement shall be revoked and Ingram shall not be
bound by any terms or conditions contained herein. Associate further
understands he has the right to revoke this Agreement at any time
within seven days of execution of this Agreement by written notice sent
by certified mail and received by Ingram prior to expiration of the
seventh day, whereupon this Agreement shall be null and void as of its
inception.
14. Sole Remedy. Associate agrees that, in the event Ingram breaches any
provision of this Agreement, his sole remedy for such breach shall be
enforcement of the terms of this Agreement or, in the case of a breach
of Paragraph 4 or 5 hereof, at Associate's election, recovery of any
provable damages as a result of such breach.
15. Attorney Fees. In the event that either party hereto files suit to
enforce or interpret the provisions of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees and costs
incurred therewith.
16. Definition of Affiliate. An "Affiliate" of Ingram for purposes of this
Agreement shall include any corporation or business entity in which
Ingram owns, directly or indirectly, at least 15% of the outstanding
equity interest.
17. Enforceability. If any provision of this Agreement shall be held
invalid or unenforceable, the remainder of this Agreement shall
nevertheless remain in full force and effect. If any provision is held
invalid or unenforceable with respect to a particular circumstance, it
shall nevertheless remain in full force and effect in all other
circumstances.
18. Entire Agreement. This instrument contains and accurately recites the
complete and entire agreement among the parties, and it expressly
terminates, cancels, and supersedes any and all prior agreements or
understandings, if any, among the parties. This Agreement may not be
modified except in writing signed by the parties.
19. Governing Law. This Agreement shall be governed by California law,
without regard to the choice or conflict of law provisions thereof.
20. Paragraph Titles. The paragraph titles used in this Agreement are for
convenience only and do not define or limit the contents of any
paragraph.
5
<PAGE> 6
21. Successors and Assigns. This Agreement shall be binding upon, and shall
inure to the benefit of, the heirs of Associate and the successors and
assigns of Ingram.
Executed and delivered to Associate by Ingram on May 15, 1998 and
executed by Associate on the date set out below.
"Ingram"
INGRAM MICRO INC..
By: /s/ Sanat Dutta
------------------------------
Sanat Dutta
President, Ingram Micro US
"Associate"
/s/ Douglas A. Antone
- ------------------------------ ----------------------------------
Date Douglas R. Antone
6
<PAGE> 7
EXHIBIT B
RELEASE AND WAIVER
The undersigned, Douglas R. Antone, in consideration of the payments
and benefits to be received from Ingram Micro Inc., a Delaware corporation
("Ingram"), pursuant to the terms of that certain Separation Agreement dated as
of May 15, 1998, by and between the undersigned and Ingram (the "Separation
Agreement") after the Separation Date, as such term is defined in the Separation
Agreement, does hereby covenant and agree with Ingram as follows:
1. Release. The undersigned hereby fully, finally and irrevocably
discharges Ingram and each of its Affiliates, and each present, former
and future director, officer and employee of Ingram and its Affiliates
and any parent, subsidiary, affiliate or shareholder thereof (the
"Ingram Released Parties") from all manner of claims, actions, causes
of action or suits, in law or in equity, which the undersigned has or
may have, known or unknown, against the Ingram Released Parties, or any
of them, by reason of any matter, cause or thing whatsoever, including
any action arising from or during his employment with Ingram and any of
its Affiliates, resulting from or relating to his employment or the
termination thereof, or relating to his status as an officer, director,
employee or participant in any employee benefit plan of Ingram or any
of its Affiliates; provided, however, that the foregoing (a) is not
intended to be, and shall not constitute, a release of any right of the
undersigned to obtain indemnification and reimbursement of expenses
from Ingram or any of its Affiliates with respect to claims based upon
or arising from alleged or actual acts or omissions of the undersigned
as an officer, director or employee of Ingram or any of its Affiliates
to the fullest extent provided by law or in any applicable certificate
of incorporation, bylaw or contract, and (b) shall not release Ingram
from liability for violations of the Separation Agreement after the
date hereof. From and after the date hereof, the undersigned agrees and
covenants not to sue, or threaten suit against, or make any claim
against, any Ingram Released Party for or alleging any of the claims,
actions, causes of action or suits as discussed above. The undersigned
acknowledges that this release includes, but is not limited to, all
claims arising under federal, state, local or foreign laws prohibiting
employer discrimination and all claims growing out of any legal
restrictions on the right of Ingram or any of its Affiliates to
terminate its employees. The undersigned also specifically waives and
releases all claims of employment discrimination and all rights
available to him under Title VII of the Civil Rights Act of 1964, as
amended, the Age Discrimination in Employment Act (ADEA), as well as
all claims or rights under the California Fair Employment and Housing
Act, or any similar law of any jurisdiction. The undersigned
specifically agrees that he will not institute litigation in any forum,
including any filing with any regulatory commission or agency, against
any Ingram Released Party based on any allegations or circumstances
that are in any way connected with his employment or the termination of
his employment with Ingram and its Affiliates.
7
<PAGE> 8
2. Waiver. The undersigned hereby expressly waives and relinquishes all
rights and benefits under Section 1542 of the California Civil Code
which provides:
"Section 1542. General Release--Claim extinguished. A general
release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially
affected his settlement with the debtor."
The undersigned understands and acknowledges that the significance and
consequence of this waiver of Section 1542 of the Civil Code is that
even if the undersigned should eventually suffer damages arising out of
his employment relationship with Ingram and its Affiliates, or
termination of such employment, the undersigned will not be permitted
to make any claim for those damages except as expressly permitted by
this Release and Waiver. Furthermore, the undersigned acknowledges that
he intends these consequences even as to claims for injuries and/or
damages that may exist as of the date of this Release and Waiver but
which the undersigned does not know exist, and which, if known, would
materially affect his decision to execute this Release and Waiver.
3. An "Affiliate" of Ingram for purposes of this Release and Waiver
shall include any corporation or business entity in which Ingram owns,
directly or indirectly, at least 15% of the outstanding equity
interest.
IN WITNESS WHEREOF, the undersigned has signed and delivered to Ingram
this Release and Waiver this _____ day of _____, 199___.
---------------------------------
Douglas R. Antone
8
<PAGE> 9
FIRST AMENDMENT TO SEPARATION AGREEMENT
This First Amendment to Separation Agreement amends the Separation
Agreement entered into between Douglas R. Antone ("Associate") as of May 15,
1998 and Ingram Micro Inc., a Delaware corporation ("Ingram"), as of May 1, 1998
(the "Separation Agreement"). Capitalized terms not otherwise defined herein
shall have the same meanings ascribed to them in the Separation Agreement.
For good and valuable consideration, the sufficiency of which is
acknowledged by both parties, and intending to be legally bound, Associate and
Ingram contract and agree as follows:
1. Paragraph 1 of the Separation Agreement is hereby amended to
read in its entirety as follows:
"Subject to the conditions set forth in this
Agreement, Ingram will provide Associate with the
benefits provided herein if Ingram removes Associate
as an officer of Ingram for any reason other than
cause at any time after the date hereof and prior to
June 30, 1999. The date of any such removal is
hereinafter referred to as the "Separation Date".
Nothing herein shall be construed as giving Associate
the right to be retained as an officer or employee of
Ingram for any period of time. As used herein,
"cause" shall exist if the Board of Directors of
Ingram, or a committee thereof, determines, in its
sole discretion, that Associate has committed acts
of dishonesty or disloyalty, or acts substantially
detrimental to the welfare of Ingram."
2. Except as set forth in Paragraph 1 above, the Separation
Agreement shall be unamended. The Separation Agreement, as
amended herein, is hereby ratified and confirmed and shall
continue in full force and effect.
9
<PAGE> 10
In witness whereof, the parties have executed and delivered this First
Amendment to Separation Agreement as of the respective dates set forth opposite
their signature lines below.
INGRAM MICRO INC.
Date: October 28, 1998 By: /s/ Jeffrey R. Rodek
----------------------------------
Jeffrey R. Rodek
President and Worldwide
Chief Operating Officer
Date: __________________________ /s/ Douglas R. Antone
-------------------------------------
Douglas R. Antone
10
<PAGE> 1
EXHIBIT 10.43
INGRAM MICRO INC.
1998 EQUITY INCENTIVE PLAN
SECTION 1. PURPOSE. The purposes of the Ingram Micro Inc. 1998 Equity
Incentive Plan are to promote the interests of Ingram Micro Inc. and its
shareowners by (i) attracting and retaining exceptional directors, executive
personnel and other key employees of Micro and its Affiliates, as defined below;
(ii) motivating such employees and directors by means of performance-related
incentives to achieve longer-range performance goals; and (iii) enabling such
employees and directors to participate in the long- term growth and financial
success of Micro.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall
have the meanings set forth below:
"AFFILIATE" means (i) any entity that is, directly or indirectly,
controlled by Micro and (ii) any other entity in which Micro has a significant
equity interest or which has a significant equity interest in Micro, in either
case as determined by the Committee.
"AWARD" means any Option, Stock Appreciation Right, Restricted Stock
Award, Performance Award or Other Stock-Based Award.
"AWARD AGREEMENT" means any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant.
"BOARD" means the Board of Directors of Micro.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"COMMITTEE" means a committee of the Board designated by the Board to
administer the Plan and composed of not less than the minimum number of persons
from time to time required by Rule 16b-3, each of whom, to the extent necessary
to comply with Rule 16b-3 only, is a "Non-Employee Director" within the meaning
of Rule 16b-3. Until otherwise determined by the Board, the Human Resources
Committee or any successor or replacement thereof designated by the Board shall
be the Committee under the Plan.
"EMPLOYEE" means an employee of Micro or any Affiliate and any member of
the Board.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXECUTIVE OFFICER" means, at any time, an individual who is an
executive officer of Micro within the meaning of Exchange Act Rule 3b-7 or who
is an officer of Micro within the meaning of Exchange Act Rule 16a-1(f).
"FAIR MARKET VALUE" means with respect to the Shares, as of any given
date or dates, the reported closing price of a share of such class of common
stock on such exchange or market as is the principal trading market for such
class of common stock. If such class of common stock is not traded on an
exchange or principal trading market on such date, the fair market value of a
Share shall be determined by the Committee in good faith taking into account as
appropriate recent sales of the Shares, recent valuations of the Shares, the
lack of liquidity of the Shares,
A-1
<PAGE> 2
the fact that the Shares may represent a minority interest and such other
factors as the Committee shall in its discretion deem relevant or appropriate.
"INCENTIVE STOCK OPTION" means a right to purchase Shares from Micro
that is granted under Section 6 of the Plan and that is intended to meet the
requirements of Section 422 of the Code or any successor provision thereto.
"MICRO" means Ingram Micro Inc., a Delaware corporation, together with
any successor thereto.
"NON-QUALIFIED STOCK OPTION" means a right to purchase Shares from Micro
that is granted under Section 6 of the Plan and that is not intended to be an
Incentive Stock Option.
"OPTION" means an Incentive Stock Option or a Non-Qualified Stock
Option.
"OTHER STOCK-BASED AWARD" means any right granted under Section 10 of
the Plan.
"PARTICIPANT" means any Employee selected by the Committee to receive an
Award under the Plan (and to the extent applicable, any heirs or legal
representatives thereof).
"PERFORMANCE AWARD" means any right granted under Section 9 of the Plan.
"PERSON" means any individual, corporation, limited liability company,
partnership, association, joint-stock company, trust, unincorporated
organization, government or political subdivision thereof or other entity.
"PLAN" means this Ingram Micro Inc. 1998 Equity Incentive Plan.
"RESTRICTED STOCK" means any Shares granted under Section 8 of the Plan.
"RESTRICTED STOCK UNIT" means any unit granted under Section 8 of the
Plan.
"RULE 16b-3" means Rule 16b-3 as promulgated and interpreted by the SEC
under the Exchange Act, or any successor rule or regulation thereto as in effect
from time to time.
"SEC" means the Securities and Exchange Commission or any successor
thereto.
"SHARES" means shares of Class A common stock, $.01 par value, of Micro
or such other securities as may be designated by the Committee from time to
time.
"STOCK APPRECIATION RIGHT" means any right granted under Section 7 of
the Plan.
"SUB-PLAN" means any sub-plan or sub-plans adopted by the Committee
under Section 14(q) hereof.
"SUBSTITUTE AWARDS" means Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
Micro or with which Micro combines.
SECTION 3. ADMINISTRATION.
(a) AUTHORITY OF COMMITTEE. The Plan shall be administered by the
Committee. Subject to the terms of the Plan, applicable law and contractual
restrictions affecting Micro, and in addition to other express powers and
authorizations conferred on the Committee by the Plan, the Committee shall have
full power and authority to: (i) designate Participants; (ii) determine the type
or types of Awards to be granted to an eligible Employee; (iii) determine the
number of Shares to be covered by, or with respect to which payments, rights, or
other matters are to be calculated in connection with, Awards; (iv) determine
the terms and conditions of any Award and Award Agreement; (v) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other property, or
canceled, forfeited, or suspended and
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the method or methods by which Awards may be settled, exercised, canceled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances cash, Shares, other securities, other Awards, other property, and
other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; (ix) make any other determination and
take any other action that the Committee deems necessary or desirable for the
administration of the Plan; and (x) adopt and administer one or more Sub-Plans.
Without limiting the foregoing, the Committee may impose such conditions with
respect to the exercise and/or settlement of any Awards, including without
limitation, any relating to the application of Federal or state securities laws
or the laws, rules or regulations of any jurisdiction outside the United States,
as it may deem necessary or advisable.
(b) COMMITTEE DISCRETION BINDING. Unless otherwise expressly provided in
the Plan, all designations, determinations, interpretations, and other decisions
under or with respect to the Plan or any Award shall be within the sole
discretion of the Committee, may be made at any time and shall be final,
conclusive and binding upon all Persons, including Micro, any Affiliate, any
Participant, any holder or beneficiary of any Award, any shareholder and any
Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(b)
and 4(c), the number of Shares with respect to which Awards may be granted under
the Plan and all Sub-Plans shall be 15,000,000. If, after the effective date of
the Plan, any Shares covered by an Award granted under the Plan or to which such
an Award relates, are forfeited, or if such an Award is settled for cash or
otherwise terminates or is canceled without the delivery of Shares, then the
Shares covered by such Award, or to which such Award relates, or the number of
Shares otherwise counted against the aggregate number of Shares with respect to
which Awards may be granted, to the extent of any such settlement, forfeiture,
termination or cancellation, shall, in the calendar year in which such
settlement, forfeiture, termination or cancellation occurs, again become Shares
with respect to which Awards may be granted unless any dividends have been paid
thereon prior to such settlement, forfeiture, termination or cancellation.
Notwithstanding the foregoing and subject to adjustment as provided in Section
4(b), no Employee of Micro may receive Awards under the Plan in any calendar
year that relate to more than 500,000 Shares.
(b) ADJUSTMENTS. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, reclassification, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of Shares or other securities of
Micro, issuance of warrants or other rights to purchase Shares or other
securities of Micro, or other similar corporate transaction or event affects the
Shares such that an adjustment is determined by the Committee to be appropriate
in order to prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan, then the Committee shall,
in such manner as it may deem equitable, adjust any or all of (i) the number of
Shares of Micro (or number and kind of other securities or property) with
respect to which Awards may thereafter be granted, (ii) the number of Shares or
other securities of Micro (or number and kind of other securities or property)
subject to outstanding Awards, and (iii) the grant or exercise price with
respect to any Award, or, if deemed appropriate, make provision for a cash
payment to the holder of an outstanding Award; provided, in each case, that
except to the extent deemed desirable by the Committee (A) with respect to
Awards of Incentive Stock Options no such adjustment shall be authorized to the
extent that such authority would cause the Plan to violate Section 422(b)(1) of
the Code, as from time to time amended, and (B) with respect to any Award no
such adjustment shall be authorized to the extent that such authority would be
inconsistent with the Plan's meeting the requirements of Section 162(m) of the
Code, as from time to time amended.
(c) SUBSTITUTE AWARDS. Any Shares underlying Substitute Awards shall
not, except in the case of Shares with respect to which Substitute Awards are
granted to Employees who are officers or directors of Micro for purposes of
Section 16 of the Exchange Act or any successor section thereto, be counted
against the Shares available for Awards under the Plan.
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(d) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered
pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
SECTION 5. ELIGIBILITY. Any Employee, including any officer or
employee-director of Micro or any Affiliate, and any member of the Board, shall
be eligible to be designated a Participant.
SECTION 6. STOCK OPTIONS.
(a) GRANT. Subject to the provisions of the Plan and contractual
restrictions affecting Micro, the Committee shall have sole and complete
authority to determine the Employees to whom Options shall be granted, the
number of Shares to be covered by each Option, the option price therefor and the
conditions and limitations applicable to the exercise of the Option. The
Committee shall have the authority to grant Incentive Stock Options, or to grant
Non-Qualified Stock Options, or to grant both types of options. In the case of
Incentive Stock Options, the terms and conditions of such grants shall be
subject to and comply with such rules as may be prescribed by Section 422 of the
Code, as from time to time amended, and any regulations implementing such
statute.
(b) EXERCISE PRICE. The Committee in its sole discretion shall establish
the exercise price at the time each Option is granted.
(c) EXERCISE. Each Option shall be exercisable at such times and subject
to such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award Agreement or thereafter.
(d) PAYMENT. No Shares shall be delivered pursuant to any exercise of an
Option until payment in full of the option price therefor is received by Micro.
Such payment may be made: (i) in cash; (ii) in Shares already owned by the
Participant (the value of such Shares shall be their Fair Market Value on the
date of exercise); (iii) by a combination of cash and Shares; (iv) if approved
by the Committee, in accordance with a cashless exercise program under which
either (A) if so instructed by the Participant, Shares may be issued directly to
the Participant's broker or dealer upon receipt of the purchase price in cash
from the broker or dealer, or (B) Shares may be issued by Micro to a
Participant's broker or dealer in consideration of such broker's or dealer's
irrevocable commitment to pay to Micro that portion of the proceeds from the
sale of such Shares that is equal to the exercise price of the Option(s)
relating to such Shares, or (v) in such other manner as permitted by the
Committee at the time of grant or thereafter.
SECTION 7. STOCK APPRECIATION RIGHTS.
(a) GRANT. Subject to the provisions of the Plan and contractual
restrictions affecting Micro, the Committee shall have sole and complete
authority to determine the Employees to whom Stock Appreciation Rights shall be
granted, the number of Shares to be covered by each Stock Appreciation Right
Award, the grant price thereof and the conditions and limitations applicable to
the exercise thereof. Stock Appreciation Rights may be granted in tandem with
another Award, in addition to another Award, or freestanding and unrelated to
another Award. Stock Appreciation Rights granted in tandem with or in addition
to an Award may be granted either at the same time as the Award or at a later
time. Stock Appreciation Rights shall not be exercisable earlier than six months
after grant and shall have a grant price as determined by the Committee on the
date of grant.
(b) EXERCISE AND PAYMENT. A Stock Appreciation Right shall entitle the
Participant to receive an amount equal to the excess of the Fair Market Value of
a Share on the date of exercise of the Stock Appreciation Right over the grant
price thereof. The Committee shall determine whether a Stock Appreciation Right
shall be settled in cash, Shares or a combination of cash and Shares.
(c) OTHER TERMS AND CONDITIONS. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine, at or after the grant
of a Stock Appreciation Right, the term, methods of exercise, methods and form
of settlement, and any other terms and conditions of any Stock Appreciation
Right. Any such determination by the Committee may be changed by the Committee
from time to time and may govern the exercise of Stock Appreciation Rights
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granted or exercised prior to such determination as well as Stock Appreciation
Rights granted or exercised thereafter. The Committee may impose such conditions
or restrictions on the exercise of any Stock Appreciation Right as it shall deem
appropriate.
SECTION 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a) GRANT. Subject to the provisions of the Plan and contractual
provisions affecting Micro, the Committee shall have sole and complete authority
to determine the Employees to whom Shares of Restricted Stock and Restricted
Stock Units shall be granted, the number of Shares of Restricted Stock and/or
the number of Restricted Stock Units to be granted to each Participant, the
duration of the period during which, and the conditions under which, the
Restricted Stock and Restricted Stock Units may be forfeited to Micro, and the
other terms and conditions of such Awards.
(b) PAYMENT. Each Restricted Stock Unit shall have a value equal to the
Fair Market Value of a Share. Restricted Stock Units shall be paid in cash,
Shares, other securities, or other property, as determined in the sole
discretion of the Committee, upon the lapse of the restrictions applicable
thereto, or otherwise in accordance with the applicable Award Agreement.
(c) DIVIDENDS AND DISTRIBUTIONS. Dividends and other distributions paid
on or in respect of any Shares of Restricted Stock may be paid directly to the
Participant, or may be reinvested in additional Shares of Restricted Stock or in
additional Restricted Stock Units, as determined by the Committee in its sole
discretion.
SECTION 9. PERFORMANCE AWARDS.
(a) GRANT. Subject to the provisions of the Plan and contractual
provisions affecting Micro, the Committee shall have sole and complete authority
to determine the Employees who shall receive a "Performance Award", which shall
consist of a right which is (i) denominated in cash or Shares, (ii) valued, as
determined by the Committee, in accordance with the achievement of such
performance goals during such performance periods as the Committee shall
establish, and (iii) payable at such time and in such form as the Committee
shall determine.
(b) TERMS AND CONDITIONS. Subject to the terms of the Plan, any
contractual provisions affecting Micro and any applicable Award Agreement, the
Committee shall determine the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
Performance Award and the amount and kind of any payment or transfer to be made
pursuant to any Performance Award.
(c) PAYMENT OF PERFORMANCE AWARDS. Performance Awards may be paid in a
lump sum or in installments following the close of the performance period or in
accordance with procedures established by the Committee, on a deferred basis.
SECTION 10. OTHER STOCK-BASED AWARDS. The Committee shall have authority
to grant to eligible Employees an "Other Stock-Based Award", which shall consist
of any right which is (i) not an Award described in Sections 6 through 9 above
and (ii) an Award of Shares or an Award denominated or payable in, valued in
whole or in part by reference to, or otherwise based on or related to, Shares
(including, without limitation, securities convertible into Shares), as deemed
by the Committee to be consistent with the purposes of the Plan; provided that
any such rights must comply with applicable law, and to the extent deemed
desirable by the Committee, with Rule 16b-3. Subject to the terms of the Plan,
any contractual provisions affecting Micro and any applicable Award Agreement,
the Committee shall determine the terms and conditions of any such Other
Stock-Based Award.
SECTION 11. TERMINATION OR SUSPENSION OF EMPLOYMENT OR SERVICE.
The following provisions shall apply in the event of the Participant's
termination of employment or service unless the Committee shall have provided
otherwise, either at the time of the grant of the Award or thereafter.
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(a) NON-QUALIFIED STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. (i)
Termination of Employment or Service. (A) Except as the Committee may at any
time otherwise provide or as required to comply with applicable law, if the
Participant's employment or service with Micro or its Affiliates is terminated
for any reason other than death, disability, or retirement, the Participant's
right to exercise any Non-Qualified Stock Option or Stock Appreciation Right
shall terminate, and such Option or Stock Appreciation Right shall expire, on
the earlier of (x) the sixtieth day following such termination of employment or
service or (y) the date such Option or Stock Appreciation Right would have
expired had it not been for the termination of employment or services. The
Participant shall have the right to exercise such Option or Stock Appreciation
Right prior to such expiration to the extent it was exercisable at the date of
such termination of employment or service and shall not have been exercised.
(b) Notwithstanding any of the provisions of Section 11(a)(i)(A), in
respect of a Participant employed outside the United States, such Participant's
right to exercise any Non-Qualified Stock Option and Stock Appreciation Rights
shall terminate and such Option or Stock Appreciation Right shall expire and
lapse, on the earlier of (x) the sixtieth day following the first to occur of
the time (1) such Participant's employer gives notice to the Participant of
termination of Participant's employment, or (2) such Participant gives notice to
such Participant's employer to terminate Participant's employment, or (3) if no
such notice is given, on the date Participant's employment is terminated
(whichever the first to occur of (1), (2) or (3) collectively,
"Notice/Termination") or (y) the date such Option or Stock Appreciation Right
would have expired had it not been for the Notice/Termination. The Participant
shall have the right to exercise such Option or Stock Appreciation Right prior
to such expiration to the extent it was exercisable at the date of
Notice/Termination and shall not have been exercised. Any such Participant shall
not be entitled, and by applying for or accepting the grant of any Non-Qualified
Stock Option or Stock Appreciation Right, shall be deemed irrevocably to have
waived any entitlement, by way of compensation for loss of office or damages for
breach of contract or otherwise howsoever to any sum or other benefit to
compensate for the loss of any rights under the Plan.
(ii) DEATH. Except as the Committee may at any time otherwise
provide or as required to comply with applicable law, if the
Participant's employment or service with Micro or its Affiliates is
terminated by reason of death all then non-exercisable Non-Qualified
Stock Options and Stock Appreciation Rights held by such Participant
shall be immediately exercisable and the Participant or his successor
shall have the right to exercise any Non-Qualified Stock Option or Stock
Appreciation Right during the one year period following such termination
of employment or service, but in no event shall such Option or Stock
Appreciation Right be exercisable later than the date the Option or
Stock Appreciation Right would have expired had it not been for the
termination of such employment or service.
(iii) DISABILITY. Except as the Committee may at any time otherwise
provide or as required to comply with applicable law, if the
Participant's employment or service with Micro or its Affiliates is
terminated by reason of disability, all then non-exercisable
Non-Qualified Stock Options and Stock Appreciation Rights held by such
Participant shall continue to vest pursuant to the vesting schedule in
effect on the date of disability and the Participant shall have the
right to exercise such Non-Qualified Stock Option or Stock Appreciation
Right through the one year period following the last vesting date, but
in no event shall such Option or Stock Appreciation Right be exercisable
later than the date the Option or Stock Appreciation Right would have
expired had it not been for the termination of such employment or
service. The meaning of the term "disability" shall be determined by the
Committee.
(iv) RETIREMENT. Except as the Committee may at any time otherwise
provide or as required to comply with applicable law, if the
Participant's employment or service with Micro or its Affiliates is
terminated by reason of retirement, the Participant shall have the right
to exercise any Non- Qualified Stock Option or Stock Appreciation Right
exercisable on the retirement date during the one year period following
such termination of employment or service, but in no event shall such
option be exercisable later than the date the Option or Stock
Appreciation Right would have expired had it not been for the
termination of such employment or service. The meaning of the term
"retirement" shall be determined by the Committee.
(v) ACCELERATION OR EXTENSION OF EXERCISABILITY. Notwithstanding the
foregoing, the Committee may, in its discretion, provide at any time (A)
that an Option or Stock Appreciation Right granted to a Participant may
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terminate at a date earlier than that set forth above, (B) that an
Option or Stock Appreciation Right granted to a Participant may
terminate at a date later than that set forth above, provided such date
shall not be beyond the date the Option or Stock Appreciation Right
would have expired had it not been for the termination of the
Participant's employment or service and (C) that an Option or Stock
Appreciation Right may become immediately exercisable when it finds that
such acceleration would be in the best interests of Micro.
(b) INCENTIVE STOCK OPTIONS AND RELATED STOCK APPRECIATION RIGHTS.
(i) TERMINATION OF EMPLOYMENT OR SERVICE. (A) Except as the
Committee may at any time otherwise provide or as required to comply
with applicable law, if the Participant's employment or service with
Micro or its Affiliates is terminated for any reason other than death,
disability, or retirement, the Participant's right to exercise any
Incentive Stock Option or related Stock Appreciation Right shall
terminate, and such Option or related Stock Appreciation Right shall
expire, on the earlier of (x) the ninetieth day following such
termination of employment or service or (y) the date such Option or
related Stock Appreciation Right would have expired had it not been for
the termination of employment or services. The Participant shall have
the right to exercise such Option or related Stock Appreciation Right
prior to such expiration to the extent it was exercisable at the date of
such termination of employment or service and shall not have been
exercised.
(B) Notwithstanding any of the provisions of Section 11(b)(i)(A),
in respect of a Participant employed outside the United States, such
Participant's right to exercise any Incentive Stock Option and
related Stock Appreciation Rights shall terminate and such Option
and related Stock Appreciation Right shall expire and lapse, on the
earlier of (x) the ninetieth day following Notice/Termination or (y)
the date such Option and related Stock Appreciation Right would have
expired had it not been for the Notice/Termination. The Participant
shall have the right to exercise such Option and related Stock
Appreciation Right prior to such expiration to the extent it was
exercisable at the date of Notice/Termination and shall not have
been exercised. Any such Participant shall not be entitled, and by
applying for or accepting the grant of any Incentive Stock Option,
whether or not in conjunction with a Stock Appreciation Right, shall
be deemed irrevocably to have waived any entitlement, by way of
compensation for loss of office or damages for breach of contract or
otherwise howsoever to any sum or other benefit to compensate for
the loss of any rights under the Plan.
(ii) DEATH, DISABILITY OR RETIREMENT. Except as the Committee may at
any time otherwise provide or as required to comply with applicable law,
if the Participant's employment or service with Micro or its Affiliates
is terminated by reason of death, disability or retirement, the
Participant or his successor (if employment or service is terminated by
death) shall have the right to exercise any exercisable Incentive Stock
Option or related Stock Appreciation Right during the 90 day period
following such termination of employment or service, but in no event
shall such option be exercisable later than the date the Incentive Stock
Option would have expired had it not been for the termination of such
employment or services. To the extent such Incentive Stock Option or
related Stock Appreciation Right is not exercised prior to the
termination of such 90 day period, the unexercised balance of such
Option automatically will be deemed a Non-Qualified Stock Option, and
such Option and related Stock Appreciation Right will vest and be
exercisable as provided in Section 11(a)(ii), (iii) or (iv), hereof, as
the case may be, but in no event shall such Option or related Stock
Appreciation Right be exercisable later than the date the Option or
related Stock Appreciation Right would have expired had it not been for
the termination of such employment or service, provided that in the
event that the Participant dies in such 90-day period the Option will
continue to be an Incentive Stock Option to the extent provided by
Section 421 or Section 422 of the Code, or any successor provision, and
any regulations promulgated thereunder.
(iii) ACCELERATION OR EXTENSION OF EXERCISABILITY. Notwithstanding
the foregoing, the Committee may, in its discretion, provide at any time
(A) that an Option and related Stock Appreciation Right granted to a
Participant may terminate at a date earlier than that set forth above,
(B) that an Option and related Stock Appreciation Right granted to a
Participant may terminate at a date later than that set forth above,
provided such date shall not be beyond the date the Option and related
Stock Appreciation Right would have expired had
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it not been for the termination of the Participant's employment or
service and (C) that an Option and related Stock Appreciation Right may
become immediately exercisable when it finds that such acceleration
would be in the best interests of Micro.
(c) RESTRICTED STOCK.
(i) Except as otherwise determined by the Committee at the time of
grant or as required to comply with applicable law, upon termination of
employment or service for any reason during the restriction period, all
shares of Restricted Stock still subject to restriction shall be
forfeited by the Participant and reacquired by Micro at the price (if
any) paid by the Participant for such Restricted Stock; provided that,
except as the Committee may at any time otherwise provide, in the event
of Participant's retirement, disability, or death such Restricted Stock
shall be subject to forfeiture and/or vesting as provided in Section
11(a)(ii), (iii) and (iv) hereof, as the case may be. In cases of
special circumstances, the Committee may, in its sole discretion, when
it finds that a waiver would be in the best interests of Micro, waive in
whole or in part any or all remaining restrictions with respect to such
Participant's shares of Restricted Stock. Any time spent by a
Participant in the status of "leave without pay" shall extend the period
otherwise required for purposes of determining the extent to which any
Award or portion thereof has vested or otherwise become exercisable or
nonforfeitable.
(ii) In the case of a Participant employed outside the United
States, except to the extent (if any) provided in the Plan in the case
of termination of such Participant's employment by reason of death,
disability or retirement, any rights of such Participant relating to
Restricted Stock and Restricted Stock Units or Performance Awards or
Other Stock Based- Awards shall lapse and no longer be capable of
exercise at the time when such Participant's employer gives notice to
the Participant or, at the time when the Participant gives notice to
such Participant's employer to terminate his employment or, if no such
notice is given, at the time when his employment is terminated. Any such
Participant shall not be entitled, and by applying for or accepting any
such Award or accepting the same he shall be deemed irrevocably to have
waived any entitlement, by way of compensation for loss of office or
damages for breach of contract or otherwise howsoever to any sum or
other benefit to compensate for the loss of any rights under the Plan.
(d) Except as the Committee may otherwise determine, for purposes hereof
any termination of a Participant's employment or service for any reason shall
occur on the date Participant ceases to perform services for Micro or any
Affiliate without regard to whether Participant continues thereafter to receive
any compensatory payments therefrom or is paid salary thereby in lieu of notice
of termination or, with respect to a member of the Board who is not also an
employee of Micro or any Affiliate, the date such Participant is no longer a
member of the Board.
SECTION 12. MERGER. In the event of a merger of Micro with or into
another corporation, each outstanding Award may be assumed or an equivalent
award may be substituted by such successor corporation or a parent or subsidiary
of such successor corporation. If, in such event, an Award is not assumed or
substituted, the Award shall terminate as of the date of the closing of the
merger. For the purposes of this paragraph, the Award shall be considered
assumed if, following the merger, the Award confers the right to purchase or
receive, for each Share subject to the Award immediately prior to the merger,
the consideration (whether stock, cash, or other securities or property)
received in the merger by holders of Common Stock for each Share held on the
effective date of the transaction (and if the holders are offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares). If such consideration received in the merger is not
solely common stock of the successor corporation or its parent, the Committee
may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Award, for each Share
subject to the Award, to be solely common stock of the successor corporation or
its parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger.
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SECTION 13. AMENDMENT AND TERMINATION.
(a) AMENDMENTS TO THE PLAN. The Board may terminate or discontinue the
Plan at any time and the Board or the Committee may amend or alter the Plan or
any portion thereof at any time; provided that no such amendment, alteration,
discontinuation or termination shall be made without shareholder approval if
such approval is necessary to comply with any tax or regulatory requirement,
including for these purposes any approval requirement which is a prerequisite
for exemptive relief from Section 16(b) of the Exchange Act, for which or with
which the Board or the Committee deems it necessary or desirable to qualify or
comply.
(b) AMENDMENTS TO AWARDS. Subject to the terms of the Plan and
applicable law, the Committee may waive any conditions or rights under, amend
any terms of, or alter, suspend, discontinue, cancel or terminate, any Award
theretofore granted, prospectively or retroactively; provided that any such
waiver, amendment, alteration, suspension, discontinuance, cancellation or
termination that would adversely affect the rights of any Participant or any
holder or beneficiary of any Award theretofore granted shall not to that extent
be effective without the consent of the affected Participant, holder or
beneficiary.
(c) CANCELLATION. Any provision of this Plan or any Award Agreement to
the contrary notwithstanding, the Committee may cause any Award granted
hereunder to be canceled in consideration of a cash payment or alternative Award
made to the holder of such canceled Award equal in value to the Fair Market
Value of such canceled Award.
SECTION 14. GENERAL PROVISIONS.
(a) DIVIDEND EQUIVALENTS. In the sole and complete discretion of the
Committee, an Award, whether made as an Other Stock-Based Award under Section 10
or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the
Participant with dividends or dividend equivalents, payable in cash, Shares,
other securities or other property on a current or deferred basis.
(b) NONTRANSFERABILITY. (i) Except as provided in subsection (ii) below,
no Award shall be assigned, alienated, pledged, attached, sold or otherwise
transferred or encumbered by a Participant, except by will or the laws of
descent and distribution.
(ii) Notwithstanding subsection (i) above, the Committee may
determine that an Award may be transferred by a Participant to one or
more members of the Participant's immediate family, to a partnership of
which the only partners are members of the Participant's immediate
family, or to a trust established by the Participant for the benefit of
one or more members of the Participant's immediate family. For this
purpose, immediate family means the Participant's spouse, parents,
children, grandchildren and the spouses of such parents, children and
grandchildren. A transferee described in this subsection (ii) may not
further transfer an Award. An Award transferred pursuant to this
subsection shall remain subject to the provisions of the Plan,
including, but not limited to, the provisions of Section 11 relating to
the effect on the Award of the death, retirement or termination of
employment of the Participant, and shall be subject to such other rules
as the Committee shall determine.
(c) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with respect
to each recipient.
(d) SHARE CERTIFICATES. All certificates for Shares or other securities
of Micro or any Affiliate delivered under the Plan pursuant to any Award or the
exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations and other requirements of the SEC or any stock exchange upon which
such Shares or other securities are then listed and any applicable Federal,
state or foreign laws or rules or regulations, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(e) WITHHOLDING. A Participant may be required to pay to Micro or any
Affiliate, and Micro or any Affiliate shall have the right and is hereby
authorized to withhold from any Award, from any payment due or transfer made
A-9
<PAGE> 10
under any Award or under the Plan or from any compensation or other amount owing
to a Participant the amount (in cash, Shares, other securities, other Awards or
other property) of any applicable withholding taxes in respect of an Award, its
exercise, or any payment or transfer under an Award or under the Plan and to
take such other action as may be necessary in the opinion of Micro to satisfy
all obligations for the payment of such taxes. The Committee may provide for
additional cash payments to holders of Awards to defray or offset any tax
arising from any such grant, lapse, vesting, or exercise of any Award.
(f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto.
(g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in
the Plan shall prevent Micro or any Affiliate from adopting or continuing in
effect other compensation arrangements, which may, but need not, provide for the
grant of options, restricted stock, Shares and other types of Awards provided
for hereunder (subject to shareholder approval if such approval is required),
and such arrangements may be either generally applicable or applicable only in
specific cases.
(h) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed
as giving a Participant the right to be retained in the employ or service of
Micro or any Affiliate. Further, Micro or an Affiliate may at any time dismiss a
Participant from employment or service, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.
(i) RIGHTS AS A STOCKHOLDER. Subject to the provisions of the applicable
Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be issued under the Plan
until he or she has become the holder of such Shares. Notwithstanding the
foregoing, in connection with each grant of Restricted Stock hereunder, the
applicable Award shall specify if and to what extent the Participant shall not
be entitled to the rights of a stockholder in respect of such Restricted Stock.
(j) GOVERNING LAW. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan and any Award Agreement shall
be determined in accordance with the laws of the State of Delaware.
(k) SEVERABILITY. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.
(l) OTHER LAWS. The Committee may refuse to issue or transfer any Shares
or other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation, whether domestic
or foreign, or entitle Micro to recover the same under Section 16(b) of the
Exchange Act, and any payment tendered to Micro by a Participant in connection
therewith shall be promptly refunded to the relevant Participant, holder or
beneficiary. Without limiting the generality of the foregoing, no Award granted
hereunder shall be construed as an offer to sell securities of Micro, and no
such offer shall be outstanding, unless and until the Committee in its sole
discretion has determined that any such offer, if made, would be in compliance
with all applicable requirements of the Federal securities laws and any other
laws, whether domestic or foreign, to which such offer, if made, would be
subject.
(m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between Micro or any Affiliate and a Participant or any
other Person. To the extent that any Person acquires a right to receive payments
from Micro or any Affiliate pursuant to an Award, such right shall be no greater
than the right of any unsecured general creditor of Micro or any Affiliate.
A-10
<PAGE> 11
(n) NO FRACTIONAL SHARES. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash or other securities or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
(o) TRANSFER RESTRICTIONS. Shares acquired hereunder may not be sold,
assigned, transferred, pledged or otherwise disposed of, except as provided in
the Plan or the applicable Award Agreement.
(p) HEADINGS. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(q) SUB-PLANS. Subject to the terms hereof, the Committee may from time
to time adopt one or more Sub-Plans and grant Awards thereunder as it shall deem
necessary or appropriate in its sole discretion in order that Awards may comply
with the laws, rules or regulations of any jurisdiction; provided, however, that
neither the terms of any Sub-Plan nor Awards thereunder shall be inconsistent
with the Plan.
SECTION 15. TERM OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall be effective as of February 1, 1998,
subject to approval by the shareowners of Micro. Awards may be granted hereunder
prior to such shareowner approval subject in all cases, however, to such
approval.
(b) EXPIRATION DATE. No Award shall be granted under the Plan after
January 31, 2008. Unless otherwise expressly provided in the Plan or in an
applicable Award Agreement, any Award granted hereunder may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Award or to waive any conditions or rights under any such
Award shall, continue after the authority for grant of new Awards hereunder has
been exhausted.
A-11
<PAGE> 1
EXHIBIT 13.1
INDEX TO
FINANCIAL INFORMATION
<TABLE>
<S> <C>
SELECTED CONSOLIDATED FINANCIAL DATA 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
CONSOLIDATED BALANCE SHEET 30
CONSOLIDATED STATEMENT OF INCOME 31
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 32
CONSOLIDATED STATEMENTS OF CASH FLOWS 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY 51
REPORT OF INDEPENDENT ACCOUNTANTS 51
COMPANY INFORMATION 52
</TABLE>
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of Ingram
Micro Inc. ("Ingram Micro" or the "Company"). The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements and notes thereto, included elsewhere in this Annual Report
to Shareowners.
The fiscal year of the Company is a 52- or 53-week period ending on the
Saturday nearest to December 31. References below to 1994, 1995, 1996, 1997 and
1998 represent the fiscal years ended December 31, 1994 (52 weeks), December 30,
1995 (52 weeks), December 28, 1996 (52 weeks), January 3, 1998 (53 weeks), and
January 2, 1999 (52 weeks), respectively.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------------------------
(In 000s, except per share data) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING INFORMATION
NET SALES $ 22,034,038 $ 16,581,539 $ 12,023,451 $ 8,616,867 $ 5,830,199
GROSS PROFIT 1,391,168 1,085,689 812,384 605,686 438,975
INCOME FROM OPERATIONS(1) 486,605 376,579 247,508 186,881 140,290
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST(1) 406,860 326,489 196,757 134,616 100,705
NET INCOME(1) 245,175 193,640 110,679 84,307 63,344
BASIC EARNINGS PER SHARE(1) 1.76 1.43 0.99 0.79 0.59
DILUTED EARNINGS PER SHARE(1) 1.64 1.32 0.88 0.74 0.57
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 139,263,810 135,764,053 112,285,058 107,251,362 107,251,362
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 149,537,870 146,307,532 125,436,376 114,517,371 110,641,131
------------ ------------ ------------ ------------ ------------
SELECTED BALANCE SHEET INFORMATION
CASH $ 96,682 $ 92,212 $ 48,279 $ 56,916 $ 58,369
TOTAL ASSETS 6,733,404 4,932,151 3,366,947 2,940,898 1,974,289
TOTAL DEBT(2) 1,720,456 1,141,131 304,033 850,548 552,283
STOCKHOLDERS' EQUITY 1,399,257 1,038,206 825,150 310,795 221,344
------------ ------------ ------------ ------------ ------------
</TABLE>
- -------------
(1) Reflects a noncash compensation charge in 1998, 1997, and 1996 of $4.6
million ($3.7 million, or $0.02 per share, net of tax) and $7.2 million
($5.9 million, or $0.04 per share, net of tax) and $23.4 million ($19.5
million, or $0.16 per share, net of tax), respectively, in connection with
the granting of Rollover Stock Options and certain restricted stock. See
Notes 12 and 13 of Notes to Consolidated Financial Statements.
(2) Includes long-term debt, convertible debentures, current maturities of
long-term debt and debt due to Ingram Industries.
18
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In evaluating the business of Ingram Micro Inc., readers should carefully
consider the important factors discussed under Exhibit 99.01 to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1999 and
"--Cautionary Statements for the Purpose of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995."
OVERVIEW
Ingram Micro is the leading wholesale distributor of computer-based
technology products and services worldwide. The Company's net sales have grown
to $22.0 billion in 1998 from $5.8 billion in 1994 while net income has grown to
$245.2 million in 1998 from $63.3 million in 1994. The growth reflects
substantial expansion of the Company's existing operations, resulting from the
successful integration of 19 acquisitions worldwide, the addition of new
customers, increased sales to the existing customer base, as well as the
addition of new product categories and suppliers. Overall, however, even
adjusting for the fact that 1997 was a 53-week year, the Company's revenue and
income grew at a slower rate in 1998 than in 1997.
The Company's gross margins declined to 6.3% in 1998 from 7.5% in 1994. The
computer-based technology products wholesale distribution industry in which the
Company operates is characterized by narrow gross and operating margins that
have declined industrywide in recent years primarily due to intense price
competition. The Company expects these competitive pricing pressures to continue
in the foreseeable future. In addition, in late 1994 the Company entered the
master reseller business, which typically has lower gross margins with a lower
operating cost model and reduced financing costs. The increase in the master
reseller business as a percentage of net sales also contributed to the reduction
in gross margins during the period.
The Company's operating margins have declined less than gross margins.
Operating margins declined to 2.2% in 1998 from 2.4% in 1994. To partially
offset the decline in gross margins, the Company has continually instituted
operational and expense controls that have reduced selling, general, and
administrative ("SG&A") expenses as a percentage of net sales to 4.1% in 1998
from 5.1% in 1994. The U.S. operations have benefited from greater economies of
scale compared to the non-U.S. operations, thereby producing higher operating
margins. There can be no assurance that the Company will be able to continue to
reduce operating expenses as a percentage of net sales to mitigate any further
reductions in gross margins. Net margins, excluding noncash compensation
charges, have remained constant at approximately 1.1% since 1994. Operating
margins and net margins were impacted in 1996, 1997 and 1998 by the noncash
compensation charges described below.
Frameworks(TM), Total Integration Services(TM) ("Frameworks"), a
value-added initiative launched in 1997, allows the Company to provide channel
assembly and custom configuration, and to produce private-label or unbranded
systems for its customers. Start-up costs associated with its initial investment
included the acquisition of assembly facilities and related business in The
Netherlands and the startup of a manufacturing facility in Memphis, Tennessee.
Additionally, during its development phase in 1998, Frameworks formed an
alliance with Solectron Corporation, a leading contract manufacturer in computer
technology, which is expected to result in increased manufacturing and assembly
capacity around the world.
Ingram Micro entered the master reseller business in late 1994 with the
launch of Ingram Alliance. The Company further expanded its master reseller
business by acquiring Intelligent Electronics, Inc.'s Reseller Network Division
("RND") in July 1997 and integrating RND into Ingram Alliance. Concurrent with
the RND acquisition, the Company more fully integrated its master reseller
business into its wholesale distribution business. A substantial majority of the
Company's master reseller sales were funded by floor plan financing companies
whose fees were previously subsidized by the Company's suppliers. Prior to 1998,
the Company typically received payment from these financing institutions within
three business days from the date of the sale, allowing the Company's master
reseller business to operate at much lower relative working capital levels than
the Company's wholesale distribution business. During the third and fourth
quarters of 1998, two of the industry's leading hardware manufacturers reduced
their flooring fee subsidies. As a result, payment from the floor plan financing
companies is now received generally within 15 days, which has increased working
capital requirements within the master reseller business and consequently
increased average borrowing levels and interest costs.
The computer-based technology products and services distribution business
is capital-intensive. The Company has relied heavily on debt financing for its
increasing working capital needs to grow both organically and through
acquisitions. The Company's business also requires significant levels of capital
to finance accounts receivable and product inventory that is not financed by
trade creditors. On June 9, 1998, the Company sold $1.33 billion aggregate
principal amount at maturity of its Zero Coupon Convertible Senior Debentures
due 2018 in a private placement. The Company has subsequently registered the
resale of these debentures with the Securities and Exchange Commission (the
"SEC").
19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Gross proceeds from this offering were $460.4 million. The Company also has
revolving credit facilities of approximately $1.65 billion, as well as
uncommitted facilities of approximately $260 million. The Company's interest
expense for any current or future indebtedness will be subject to fluctuations
in interest rates and may cause fluctuations in the Company's net income.
In November 1996, the Company was split-off (the "Split-Off") from Ingram
Industries Inc. ("Ingram Industries"), the former parent company, and Ingram
Entertainment Inc. ("Ingram Entertainment"), and the Company completed an
initial public offering (the "IPO") of its Class A Common Stock that raised
$393.8 million, net of underwriters' discounts and expenses, of which
approximately $366.3 million was used to repay certain indebtedness to Ingram
Industries.
In connection with the Split-Off, certain outstanding Ingram Industries
stock options, incentive stock units ("ISUs"), and stock appreciation rights
("SARs") held by certain employees of Ingram Industries, Ingram Entertainment,
and Ingram Micro were converted to options to purchase up to an aggregate of
approximately 10,989,000 shares of Class A Common Stock ("Rollover Stock
Options"). The Company recorded a pre-tax noncash compensation charge of
approximately $23.4 million ($19.5 million, net of tax) in 1996, $7.2 million
($5.9 million, net of tax) in 1997 and $4.6 million ($3.7 million, net of tax)
in 1998 primarily related to the vested portion of certain Rollover Stock
Options grants based on the difference between the estimated fair value of the
Company's common stock at the applicable measurement dates and the exercise
price of such options. The Company will record additional noncash compensation
charges over the remaining vesting periods of the Rollover Stock Options. These
additional charges, including charges for certain 1996 restricted stock grants,
are expected to be approximately $2.7 million ($1.9 million, net of tax) for
1999 and $1.1 million ($0.7 million, net of tax) for 2000.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by geographic region
(excluding intercompany sales), and the percentage of total net sales
represented thereby, for each of the periods indicated.
FISCAL YEAR
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- ----------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
NET SALES BY GEOGRAPHIC REGION:
UNITED STATES $14,393 65.3% $11,540 69.6% $ 8,058 67.0%
EUROPE 5,624 25.5% 3,353 20.2% 2,590 21.6%
OTHER INTERNATIONAL 2,017 9.2% 1,689 10.2% 1,375 11.4%
------- ------- ------- ------- ------- -------
TOTAL $22,034 100.0% $16,582 100.0% $12,023 100.0%
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain items from the Company's Consolidated
Statement of Income as a percentage of net sales, for each of the periods
indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
FISCAL YEAR
--------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0%
COST OF SALES 93.7% 93.5% 93.2%
----- ----- -----
GROSS PROFIT 6.3% 6.5% 6.8%
EXPENSES:
SG&A EXPENSES 4.1% 4.2% 4.5%
NONCASH COMPENSATION CHARGE 0.0% 0.0% 0.2%
----- ----- -----
INCOME FROM OPERATIONS 2.2% 2.3% 2.1%
OTHER EXPENSE, NET 0.4% 0.3% 0.5%
----- ----- -----
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1.8% 2.0% 1.6%
PROVISION FOR INCOME TAXES 0.7% 0.8% 0.7%
MINORITY INTEREST 0.0% 0.0% 0.0%
----- ----- -----
NET INCOME 1.1% 1.2% 0.9%
===== ===== =====
</TABLE>
20
<PAGE> 5
1998 Compared to 1997
Consolidated net sales increased 32.9% to $22.0 billion in 1998 from $16.6
billion in 1997. The increase in worldwide net sales was primarily attributable
to the addition of new customers, increased sales to the existing customer base,
expansion of the Company's product offerings, growth in the computer-based
technology products and services industry in general, and the July 1998
acquisition of a 95% ownership interest in Munich, Germany-based Macrotron AG
("Macrotron").
Net sales from U.S. operations increased 24.7% to $14.4 billion in 1998
from $11.5 billion in 1997 primarily due to growth of its current business,
which was favorably impacted by the RND acquisition in July 1997. The U.S. sales
increase was tempered, however, by manufacturers making more product directly
available to resellers during the fourth quarter of 1998, resulting in less
business through wholesale distribution. Net sales from European operations
increased 67.8% to $5.6 billion in 1998 from $3.4 billion in 1997 due primarily
to the acquisition of Macrotron, as well as to the overall growth in the
Company's existing European operations. Other international net sales increased
19.4% to $2.0 billion in 1998 from $1.7 billion in 1997 primarily due to the
acquisition of Computacion Tecnica, S.A. ("Computek") in Latin America as well
as growth in the Company's Canadian operations.
Gross profit, as a percentage of net sales, decreased to 6.3% in 1998 from
6.5% in 1997. During the fourth quarter of 1998, the Company's operations
experienced a significant decrease in gross profit percentage compared to the
fourth quarter of 1997, which has continued into 1999. These decreases were
largely attributable to significant competitive pricing pressures experienced
primarily in the U.S. and the larger countries in Europe. The Company expects
these competitive pricing pressures to continue in the foreseeable future.
Furthermore, during 1998, the Company incurred significant costs associated with
its investment in Frameworks, which negatively impacted gross profit. The
Company expects that its losses associated with Frameworks will continue in
fiscal 1999, but to a lesser extent due to expected revenue growth, the
reduction of start-up costs, and continued cost-control measures.
Total SG&A expenses increased 28.2% to $900.0 million in 1998 from $702.0
million in 1997, but decreased as a percentage of net sales to 4.1% in 1998 from
4.2% in 1997. The increase in SG&A spending was attributable to the acquisitions
in July 1998 of Macrotron, a manufacturing facility and related business in The
Netherlands in June 1998, the full year's effect of the 1997 acquisitions of RND
and Computek, as well as the increased expenses required to support the
expansion of the Company's business. Expenses related to expansion consisted of
incremental personnel and support costs, lease expenses relating to new
operating facilities, and expenses associated with the development and
maintenance of information systems. The overall decrease in SG&A expenses as a
percentage of sales is attributable to economies of scale from greater sales
volume as well as continued cost-control measures.
Excluding the noncash compensation charges, total income from operations
decreased as a percentage of net sales to 2.2% in 1998 from 2.3% in 1997. U.S.
income from operations, excluding the noncash compensation charge, increased as
a percentage of net sales to 2.8% in 1998 from 2.7% in 1997; however, European
income from operations, excluding the noncash compensation charge, decreased as
a percentage of net sales to 1.1% in 1998 from 1.2% in 1997. For geographic
regions outside the U.S. and Europe, income from operations, excluding noncash
compensation charges, decreased as a percentage of net sales to 1.4% in 1998
from 1.9% in 1997, primarily due to currency devaluations and overall weaker
economies in Latin America. During 1998, the Company recorded a noncash
compensation charge of $4.6 million ($3.7 million, net of tax) in connection
with the Rollover Stock Options, while in 1997, the Company recorded a noncash
compensation charge of $7.2 million ($5.9 million, net of tax) in connection
with the Rollover Stock Options. Income from operations, including noncash
compensation charges, increased 29.2% to $486.6 million in 1998 from $376.6
million in 1997, and, as a percentage of net sales, decreased to 2.2% in 1998
from 2.3% in 1997.
Other expense, net, consisting primarily of interest, foreign currency
exchange losses and miscellaneous nonoperating expenses, increased 59.2% to
$79.7 million in 1998 from $50.1 million in 1997. Other expense, net, also
increased as a percentage of net sales to 0.4% in 1998 from 0.3% in 1997. Toward
the end of 1998, the Company's interest expense grew as a result of increased
borrowings to finance acquisitions; the investment in SOFTBANK Corp.
("SOFTBANK"), Japan's largest distributor of software, peripherals and
networking products; expansion of the Company's business; ongoing sales growth;
and maintenance of higher accounts receivable levels. Accounts receivable levels
were higher primarily due to a reduction in master reseller sales as a
percentage of total sales and due to the changing vendor terms and conditions
associated with floor plan financing arrangements of those sales. In 1999, the
Company expects its interest expense to grow due to increased working capital
requirements needed to support the growth of the Company's business, the 1998
acquisition of Macrotron, and the increase of the Company's ownership interest
in Electronic Resources Ltd. ("ERL") to approximately 95% in the first quarter
of 1999. In addition, as discussed above, if the Company continues to experience
less favorable floor plan financing terms, interest expense will likely
increase. The increase in other expense also reflects an increase in foreign
currency exchange losses primarily attributable to ongoing international
economic conditions that have led to weaker currencies in Latin America as
compared to the U.S. dollar.
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The provision for income taxes increased 23.0% to $161.7 million in 1998
from $131.5 million in 1997, reflecting the 24.6% increase in the Company's
income before income taxes. The Company's effective tax rate was 39.7% in 1998
compared to 40.3% in 1997. The decrease in the effective tax rate was primarily
due to the reduction in the noncash compensation charge, much of which is not
deductible for tax purposes, as well as the effect of certain international
taxes in 1998.
Excluding the noncash compensation charges, net income increased 24.7% to
$248.8 million in 1998 from $199.6 million in 1997 and, as a percentage of net
sales, decreased to 1.1% in 1998 from 1.2% in 1997. Pro forma diluted earnings
per share, excluding the noncash compensation charges, increased 22.1% to $1.66
in 1998 from $1.36 in 1997. Net income, including the noncash compensation
charges, increased 26.6% to $245.2 million in 1998 from $193.6 million in 1997.
Diluted earnings per share, including the noncash compensation charge, increased
24.2% to $1.64 in 1998 from $1.32 in 1997.
1997 Compared to 1996
Consolidated net sales increased 37.9% to $16.6 billion in 1997 from $12.0
billion in 1996. The increase in worldwide net sales was attributable to growth
in the computer-based technology products and services industry in general, the
addition of new customers, increased sales to the existing customer base,
expansion of the Company's product offerings, and the acquisition of several
companies in 1997.
Net sales from U.S. operations increased 43.2% to $11.5 billion in 1997
from $8.1 billion in 1996. U.S. net sales were positively impacted by the
acquisition of RND, which was completed on July 18, 1997. Net sales from
European operations increased 29.4% to $3.4 billion in 1997 from $2.6 billion in
1996. Other international net sales increased 22.9% to $1.7 billion in 1997 from
$1.4 billion in 1996, primarily due to the growth in net sales from the
Company's Mexican and Canadian operations.
Gross profit as a percentage of net sales decreased to 6.5% in 1997 from
6.8% in 1996. This decrease was largely attributable to the increase as a
percentage of net sales of the master reseller business, which has lower
margins, as well as competitive pricing pressures.
Total SG&A expenses increased 29.6% to $702.0 million in 1997 from $541.5
million in 1996, but decreased as a percentage of net sales to 4.2% in 1997 from
4.5% in 1996. The increased level of spending was attributable to expenses
required to support expansion of the Company's business, consisting primarily of
incremental personnel and support costs, lease expenses relating to new
operating facilities, and expenses associated with the development and
maintenance of information systems. The decrease in SG&A expenses as a
percentage of sales is attributable to the growth of the Company's master
reseller business, which utilizes a lower-cost business model, and economies of
scale from higher sales volumes.
During 1997, the Company recorded a noncash compensation charge of $7.2
million ($5.9 million, net of tax) in connection with the Rollover Stock
Options. In 1996, the Company recorded a noncash compensation charge of $23.4
million ($19.5 million, net of tax) in connection with the Rollover Stock
Options.
Excluding the noncash compensation charges, total income from operations
remained constant as a percentage of net sales at 2.3% in 1997 and 1996. Income
from operations in the United States excluding the noncash compensation charge
remained constant as a percentage of net sales at 2.7% in 1997 and 1996. Income
from operations in Europe, excluding the noncash compensation charge, increased
as a percentage of net sales to 1.2% in 1997 from 0.8% in 1996. This increase
was partially offset by a decrease in income from operations, excluding the
noncash compensation charge, as a percentage of net sales for geographic regions
outside the United States and Europe to 1.9% in 1997 from 2.2% in 1996.
Income from operations, including the noncash compensation charges,
increased 52.1% to $376.6 million in 1997 from $247.5 million in 1996, and, as a
percentage of net sales, increased to 2.3% in 1997 from 2.1% in 1996.
Other expense, net, which consists primarily of net interest expense
(including interest expense charged by Ingram Industries in 1996), foreign
currency exchange losses, and miscellaneous nonoperating expenses, decreased
1.3% to $50.1 million in 1997 from $50.8 million in 1996, and decreased as a
percentage of net sales to 0.3% in 1997 from 0.5% in 1996. Although other
expense, net, remained relatively constant overall, the Company experienced
lower interest expense in 1997, primarily due to the reduction in average
outstanding borrowings (including amounts due to Ingram Industries) following
the IPO. The Company's interest expense increased toward the end of 1997 as a
result of increased borrowings to finance acquisitions and the expansion of the
Company's business.
The provision for income taxes increased 54.9% to $131.5 million in 1997
from $84.9 million in 1996, reflecting the 65.9% increase in the Company's
income before income taxes and minority interest. The Company's effective tax
rate was 40.3% in 1997 compared to 43.1% in 1996. The decrease in the effective
tax rate was primarily due to the reduction in the noncash compensation charge,
much of which is not deductible for tax purposes, as well as the effect of
certain international taxes in 1997.
22
<PAGE> 7
Excluding the noncash compensation charges, net income increased 53.3% to
$199.6 million in 1997 from $130.2 million in 1996 and, as a percentage of net
sales, increased to 1.2% in 1997 from 1.1% in 1996. Pro forma diluted earnings
per share, excluding the noncash compensation charges, increased 30.8% to $1.36
in 1997 from $1.04 in 1996. Net income, including the noncash compensation
charges, increased 75.0% to $193.6 million in 1997 from $110.7 million in 1996.
Diluted earnings per share, including the noncash compensation charge, increased
50.0% to $1.32 in 1997 from $0.88 in 1996.
QUARTERLY DATA; SEASONALITY
The Company's quarterly sales and operating results have varied in the past
and will likely continue to do so in the future as a result of seasonal
variations in the demand for the products and services offered by the Company;
the introduction of new hardware and software technologies and products offering
improved features and functionality; the introduction of new products and
services by the Company and its competitors; the loss or consolidation of a
significant supplier or customer; changes in the level of operating expenses;
inventory adjustments; product supply constraints; competitive conditions
including pricing; interest rate fluctuations; the impact of acquisitions;
currency fluctuations; and general economic conditions. The Company's narrow
operating margins may magnify such fluctuations. Specific historical seasonal
variations in the Company's operating results have included a reduction of
demand in Europe during the summer months, increased Canadian government
purchasing in the first quarter, and worldwide pre-holiday stocking in the
retail channel during the September-to-November period. In addition, the product
cycle of major products may materially impact the Company's business, financial
condition, or results of operations.
The following table sets forth certain unaudited quarterly historical
financial data for each of the 8 quarters in the period ended January 2, 1999.
This unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the selected quarterly information. This
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report to
Shareowners. The operating results for any quarter shown are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
CONSOLIDATED QUARTERLY INFORMATION
INCOME INCOME BEFORE BASIC DILUTED
NET GROSS FROM INCOME TAXES AND NET EARNINGS EARNINGS
SALES PROFIT OPERATIONS MINORITY INTEREST INCOME PER SHARE PER SHARE
----- ------ ---------- ----------------- ------ --------- ---------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JANUARY 3, 1998
THIRTEEN WEEKS ENDED(1):
MARCH 29, 1997 $3,650.0 $234.7 $ 78.8 $ 69.0 $40.4 $0.30 $0.28
JUNE 28, 1997 3,716.8 242.1 79.2 68.0 40.0 0.30 0.27
SEPTEMBER 27, 1997 4,087.3 264.0 85.6 75.7 44.3 0.32 0.30
JANUARY 3, 1998(2) 5,127.4 344.9 133.0 113.8 68.9 0.51 0.47
FISCAL YEAR ENDED JANUARY 2, 1999
THIRTEEN WEEKS ENDED(3):
APRIL 4, 1998 $5,150.1 $329.9 $116.2 $ 94.0 $56.5 $0.41 $0.38
JULY 4, 1998 4,956.1 315.5 110.8 92.8 55.6 0.40 0.37
OCTOBER 3, 1998 5,708.0 357.8 118.4 99.3 59.8 0.43 0.40
JANUARY 2, 1999 6,219.8 388.0 141.2 120.8 73.3 0.52 0.49
</TABLE>
(1) Reflects a noncash compensation charge of $1.8 million, $1.7 million, $1.8
million, and $1.9 million for the first, second, third and fourth quarters
of 1997, respectively, in connection with the granting of the Rollover
Stock Options.
(2) Fourteen weeks ended January 3, 1998.
(3) Reflects a noncash compensation charge of $1.1 million for each of the
first, second, third and fourth quarters of 1998 in connection with the
granting of the Rollover Stock Options.
As indicated in the table above, the increases in the Company's net sales
in the fourth-quarter of each fiscal year have generally been higher than those
in the other three quarters in the same fiscal year. The trend of higher fourth
quarter net sales is attributable to calendar year-end business purchases and
holiday period purchases made by customers. Additionally, gross profit in the
fourth quarter of each year has historically been favorably impacted by
attractive year-end product buying opportunities, which have often resulted in
higher purchase discounts to the Company.
23
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company has financed its growth and cash needs largely through income
from operations and borrowings, trade and supplier credit, the public sale of
23,200,000 shares of its Class A Common Stock at $18.00 per share in the IPO
completed in November 1996, and the sale of Zero Coupon Convertible Senior
Debentures in June 1998.
Cash used by operating activities was $278.5 million in 1998 as compared to
$647.7 million in 1997 and cash provided by operating activities of $78.0
million in 1996. The significant decrease in cash used by operating activities
in 1998 compared to 1997 was partially attributable to the increase in net
income and the increase in trade creditor financing of product inventory through
the increase in accounts payable. The significant decrease in cash provided by
operating activities in 1997 compared to 1996 was primarily attributable to
increases in accounts receivable and product inventory that was not financed by
trade creditors, resulting from the continued growth of the Company.
Net cash used by investing activities was $218.6 million, $193.3 million,
and $107.2 million in 1998, 1997, and 1996, respectively. These increases were
due in part to the Company's expansion of warehouses and other facilities as
well as the Company's commitment to growth through acquisitions and strategic
alliances. In 1998, the Company used approximately $97 million in cash for
acquisitions, net of cash acquired (see Note 4 of the Notes to Consolidated
Financial Statements), and approximately $50 million in a strategic alliance
with SOFTBANK. Mitigating the uses of cash, the Company entered into a
sale/leaseback agreement whereby the Company sold its Santa Ana, California,
facility and a portion of its Buffalo, New York, facility to a third party and
received approximately $75 million in cash. In 1997, the Company used
approximately $34.0 million in cash for acquisitions, net of cash acquired, and
approximately $71.2 million in cash for the purchase of common stock, warrants
and an option to acquire additional common stock of ERL (see Note 4 of the Notes
to Consolidated Financial Statements). In 1996, purchases of property and
equipment included $22.6 million related to the acquisition, in connection with
the Split-Off, of certain previously leased facilities utilized by the Company.
Net cash provided by financing activities was $497.1 million, $888.4
million, and $21.3 million in 1998, 1997 and 1996, respectively. Net cash
provided by financing activities in 1998 was primarily due to the proceeds from
the convertible debentures and Company stock option exercises. The reduction of
cash provided by financing activities in 1998 compared to 1997 is due in part to
the Company's ability to finance its operations through trade creditors as well
as the increase in proceeds from stock option exercises. Net cash provided by
financing activities in 1997 was due primarily to the increase in revolving
credit of $770.4 million. Net cash provided by financing activities in 1996
includes the receipt of $393.8 million in net proceeds from the IPO. Net cash
provided by financing activities in 1996 decreased as a result of the repayment
of borrowings from Ingram Industries totaling $513.8 million as a result of the
Split-Off as well as a $20.0 million distribution to Ingram Industries. The
decrease in borrowings from Ingram Industries was partially offset by proceeds
from debt totaling $49.7 million and net borrowings under the revolving credit
facilities of $80.6 million.
Acquisitions
In 1998, the Company completed acquisitions of Macrotron, Nordemaq
Commercial de Maquinas Nordeste Ltda ("Nordemaq"), a Brazilian computer products
distributor, Tulip Computer N.V.'s assembly facility and related business in
's-Hertogenbosch, The Netherlands, and the remaining 30% minority interest in
Ingram Dicom S.A. de C.V., a Mexican subsidiary. The combined cash consideration
was approximately $97 million, net of cash acquired (see Note 4 of the Notes to
Consolidated Financial Statements).
In December 1997, the Company completed its purchase of approximately 21%
of the outstanding common stock, and approximately 19% of an outstanding class
of warrants of ERL, a publicly traded electronic components distributor based in
Singapore, for approximately $71 million. In January 1999, the Company purchased
additional shares from specific shareholders, which brought the Company's total
ownership to approximately 39.6%. In January and February 1999, the Company made
open-market purchases of ERL shares and warrants, and on February 19, 1999,
completed a tender offer for the remaining outstanding shares and warrants of
ERL. These purchases resulted in a 95% ownership of the outstanding common stock
and a 95% ownership of the outstanding warrants of ERL. The combined cash
consideration paid in 1999 was approximately $233 million (see Notes 4 and 14 of
the Notes to Consolidated Financial Statements).
24
<PAGE> 9
Capital Resources
The Company has three credit facilities with bank syndicates providing an
aggregate credit availability of $1.65 billion. Under the credit facilities, the
Company is required to comply with certain financial covenants, including
minimum tangible net worth, restrictions on funded debt and interest coverage.
The credit facilities also restrict the Company's ability to pay dividends.
Borrowings are subject to the satisfaction of customary conditions, including
the absence of any material adverse change in the Company's business or
financial condition. On January 2, 1999, the Company had $994.5 million in
outstanding borrowings under the credit facilities.
In November 1996, the Company sold 23,200,000 shares of Class A Common
Stock in the IPO at $18.00 per share. The Company received net proceeds of
$393.8 million, of which approximately $366.3 million was used to repay certain
existing indebtedness to Ingram Industries.
The Company has an arrangement with a trust pursuant to which certain U.S.
trade accounts receivable of the Company are transferred to the trust, which in
turn has sold certificates representing undivided interests in the total pool of
trade receivables without recourse. The trust has issued fixed-rate, medium-term
certificates and a variable-rate certificate to support a commercial paper
program. At January 2, 1999, the amount of medium-term certificates outstanding
totaled $100 million, and the amount of commercial paper outstanding totaled
$150 million. The Company believes that there are sufficient trade accounts
receivables to support the outstanding medium-term certificates as well as the
commercial paper program.
On June 9, 1998, the Company sold $1.33 billion aggregate principal amount
at maturity of its Zero Coupon Convertible Senior Debentures due 2018 in a
private placement. The Company has subsequently registered the resale of these
debentures with the SEC. Gross proceeds from this offering were $460.4 million
and were used primarily to pay outstanding indebtedness. The debentures were
sold at an issue price of $346.18 per $1,000 principal amount at maturity
(representing a yield to maturity of 5.375% per annum), and are convertible into
shares of the Company's Class A Common Stock at a rate of 5.495 shares per
$1,000 principal amount at maturity, subject to adjustment under certain
circumstances. The debentures are currently convertible into approximately 7.3
million shares of the Company's Class A Common Stock. The debentures are
redeemable for cash at the option of the Company on or after June 9, 2003, at
the issue price plus accrued original issue discount to the date of the
redemption. Each debenture is subject to repurchase at the option of the holder
as of June 9, 2001, June 9, 2003, June 9, 2008, or June 9, 2013, or if there is
a Fundamental Change (as defined), at the issue price plus accrued original
issue discount to the date of the redemption. In the event of repurchase at the
option of a holder (other than upon a Fundamental Change), the Company may, at
its option, pay in cash or Class A Common Stock, or any combination thereof. In
the case of any such repurchase as of June 9, 2001, the Company may elect, in
lieu of the payment of cash or Class A Common Stock, to satisfy the redemption
in new Zero Coupon Convertible Senior Debentures due 2018. At January 2, 1999,
the issue price plus accrued original issue discount was $473.5 million.
The Company and its foreign subsidiaries have uncommitted lines of credit,
commercial paper, and short-term overdraft facilities in various currencies
which aggregated $260 million and $119 million at the end of 1998 and 1997,
respectively. These facilities are used principally for working capital and bear
interest at market rates.
The proceeds from stock option exercises provide an additional source of
cash to the Company. In 1998, 1997 and 1996, respectively, cash proceeds from
the exercise of stock options, including applicable tax benefits, totaled $93.9
million, $28.4 million and $11.3 million, respectively.
The Company believes that cash provided by operating activities,
supplemented as necessary with funds available under credit arrangements
(including the $1.65 billion in credit facilities and the sale of the Company's
convertible debentures), will provide sufficient resources to meet its present
and future working capital and cash requirements for at least the next 12
months, or earlier if the Company were to engage in significant, material
corporate transactions not currently anticipated, in which event the Company
anticipates that additional financing may be required.
Capital Expenditures
The Company presently expects to spend approximately $175 million in 1999
for capital expenditures due to continued expansion of its business.
25
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations and
interest rate changes due to its international sales and global funding. In the
normal course of business, the Company employs established policies and
procedures to manage its exposure to fluctuations in the value of foreign
currencies and interest rates using a variety of financial instruments. It is
the Company's policy to utilize financial instruments to reduce risks where
internal netting cannot be effectively employed. It is the Company's policy not
to enter into foreign currency or interest rate transactions for speculative
purposes.
In addition to product sales and costs, the Company has foreign currency
risk related to debt that is denominated in currencies other than the dollar and
cross-currency swaps hedging intercompany debt. The Company's foreign currency
risk management objective is to protect its earnings and cash flows resulting
from sales, purchases and other transactions from the adverse impact of exchange
rate movements. Foreign exchange risk is managed by using forward and option
contracts to hedge receivables and payables. By policy, the Company maintains
hedge coverage between minimum and maximum percentages. Cross-currency swaps are
used to hedge foreign currency denominated payments related to intercompany and
third-party loans. Hedged transactions are denominated primarily in British
pounds, Canadian dollars, French francs, German marks, Italian lira, Spanish
pesetas, and Swedish krona.
The Company is exposed to changes in interest rates primarily as a result
of its long-term debt used to maintain liquidity and finance inventory, capital
expenditures and business expansion. Interest rate risk is also present in the
cross-currency swaps hedging intercompany and third-party loans. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives the Company uses a combination of fixed- and
variable-rate debt. As of January 2, 1999, approximately 28% of the outstanding
debt had fixed interest rates. The Company finances working capital needs
through various bank loans and commercial paper programs.
MARKET RISK MANAGEMENT
Foreign exchange and interest rate risk and related derivatives use is
monitored using a variety of techniques including a review of market value,
sensitivity analysis and Value-at-Risk ("VaR"). The VaR model determines the
maximum potential loss in the fair value of foreign exchange rate-sensitive
financial instruments assuming a one-day holding period. The VaR model estimates
were made assuming normal market conditions and a 95% confidence level. There
are various modeling techniques that can be used in the VaR computation. The
Company's computations are based on interrelationships between currencies and
interest rates (a "variance/co-variance" technique). These interrelationships
were determined by observing foreign currency market changes and interest rate
changes over the preceding 90 days. The value of foreign currency options does
not change on a one-to-one basis with changes in the underlying currency rate.
The potential loss in option value was adjusted for the estimated sensitivity
(the "delta" and "gamma") to changes in the underlying currency rate. The model
includes all of the Company's forwards, options, cross-currency swaps and
nonfunctional currency denominated debt (i.e., the Company's market-sensitive
derivative and other financial instruments as defined by the SEC). The accounts
receivable and accounts payable denominated in foreign currencies, which certain
of these instruments are intended to hedge, were excluded from the model.
The VaR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by the Company, nor does it
consider the potential effect of favorable changes in market rates. It also does
not represent the maximum possible loss that may occur. Actual future gains and
losses will differ from those estimated because of changes or differences in
market rates and interrelationships, hedging instruments and hedge percentages,
timing and other factors.
The estimated maximum loss in fair value on the Company's foreign
currency-sensitive financial instruments and interest rate-sensitive financial
instruments, derived using the VaR model and a one-day holding period, was $1.3
million and $1.6 million, respectively, at January 2, 1999. The Company believes
that this hypothetical loss in fair value of its derivatives would be offset by
increases in the value of the underlying transactions being hedged.
26
<PAGE> 11
EURO CONVERSION
On January 1, 1999, a single currency called the euro was introduced in
Europe. Eleven of the 15 member countries of the European Union adopted the euro
as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002 (but not later than July 1, 2002). During this transition period, parties
may settle transactions using either the euro or a participating country's
legacy currency. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legacy currencies will be withdrawn from circulation. The
Company has implemented plans to address the issues raised by the euro currency
conversion. These plans include, among others, the need to adapt computer
information systems and business processes and equipment to accommodate
euro-denominated transactions; the need to analyze the legal and contractual
implications on contracts; and the ability of the Company's customers and
vendors to accommodate euro-denominated transactions on a timely basis. Since
the implementation of the euro on January 1, 1999, the Company has experienced
improved efficiencies in its cash management program in Europe as all
intracompany transactions within participating countries are conducted in euros.
In addition, the Company has reduced hedging activities in Europe for
transactions conducted between euro-participating countries. Since the Company's
information systems and processes generally accommodate multiple currencies, the
Company anticipates that modifications to its information systems, equipment and
processes will be made on a timely basis and does not expect any failures that
would have a material adverse effect on the Company's financial position or
results of operations, or that the costs of such modifications will have a
material effect on the Company's financial position or results of operations.
The Company has not experienced any material adverse effects on its financial
position or results of operations in connection with the January 1, 1999
first-stage conversion.
YEAR 2000 MATTERS
Introduction
The Company's Year 2000 ("Y2K") readiness issues are broad and complex. As
is the case with many computer software systems, some of the Company's systems
use two-digit data fields that recognize dates using the assumption that the
first two digits are "19" (i.e., the number "99" is recognized as the year
"1999"). Therefore, the Company's date-critical functions relating to the year
2000 and beyond, such as sales, distribution, purchasing, inventory control,
merchandise planning and replenishment, facilities, and financial systems, may
be severely affected unless changes are made to these systems.
State of Readiness
With the assistance of an outside consultant, the Company commenced a
review of its internal information technology ("IT") systems to identify
applications that are not Y2K ready and to assess the impact of the Y2K problem.
The Company has developed an overall plan to modify its internal systems to be
Y2K ready. In addition, the Company formed a Y2K Global Project Team to provide
global oversight to the Company's Y2K readiness activities in the IT and non-IT
areas, the assessment of Y2K risks in connection with third-party relationships
and the development of contingency plans.
The Company's Y2K plan is divided into three major sections: IT systems,
non-IT systems ("Non-IT Systems"), and Y2K interfaces with material third
parties. The broad phases of the plan are generally common to all three
sections. The phases consist of: (1) inventorying potential Y2K sensitive items,
(2) assigning priorities to identified items, (3) assessing the Y2K readiness of
items determined to be material to the Company, (4) repairing or replacing
material items that are determined not to be Y2K ready ("remediation"), (5)
testing material items and/or certification of Y2K readiness, i.e., validation
and written confirmation that the process, activity or component can properly
process a date beyond December 31, 1999, as it does earlier dates and (6)
designing and implementing contingency and business-continuation plans for the
Company.
Please refer to "--Contingency Planning and Risks" regarding the Company's
progress for its Y2K plan with respect to ERL, which became a subsidiary of the
Company in February 1999.
27
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Information Technology Systems
The Company has completed an inventory and technical assessment (with the
exception of personal computers, which are assessed and remediated in a single
step) of all of its global hardware, operating systems, software (including
business applications, but excluding desktop software such as office tools) and
electronic interfaces that were in operation by the end of December 1998 ("IT
Systems") for Y2K remediation. With the exception of the Company's recently
acquired German subsidiary, Macrotron, the Company has completed remediation and
unit testing or upgrading/replacement of the mainframe part of its IT Systems,
and anticipates that it will complete the remediation, unit testing and/or
upgrading/replacement process on the balance of its IT Systems, which includes
client servers and personal computers, in the second quarter of 1999. As a
result of the Company's continued integration and consolidation of the Macrotron
facilities, the Company anticipates that the second-quarter 1999 target date for
remediation and unit testing or upgrading/replacement of Macrotron's IT Systems
will be extended by two months. The Company anticipates that it will complete
system and century testing and certification of Y2K readiness of all of its IT
Systems in the third quarter of 1999.
The Company uses different test methodologies for different phases: (1)
unit testing is used to verify that the individually changed components function
properly at the unit level, (2) system/integration testing is used to verify
that all changed components function as a complete system, (3) regression
testing is used to verify that changes made for Y2K readiness do not impact any
other functions within the IT system, and (4) century testing, i.e., simulating
the transition to January 1, 2000, is used to validate that the entire IT system
will function on or after such date.
With respect to desktop software on the Company's personal computers, the
Company provided to its associates before the end of 1998 a list of Y2K ready
versions of software. Associates were advised that if they have non-Y2K ready
versions of software on their personal computers, they must request upgrades to
Y2K ready versions of software. The Company will provide the necessary IT
support to upgrade associates' personal computers and will periodically remind
associates to assure that the necessary upgrades occur and to make appropriate
adjustments to date-sensitive databases or programs.
Non-Information Technology Systems
The Non-IT Systems consist of any device that is able to store and report
date-related information, such as access control systems, elevators, escalators,
conveyors and sensors; building systems; and other items containing a
microprocessor or an internal clock, such as handheld computers used to assist
with inventory control, electric power distribution systems and vaults. The
Company has completed a global inventory and assessment of its Non-IT Systems.
The Company's plan provides that by the end of the second quarter of 1999, all
Non-IT Systems that are deemed business-critical will either (a) have written
certifications that they are Y2K ready (e.g., confirmations from manufacturers
that the product is not impacted by the Y2K date transition or will continue to
operate on and after January 1, 2000, just as it did prior to such date) or (b)
have been replaced and/or modified to be Y2K ready.
Y2K Interfaces With Material Third Parties
The Company has commenced an inventory of third parties (including, among
others, domestic and international suppliers and vendors, financial service
providers and transportation and other logistics providers) whose Y2K
noncompliance could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, the Company has been
sending questionnaires to all such third parties in order to determine their
current Y2K status, tracking responses to these questionnaires and using such
responses towards contingency plan development. The Company anticipates that it
will have completed such assessment and inquiry by the end of the second quarter
of 1999. Follow-up inquiries, where appropriate, are planned throughout the
remainder of 1999.
Costs to Address Y2K Readiness
The Company has incurred approximately $3.8 million to date on Y2K
readiness efforts (excluding compensation and benefit costs for associates who
do not work full time on the Y2K project and costs of systems upgrades that
would normally have been made on a similar timetable) with respect to IT Systems
and anticipates that its total expenditures will not exceed $10 million.
However, such amount does not reflect costs for upgrades to servers, personal
computers, communications equipment and Non-IT Systems on a global basis as a
result of potential new acquisitions and/or business relationships throughout
the remainder of 1999 as the scope of this cost will not be known until the
Company has completed technical assessment of all of these areas. Although there
are opportunity costs and some diversion of human resources to the Company's Y2K
readiness efforts, management believes that no significant IT projects have been
deferred or accelerated due to this effort.
28
<PAGE> 13
Contingency Planning and Risks
The Y2K Global Project Team is responsible for the development of a global
contingency plan to address the Company's at-risk business functions as a result
of Y2K issues. The Company anticipates that development of such a global
contingency plan will be completed in the second quarter of 1999. In the normal
course of business, the Company maintains and deploys contingency plans designed
to address various other potential business interruptions. For example, the
Company has the capability in the United States to automatically reroute
incoming telephone calls, such as from its Santa Ana (West Coast sales) facility
to its Buffalo (East Coast sales) facility, and the ability to reroute warehouse
shipping from one U.S. location to another location. Although these plans are
not Y2K specific, they may be applicable to address limited Y2K failures or
interruption of support provided by some third parties resulting from their
failure to be Y2K ready.
The Company's global IT and Non-IT operations are highly centralized in the
United States. The Company's strategy with respect to Y2K readiness is to
resolve its Y2K issues from a global perspective first through its U.S.
operations. For example, the Company's core enterprise system, IMpulse, is based
in the U.S. but operates globally. Remediation of this system is effective
across the Company's entire operations. However, the Company may continue to
experience risks with respect to new acquisitions where new management may not
be as familiar with the Company's computer systems (although the Company strives
to convert newly acquired operations to IMpulse as soon as possible), or the
existing associates may not be familiar with the Company's Y2K plan. For
example, the Company completed an unconditional tender offer for ERL's shares
and warrants on February 19, 1999. The Company currently believes that it will
complete the various stages with respect to IT Systems, Non-IT Systems and Y2K
interfaces with material third parties in the ERL organization approximately two
months later than the target dates set forth above. A similar extension of
approximately two months of the target date for the remediation and unit testing
or upgrading/replacement of IT Systems for the Company's recently acquired
Macrotron organization in Germany is anticipated.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially and adversely affect the Company's
results of operations, liquidity and financial condition. In addition, the
Company's operating results could be materially adversely affected if it were to
be held responsible for the failure of any products sold by the Company to be
Y2K ready despite the Company's disclaimer of product warranties and the
limitation of liability contained in its sales terms and conditions.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The matters in this Annual Report that are forward-looking statements are
based on current management expectations that involve certain risks, including
without limitation: the potential decline as well as seasonal variations in
demand for the Company's products; the potential termination of a supply
agreement with a major supplier; continued pricing and margin pressures; product
supply shortages; rapid product improvement and technological changes, and
resulting obsolescence risks; unavailability of adequate capital; the impact on
management of growth and acquisitions; foreign currency fluctuations; the
failure to achieve substantial Year 2000 readiness; and reliability of
information systems. For a further discussion of these and other significant
factors to consider in connection with forward-looking statements concerning the
Company, reference is made to Exhibit 99.01 of the Company's Annual Report on
Form 10-K for fiscal year ended January 2, 1999; other risks or uncertainties
may be detailed from time to time in the Company's future SEC filings.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which will become effective for the Company
in fiscal 2000. FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. However, the Company does not expect the adoption of FAS 133 to have
a material impact on its reported consolidated financial condition or results of
operations.
29
<PAGE> 14
CONSOLIDATED BALANCE SHEET
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR END
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH $ 96,682 $ 92,212
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCES OF $55,904
IN 1998 AND $48,541 IN 1997) 2,562,050 1,635,728
INVENTORIES 3,094,227 2,492,646
OTHER CURRENT ASSETS 278,591 225,408
----------- -----------
TOTAL CURRENT ASSETS 6,031,550 4,445,994
PROPERTY AND EQUIPMENT, NET 254,718 215,148
GOODWILL, NET 232,112 142,478
OTHER 215,024 128,531
----------- -----------
TOTAL ASSETS $ 6,733,404 $ 4,932,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 3,306,045 $ 2,415,001
ACCRUED EXPENSES 254,627 292,515
CURRENT MATURITIES OF LONG-TERM DEBT 38,978 21,869
----------- -----------
TOTAL CURRENT LIABILITIES 3,599,650 2,729,385
CONVERTIBLE DEBENTURES 473,475 --
OTHER LONG-TERM DEBT 1,208,003 1,119,262
OTHER 45,205 23,843
----------- -----------
TOTAL LIABILITIES 5,326,333 3,872,490
----------- -----------
MINORITY INTEREST -- 4,862
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
REDEEMABLE CLASS B COMMON STOCK 7,814 16,593
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE, 1,000,000 SHARES
AUTHORIZED; NO SHARES ISSUED AND OUTSTANDING -- --
CLASS A COMMON STOCK, $0.01 PAR VALUE, 265,000,000 SHARES
AUTHORIZED; 66,520,715 AND 37,366,389 SHARES
ISSUED AND OUTSTANDING IN 1998 AND 1997, RESPECTIVELY 665 374
CLASS B COMMON STOCK, $0.01 PAR VALUE, 135,000,000 SHARES
AUTHORIZED; 75,459,710 AND 99,714,672 SHARES
ISSUED AND OUTSTANDING IN 1998 AND 1997 (INCLUDING
1,116,250 AND 2,370,400 REDEEMABLE SHARES
IN 1998 AND 1997), RESPECTIVELY 743 973
ADDITIONAL PAID IN CAPITAL 591,235 484,912
RETAINED EARNINGS 811,616 566,441
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (4,914) (14,236)
UNEARNED COMPENSATION (88) (258)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,399,257 1,038,206
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,733,404 $ 4,932,151
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
30
<PAGE> 15
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 22,034,038 $ 16,581,539 $ 12,023,451
COST OF SALES 20,642,870 15,495,850 11,211,067
------------ ------------ ------------
GROSS PROFIT 1,391,168 1,085,689 812,384
EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE 900,001 701,958 541,526
NONCASH COMPENSATION CHARGE 4,562 7,152 23,350
------------ ------------ ------------
904,563 709,110 564,876
------------ ------------ ------------
INCOME FROM OPERATIONS 486,605 376,579 247,508
OTHER (INCOME) EXPENSE:
INTEREST INCOME (5,652) (3,924) (2,060)
INTEREST EXPENSE 72,181 37,940 14,812
INTEREST EXPENSE CHARGED BY INGRAM INDUSTRIES -- -- 35,123
NET FOREIGN CURRENCY EXCHANGE LOSS 6,247 2,430 701
OTHER 6,969 13,644 2,175
------------ ------------ ------------
79,745 50,090 50,751
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 406,860 326,489 196,757
PROVISION FOR INCOME TAXES 161,685 131,463 84,889
------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 245,175 195,026 111,868
MINORITY INTEREST -- 1,386 1,189
------------ ------------ ------------
NET INCOME $ 245,175 $ 193,640 $ 110,679
============ ============ ============
BASIC EARNINGS PER SHARE $ 1.76 $ 1.43 $ 0.99
============ ============ ============
DILUTED EARNINGS PER SHARE $ 1.64 $ 1.32 $ 0.88
============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
31
<PAGE> 16
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN 000S)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID IN RETAINED COMPREHENSIVE UNEARNED
CLASS A CLASS B CAPITAL EARNINGS INCOME (LOSS) COMPENSATION TOTAL
------- ------- ------- -------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 30, 1995 $ -- $ 1,073 $ 22,427 $ 282,122 $ 5,173 $ -- $ 310,795
DISTRIBUTION TO
INGRAM INDUSTRIES (20,000) (20,000)
GRANT OF RESTRICTED CLASS B
COMMON STOCK 1 713 (714) --
NET PROCEEDS FROM
SALE OF CLASS A
COMMON STOCK 232 393,612 393,844
NONCASH COMPENSATION
CHARGE RELATED TO
STOCK OPTIONS 23,170 23,170
STOCK OPTIONS EXERCISED 10 1,612 1,622
INCOME TAX BENEFIT FROM
EXERCISE OF STOCK OPTIONS 8,123 8,123
CONVERSION OF CLASS B
COMMON STOCK TO
CLASS A COMMON STOCK 8 (8) --
AMORTIZATION OF UNEARNED
COMPENSATION 180 180
COMPREHENSIVE
INCOME (LOSS) 110,679 (3,263) 107,416
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 28, 1996 250 1,066 449,657 372,801 1,910 (534) 825,150
NONCASH COMPENSATION
CHARGE RELATED TO
STOCK OPTIONS 6,876 6,876
STOCK OPTIONS EXERCISED 31 6,546 6,577
INCOME TAX BENEFIT FROM
EXERCISE OF STOCK OPTIONS 21,833 21,833
CONVERSION OF CLASS B
COMMON STOCK TO
CLASS A COMMON STOCK 93 (93) --
AMORTIZATION OF UNEARNED
COMPENSATION 276 276
COMPREHENSIVE
INCOME (LOSS) 193,640 (16,146) 177,494
---------- ---------- ---------- ---------- ---------- ---------- ----------
JANUARY 3, 1998 374 973 484,912 566,441 (14,236) (258) 1,038,206
VESTING OF REDEEMABLE
CLASS B COMMON STOCK 11 8,118 8,129
NONCASH COMPENSATION
CHARGE RELATED TO
STOCK OPTIONS 4,392 4,392
STOCK OPTIONS EXERCISED 50 36,337 36,387
INCOME TAX BENEFIT FROM
EXERCISE OF STOCK OPTIONS 57,476 57,476
CONVERSION OF CLASS B
COMMON STOCK TO
CLASS A COMMON STOCK 241 (241) --
AMORTIZATION OF UNEARNED
COMPENSATION 170 170
COMPREHENSIVE
INCOME (LOSS) 245,175 9,322 254,497
---------- ---------- ---------- ---------- ---------- ---------- ----------
JANUARY 2, 1999 $ 665 $ 743 $ 591,235 $ 811,616 $ (4,914) $ (88) $1,399,257
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
32
<PAGE> 17
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN 000S)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
NET INCOME $ 245,175 $ 193,640 $ 110,679
ADJUSTMENTS TO RECONCILE NET INCOME TO
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 67,942 47,835 36,170
DEFERRED INCOME TAXES 3,532 8,226 (1,635)
MINORITY INTEREST -- 1,387 1,189
NONCASH COMPENSATION CHARGE 4,562 7,152 23,350
NONCASH INTEREST EXPENSE ON DEBENTURES 14,248 -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES,
NET OF EFFECTS OF ACQUISITIONS:
TRADE ACCOUNTS RECEIVABLE (786,727) (485,711) (237,747)
INVENTORIES (445,324) (542,886) (239,054)
OTHER CURRENT ASSETS (17,473) (61,642) (46,291)
ACCOUNTS PAYABLE 694,880 92,396 399,995
ACCRUED EXPENSES (59,348) 91,912 31,372
--------- --------- ---------
CASH (USED) PROVIDED BY OPERATING ACTIVITIES (278,533) (647,691) 78,028
--------- --------- ---------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (143,236) (101,458) (105,584)
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT 75,321 12,963 --
ACQUISITIONS, NET OF CASH ACQUIRED (96,550) (33,960) --
EQUITY INVESTMENT IN ERL -- (71,212) --
PURCHASE OF AVAILABLE-FOR-SALE SECURITIES (50,262) -- --
OTHER (3,867) 320 (1,596)
--------- --------- ---------
CASH (USED) BY INVESTING ACTIVITIES (218,594) (193,347) (107,180)
--------- --------- ---------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
PROCEEDS FROM SALE OF CLASS A COMMON STOCK -- -- 393,844
PROCEEDS FROM (REPURCHASE OF) REDEEMABLE
CLASS B COMMON STOCK (650) (630) 17,223
EXERCISE OF STOCK OPTIONS INCLUDING TAX BENEFITS 93,863 28,410 11,331
(REPAYMENT) OF BORROWINGS FROM INGRAM INDUSTRIES -- -- (513,792)
(REPAYMENT) PROCEEDS OF DEBT (80,689) 90,219 49,717
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURES,
NET OF ISSUANCE COSTS 449,604 -- --
NET BORROWINGS UNDER REVOLVING CREDIT FACILITIES 34,978 770,367 80,618
DISTRIBUTION TO INGRAM INDUSTRIES -- -- (20,000)
MINORITY INTEREST INVESTMENT -- -- 2,400
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES 497,106 888,366 21,341
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 4,491 (3,395) (826)
--------- --------- ---------
INCREASE (DECREASE) IN CASH 4,470 43,933 (8,637)
CASH, BEGINNING OF YEAR 92,212 48,279 56,916
--------- --------- ---------
CASH, END OF YEAR $ 96,682 $ 92,212 $ 48,279
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAYMENTS DURING THE YEAR:
INTEREST $ 61,706 $ 36,185 $ 50,071
INCOME TAXES 109,108 107,129 101,091
</TABLE>
See accompanying notes to these consolidated financial statements.
33
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Ingram Micro Inc. (the "Company" or "Ingram Micro"), formerly Ingram Micro
Holdings Inc., is primarily engaged in wholesale distribution of computer-based
technology products and services worldwide. The Company conducts the majority of
its operations in North America, Europe and Latin America. In November 1996, the
Company's former parent, Ingram Industries Inc. ("Ingram Industries"),
consummated a split-off of the Company in a tax-free reorganization (the
"Split-Off"). In connection with the Split-Off, certain stockholders of Ingram
Industries exchanged all or some of their shares of Ingram Industries Common
Stock for 107,251,362 shares of Class B Common Stock of the Company in specified
ratios (see Note 3).
The accompanying historical consolidated financial statements have been
prepared as if the Company had operated as an independent stand-alone entity for
all periods presented except that prior to the Split-Off, the Company generally
had no significant borrowings in North America other than amounts due to Ingram
Industries (see Notes 7 and 11).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The equity method of accounting is used for the Company's 50% or less owned
affiliates, over which the Company has the ability to exercise significant
influence.
Fiscal Year
The fiscal year of the Company is a 52- or 53-week period ending on the
Saturday nearest to December 31. All references herein to "1998" represent the
52-week fiscal year ended January 2, 1999. All references herein to "1997"
represent the 53-week fiscal year ended January 3, 1998, and all references
herein to "1996" represent the 52-week fiscal year ended December 28, 1996.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the financial statement date, and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
Revenue Recognition
Revenue is recognized at the time of product shipment. The Company, under
specific conditions, permits its customers to return or exchange products. The
provision for estimated sales returns is recorded concurrently with the
recognition of revenue.
Vendor Programs
Funds received from vendors for price protection, product rebates,
marketing or training programs are recorded net of direct costs as adjustments
to product costs, selling, general and administrative expenses or revenue
according to the nature of the program.
The Company's suppliers generally warrant the products distributed by the
Company and allow the Company to return defective products, including those that
have been returned to the Company by its customers. The Company does not
independently warrant the products it distributes; however, the Company does
warrant the following: (1) services with regard to products configured for its
customers, and (2) products it builds to order from components purchased from
other sources. Provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience. Warranty expense
was not material to the Company's Consolidated Statement of Income.
The Company generated approximately 40% of its net sales in fiscal 1998,
38% in 1997, and 35% in 1996 from products purchased from three vendors.
34
<PAGE> 19
Foreign Currency Translation and Remeasurement
Financial statements of foreign subsidiaries, for which the functional
currency is the local currency, are translated into U.S. dollars using the
exchange rate at each balance sheet date for assets and liabilities and a
weighted average exchange rate for each period for statement of income items.
Translation adjustments are recorded in other comprehensive income. The
functional currency of the Company's subsidiaries in Latin America is the U.S.
dollar; accordingly, the monetary assets and liabilities of these subsidiaries
are translated into U.S. dollars at the exchange rate in effect at the balance
sheet date. Revenues, expenses, gains or losses are translated at the average
exchange rate for the period, and nonmonetary assets and liabilities are
translated at historical rates. The resultant remeasurement gains and losses of
these subsidiaries are recognized in the Consolidated Statement of Income. Gains
and losses from foreign currency transactions are included in the Consolidated
Statement of Income.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
other accrued expenses approximate fair value because of the short maturity of
these items. The carrying amounts of debt issued pursuant to bank credit
agreements approximate fair value because interest rates on these instruments
approximate current market interest rates. The carrying amount of the Zero
Coupon Convertible Debentures including accrued original issue discount
approximates fair value based upon available market information.
Cash
Book overdrafts of $228,556 and $108,399 as of January 2, 1999, and January
3, 1998, respectively, are included in accounts payable. The Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.
Inventories
Inventories are stated at the lower of average cost or market.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected, undiscounted future net cash flows is less than the
carrying amount of the asset.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life:
<TABLE>
<S> <C>
BUILDINGS 40 YEARS
LEASEHOLD IMPROVEMENTS 3 - 17 YEARS
DISTRIBUTION EQUIPMENT 5 - 7 YEARS
COMPUTER EQUIPMENT 2 - 5 YEARS
</TABLE>
Maintenance, repairs and minor renewals are charged to expense as incurred.
Additions, major renewals and betterments to property and equipment are
capitalized.
Goodwill
Goodwill is amortized on a straight-line basis over periods ranging from
five to 30 years. Accumulated amortization was $31,621 at January 2, 1999, and
$21,638 at January 3, 1998. Amortization expense totaled $10,269, $4,955, and
$2,990 for 1998, 1997, and 1996, respectively. The Company assesses the
realizability of goodwill consistent with its policy for long-lived assets.
Investments in Available-for-Sale Securities
The Company classifies its marketable equity securities as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These securities are carried at fair market value, with
unrealized gains and losses reported in stockholders' equity as a component of
other comprehensive income (loss). Gains or losses on securities sold are based
on the specific identification method.
35
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
During 1998, the Company purchased approximately $50,000 in equity
securities. These securities had a gross unrealized holding gain of $6,666 as of
January 2, 1999. Income taxes have not been provided on the unrealized gain due
to tax planning strategies that the Company believes will reduce its tax
consequences to an immaterial amount.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable
and derivative financial instruments. Credit risk with respect to trade accounts
receivable is limited due to the large number of customers and their dispersion
across geographic areas. The Company sells its products primarily in the United
States, Europe, Canada and Latin America. The Company performs ongoing credit
evaluations of its customers' financial conditions, obtains credit insurance in
certain locations and requires collateral in certain circumstances. The Company
maintains an allowance for potential credit losses. Historically, such losses
have been within management's expectations.
Derivative Financial Instruments
The Company operates internationally with distribution facilities in
various locations around the world. The Company reduces its exposure to
fluctuations in interest rates and foreign exchange rates by creating offsetting
positions through the use of derivative financial instruments. The market risk
related to the foreign exchange agreements is offset by changes in the valuation
of the underlying items being hedged. The majority of the Company's derivative
financial instruments have terms of 90 days or less. The Company currently does
not use derivative financial instruments for trading or speculative purposes,
nor is the Company a party to leveraged derivatives.
Foreign exchange risk is managed by using forward and option contracts to
hedge receivables and payables. Written foreign currency options are used to
mitigate currency risk in conjunction with purchased options. Currency interest
rate swaps and forward rate agreements are used to hedge foreign currency
denominated principal and interest payments related to intercompany and
third-party loans.
Derivative financial instruments are accounted for on an accrual basis.
Income and expense are recorded in the same category as that arising from the
related asset or liability being hedged. Gains and losses resulting from
effective hedges of existing assets, liabilities or firm commitments are
deferred and recognized when the offsetting gains and losses are recognized on
the related hedged items. Gains or losses on written foreign currency options
are adjusted to market value at the end of each accounting period and have not
been material to date.
The notional amount of forward exchange contracts and options is the amount
of foreign currency bought or sold at maturity. The notional amount of currency
interest rate swaps and forward rate agreements are the underlying principal and
currency amounts used in determining the interest payments exchanged over the
life of the swap. Notional amounts are indicative of the extent of the Company's
involvement in the various types and uses of derivative financial instruments
and are not a measure of the Company's exposure to credit or market risks
through its use of derivatives. The estimated fair value of derivative financial
instruments represents the amount required to enter into like offsetting
contracts with similar remaining maturities based on quoted market prices.
Credit exposure for derivative financial instruments is limited to the
amounts, if any, by which the counterparties' obligations under the contracts
exceed the obligations of the Company to the counterparties. Potential credit
losses are minimized through careful evaluation of counter-party credit
standing, selection of counterparties from a limited group of high-quality
institutions and other contract provisions.
Derivative financial instruments comprise the following:
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
FOREIGN EXCHANGE FORWARD CONTRACTS $702,343 $ (1,648) $279,911 $ 2,197
PURCHASED FOREIGN CURRENCY OPTIONS 32,604 78 37,966 320
WRITTEN FOREIGN CURRENCY OPTIONS 18,652 (111) 49,214 (185)
CURRENCY INTEREST RATE SWAPS 200,732 628 15,832 1,492
FORWARD RATE AGREEMENTS 149,400 10 -- ---
</TABLE>
36
<PAGE> 21
Comprehensive Income
Effective in the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and displaying comprehensive
income and its components in the Company's consolidated financial statements.
Comprehensive income is defined in FAS 130 as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources.
The components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
FOREIGN CHANGE IN ACCUMULATED
CURRENCY UNREALIZED GAIN ON OTHER
TRANSLATION AVAILABLE-FOR-SALE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
---------- ---------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 30, 1995 $ 5,173 $ -- $ 5,173
CURRENT YEAR CHANGE (3,263) -- (3,263)
-------- -------- --------
BALANCE AT DECEMBER 28, 1996 1,910 -- 1,910
CURRENT YEAR CHANGE (16,146) -- (16,146)
-------- -------- --------
BALANCE AT JANUARY 3, 1998 (14,236) -- (14,236)
CURRENT YEAR CHANGE 2,656 6,666 9,322
-------- -------- --------
BALANCE AT JANUARY 2, 1999 $(11,580) $ 6,666 $ (4,914)
======== ======== ========
</TABLE>
Accounting for Stock-Based Compensation
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("FAS 123"). As permitted by FAS 123, the Company continues to
measure compensation cost in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), but provides pro
forma disclosures of net income and earnings per share as if the fair-value
method had been applied.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("FAS 128"), and related interpretations. FAS 128
requires dual presentation of Basic Earnings per Share ("Basic EPS") and Diluted
Earnings per Share ("Diluted EPS"). Basic EPS excludes dilution and is computed
by dividing net income by the weighted average number of common shares
outstanding during the reported period, after giving retroactive effect to the
Split-Off (see Notes 1 and 3). Diluted EPS reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised using the treasury stock method or the if-converted method, where
applicable.
The composition of Basic EPS and Diluted EPS is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ------------
<S> <C> <C> <C>
NET INCOME $ 245,175 $ 193,640 $ 110,679
=============== =============== ============
WEIGHTED AVERAGE SHARES 139,263,810 135,764,053 112,285,058
=============== =============== ============
BASIC EARNINGS PER SHARE $ 1.76 $ 1.43 $ 0.99
=============== =============== ============
WEIGHTED AVERAGE SHARES INCLUDING
THE DILUTIVE EFFECT OF STOCK OPTIONS
(10,274,060, 10,543,479, AND 13,151,318 FOR
FISCAL 1998, 1997, AND 1996, RESPECTIVELY) 149,537,870 146,307,532 125,436,376
=============== =============== ============
DILUTED EARNINGS PER SHARE $ 1.64 $ 1.32 $ 0.88
=============== =============== ============
</TABLE>
At January 2, 1999, there was $473,475 in Zero Coupon Convertible
Debentures that are convertible into 7,308,350 shares of Class A Common Stock
(see Note 7). In 1998, these potential shares were excluded from the computation
of Diluted EPS because their effect would be antidilutive. Additionally, there
were approximately 388,000, 262,000, and -0- options in 1998, 1997, and 1996,
respectively, that were not included in the computation of Diluted EPS because
the exercise price was greater than the average market price of the Class A
Common Stock, thereby resulting in an antidilutive effect.
37
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which will become effective for the Company
in fiscal 2000. FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The Company does not expect the adoption of FAS 133 to have a
material impact on its reported consolidated financial condition or results of
operations.
In 1998, the Company elected to adopt the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement requires capitalization of computer
software costs that meet both the definition of internal-use software and
defined criteria for capitalization. The Company amortizes the costs of computer
software developed or obtained for internal use on a straight-line basis over
the estimated life of the software. The impact of adoption was not material to
the Company's consolidated financial statements.
NOTE 3 - SPLIT-OFF, REORGANIZATION AND EXCHANGE
In November 1996, the Split-Off was effected pursuant to a Reorganization
Agreement among the Company, Ingram Industries, and its subsidiary, Ingram
Entertainment Inc. ("Ingram Entertainment"), and an Exchange Agreement among
such companies and the stockholders of Ingram Industries. Pursuant to the
Reorganization Agreement, the Company retained all of the assets and liabilities
associated with the Company's business and indemnified Ingram Industries for all
liabilities related to the Company's business and operations or otherwise
assigned to the Company. In addition, the Reorganization Agreement provided for
the sharing by the Company of approximately 73% of certain contingent assets and
liabilities not allocated to one of the parties. The Company assumed a portion
of Ingram Industries' debt in return for the extinguishment of intercompany
indebtedness (see Note 7).
In connection with the Reorganization Agreement, the Company entered into
an Employee Benefits Transfer and Assumption Agreement with Ingram Industries,
which provided for the allocation of employee benefit assets and liabilities to
each of the parties' respective employees. The Company also entered into a Tax
Sharing and Tax Services Agreement pursuant to which the Company will be
responsible for its allocable share of Ingram Industries' consolidated federal
and state income tax liabilities for fiscal 1996 through the date of the
Split-Off and approximately 73% of any adjustment in excess of reserves already
established by Ingram Industries for past federal and state liabilities of the
Company and Ingram Industries. Similarly, the Company will share in any refunds
received with respect to such periods. The Company also entered into
Transitional Service Agreements related to certain administrative services and
data processing (see Note 11).
Pursuant to the Exchange Agreement, certain stockholders of Ingram
Industries exchanged all or some of their shares of Ingram Industries Common
Stock for 107,251,362 shares of Class B Common Stock of the Company in specified
ratios.
NOTE 4 - ACQUISITIONS
In July 1998, the Company completed the acquisition of Tech Data
Corporation's 99% and 91% interest in the outstanding common and preferred
stock, respectively, of Macrotron AG ("Macrotron") for approximately $100,000 in
cash. Macrotron is based in Munich, Germany, and operates primarily in Germany,
Austria, and Switzerland. The acquisition was accounted for using the purchase
method, and the results of Macrotron's operations have been combined with those
of the Company since July 1, 1998, the effective date of acquisition. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The excess of
the purchase price over the net assets acquired is approximately $80,000 and is
being amortized on a straight-line basis over 30 years.
In June 1998, the Company completed its acquisition of Tulip Computer
N.V.'s assembly facility and related business in 's-Hertogenbosch, The
Netherlands. In October 1998, the Company completed its purchase of the
remaining 30% minority interest in Ingram Dicom S.A. de C.V. ("Dicom"), a
Mexican subsidiary. In December 1998, the Company completed the acquisition of
Nordemaq Commercial de Maquinas Nordeste Ltda, a Brazilian computer products
distributor. The combined consideration paid was approximately $19,000. The
acquisitions were accounted
38
<PAGE> 23
for using the purchase method of accounting and the results of operations have
been combined with those of the Company since the respective dates of
acquisition. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of the purchase price over net assets acquired for these
acquisitions totaled approximately $9,000 and is being amortized on a
straight-line basis over 20 years.
Pro forma financial information has not been presented because the effect
of the 1998 acquisitions was not significant.
In December 1997, the Company completed its purchase of 49,606,000 shares
or approximately 21% of the outstanding common stock of Electronic Resources
Ltd. ("ERL"), a publicly traded electronic components distributor based in
Singapore and operating in Australia, New Zealand, and seven Asian countries. In
addition, the Company purchased approximately 19% of an outstanding class of
warrants to acquire 8,443,195 shares of ERL. The aggregate purchase price for
this transaction was approximately $71,000. The Company accounted for the
investment in fiscal 1998 and 1997 under the equity method. The Company's
investment in ERL has been recorded in other assets at January 2, 1999, and
January 3, 1998, and includes the unamortized excess of the Company's investment
over its equity in the net assets of ERL. This excess of approximately $38,000
and $40,000 at January 2, 1999, and January 3, 1998, respectively, is being
amortized on a straight-line basis over its estimated useful life of 20 years.
At January 2, 1999, the aggregate market value of the Company's share of ERL
common stock and warrants, as quoted on the Stock Exchange of Singapore, was
approximately $49,239. The Company commenced a tender offer for ERL shares
subsequent to January 2, 1999 (see Note 14).
On July 18, 1997, the Company completed the acquisition of the Intelligent
Electronics Inc. indirect distribution business, its Reseller Network Division
("RND"). The purchase price was $73,000, payable by the assumption of
liabilities in excess of current assets (including $30,000 in cash acquired),
based on the balance sheet of RND at closing. This acquisition was accounted for
using the purchase method, and the results of RND's operations have been
combined with those of the Company since the date of acquisition. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The excess of purchase
price over net assets acquired of approximately $88,000 is being amortized on a
straight-line basis over 20 years.
The following table reflects unaudited pro forma combined results of
operations of the Company and RND as if the acquisition had occurred at the
beginning of fiscal 1996. These unaudited pro forma results have been prepared
for comparative purposes only and include certain pro forma adjustments. Such
pro forma amounts are not necessarily indicative of what actual consolidated
results of operations might have been or will be in the future. Pro forma
combined results of operations for the year ended December 28, 1996, exclude a
nonrecurring charge of approximately $61,600 taken by RND in fiscal 1996
primarily relating to the write-off of previously recorded goodwill. If this
nonrecurring charge was included, pro forma combined results of operations for
the year ended December 28, 1996, would reflect net income of $44,623 and
diluted earnings per share of $0.36.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
NET SALES $17,630,842 $15,109,451
NET INCOME $ 177,119 $ 106,223
DILUTED EARNINGS PER SHARE $ 1.21 $ 0.85
</TABLE>
In April 1997, the Company acquired Tallgrass Technologies AS., a
distributor of computer products based in Norway. In August 1997, the Company
acquired J&W Computer GmbH, a distributor of computer products with operations
in Germany, France, Switzerland, and Austria. In November 1997, the Company
acquired Computacion Tecnica, S.A, a distributor of computer products with
operations in Chile, Brazil, Peru, and Florida. In December 1997, the Company
acquired Latino Americana de Software, a distributor of primarily software
products with operations in Brazil, and TT Microtrading Oy, a software
distribution company based in Finland. The combined consideration paid was
approximately $75,053. The acquisitions were accounted for using the purchase
method of accounting and the results of operations of the acquired companies
have been combined with those of the Company since the respective dates of
acquisition. The purchase price was allocated to the assets acquired and the
liabilities assumed based upon their estimated fair values at the respective
dates of acquisition. The excess of purchase price over net assets acquired for
all five acquisitions totaled approximately $50,000 and is being amortized on a
straight-line basis over 20 years. Pro forma results of operations have not been
presented because the effect of these five acquisitions was not significant.
39
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 5 - ACCOUNTS RECEIVABLE
From February 1993 through the Split-Off, the Company had an arrangement
with Ingram Industries whereby the Company sold all of its domestic trade
accounts receivable to Ingram Industries on an ongoing basis. Ingram Industries
transferred certain trade accounts receivable from the Company and other Ingram
Industries affiliates to a trust that sold certificates representing undivided
interests in the total pool of trade receivables without recourse.
In connection with the Split-Off, in partial satisfaction of amounts due to
Ingram Industries, the Ingram Industries' accounts receivable securitization
agreement related to the Company was assumed by the Company. As of the
Split-Off, the trust had sold $160,000 of medium-term certificates with various
amortization commencement dates between June 1, 1998, and February 1, 2004. In
addition, approximately $13,000 of trust certificate-backed commercial paper was
outstanding on the Split-Off date. Assumption of the securitization program
resulted in a $100,000 and $160,000 reduction of trade accounts receivable and
long-term debt on the Company's Consolidated Balance Sheet at January 2, 1999,
and January 3, 1998, respectively, to reflect the sale of such receivables.
Amounts outstanding under the commercial paper program of $150,000 are included
in accounts receivable and other long-term debt in the Consolidated Balance
Sheet at January 2, 1999, and January 3, 1998. The commercial paper program
arrangement with the trust extends to December 31, 1999, renews biannually,
subject to certain conditions, and has a final termination date of February 10,
2013.
Fees in the amount of $8,667, $11,102, and $1,537 in 1998, 1997 and 1996,
respectively, related to the sale of trade accounts receivable under the
medium-term certificates are included in other expenses in the Consolidated
Statement of Income. Prior to the Company assuming the accounts receivable
securitization program, such fees were included in interest expense charged by
Ingram Industries.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR END
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
LAND $ 9,443 $ 19,414
BUILDINGS AND LEASEHOLD IMPROVEMENTS 59,370 93,529
DISTRIBUTION EQUIPMENT 188,045 120,879
COMPUTER EQUIPMENT 171,364 109,570
--------- ---------
428,222 343,392
ACCUMULATED DEPRECIATION (173,504) (128,244)
--------- ---------
$ 254,718 $ 215,148
========= =========
</TABLE>
Depreciation expense was $57,673 in 1998, $42,880 in 1997 and $33,180 in
1996.
NOTE 7 - LONG-TERM DEBT
Effective upon completion of the Company's initial public offering (the
"IPO") in November 1996, the Company entered into a $1,000,000 revolving credit
agreement (the "U.S. Credit Facility") with a syndicate of banks. The U.S.
Credit Facility is unsecured and matures on October 30, 2001. In October 1997,
the Company entered into two additional multicurrency revolving credit
agreements of $500,000 (the "European Credit Facility") and $150,000 (the
"Canadian Credit Facility") with two bank syndicates. The European Credit
Facility and the Canadian Credit Facility are unsecured and mature on October
28, 2002, and October 28, 2001, respectively. The Company intends to exercise
its option to extend its U.S. and Canadian credit facilities to match the
European Credit Facility term. Collectively, the U.S. Credit Facility, the
European Credit Facility and the Canadian Credit Facility are referred to as the
"Credit Facilities."
Revolving loan rate and competitive bid interest rate options are available
under the Credit Facilities. The spread over LIBOR for revolving rate loans and
associated facility fees are determined by reference to certain financial ratios
or credit ratings by recognized rating agencies on the Company's senior
unsecured debt. The weighted average interest rate on outstanding borrowings
under the Credit Facilities at January 2, 1999, and January 3, 1998, was 4.95%
and 5.76%, respectively.
40
<PAGE> 25
The Company is required to comply with certain financial covenants,
including minimum tangible net worth, restrictions on funded debt and interest
coverage. The credit facilities also restrict the Company's ability to pay
dividends. At January 2, 1999, the Company was in compliance with these
covenants.
At January 2, 1999, and January 3, 1998, commercial paper outstanding was
$199,673 and $150,000, respectively, and is included in other long-term debt.
These amounts include $150,000 of commercial paper in 1998 and 1997 issued under
the Company's accounts receivable securitization program (see Note 5) with the
remainder issued in Europe. The weighted average interest rate on the commercial
paper was 5.27% and 5.76% at January 2, 1999, and January 3, 1998, respectively.
On June 9, 1998, the Company sold $1,330,000 aggregate principal amount at
maturity of its Zero Coupon Convertible Senior Debentures due 2018 in a private
placement. The Company has subsequently registered the resale of these
debentures with the SEC. Gross proceeds from this offering were $460,400. The
debentures were sold at an issue price of $346.18 per $1,000 principal amount at
maturity (representing a yield to maturity of 5.375% per annum), and are
convertible into shares of the Company's Class A Common Stock at a rate of 5.495
shares per $1,000 principal amount at maturity, subject to adjustment under
certain circumstances. The debentures are currently convertible into
approximately 7.3 million shares of the Company's Class A Common Stock. The
debentures are redeemable for cash at the option of the Company on or after June
9, 2003, at the issue price plus accrued original issue discount to the date of
the redemption. Each debenture is subject to repurchase at the option of the
holder as of June 9, 2001, June 9, 2003, June 9, 2008, or June 9, 2013, or if
there is a Fundamental Change (as defined), at the issue price plus accrued
original issue discount to the date of the redemption. In the event of
repurchase at the option of a holder (other than upon a Fundamental Change), the
Company may, at its option, pay in cash or Class A Common Stock, or any
combination thereof. In the case of any such repurchase as of June 9, 2001, the
Company may elect, in lieu of the payment of cash or Class A Common Stock, to
satisfy the redemption in new Zero Coupon Convertible Senior Debentures due
2018. At January 2, 1999, the issue price plus accrued original issue discount
was $473,475.
The Company has additional lines of credit and short-term overdraft
facilities with various banks worldwide, which provide for borrowings
aggregating $209,924 and $119,043 in 1998 and 1997, respectively. Most of these
arrangements are on an uncommitted basis and are reviewed periodically for
renewal. At January 2, 1999, and January 3, 1998, the Company had $52,759 and
$52,493, respectively, outstanding under these facilities.
Other long-term debt, excluding the convertible debentures, consists of the
following:
<TABLE>
<CAPTION>
FISCAL YEAR END
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CREDIT FACILITIES $ 994,549 $ 938,638
OVERDRAFT FACILITIES 38,978 21,869
COMMERCIAL PAPER 199,673 150,000
OTHER 13,781 30,624
----------- -----------
1,246,981 1,141,131
LESS CURRENT MATURITIES OF LONG-TERM DEBT (38,978) (21,869)
----------- -----------
$ 1,208,003 $ 1,119,262
=========== ===========
</TABLE>
Annual maturities of long-term debt as of January 2, 1999, including the
convertible debentures, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 38,978
2000 --
2001 5,123
2002 1,202,880
2003 --
Thereafter 473,475
----------
$1,720,456
==========
</TABLE>
41
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 8 - INCOME TAXES
The components of income before taxes and minority interest consist of the
following:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
UNITED STATES $350,631 $279,762 $165,576
FOREIGN 56,229 46,727 31,181
-------- -------- --------
TOTAL $406,860 $326,489 $196,757
======== ======== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
FEDERAL $ 111,862 $ 87,156 $ 64,252
STATE 15,146 16,697 9,952
FOREIGN 31,145 19,384 13,076
--------- --------- ---------
158,153 123,237 87,280
DEFERRED:
FEDERAL 4,057 7,355 (5,241)
STATE 6,926 1,582 462
FOREIGN (7,451) (711) 2,388
--------- --------- ---------
3,532 8,226 (2,391)
--------- --------- ---------
TOTAL INCOME TAX PROVISION $ 161,685 $ 131,463 $ 84,889
========= ========= =========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------
1998 1997
-------- --------
<S> <C> <C>
NET DEFERRED TAX ASSETS AND LIABILITIES:
TAX IN EXCESS OF BOOK BASIS OF FOREIGN OPERATIONS $ 31,391 $ 23,838
ITEMS NOT CURRENTLY DEDUCTIBLE (8,049) 216
DEPRECIATION (3,659) (1,618)
OTHER 12,426 7,590
-------- --------
TOTAL $ 32,109 $ 30,026
======== ========
</TABLE>
Net current deferred tax assets of $15,562 and $12,856 are included in
other current assets at January 2, 1999, and January 3, 1998, respectively. Net
non-current deferred tax assets of $16,547 and $17,170 are included in other
assets at January 2, 1999, and January 3, 1998, respectively.
42
<PAGE> 27
Reconciliation of the statutory U.S. federal income tax rate to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. STATUTORY RATE 35% 35% 35%
STATE INCOME TAXES, NET OF FEDERAL INCOME TAX BENEFIT 4% 4% 4%
NONCASH COMPENSATION 0% 0% 2%
FOREIGN RATES IN EXCESS OF U.S. STATUTORY RATE 1% 1% 2%
---- ---- ----
EFFECTIVE TAX RATE 40% 40% 43%
==== ==== ====
</TABLE>
At January 2, 1999, the Company had foreign net operating tax loss
carryforwards of $71,406 of which approximately 80% have no expiration date. The
remaining foreign net operating tax loss carryforwards expire through the year
2008.
The Company does not provide for income taxes on undistributed earnings of
foreign subsidiaries as such earnings are intended to be permanently reinvested
in those operations.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
There are various claims, lawsuits and pending actions against the Company
incident to the Company's operations. It is the opinion of management that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
The Company has arrangements with certain finance companies that provide
accounts receivable and inventory financing facilities for its customers. In
conjunction with certain of these arrangements, the Company has agreements with
the finance companies that would require it to repurchase certain inventory
which might be repossessed from the customers by the finance companies. Such
repurchases have been insignificant to date.
The Company leases the majority of its facilities and certain equipment
under noncancelable operating leases. Renewal and purchase options at fair
values exist for a substantial portion of the leases. Rental expense for the
years ended January 2, 1999, January 3, 1998, and December 28, 1996, was
$55,906, $42,321, and $34,784, respectively.
Future minimum rental commitments on operating leases that have remaining
noncancelable lease terms in excess of one year as of January 2, 1999, are as
follows:
<TABLE>
<S> <C>
1999 $ 40,667
2000 36,660
2001 34,017
2002 29,625
2003 25,939
Thereafter 153,297
--------
$320,205
========
</TABLE>
43
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 10 - SEGMENT INFORMATION
Effective for 1998, the Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"). The Company's reportable
operating segments are based on geographic location, and the measure of segment
profit is income from operations. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
The Company operates predominantly in a single industry segment as a
wholesale distributor of computer-based technology products and services.
Geographic areas in which the Company operates include the United States, Europe
(Austria, Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland, and the United Kingdom) and Other (Brazil,
Canada, Chile, Malaysia, Mexico, Peru, and Singapore). Intergeographic sales
primarily represent intercompany sales which are accounted for based on
established sales prices between the related companies and are eliminated in
consolidation.
Financial information by geographic segments is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES:
UNITED STATES
SALES TO UNAFFILIATED CUSTOMERS $ 14,393,295 $ 11,539,623 $ 8,058,578
INTERGEOGRAPHIC SALES 163,199 190,765 140,721
EUROPE 5,624,074 3,352,451 2,590,120
OTHER 2,016,669 1,689,465 1,374,753
ELIMINATIONS OF INTERGEOGRAPHIC SALES (163,199) (190,765) (140,721)
------------ ------------ ------------
TOTAL $ 22,034,038 $ 16,581,539 $ 12,023,451
============ ============ ============
INCOME FROM OPERATIONS:
UNITED STATES $ 397,194 $ 304,003 $ 195,298
EUROPE 62,172 41,045 21,593
OTHER 27,239 31,531 30,617
------------ ------------ ------------
TOTAL $ 486,605 $ 376,579 $ 247,508
============ ============ ============
IDENTIFIABLE ASSETS:
UNITED STATES $ 3,939,573 $ 3,139,114 $ 2,227,997
EUROPE 2,051,827 1,180,792 800,755
OTHER 742,004 612,245 338,195
------------ ------------ ------------
TOTAL $ 6,733,404 $ 4,932,151 $ 3,366,947
============ ============ ============
CAPITAL EXPENDITURES:
UNITED STATES $ 119,838 $ 82,281 $ 90,626
EUROPE 19,109 13,749 8,596
OTHER 4,289 5,428 6,362
------------ ------------ ------------
TOTAL $ 143,236 $ 101,458 $ 105,584
============ ============ ============
DEPRECIATION AND AMORTIZATION:
UNITED STATES $ 44,067 $ 32,333 $ 22,438
EUROPE 15,904 9,538 8,091
OTHER 7,971 5,964 5,641
------------ ------------ ------------
TOTAL $ 67,942 $ 47,835 $ 36,170
============ ============ ============
</TABLE>
U.S. includes all noncash compensation charges. No single customer accounts
for 10% or more of the Company's net sales.
44
<PAGE> 29
NOTE 11 - TRANSACTIONS WITH RELATED PARTIES
Historically, Ingram Industries provided certain administrative services to
the Company. Prior to the Split-Off, the Company was allocated a portion of the
costs of these administrative services. Charges for these services were based
upon utilization and at amounts which management believes are less than the
amounts which the Company would have incurred as a stand-alone entity. Such
amounts totaled $3,633 in 1996 and have been included in selling, general and
administrative expenses in the Consolidated Statement of Income. Subsequent to
the Split-Off, such allocations ceased and the Company entered into a
Transitional Services Agreement with Ingram Industries relating to the continued
provision of certain administrative services, including payroll processing,
through December 31, 1997. The Company believes that the terms of this agreement
were on a basis as favorable as those that would be obtained from third parties
on an arms-length basis.
In addition, the Company entered into the Data Center Services Agreements
with Ingram Entertainment and a division of Ingram Industries, pursuant to which
the Company agreed to provide computer services and maintenance. Charges for
these services were based on a pro rata allocation of costs incurred by the
Company in operating the data services center. These agreements were terminated
during 1998.
The Company has in the past leased warehouse or office space from certain
of its shareowners, but no such leases remained in effect at January 2, 1999.
Total rental payments to shareowners were $1,460 in 1998, and $1,645 in both
fiscal 1997 and 1996, respectively.
Other transactions with Ingram Industries affiliates include sales of $996,
$4,482, and $3,464 in 1998, 1997, and 1996, respectively.
NOTE 12 - STOCK OPTIONS AND INCENTIVE PLANS
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("FAS 123") in 1996. As permitted by FAS 123, the
Company continues to measure compensation cost in accordance with APB 25.
Therefore, the adoption of FAS 123 had no impact on the Company's financial
condition or results of operations. Had compensation cost for the Company's
stock option plans been determined based on the fair value of the options
consistent with the method of FAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME AS REPORTED $245,175 $193,640 $110,679
PRO FORMA $225,772 $182,977 $106,825
DILUTED EARNINGS PER SHARE AS REPORTED $ 1.64 $ 1.32 $ 0.88
PRO FORMA $ 1.51 $ 1.25 $ 0.85
</TABLE>
For pro forma disclosure, the fair value of compensatory stock options,
restricted stock grants and stock purchase rights was estimated using the
Black-Scholes option pricing model using the following weighted average
assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
RISK-FREE INTEREST RATE 5.01% 6.39% 5.68%
EXPECTED YEARS UNTIL EXERCISE 4.0 YEARS 4.0 YEARS 3.1 YEARS
EXPECTED STOCK VOLATILITY 57.4% 47.0% 39.4%
EXPECTED DIVIDENDS -- -- --
</TABLE>
The above table represents the weighted average expected stock volatility
after the IPO in November 1996. The Company used an expected volatility of 0%
for options granted prior to the IPO.
45
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
Rollover Stock Option Plan
Certain of the Company's employees participated in Ingram Industries'
qualified and non-qualified stock option and stock appreciation right ("SAR")
plans. In conjunction with the Split-Off, Ingram Industries options and SARs
held by the Company's employees and certain other Ingram Industries options,
SARs and Incentive Stock Units ("ISUs") were converted to or exchanged for
Ingram Micro options ("Rollover Stock Options") to purchase Class A Common
Stock. Approximately 10,989,000 Rollover Stock Options were outstanding
immediately following the conversion. The majority of the Rollover Stock Options
will be fully vested by the year 2000 and no such options expire later than 10
years from the date of grant. The Company recorded a noncash compensation charge
of approximately $4,392 ($3,659, net of tax) in 1998, $6,876 ($5,915, net of
tax) in 1997 and $23,170 ($19,483, net of tax) in 1996 related to the vested
portion of certain Rollover Stock Options based on the difference between the
estimated fair value of the underlying common stock at the applicable
measurement dates and the exercise price of such options. The weighted average
fair value of Rollover Stock Options for pro forma disclosure was $7.60 per
share.
1996 Equity Incentive Plan
As of April 30, 1996, the Company adopted the Ingram Micro Inc. 1996 Equity
Incentive Plan, as amended (the "Plan"), and Ingram Industries approved the
grant of options under this plan. The Plan authorized the granting of
stock-based awards to purchase up to 12,000,000 shares of Common Stock. In June
1996, the Company issued options under the Plan at $7.00 per share to purchase
an aggregate of approximately 4,618,000 shares of Class B Common Stock to all
eligible employees of the Company. These options vest and generally become
exercisable over five years from the issue date and expire eight years from the
issue date.
In November 1996, the Company issued options under the Plan at $18.00 per
share (the initial public offering price) to purchase an aggregate of
approximately 5,137,000 shares of Class A Common Stock to certain executive
officers, employees, and directors of the Company. Options to purchase 2,680,000
shares vest at the end of nine years; however, such options will vest earlier if
the Company achieves certain performance criteria. All such options expire ten
years from the issue date. During 1998, the Company achieved the performance
criteria established under the Plan and the outstanding options automatically
vested. The remaining options to purchase 2,457,000 shares vest and generally
become exercisable over five years and expire eight years from the issue date.
In 1997, the Company issued options under the Plan at exercise prices
ranging from $20.12 to $30.19 to purchase approximately 1.9 million shares of
Class A Common Stock to certain executive officers and employees of the Company.
The exercise price was equal to the market value of the underlying common stock
at the date of grant. The options generally vest over five years and expire
eight years from issue date.
1998 Equity Incentive Plan
Effective February 1998, the Company's Board of Director's and stockholders
adopted the Ingram Micro Inc. 1998 Equity Incentive Plan ("1998 Plan"). The 1998
Plan authorized the granting of stock-based awards to purchase up to 15,000,000
shares of the Company's Class A Common Stock. In 1998, the Company issued
options under the 1998 Plan at exercise prices ranging from $27.88 to $53.56 to
purchase approximately 2.7 million shares of Class A Common Stock to certain
executive officers and employees of the Company. The exercise price of the
options was equal to the market value of the underlying common stock on the date
of grant. The options generally vest over five years and expire eight years from
issue date.
The weighted average fair value of options granted in 1998, 1997 and 1996
for pro forma disclosure was $16.54, $11.34, and $3.87, respectively.
46
<PAGE> 31
A summary of the status of the Company's stock option plans is presented
below:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
(000s) EXERCISE PRICE
------ --------------
<S> <C> <C>
OUTSTANDING AT DECEMBER 30, 1995 -- $ --
ROLLOVER STOCK OPTIONS 10,989 1.83
STOCK OPTIONS GRANTED DURING THE YEAR 9,756 12.79
STOCK OPTIONS EXERCISED (1,078) 1.32
FORFEITURES (20) 1.87
------- ------
OUTSTANDING AT DECEMBER 28, 1996 19,647 7.30
STOCK OPTIONS GRANTED DURING THE YEAR 1,888 23.22
STOCK OPTIONS EXERCISED (3,085) 2.13
FORFEITURES (417) 5.67
------- ------
OUTSTANDING AT JANUARY 3, 1998 18,033 9.89
STOCK OPTIONS GRANTED DURING THE YEAR 2,709 32.52
STOCK OPTIONS EXERCISED (4,992) 7.29
FORFEITURES (569) 8.12
------- ------
OUTSTANDING AT JANUARY 2, 1999 15,181 $14.85
======= ======
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES AT 1/2/99 (000s) LIFE EXERCISE PRICE 1/2/99 (000s) EXERCISE PRICE
----------------- --------------- --------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$0.66 - $ 3.32 4,075 3.6 $ 2.16 2,182 $ 1.75
$ 7.00 2,857 5.5 7.00 200 7.00
$18.00 3,780 5.8 18.00 2,069 18.00
$20.12 - $30.19 3,643 6.8 26.14 266 22.85
$30.50 - $45.63 656 7.7 38.35 -- --
$46.50 - $53.56 170 7.7 49.05 -- --
----------------- ---------- ------ ------ ---------
15,181 $14.85 4,717 $ 10.29
================= ========== ====== ====== =========
</TABLE>
Stock options exercisable totaled approximately 4,717,000, 3,004,000 and
1,948,000 at January 2, 1999, January 3, 1998, and December 28, 1996,
respectively, at weighted average exercise prices of $10.29, $3.49 and $3.18,
respectively.
1996 Employee Stock Purchase Plan
In October 1996, the Board of Directors and stockholders adopted the 1996
Employee Stock Purchase Plan (the "1996 ESPP"). The 1996 ESPP permits eligible
employees of the Company to purchase Class A Common Stock through payroll
deductions, provided that no employee may accrue the right to purchase more than
$25 worth of stock under all employee stock purchase plans of the Company in any
calendar year. Up to 1,000,000 shares of Class A Common Stock were initially
available for sale under the 1996 ESPP. The initial offering period commenced on
November 1, 1996, and ended on the last market trading day on or before December
31, 1998. The purchase price under the initial offer was the lower of $18.00 per
share or the last reported transaction price of the Class A Common Stock
reported on the New York Stock Exchange on December 31, 1998. Employees may end
their participation in the 1996 ESPP at any time during an offering period, and
they will be paid their payroll deductions accumulated to date. A second
offering ("ESPP2") pursuant to the 1996 ESPP commenced on June 29, 1997, and
ended on the last market trading day on or before December 31, 1998. The ESPP2
has the same rights and restrictions as the 1996 ESPP except the purchase price
under ESPP2 was the lower of $24.06 per share or the last reported transaction
price of the Class A Common Stock reported on the New York Stock Exchange on
December 31, 1998. A third offering ("ESPP3") commenced on December 31, 1997,
and ended on the last trading day on
47
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
or before December 31, 1998. The ESPP3 has the same rights and restrictions as
the 1996 ESPP except the purchase price under the ESPP3 was the lower of $29.12
per share or the last reported transaction price of the Class A Common Stock
reported on the New York Stock Exchange on December 31, 1998. A fourth offering
("ESPP4") commenced on July 1, 1998, and ended on the last trading day on or
before December 31, 1998. The ESPP4 has the same rights and restrictions as the
1996 ESPP except the purchase price under the ESPP4 was the lower of $44.25 per
share or the last reported transaction price of the Class A Common Stock
reported on the New York Stock Exchange on December 31, 1998.
On December 31, 1998, the offering period was completed for all 1996 ESPP
offerings. In January 1999, the Company issued approximately 585,900 of the
1,000,000 shares. The 1996 ESPP terminated on December 31, 1998.
1998 Employee Stock Purchase Plan
Effective as of March 18, 1998, the Company's Board of Directors and
stockholders adopted the 1998 Employee Stock Purchase Plan (the "1998 ESPP").
The 1998 ESPP permits eligible employees of the Company to purchase Class A
Common Stock through payroll deductions, provided that no employee may accrue
the right to purchase more than $25 worth of stock under the 1998 Plan in any
calendar year. Up to 3,000,000 shares of Class A Common Stock will be initially
available for sale under the 1998 ESPP.
Under the 1998 ESPP, each participant electing to participate in the Plan
will have the right to purchase from the Company on December 31, 1999, up to but
not exceeding the aggregate number of whole shares of Common Stock that may be
purchased with funds accumulated in the participant's stock purchase plan
account, minus amounts required to be withheld under applicable local law.
No offerings under the 1998 ESPP were made during 1998. During 1999, two
offerings will be made under the 1998 ESPP. The "First Offering" will commence
on the first business day of the first payroll period beginning in January 1999
or, in the case of an individual first becoming eligible to participate
thereafter (but prior to December 31, 1999), on the last business day of the
month in which such individual becomes eligible (the "First Grant Date") and end
on December 31, 1999. The "Second Offering" will commence on the first business
day of the first payroll period beginning after June 30, 1999, or in the case of
individuals first becoming eligible to participate thereafter (but prior to
December 31, 1999), on the last business day of the month in which such
individual becomes eligible (the "Second Grant Date"), and end on December 31,
1999.
The purchase price per share in the First and Second Offerings will be the
lower of the last reported transaction prices of the Company's Common Stock on
the principal exchange on which it trades on the First Grant Date or the Second
Grant Date or in the case of an individual first becoming eligible to
participate on the last business day of the month in which such individual
becomes eligible, and December 31, 1999.
Employee Benefit Plans
Prior to the Split-Off, the Company participated in Ingram Industries'
defined contribution plan covering substantially all U.S. employees. As a result
of the Split-Off, the Company established its own employee benefit plans. The
plans permit eligible employees to make contributions up to certain limits which
are matched by the Company at stipulated percentages. The Company's
contributions charged to expense were $3,314 in 1998, $2,678 in 1997, and $1,642
in 1996.
NOTE 13 - COMMON STOCK
The Company has two classes of Common Stock, consisting of 265,000,000
authorized shares of $0.01 par value Class A Common Stock and 135,000,000
authorized shares of $0.01 par value Class B Common Stock, and 1,000,000
authorized shares of $0.01 par value Preferred Stock. Class A stockholders are
entitled to one vote on each matter to be voted on by the stockholders whereas
Class B stockholders are entitled to ten votes on each matter to be voted on by
the stockholders. The two classes of stock have the same rights in all other
respects. Each share of Class B Common Stock may at any time be converted to a
share of Class A Common Stock; however, conversion will occur automatically on
the earliest to occur of (1) the fifth anniversary of the consummation of the
Split-Off; (2) the sale or transfer of such share of Class B Common Stock to any
person not specifically authorized to hold such shares by the Company's
Certificate of Incorporation; or (3) the date on which the number of shares of
Class B Common Stock then outstanding represents less than 25% of the aggregate
number of shares of Class A Common Stock and Class B Common Stock then
outstanding.
48
<PAGE> 33
Initial Public Offering
On November 1, 1996, the Company sold 23,200,000 shares of Class A Common
Stock at $18.00 per share in the IPO. Proceeds of $393,844, net of underwriters'
commissions and expenses of the offering aggregating $23,756, were received and
used to repay indebtedness to Ingram Industries in the amount of $366,340. The
remaining amount of $27,504 was used for working capital purposes.
Key Employee Stock Purchase Plan
As of April 30, 1996, the Company adopted the Key Employee Stock Purchase
Plan (the "Stock Purchase Plan") which provides for the issuance of up to
4,000,000 shares of Class B Common Stock to certain employees. In June 1996, the
Company offered 2,775,000 shares of its Class B Common Stock for sale to certain
employees pursuant to the Stock Purchase Plan, and subsequently sold 2,510,400
shares at $7.00 per share with aggregate proceeds of approximately $17,573. The
shares sold thereby are subject to certain restrictions on transfer and to
repurchase by the Company upon termination of employment prior to certain
specified vesting dates at the original offering price. The Company has
repurchased 232,900 of such shares.
In addition, the Company granted, pursuant to the Stock Purchase Plan,
107,000 restricted shares of Class B Common Stock to certain officers and
employees of the Company. These shares generally vest over four years. Prior to
vesting, these restricted shares are subject to forfeiture to the Company
without consideration upon termination of employment. At January 2, 1999, 10,000
of such shares have been forfeited to the Company. Unearned compensation in the
amount of $714 related to the restricted shares was recorded as a separate
component of stockholders' equity and is amortized to noncash compensation over
the vesting period. The amount amortized to noncash compensation in 1998, 1997,
and 1996 was $170, $276, and $180, respectively.
The detail of changes in the number of issued and outstanding shares of
Class A Common Stock, Class B Common Stock, and Redeemable Class B Common Stock
for the three year period ended January 2, 1999, is as follows:
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------
REDEEMABLE
CLASS A CLASS B CLASS B
------------ ------------ ------------
<S> <C> <C> <C>
DECEMBER 30, 1995 -- 107,251,362 --
GRANT OF RESTRICTED CLASS B COMMON STOCK 107,000
SALE OF REDEEMABLE CLASS B COMMON STOCK 2,510,400
SALE OF CLASS A COMMON STOCK 23,200,000
STOCK OPTIONS EXERCISED 1,077,696
FORFEITURE OF RESTRICTED CLASS B COMMON STOCK (5,000)
REPURCHASE OF REDEEMABLE CLASS B COMMON STOCK (50,000)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 770,000 (770,000)
------------ ------------ ------------
DECEMBER 28, 1996 25,047,696 106,583,362 2,460,400
STOCK OPTIONS EXERCISED 3,084,603
FORFEITURE OF RESTRICTED CLASS B COMMON STOCK (5,000)
REPURCHASE OF REDEEMABLE CLASS B COMMON STOCK (90,000)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 9,234,090 (9,234,090)
------------ ------------ ------------
JANUARY 3, 1998 37,366,389 97,344,272 2,370,400
VESTING OF REDEEMABLE CLASS B COMMON STOCK 1,161,250 (1,161,250)
STOCK OPTIONS EXERCISED 4,992,264
REPURCHASE OF REDEEMABLE CLASS B COMMON STOCK (92,900)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 24,162,062 (24,162,062)
------------ ------------ ------------
JANUARY 2, 1999 66,520,715 74,343,460 1,116,250
============ ============ ============
</TABLE>
49
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 14 - SUBSEQUENT EVENT
In January 1999, the Company purchased 44,114,340 shares of ERL common
stock from certain shareholders, which increased the Company's ownership to
39.6%. In accordance with Singapore law, the Company was required to extend a
tender offer for the remaining shares and warrants of ERL as a result of its
increased ownership. The Company offered to purchase the remaining outstanding
shares and warrants for approximately $1.20 and $0.65 per share and warrant,
respectively, during the tender offer period from January 4, 1999, to February
19, 1999. In addition, during January and February 1999, the Company made
open-market purchases of ERL shares and warrants. As a result of the open-market
purchases and the tender offer, the Company's ownership in ERL increased to
approximately 95%. The aggregate purchase price paid in 1999 for purchases of
ERL common stock and warrants was approximately $233 million. The Company
intends to amortize the excess of the purchase price over the net assets
acquired for all of the ERL acquisition on a straight-line basis over 30 years.
50
<PAGE> 35
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY
Management is responsible for the integrity of the financial information
contained in this annual report, including the Company's consolidated financial
statements, which have been prepared in conformity with generally accepted
accounting principles and include amounts based upon management's informed
estimates and judgments.
Management maintains an effective system of internal accounting controls,
including an internal audit program, that is designed to provide reasonable, but
not absolute, assurance that assets are safeguarded and that accounting records
provide a reliable basis for the preparation of financial statements. This
system is continuously reviewed, improved and modified in response to changing
business conditions and operations and recommendations made by the independent
accountants and internal auditors. Management believes that the accounting and
control systems provide reasonable assurance that assets are safeguarded and
financial information is reliable.
The Company's Bylaws provide that a majority of members of the Audit
Committee of the Board of Directors shall be Independent Directors who are not
employees of the Company. The Audit Committee is currently comprised entirely of
Independent Directors. The Audit Committee represents the shareowners and the
Board of Directors on matters relating to corporate accounting, financial
reporting, internal accounting control and auditing including the ongoing
assessment of the activities of the independent accountants and internal
auditors. The independent accountants and internal auditors advise the Audit
Committee of significant findings and recommendations arising from their
activities and have free access to the Audit Committee, with or without the
presence of management.
/s/ JERRE L. STEAD /s/ MICHAEL J. GRAINGER
- ------------------------------- ----------------------------------
Jerre L. Stead Michael J. Grainger
Chairman of the Board and Executive Vice President and
Chief Executive Officer Worldwide Chief Financial
Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Ingram Micro Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Ingram Micro
Inc. and its subsidiaries at January 2, 1999 and January 3, 1998, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 2, 1999, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------------------
PricewaterhouseCoopers LLP
Costa Mesa, California
February 10, 1999, except as to Note 14,
which is as of February 19, 1999
51
<PAGE> 36
BOARD OF DIRECTORS
JERRE L. STEAD
Chairman of the Board and Chief Executive Officer,
Ingram Micro Inc.
DON H. DAVIS, JR.
Chairman and Chief Executive Officer,
Rockwell International Corporation
JOHN R. INGRAM
Chairman, Ingram Book Group
and Co-President, Ingram Industries Inc.
MARTHA R. INGRAM
Chairman of the Board, Ingram Industries Inc.
PHILIP M. PFEFFER
Chief Executive Officer, Borders Group, Inc.
J. PHILLIP SAMPER
Founder and General Partner,
Gabriel Venture Partners, Chairman, Placeware Inc.
JOE B. WYATT
Chancellor, Vanderbilt University
CORPORATE MANAGEMENT
JERRE L. STEAD
Chairman of the Board and Chief Executive Officer
JEFFREY R. RODEK
President and Worldwide Chief Operating Officer
MICHAEL J. GRAINGER
Executive Vice President and Worldwide Chief Financial Officer
DOUGLAS R. ANTONE
Executive Vice President and Worldwide President,
Frameworks,(TM) Worldwide
GUY P. ABRAMO
Senior Vice President, Marketing, Worldwide
JAMES E. ANDERSON, JR.
Senior Vice President, Secretary and General Counsel
DAVID M. CARLSON
Senior Vice President and Chief Technology Officer
DAVID M. FINLEY
Senior Vice President, Human Resources, Worldwide
JAMES F. RICKETTS
Vice President and Worldwide Treasurer
REGIONAL MANAGEMENT
PHILIP D. ELLETT
Executive Vice President and President,
Ingram Micro North America
ROBERT D. GRAMBO
Executive Vice President and President,
Ingram Micro Europe
HANS T. KOPPEN
Senior Vice President and President,
Ingram Micro Latin America
GREGORY M. SPIERKEL
Senior Vice President and President,
Ingram Micro Asia-Pacific
52
<PAGE> 37
Corporate Offices
Ingram Micro Inc.
1600 E. St. Andrew Place
Santa Ana, CA 92705
Phone: (714) 566-1000
Annual Meeting
The 1999 Annual Meeting of Shareowners will be held at 10 a.m. (Central time)
Wednesday, May 19, 1999, at the Ingram Micro Distribution Center, 3820 Micro
Drive (off Route 51) in Millington, Tennessee. Shareowners are cordially invited
to attend.
Shareowner Inquiries
Requests for information may be sent to the Investor Relations Department
at our corporate offices.
Investor Relations telephone information line: (714) 382-8282.
Investor Relations e-mail address: [email protected]
Additional information also is available on our Web site, www.ingrammicro.com.
Transfer Agent and Registrar
First Chicago Trust Company of New York
ADivision of EquiServe
Post Office Box 2500
Jersey City, NJ 07303-2500
(201) 324-1644
<PAGE> 38
Common Stock
The Class ACommon Stock of Ingram Micro is traded on the New York Stock Exchange
under the symbol "IM."
<TABLE>
<CAPTION>
Price Range of Class A Common Stock
High Low
<S> <C> <C>
Fiscal 1997 First Quarter $25.88 $19.00
Second Quarter 25.25 20.75
Third Quarter 30.13 23.63
Fourth Quarter 34.75 23.50
Fiscal 1998 First Quarter $40.75 $26.63
Second Quarter 49.25 36.75
Third Quarter 54.63 43.31
Fourth Quarter 50.38 32.88
</TABLE>
<PAGE> 1
INGRAM MICRO INC. SUBSIDIARIES AS OF MARCH 16, 1999
EXHIBIT 21.01
<TABLE>
<CAPTION>
SUBSIDIARY/AFFILIATE JURISDICTION
- -------------------- ------------
<S> <C>
1) Ingram Export Company Ltd. Barbados
2) Ingram Micro Inc. Canada
3) CD Access Inc. Iowa
4) Ingram Micro Delaware Inc. Delaware
a) Ingram Micro L.P.(1) Tennessee
b) Ingram Micro Texas L.P.(2) Texas
c) Ingram Micro CLBT(3) Pennsylvania
5) Ingram Micro Management Company California
6) Ingram Dicom S.A. de C.V. Mexico
a) Export Services Inc. California
7) Ingram European Coordination Center S.A./N.V. Belgium
8) Ingram Micro S.A.R.L. France
a) Ingram Micro Purchasing S.A.R.L. France
9) Ingram Micro N.V. Belgium
10) Ingram Micro B.V. The Netherlands
a) Micro Communication Services B.V. The Netherlands
b) Bright Communications B.V. The Netherlands
c) Ingram Micro Frameworks B.V. The Netherlands
d) Ingram Micro Purchasing B.V. The Netherlands
11) Ingram Micro S.p.A.(4) Italy
12) Ingram Micro Holdings GmbH(5) Germany
a) Ingram Micro Deutschland GmbH Germany
i) Ingram Micro GmbH Zweigniederlassung Oesterriech Austria
b) J & W Computer GmbH Germany
d) Ingram Micro Europe GmbH Germany
i) Ingram Micro Management GmbH Germany
ii) Ingram Micro Development GmbH Germany
(1) Macrotron AG (95%)(6) Germany
(a) Macrotron Distribution GmbH Germany
(i) Macrotron Computer Manufacturing Germany
(b) Macrotron Systems GmbH Germany
(i) Macrotron (UK) Ltd. England
(ii) Macrotron Process Technologies (51%) Germany
(iii) Macrotron CAD-CAM Systems Germany
(c) Macrokom (90%) Germany
(d) Future Software (90%) Germany
(e) Compu-Shack Germany
(i) Compu-Shack Praha Czechoslovakia
(ii) Walton Networking (34.4%) Hungary
(iii) Compushack Distribution Germany
(iv) Compushack Production Germany
(v) Allied Technology (66.6%) California
(f) Ingram Macrotron AG Switzerland
(g) Ingram Macrotron Ges.m.b.H Austria
iii) Ingram Micro Germany Verwaltungs GmbH Germany
13) Ingram Micro Acquisition GmbH Germany
</TABLE>
1
<PAGE> 2
<TABLE>
<CAPTION>
SUBSIDIARY/AFFILIATE JURISDICTION
- -------------------- ------------
<S> <C>
14) Ingram Micro Holdings Limited United Kingdom
a) Ingram Micro (UK) Limited United Kingdom
b) Metrocom Computer Systems Limited(7) United Kingdom
c) Document Technology Limited(7) United Kingdom
d) Software Limited(7) United Kingdom
e) Ingram Micro Finance Center of Excellence Ltd. United Kingdom
f) Ingram Micro Purchasing Ltd. United Kingdom
15) Ingram Micro Singapore Inc. California
a) Ingram Micro Hong Kong Ltd.(7) Hong Kong
b) Electronic Resources Limited(8) Singapore
i) Eltee Electronics Pte Ltd Singapore
ii) Electronic Resources Systems Pte Ltd. Singapore
iii) Erijaya Pte Ltd (60%) Singapore
iv) Megawave Pte Ltd (60%) Singapore
v) ERI Pte Ltd (51%) Singapore
(1) ER Gulf Fze United Arab Emirates
vi) ERIM Pte Ltd Singapore
(1) ERIM Malaysia Sdn Bhd Malaysia
vii) ER Indo-China Pte Ltd (60%) Singapore
viii) ER (Malaysia) Sdn Bhd Malaysia
ix) L.T. Electronics (Malaysisa) Sdn Bhd Malaysia
x) Electronic Resources (Thailand) Limited Thailand
(1) ER (Thailand) Company Limited (55%) Thailand
xi) Electronic Resources Australia Pty Limited Australia
(1) Electronic Resources Australia (Vic) Pty Ltd. Australia
(2) Electronic Resources Australia (Qld) Pty Ltd. (76%) Australia
xii) Electronic Resources (N.Z.) Limited (70%) New Zealand
xiii) Electronic Resources HK Limited Hong Kong
(1) Chinman Electronics Limited (51%)(9) Hong Kong
(2) Electronic Resources China Limited (51%)(9) Hong Kong
(3) Xin Jia Electronic Resources International Trading
(Shanghai) Co., Ltd. China
xiv) Electronic Resources India Limited (51%) India
xv) Electronics Resources Pakistan Pte Ltd. Singapore
16) Ingram Micro Japan Inc. Delaware
17) Ingram Micro S.A. Spain
18) Ingram Micro AB Sweden
a) Ingram Micro A/S Denmark
b) Ingram Micro A.S. Norway
c) Ingram Micro International OY(10) Finland
19) Ingram Micro Europe AG Switzerland
20) IMI Washington Inc. Delaware
21) Ingram Funding Inc. Delaware
22) Ingram Micro CLBT Inc. Delaware
23) Ingram Micro Latin America Cayman Islands
a) Ingram Micro Caribbean Cayman Islands
b) Ingram Micro Chile Chile
c) Ingram Micro Holding Limitada Brazil
i) Ingram Micro do Brazil Limitada Brazil
d) Ingram Micro Peru Peru
24) RND, Inc.(10) Colorado
25) Intelligent Advanced Systems, Inc.(10) Delaware
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
SUBSIDIARY/AFFILIATE JURISDICTION
- -------------------- ------------
<S> <C>
26) Intelligent Distribution Services, Inc.(10) Delaware
27) Intelligent Express, Inc.(10) Pennsylvania
28) Intelligent SP, Inc.(10) Colorado
29) Ingram Micro OY Finland
30) Computek Enterprises (U.S.A.) Inc.(10) Florida
31) Ingram Micro Compania de Servicios S.A. de C.V. Mexico
32) Ingram Micro Taiwan Inc. Delaware
33) Ingram Micro Purchasing & Warehousing AB Sweden
34) Ingram Micro SB Holdings Inc. Cayman Islands
a) Ingram Micro SB Inc. California
35) Ingram Micro Logistics Inc.(11) Cayman Islands
36) Ingram Micro Texas LLC(12) Delaware
</TABLE>
- ----------
(1) Tennessee limited partnership, with Ingram Micro Inc. (Delaware) as general
partner and Ingram Micro Delaware Inc. as limited partner.
(2) Texas limited partnership, with Ingram Micro Texas LLC (dba IMTX LLC) as
general partner and Ingram Micro Delaware Inc. as limited partner.
(3) Pennsylvania Business Trust, with Ingram Micro Delaware Inc. as trustee.
(4) 97% owned by Ingram Micro Inc. and 3% by Ingram Micro N.V.
(5) German limited partnership, with Ingram Micro Inc. (Delaware) as general
partner and Ingram Micro Delaware Inc. as limited partner.
(6) 5% - average between common and preferred stock.
(7) Under liquidation.
(8) Ingram Micro Singapore owns over 95% of the outstanding common shares on a
fully diluted basis.
(9) Remaining 49% is held by Electronic Resources Limited.
(10) Dormant.
(11) Ingram Micro Inc. (Delaware) owns 40,000,000 voting preferred shares and
Ingram Micro SB Inc. owns 10,000,000 non-voting common shares.
(12) Single member limited liability company with Ingram Micro Inc. (Delaware)
as its sole member, dba IMTX LLC in Texas.
3
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-23821, 333-23823, 333-23825, 333-23827,
333-43447, 333-52807 and 333-52809) of Ingram Micro Inc. of our report dated
February 10, 1999, except as to Note 14, which is as of February 19, 1999
appearing on page 51 of the 1998 Annual Report to Shareowners of Ingram Micro
Inc. which is incorporated by reference in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 25 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
March 29, 1999
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-39457 and
333-58857) of Ingram Micro Inc. of our report dated February 10, 1999 except as
to Note 14, which is as of February 19, 1999, appearing on page 51 of the 1998
Annual Report to Shareowners of Ingram Micro Inc. which is incorporated by
reference in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 25 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 96,682
<SECURITIES> 0
<RECEIVABLES> 2,617,954
<ALLOWANCES> 55,904
<INVENTORY> 3,094,227
<CURRENT-ASSETS> 6,031,550
<PP&E> 428,222
<DEPRECIATION> 173,504
<TOTAL-ASSETS> 6,733,404
<CURRENT-LIABILITIES> 3,599,650
<BONDS> 0
0
0
<COMMON> 1,408
<OTHER-SE> 1,397,849
<TOTAL-LIABILITY-AND-EQUITY> 6,733,404
<SALES> 22,034,038
<TOTAL-REVENUES> 22,034,038
<CGS> 20,642,870
<TOTAL-COSTS> 20,642,870
<OTHER-EXPENSES> 13,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,529
<INCOME-PRETAX> 406,860
<INCOME-TAX> 161,685
<INCOME-CONTINUING> 245,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245,175
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.64
</TABLE>
<PAGE> 1
EXHIBIT 99.01
CAUTIONARY STATEMENTS FOR PURPOSES OF THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for "forward-looking statements" to encourage companies to provide
prospective information, so long as such information is identified as
forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statement(s). Ingram
Micro Inc. (the "Company") desires to take advantage of the safe harbor
provisions of the Act.
Except for historical information, the Company's Annual Report on Form 10-K
for the year ended January 2, 1999 to which this exhibit is appended, the
Company's quarterly reports on Form 10-Q, the Company's current reports on Form
8-K, periodic press releases, as well as other public documents and statements,
may contain "forward-looking statements" within the meaning of the Act.
In addition, representatives of the Company from time to time participate
in speeches and calls with market analysts, conferences with investors and
potential investors in the Company's securities, and other meetings and
conferences. Some of the information presented in such speeches, calls, meetings
and conferences may be "forward-looking statements" within the meaning of the
Act.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect the Company and/or the computer-based
technology products and services distribution industry as a whole. In some
cases, information regarding certain important factors that could cause actual
results to differ materially from those projected, forecasted, estimated,
budgeted or otherwise expressed in forward-looking statements made by or on
behalf of the Company may appear or be otherwise conveyed together with such
statements. The following additional factors (in addition to other possible
factors not listed) could affect the Company's actual results and cause such
results to differ materially from those projected, forecasted, estimated,
budgeted or otherwise expressed in forward-looking statements made by or on
behalf of the Company:
INTENSE COMPETITION. The Company operates in a highly competitive
environment, both in the United States and internationally. The computer-based
technology products and services distribution industry is characterized by
intense competition, based primarily on price, product availability, speed and
accuracy of delivery, effectiveness of sales and marketing programs, credit
availability, ability to tailor specific solutions to customer needs, quality
and breadth of product lines and services, and availability of technical and
product information. The Company's competitors include regional, national, and
international wholesale distributors, as well as hardware manufacturers,
networking equipment manufacturers, and software publishers that sell directly
to resellers and end-users and large resellers who resell to other resellers.
There can be no assurance that the Company will not lose market share in the
United States or in international markets, or that it will not be forced in the
future to reduce its prices in response to the actions of its competitors and
thereby experience a further reduction in its gross margins. See "--Narrow
Margins."
The Company entered into the channel assembly business during 1997 and has
since expanded to include the manufacture of private label and unbranded systems
and systems for original equipment manufacturers ("OEMs"). Certain of the
Company's competitors in channel assembly, private label and unbranded systems
manufacturing and OEM systems manufacturing may be more experienced and may have
more established contacts with suppliers and other types of partners, providing
those competitors with a competitive advantage over the Company. Success in the
channel assembly, private label and unbranded systems manufacturing and OEM
systems manufacturing business requires significant infrastructure investment,
and there can be no assurance that product can be assembled and delivered in a
cost effective manner sufficient to adequately cover the Company's investment.
In addition, if OEM and reseller partners choose not to participate or choose
not to increase their support for the Company's channel assembly, private label
and unbranded systems manufacturing and OEM systems manufacturing initiatives,
and if the Company is not successful in finding other ways to cover the
Company's infrastructure investment, there
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is no assurance that the Company's business, financial condition, or results of
operations will not be materially impacted.
As the Company initiates other business models, such as electronic software
distribution, it faces competition from companies with more experience in this
arena. There also exists a risk that, after investing in the new distribution
method, this form of software delivery may not generate the volume adequate to
cover the Company's investment. In addition, as the Company enters new business
areas, it may also encounter increased competition from current competitors
and/or from new competitors, some of which may be current customers of the
Company. There can be no assurance that increased competition and adverse
reaction from customers resulting from the Company's expansion into new business
models will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
NARROW MARGINS. As a result of intense price competition in the
computer-based technology products and services wholesale distribution industry,
the Company's margins have historically been narrow and are expected in the
future to continue to be narrow. The Company's gross margins have been further
reduced by the Company's entry into the master reseller business, which has
lower gross margins than the Company's traditional wholesale distribution
business. These narrow margins magnify the impact on operating results of
variations in operating costs. The Company receives purchase discounts from
suppliers based on a number of factors, including sales or purchase volume and
breadth of customers. These purchase discounts directly affect gross margins.
Because many purchase discounts from suppliers are based on percentage increases
in sales of products, it may become more difficult for the Company to achieve
the percentage growth in sales required for larger discounts due to the current
size of the Company's revenue base. In the last year, major PC manufacturers
have substantially raised the threshold on sales volume before distributors may
qualify for discounts and/or rebates, which has adversely affected the Company's
narrow margins. There has also been increased price competition among
distributors in the last year as distributors have fought to maintain market
share. The intense price competition, particularly in the United States, has
adversely affected the Company's narrow margins. Further decreases in purchase
discounts and rebates by suppliers and continued or increased price competition
among distributors may have a material adverse impact on the Company's results
of operations. In addition, as hardware manufacturers look to increase direct
sales volumes while tightening terms and conditions, some customers are buying
more products directly from the manufacturer rather than through distribution,
which may adversely affect the Company's sales volumes and profit margins. As a
result of the Company's narrow margins, if the Company's receivables experience
a substantial deterioration in their collectibility or the Company cannot obtain
credit insurance at reasonable rates, the Company's financial condition and
results of operations may also be adversely impacted.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly net sales and
operating results have varied significantly in the past and will likely continue
to do so in the future as a result of seasonal variations in the demand for the
products and services offered by the Company, the introduction of new hardware
and software technologies and products offering improved features and
functionality, the introduction of new products and services by the Company and
its competitors, the loss or consolidation of a significant supplier or
customer, changes in the level of operating expenses, inventory adjustments,
product supply constraints, competitive conditions including pricing, interest
rate fluctuations, the impact of acquisitions, currency fluctuations, and
general economic conditions. The Company's narrow margins may magnify the impact
of these factors on the Company's operating results. The Company believes that
period-to-period comparisons of its operating results should not be relied upon
as an indication of future performance. In addition, the results of any
quarterly period are not indicative of results to be expected for a full fiscal
year. In certain future quarters, the Company's operating results may be below
the expectations of public market analysts or investors. In such event, the
market price of the Common Stock would be materially adversely affected.
CAPITAL INTENSIVE NATURE OF BUSINESS. The Company's business requires
significant levels of capital to finance accounts receivable and product
inventory that is not financed by trade creditors. In order to continue its
expansion, including acquisitions, the Company will need additional financing,
including debt financing, which may or may not be available on terms acceptable
to the Company, or at all. In addition to the Company's prospects, financial
condition and results of operations, macroeconomic factors such as fluctuations
in interest rates or a general economic downturn may restrict the Company's
ability to raise the necessary capital. No assurance can be given
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that the Company will continue to be able to raise capital in adequate amounts
for these or other purposes on terms acceptable to the Company, and the failure
to do so could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "--Fluctuations in Quarterly
Results," "--Acquisitions" and "--Risk of Termination of Subsidized Floor Plan
Financing for the Company's Master Reseller Business."
MANAGEMENT OF GROWTH. The rapid growth of the Company's business has
required the Company to make significant recent additions in personnel and has
significantly increased the Company's working capital requirements. Although the
Company has experienced significant sales growth in recent years, such growth
should not be considered indicative of future sales growth. Such growth has
resulted in new and increased responsibilities for management personnel and has
placed and continues to place a significant strain upon the Company's
management, operating and financial systems, and other resources. There can be
no assurance that the strain placed upon the Company's management, operating and
financial systems, and other resources will not have a material adverse effect
on the Company's business, financial condition, and results of operations, nor
can there be any assurance that the Company will be able to attract or retain
sufficient personnel to continue the expansion of its operations. Also crucial
to the Company's success in managing its growth will be its ability to achieve
additional economies of scale. There can be no assurance that the Company will
be able to achieve such economies of scale, and the failure to do so could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON INFORMATION SYSTEMS. The Company depends on a variety of
information systems for its operations, particularly its centralized IMpulse
information processing system which supports more than 40 operational functions
including receiving, customer management, order processing, shipping, inventory
management, and accounting. At the core of the IMpulse system is on-line,
real-time distribution software to which considerable enhancements and
modifications have been made to support the Company's growth and its low cost
business model. Although the Company has not in the past experienced significant
failures or downtime of IMpulse or any of its other information systems, any
such failure or significant downtime could prevent the Company from taking
customer orders, printing product pick-lists, and/or shipping product and could
prevent customers from accessing price and product availability information from
the Company.
In order to react to changing market conditions, the Company must
continuously expand and improve IMpulse and its other information systems. The
Company has begun to migrate its IMpulse information processing system from a
mainframe-based system using Cobol language to a client-server based system
using Oracle database management systems. The Company believes that this new
information system architecture will address the Company's need for a
distributed computing environment and will increase system scalability and fault
tolerance. However, to the extent the Company fails to implement improvements to
its IMpulse information systems at a rate that meets the demands of customers,
the Company's competitive advantage with respect to such systems may be
adversely affected, which may have a material adverse effect on the Company
business, financial condition and results of operations.
From time to time the Company may acquire other businesses having
information systems and records, which must be converted and integrated into
IMpulse or other Company information systems. These conversion and integration
projects could result in a significant diversion of resources from other
operations. The transition to and implementation of new or upgraded hardware or
software systems could result in system delays or failures. Any interruption,
corruption, degradation or failure of the Company's information systems could
adversely impact its ability to receive and process customer orders on a timely
basis.
The Company believes that customer information systems are becoming
increasingly important in the wholesale distribution of technology products. As
a result, the Company has enriched its customer information systems by adding
features that allow increased flexibility in how reseller customers purchase
products from the Company. However, there can be no assurance that competitors
will not develop customer information systems that are superior to those offered
by the Company. The inability of the Company to develop competitive customer
information systems could adversely affect the Company's business, financial
condition, and results of operations.
As is the case with many computer software systems, some of the Company's
systems use two digit data fields
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which recognize dates using the assumption that the first two digits are "19"
(i.e., the number 99 is recognized as the year 1999). Therefore, the Company's
date critical functions relating to the year 2000 and beyond, such as sales,
distribution, purchasing, inventory control, merchandise planning and
replenishment, facilities, and financial systems, may be severely affected
unless changes are made to these systems. With the assistance of an outside
consultant, the Company commenced a review of its internal systems to identify
applications that are not Year 2000 ready and to assess the impact of the Year
2000 problem. The Company has developed an overall plan to modify its internal
systems to be Year 2000 ready. The Company anticipates that the required Year
2000 modifications will be made on a timely basis and does not believe that the
cost of such modifications will have a material effect on the Company's
operating results. There can be no assurance, however, that the Company will be
able to modify successfully and in a timely manner all of its internal services
and systems to comply with Year 2000 requirements, which could have a material
adverse effect on the Company's operating results. In addition, the Company
faces risks to the extent that suppliers of products (including components for
its channel assembly, private label and unbranded systems, and configuration
initiative), services (including services provided by independent shipping
companies), and business on a worldwide basis may not have business systems or
products that comply with Year 2000 requirements. In the event any such third
parties cannot provide the Company with products, services or systems that meet
Year 2000 requirements in a timely manner, the Company's operating results could
be materially adversely affected. The Company's operating results also could be
materially adversely affected if it were to be held responsible for the failure
of any products sold by the Company to be Year 2000 compliant despite its
disclaimer of product warranties and the limitation of liability contained in
its sales terms and conditions.
EXPOSURE TO FOREIGN MARKETS; CURRENCY RISK. The Company, through its
subsidiaries, operates in a number of countries outside of the United States,
and the Company expects its international net sales to increase as a percentage
of total net sales in the future. The Company's net sales from operations
outside the United States are primarily denominated in currencies other than the
U.S. dollar. Accordingly, the Company's international operations impose risks
upon its business as a result of exchange rate fluctuations. There can be no
assurance that exchange rate fluctuations will not have a material adverse
effect on the Company's business, financial condition, or results of operations
in the future. In certain countries outside the United States, operations are
accounted for primarily on a U.S. dollar denominated basis. In the event of an
unexpected devaluation of the local currency in those countries (as occurred in
Mexico in December 1994 and more recently in 1997 in Asia and Latin America),
the Company may experience significant foreign exchange losses. In addition, the
Company's operations may be significantly adversely affected as a result of the
general economic impact of the devaluation of the local currency.
The Company's operations outside the United States are subject to other
risks such as the imposition of governmental controls, export license
requirements, restrictions on the export of certain technology, political
instability, trade restrictions, tariff changes, difficulties in staffing and
managing international operations, difficulties in collecting accounts
receivable and longer collection periods, and the impact of local economic
conditions and practices. These risks are more prevalent in regions where the
economic and political environments are less stable compared to more stable
areas such as Canada and Western Europe. As the Company continues to expand its
international business, its success will be dependent, in part, on its ability
to anticipate and effectively manage these and other risks. There can be no
assurance that these and other factors will not have a material adverse effect
on the Company's operations or its business, financial condition, and results of
operations as a whole.
DEPENDENCE ON KEY INDIVIDUALS. The Company is dependent in large part on
its ability to retain the services of its key management, sales, and operational
personnel. The Company's continued success is also dependent upon its ability to
retain and attract other qualified employees, including highly skilled
technical, managerial, and marketing personnel, to meet the Company's needs.
Competition for qualified personnel is intense, particularly in the area of
technical support. The Company may not be successful in attracting and retaining
the personnel it requires, which could have a material adverse effect on the
financial condition and results of operations of the Company.
PRODUCT SUPPLY; DEPENDENCE ON KEY SUPPLIERS. The ability of the Company to
obtain particular products or product lines in the required quantities and to
fulfill customer orders on a timely basis is critical to the Company's success.
In most cases, the Company has no guaranteed price or delivery agreements with
its suppliers. As a result, the Company has experienced, and may in the future
continue to experience, short-term inventory shortages. In addition,
manufacturers who currently distribute their products through the Company may
decide to distribute, or to
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substantially increase their existing distribution, through other distributors,
their own dealer networks, or directly to resellers. Further, the computer-based
technology products industry experiences significant product supply shortages
and customer order backlogs from time to time due to the inability of certain
manufacturers to supply certain products on a timely basis. There can be no
assurance that suppliers will be able to maintain an adequate supply of products
to fulfill the Company's customer orders on a timely basis or that the Company
will be able to obtain particular products or that a product line currently
offered by suppliers will continue to be available.
ACQUISITIONS. As part of its growth strategy, the Company pursues the
acquisition of companies that either complement or expand its existing business.
Acquisitions involve a number of risks and difficulties, including expansion
into new geographic markets and business areas, the possibility that the Company
could incur or acquire substantial debt in connection with the acquisitions, the
requirement to understand local business practices, the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, the integration of the acquired companies' management
information systems with those of the Company, potential adverse short-term
effects on the Company's operating results, the amortization of acquired
intangible assets, and the need to present a unified corporate image.
RISK OF DECLINES IN INVENTORY VALUE. The Company's business, like that of
other wholesale distributors, is subject to the risk that the value of its
inventory will be adversely affected by price reductions by suppliers or by
technological changes affecting the usefulness or desirability of the products
comprising the inventory. It is the policy of most suppliers of computer-based
technology products and services to protect distributors such as the Company,
who purchase directly from such suppliers, from the loss in value of inventory
due to technological change or the supplier's price reductions. These policies
are sometimes not embodied in written agreements and do not protect the Company
in all cases from declines in inventory value. Major PC suppliers in the last
year have decreased the availability of price protection for distributors. The
shorter time periods during which distributors may receive rebates or credit for
decreases in manufacturer prices on unsold inventory have made it more difficult
for the Company to match its inventory levels with the price protection periods.
Consequently, the Company's risk of loss due to declines in value of inventory
held by the Company after such price protection periods have passed has
increased. No assurance can be given that unforeseen new product developments
will not materially adversely affect the Company, or that the Company will be
able to successfully manage its existing and future inventories. The Company's
risk of declines in inventory value could also be greater outside the United
States where agreements with suppliers are more restrictive with regard to price
protection and the Company's ability to return unsold inventory. For those
suppliers participating in the Company's channel assembly program, the extent to
which the amount of inventory in the channel is reduced may directly impact the
amount of price protection which will be provided by those suppliers. If major
computer-based technology vendors substantially decrease or eliminate the
availability of price protection to wholesale distributors, such change in
policy could have a material adverse effect on the Company's financial condition
and results of operations.
DEPENDENCE ON INDEPENDENT SHIPPING COMPANIES. The Company relies almost
entirely on arrangements with independent shipping companies for the delivery of
its products. The termination of the Company's arrangements with one or more of
these independent shipping companies, or the failure or inability of one or more
of these independent shipping companies to deliver products from suppliers to
the Company or products from the Company to its reseller customers or their
end-user customers could have a material adverse effect on the Company's
business, financial condition, or results of operations.
RAPID TECHNOLOGICAL CHANGE; ALTERNATE MEANS OF SOFTWARE DISTRIBUTION. The
computer-based technology products industry is subject to rapid technological
change, new and enhanced product specification requirements, and evolving
industry standards. These changes may cause inventory in stock to decline
substantially in value or to become obsolete. In addition, suppliers may give
the Company limited or no access to new products being introduced.
Net sales of software products have decreased as a percentage of total net
sales in recent years due to a number of factors, including bundling of software
with microcomputers; sales growth in Ingram Alliance, which is a hardware-only
business; declines in software prices; and the emergence of alternative means of
software distribution, such as site licenses and electronic distribution. The
Company expects this trend to continue.
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RISK OF TERMINATION OF SUBSIDIZED FLOOR PLAN FINANCING FOR THE COMPANY'S
MASTER RESELLER BUSINESS. The master reseller business is characterized by gross
margins and operating margins that are even narrower than those of the rest of
its U.S. business and by competition based almost exclusively on price,
programs, and execution. A substantial majority of the Company's master reseller
sales are funded by floor plan financing companies. The Company has typically
received payment from these financing institutions within three business days
from the date of the sale, allowing the Company's master reseller business to
operate at much lower relative working capital levels than the Company's
wholesale distribution business. Its suppliers typically subsidize such floor
plan financing for the Company's reseller customers. Starting in the second half
of 1998, certain of the industry's leading hardware manufacturers reduced their
flooring fee subsidies. As a result, payments from institutions that finance
master reseller sales with these reduced subsidies are now received within 15
days. This delay in payment has increased the Company's average borrowing levels
and interest costs. If the arrangements for these floor plan financing subsidies
are terminated or continue to be substantially reduced, such change in policy
could have a material adverse effect on the Company's financial condition and
results of operations.
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