<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 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)
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
--- ---
The Registrant had 68,722,823 shares of Class A Common Stock, par value $.01 per
share, and 74,364,168 shares of Class B Common Stock, par value $.01 per share,
outstanding at April 3, 1999.
<PAGE> 2
INGRAM MICRO INC.
INDEX
<TABLE>
<CAPTION>
Pages
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at April 3, 1999 and January 2, 1999 3
Consolidated Statement of Income for the thirteen weeks ended
April 3, 1999 and April 4, 1998 4
Consolidated Statement of Cash Flows for the thirteen weeks ended
April 3, 1999 and April 4, 1998 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INGRAM MICRO INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1999 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 100,612 $ 96,682
Trade accounts receivable (less allowances of $64,470
and $55,904 at April 3, 1999 and January 2, 1999,
respectively) 2,620,447 2,562,050
Inventories 2,873,321 3,094,227
Other current assets 295,822 278,591
----------- -----------
Total current assets 5,890,202 6,031,550
Property and equipment, net 264,728 254,718
Goodwill, net 435,377 232,112
Other 216,642 215,024
----------- -----------
Total assets $ 6,806,949 $ 6,733,404
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,539,480 $ 3,306,045
Accrued expenses 269,661 254,627
Current maturities of long-term debt 58,974 38,978
----------- -----------
Total current liabilities 3,868,115 3,599,650
Convertible debentures 422,966 473,475
Other long-term debt 943,809 1,208,003
Other 54,619 45,205
----------- -----------
Total liabilities 5,289,509 5,326,333
----------- -----------
Commitments and contingencies
Redeemable Class B Common Stock 3,907 7,814
----------- -----------
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; 68,722,823 and 66,520,715 shares
issued and outstanding at April 3, 1999 and
January 2, 1999, respectively 687 665
Class B Common Stock, $0.01 par value, 135,000,000
shares authorized; 74,364,168 and 75,459,710 shares
issued and outstanding (including 558,125 and
1,116,250 redeemable shares) at April 3, 1999 and
January 2, 1999, respectively 738 743
Additional paid in capital 617,833 591,235
Retained earnings 853,870 811,616
Accumulated other comprehensive income (loss) 40,468 (4,914)
Unearned compensation (63) (88)
----------- -----------
Total stockholders' equity 1,513,533 1,399,257
----------- -----------
Total liabilities and stockholders' equity $ 6,806,949 $ 6,733,404
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
3
<PAGE> 4
INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
APRIL 3, APRIL 4,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 6,725,275 $ 5,150,088
Cost of sales 6,366,021 4,820,178
----------- -----------
Gross profit 359,254 329,910
Expenses:
Selling, general and administrative 267,509 213,786
Reorganization costs 6,234 --
----------- -----------
273,743 213,786
----------- -----------
Income from operations 85,511 116,124
Other (income) expense:
Interest income (1,319) (1,413)
Interest expense 25,224 19,272
Net foreign currency exchange loss (324) 1,575
Other 783 2,680
----------- -----------
24,364 22,114
----------- -----------
Income before income taxes 61,147 94,010
Provision for income taxes 22,671 37,474
----------- -----------
Income before extraordinary item 38,476 56,536
Extraordinary gain on repurchase of debentures,
net of $2,405 in income taxes 3,778 --
----------- -----------
Net income $ 42,254 $ 56,536
=========== ===========
Basic earnings per share:
Income before extraordinary item $ 0.27 $ 0.41
Extraordinary gain on repurchase of debentures 0.03 --
----------- -----------
Net income $ 0.30 $ 0.41
=========== ===========
Diluted earnings per share:
Income before extraordinary item $ 0.26 $ 0.38
Extraordinary gain on repurchase of debentures 0.03 --
----------- -----------
Net income $ 0.29 $ 0.38
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE> 5
INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN 000S)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------
APRIL 3, APRIL 4,
1999 1998
--------- ---------
<S> <C> <C>
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 42,254 $ 56,536
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 21,903 15,402
Deferred income taxes (3,832) (1,138)
Gain on repurchase of debentures (3,778) --
Noncash interest charge 6,423 --
Noncash compensation charge 509 1,148
Changes in operating assets and liabilities,
net of effects of acquisitions:
Trade accounts receivable 180,325 (165,131)
Inventories 295,863 206,658
Other current assets (14,140) 33,400
Accounts payable 85,754 (127,887)
Accrued expenses 17,003 (8,751)
--------- ---------
Cash provided by operating activities 628,284 10,237
--------- ---------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment (22,998) (27,052)
Proceeds from sale of property and equipment 6,910 --
Acquisitions, net of cash acquired (222,260) --
Other (9,261) (4,633)
--------- ---------
Cash used by investing activities (247,609) (31,685)
--------- ---------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES:
Redemption of Redeemable Class B Common Stock -- (335)
Exercise of stock options including tax benefits 8,152 11,696
Repurchase of convertible debentures (50,321) --
Repayments of debt (8,482) (452)
Net (repayments) borrowings under revolving
credit facilities (322,740) 22,453
--------- ---------
Cash (used) provided by financing activities (373,391) 33,362
--------- ---------
Effect of exchange rate changes on cash (3,354) (432)
--------- ---------
Increase in cash 3,930 11,482
Cash, beginning of period 96,682 92,212
--------- ---------
Cash, end of period $ 100,612 $ 103,694
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period:
Interest $ 24,386 $ 19,038
Income taxes 12,065 13,754
</TABLE>
See accompanying notes to these consolidated financial statements.
5
<PAGE> 6
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Ingram Micro Inc. (the "Company" or "Ingram Micro") 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, Latin America, and Asia Pacific.
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all material
adjustments necessary to present fairly the financial position of the Company
and its wholly-owned and majority-owned subsidiaries as of April 3, 1999, their
results of operations for the thirteen weeks ended April 3, 1999 and April 4,
1998 and their cash flows for the thirteen weeks ended April 3, 1999 and April
4, 1998. All significant intercompany accounts and transactions have been
eliminated in consolidation. The results of operations for the thirteen week
period ended April 3, 1999 may not be indicative of the results of operations
that can be expected for the full year.
NOTE 2 - 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. 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>
THIRTEEN WEEKS ENDED
------------------------------
APRIL 3, APRIL 4,
1999 1998
------------ ------------
<S> <C> <C>
Income before extraordinary item $ 38,476 $ 56,536
============ ============
Weighted average shares 142,755,066 137,409,171
============ ============
Basic earnings per share $ 0.27 $ 0.41
============ ============
Weighted average shares including
the dilutive effect of stock
options (5,430,404 and 11,652,658
for the 13 weeks ended April 3,
1999 and April 4, 1998,
respectively) 148,185,470 149,061,829
============ ============
Diluted earnings per share $ 0.26 $ 0.38
============ ============
</TABLE>
At April 3, 1999, there was $422,966 in Zero Coupon Convertible Senior
Debentures that were convertible into 6,427,721 shares of Class A Common Stock.
For the thirteen weeks ended April 3, 1999, these potential shares were excluded
from the computation of Diluted EPS because their effect would be antidilutive.
Additionally, there were approximately 3,118,447 and 61,455 options for the
thirteen weeks ended April 3, 1999 and April 4, 1998, 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.
6
<PAGE> 7
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 3 - 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 (i) November 6, 2001; (ii) 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 (iii) 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.
NOTE 4 - COMPREHENSIVE INCOME
The Company has 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 UNREALIZED ACCUMULATED
CURRENCY GAIN ON OTHER
TRANSLATION AVAILABLE FOR COMPREHENSIVE
ADJUSTMENT SALE SECURITIES INCOME (LOSS)
----------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 3, 1998 $(14,236) $ -- $(14,236)
Thirteen week change (2,407) -- (2,407)
-------- -------- --------
Balance at April 4, 1998 $(16,643) $ -- $(16,643)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOREIGN UNREALIZED ACCUMULATED
CURRENCY GAIN ON OTHER
TRANSLATION AVAILABLE FOR COMPREHENSIVE
ADJUSTMENT SALE SECURITIES INCOME (LOSS)
----------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 2, 1999 $(11,580) $ 6,666 $ (4,914)
Thirteen week change (16,282) 61,664 45,382
-------- ------- --------
Balance at April 3, 1999 $(27,862) $68,330 $ 40,468
======== ======= ========
</TABLE>
Total comprehensive income for the thirteen weeks ended April 3, 1999 and
April 4, 1998 was $87,636 and $54,129, respectively.
NOTE 5 - EXTRAORDINARY ITEM
7
<PAGE> 8
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
In March 1999, the Company repurchased Zero Coupon Convertible Senior
Debentures with a carrying value of $56,504 as of the repurchase date for
approximately $50,321 in cash. The debenture repurchase resulted in an
extraordinary gain of $3,778 (net of $2,405 in income taxes).
NOTE 6 - ACQUISITION
In January 1999, the Company purchased 44,114,340 shares of Electronic
Resources Ltd. ("ERL") common stock from certain shareholders, which increased
the Company's ownership to 39.6% from the 21% ownership held in 1998. 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 ERL shares and warrants was
approximately $232,010. Prior to 1999, the Company accounted for its investment
in ERL under the equity method. Due to the purchase of ERL common stock and
warrants in 1999, the Company has accounted for the acquisition of ERL under the
purchase method; accordingly, the results of ERL's operations have been combined
with those of the Company for the thirteen weeks ended April 3, 1999. 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, including the $71,212 paid in December 1997, over the net assets
acquired of approximately $208,120 is being amortized on a straight-line basis
over 30 years. The final allocation of the purchase price may vary as additional
information is obtained; accordingly, the final allocations may differ from
those used in the unaudited consolidated financial statements included herein.
NOTE 7 - SEGMENT INFORMATION
Effective in 1998, the Company adopted the disclosure requirements of SFAS
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 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
(Australia, Brazil, Canada, Chile, China, India, Indonesia, Malaysia, Mexico,
New Zealand, Peru, Singapore, and Thailand). Inter-geographic sales primarily
represent intercompany sales which are accounted for based on established sales
prices between the related companies and are eliminated in consolidation.
8
<PAGE> 9
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
Financial information by geographic segments is as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------
APRIL 3, APRIL 4,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES
United States
Sales to unaffiliated customers $ 4,137,414 $ 3,456,087
Transfers between geographic areas 37,417 40,800
Europe 1,747,289 1,174,989
Other 840,572 519,012
Eliminations (37,417) (40,800)
----------- -----------
Total $ 6,725,275 $ 5,150,088
=========== ===========
INCOME FROM OPERATIONS
United States $ 65,617 $ 91,614
Europe 10,336 19,498
Other 9,558 5,012
----------- -----------
Total $ 85,511 $ 116,124
=========== ===========
IDENTIFIABLE ASSETS
United States $ 4,143,630 $ 3,129,405
Europe 1,721,697 1,184,139
Other 941,622 561,885
----------- -----------
Total $ 6,806,949 $ 4,875,429
=========== ===========
CAPITAL EXPENDITURES
United States $ 20,522 $ 23,514
Europe 1,160 2,298
Other 1,316 1,240
----------- -----------
Total $ 22,998 $ 27,052
=========== ===========
DEPRECIATION AND AMORTIZATION
United States $ 12,992 $ 10,433
Europe 4,604 2,919
Other 4,307 2,050
----------- -----------
Total $ 21,903 $ 15,402
=========== ===========
</TABLE>
NOTE 8 - REORGANIZATION COSTS
In February 1999, the Company initiated a plan primarily in the United
States to streamline operations and reorganize resources to increase flexibility
and service and maximize cost savings and operational efficiencies. This
reorganization plan includes instituting several organizational and structural
changes, including the closing of the Company's California-based consolidation
center and certain other redundant locations, re-alignment of the Company's
sales force and the creation of a merchandising organization that integrates
purchasing, vendor sales, and product marketing functions, as well as a
realignment of administrative functions and processes throughout the U.S.
organization.
9
<PAGE> 10
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
In connection with the reorganization plan, the Company recorded a charge of
$6,234 in the thirteen weeks ended April 3, 1999. This reorganization charge
included $4,269 in employee termination benefits for approximately 358
employees, $1,519 for closing and consolidation of redundant facilities relating
primarily to excess lease costs net of estimated sublease income, and $446 for
other costs associated with the reorganization. These initiatives are expected
to be largely completed by the end of 1999.
The reorganization charge and related activity are summarized as follows:
<TABLE>
<CAPTION>
AMOUNTS PAID
1999 AND CHARGED REMAINING
REORGANIZATION AGAINST THE LIABILITY AT
CHARGE LIABILITY ADJUSTMENTS APRIL 3, 1999
-------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Employee termination benefits $4,269 $2,209 $ -- $2,060
Facility costs 1,519 -- -- 1,519
Other costs 446 3 -- 443
------ ------ ----- ------
Total $6,234 $2,212 $ -- $4,022
====== ====== ===== ======
</TABLE>
NOTE 9 - 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.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------------------
APRIL 3, 1999 APRIL 4, 1998
------------------- ------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Net sales by geographic region:
United States $4,137 61.5% $3,456 67.1%
Europe 1,747 26.0% 1,175 22.8%
Other international 841 12.5% 519 10.1%
------ ----- ------ -----
Total $6,725 100.0% $5,150 100.0%
====== ===== ====== =====
</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
THIRTEEN WEEKS ENDED
-----------------------
APRIL 3, APRIL 4,
1999 1998
-------- --------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 94.7% 93.6%
----- -----
Gross profit 5.3% 6.4%
Expenses:
SG&A expenses 4.0% 4.2%
Reorganization costs 0.0% --
----- -----
Income from operations 1.3% 2.2%
Other expense, net 0.4% 0.4%
----- -----
Income before income taxes 0.9% 1.8%
Provision for income taxes 0.3% 0.7%
----- -----
Income before extraordinary item 0.6% 1.1%
Extraordinary gain on repurchase of debentures,
net of income taxes 0.0% --
----- -----
Net income 0.6% 1.1%
===== =====
</TABLE>
THIRTEEN WEEKS ENDED APRIL 3, 1999 COMPARED TO THIRTEEN WEEKS ENDED APRIL 4,
1998
Consolidated net sales increased 30.6% to $6.73 billion in the first quarter
of 1999 from $5.15 billion in the first quarter of 1998. 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, the July 1998 acquisition of Munich, Germany-based
Macrotron AG ("Macrotron"), and the consolidation of Electronic Resources, Ltd
("ERL") resulting from the Company's increased ownership position in ERL ("the
ERL Acquisition" - See Note 6 of Notes to Consolidated Financial Statements).
Net sales from U.S. operations increased 19.7% to $4.14 billion in the first
quarter of 1999 from $3.46 billion in the first quarter of 1998 primarily due to
growth of its current business. Net sales from European operations increased
48.7% to $1.75 billion in the first quarter of 1999 from $1.17 billion in the
first quarter of 1998 primarily due to the July 1998 acquisition of Macrotron as
well as to the overall growth in the Company's existing European operations.
Other net sales increased 62.0% to $840.6 million in the first quarter of 1999
from $519.0 million in the first quarter of 1998 primarily due to the January
1999 ERL acquisition as well as growth in the Company's Canadian operations.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS Continued
Gross profit, as a percentage of net sales, decreased to 5.3% in the first
quarter of 1999 from 6.4% in the first quarter of 1998. The decrease was 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.
Total SG&A expenses increased 25.1% to $267.5 million in the first quarter
of 1999 from $213.8 million in the first quarter of 1998, but decreased as a
percentage of net sales to 3.98% in the first quarter of 1999 from 4.15% in the
first quarter of 1998. The increase in SG&A expenses was attributable to the
acquisitions of ERL in January 1999 and Macrotron in July 1998 as well as the
increased expenses required to support the expansion of the Company's business.
Expenses related to expansion consists of incremental personnel and support
costs, lease expense related to new operating facilities, and the expenses
associated with the development and maintenance of information systems. The
overall decrease in SG&A expenses as a percentage of net sales is attributable
to economies of scale from greater sales volume as well as continued
cost-control measures.
In February 1999, the Company initiated a plan primarily in the United
States to streamline operations and reorganize resources to increase flexibility
and service and maximize cost savings and operational efficiencies. This
reorganization plan includes instituting several organizational and structural
changes, including the closing of the Company's California-based consolidation
center and certain other redundant locations, re-alignment of the Company's
sales force and the creation of a merchandising organization that integrates
purchasing, vendor sales, and product marketing functions, as well as a
realignment of administrative functions and processes throughout the U.S.
organization.
In connection with the reorganization plan, the Company recorded a charge of
approximately $6.2 million in the thirteen weeks ended April 3, 1999. This
reorganization charge included approximately $4.3 million in employee
termination benefits for approximately 358 employees, $1.5 million for closing
and consolidation of redundant facilities primarily relating to excess lease
costs net of estimated sublease income, and $0.4 million for other costs
associated with the reorganization. The Company expects to begin to realize
cost-savings from these changes in the second quarter of 1999. Based upon these
changes and continued cost control measures, the Company expects its SG&A
expenses to remain below 4.0% of consolidated net sales for the foreseeable
future. However, any significant decline in future sales growth rates or
significant changes in the business or industry in which the Company operates
could impact this trend.
Income from operations, excluding reorganization costs, decreased as a
percentage of net sales to 1.4% in the first quarter of 1999 from 2.3% in the
first quarter of 1998. U.S. income from operations, excluding reorganization
costs, as a percentage of net sales decreased to 1.7% in the first quarter of
1999 from 2.7% in the first quarter of 1998. European income from operations,
excluding reorganization costs, as a percentage of net sales decreased to 0.6%
in the first quarter of 1999 from 1.7% in the first quarter of 1998. The
decreases in income from operations, excluding reorganization costs, as a
percentage of net sales in the U.S. and Europe are primarily due to the
significant decrease in gross profit as a percentage of net sales as described
above. For geographic regions outside U.S. and Europe, income from operations,
excluding reorganization costs, as a percentage of net sales remained constant
at approximately 1.0% for the first quarters of 1999 and 1998. Income from
operations, including reorganization costs, as a percentage of net sales
decreased to 1.3% in the first quarter of 1999 from 2.3% in the first quarter of
1998.
Other expense, net, which consists primarily of interest expense, foreign
currency exchange losses, and miscellaneous non-operating expenses, increased
10.2% to $24.4 million in the first quarter of 1999 from $22.1 million in the
first quarter of 1998. Other expense, net, remained constant as a percentage of
net sales at 0.4% for the first quarters of 1999 and 1998. Interest expense grew
as a result of increased borrowings to finance the ERL and Macrotron
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. The higher accounts receivable levels are partially due to a
reduction in master reseller sales as a percentage of total sales and due to
changing vendor terms and conditions associated with floor plan financing
arrangements of such sales. In 1999, the Company expects its interest expense to
increase over comparable periods in 1998 primarily due to the factors described
above. Foreign exchange losses decreased by $1.9 million in the first quarter of
1999 compared to the first quarter of 1998 primarily due to the strengthening of
currencies in Latin America as compared to the U.S. dollar.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Continued
The provision for income taxes decreased 39.5% to $22.7 million in the
first quarter of 1999 from $37.5 million in the first quarter of 1998,
reflecting the 35.0% decrease in the Company's income before income taxes. The
Company's effective tax rate was 37.1% in the first quarter of 1999 compared to
39.9% in the first quarter of 1998. The decrease in the effective tax rate was
primarily due to tax planning in certain countries as well as the acquisition of
ERL, which has a lower effective tax rate compared to the Company's overall
effective tax rate.
In March 1999, the Company repurchased Zero Coupon Convertible Senior
Debentures with a carrying value of $56.5 million as of the repurchase date for
approximately $50.3 million in cash. The debenture repurchase resulted in an
extraordinary gain of $3.8 million (net of $2.4 million in income taxes).
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, particularly on a quarterly
basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company has financed its growth and cash needs largely through income
from operations, 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 initial
public offering completed in November 1996, and the issuance of the Zero Coupon
Convertible Senior Debentures due 2018 in June 1998.
Net cash provided by operating activities was $628.3 million in the first
three months of 1999 as compared to $10.2 million in the first three months of
1999. The increase in cash provided by operating activities was largely
attributable to the reduction of trade receivables, excluding acquisitions, for
the first three months of 1999 compared to the first three months of 1998, as
well as the increase in trade creditor financing of product through the increase
in accounts payable, excluding acquisitions, in the first three months of 1999
compared to the first three months of 1998.
Net cash used by investing activities was $247.6 million in the first three
months of 1999 compared to $31.7 million in the first three months of 1998. The
increase was due to the Company's commitment to growth through acquisitions as
well as the Company's expansion of warehouse and other facilities. In the first
three months of 1999, the Company used approximately $222.3 million in cash, net
of cash acquired, for the purchase of common stock and warrants of ERL (see Note
6 of the Notes to Consolidated Financial Statements). Mitigating the uses of
cash for the first three months of 1999, the Company entered into a
sale/leaseback agreement whereby the Company sold its Harrisburg, Pennsylvania,
facility to a third party and received approximately $6.9 million in cash.
Net cash used by financing activities was $373.4 million in the first three
months of 1999 compared to net cash provided of $33.4 million in the first three
months of 1998. The increase in cash used by financing activities was due to
repayments of debt under the revolving credit facilities, repayments of other
debt and repurchases of convertible debentures. These repayments were made
possible through the Company's management of trade debtors and trade creditors.
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<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS Continued
Acquisitions
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 additional 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 $232 million.
Capital Resources
The Company has three credit facilities with bank syndicates providing an
aggregate 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. At April 3, 1999, the Company had $663.9 million in
outstanding borrowings under the credit facilities.
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 April 3, 1999, the amount of medium-term certificates outstanding
totaled $75 million and the amount of commercial paper outstanding totaled $25
million. In addition, the Company has certain other facilities relating to
accounts receivable in Europe. Under these programs, the Company has sold
approximately $72 million of receivables resulting in a reduction of trade
accounts receivable and debt on the Company's Consolidated Balance Sheet at
April 3, 1999. The Company believes that there are sufficient trade accounts
receivable to support the outstanding medium-term certificates as well as the
commercial paper program and European facilities.
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 the offering were $460.4 million.
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. In March 1999, the Company repurchased Zero Coupon
Convertible Senior Debentures with a carrying value of $56.5 million as of the
repurchase date for approximately $50.3 million in cash. The debenture
repurchase resulted in an extraordinary gain of $3.8 million (net of $2.4
million in income taxes).
The debentures are currently convertible into approximately 6.4 million
shares of the Company's Class A Common Stock. The debentures are redeemable 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 redemption. Each debenture is
subject to repurchase at the option of the holder, as of June 9, 2001, June 9,
2003, June 9, 2008, and 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 a repurchase at the option of the holder (other
than upon a Fundamental Change), the Company may, at its option, satisfy the
redemption 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.
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS Continued
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 which
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.
15
<PAGE> 16
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 is providing the necessary IT
support to upgrade associates' personal computers and is periodically reminding
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
which 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
hand-held 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 completed an
inventory of third parties (including, among other things, 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 sent 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 $5.8
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.
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<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS Continued
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 dates 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.
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 year 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.
CAUTIONARY STATEMENTS FOR THE PURPOSE OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters in this Form 10-Q 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
----- -----------
10.44 Agreement with Sanat K. Dutta dated April 1, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the thirteen weeks
ended April 3, 1999.
SIGNATURES
Pursuant to the requirements 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/ Michael J. Grainger
------------------------------------
Name: Michael J. Grainger
Title: Executive Vice President and
Worldwide Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
May 18, 1999
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<PAGE> 1
EXHIBIT 10.44
RETIREMENT AGREEMENT
THIS RETIREMENT AGREEMENT is entered into between Sanat K. Dutta
("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 to provide limited services to Ingram after his
retirement. 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. Scheduled Retirement. Associate has informed Ingram that he intends to
retire as an officer of Ingram on July 4, 1999 (the "Retirement Date").
Associate will serve as Executive Vice President and President, Ingram
Micro North America until March 1, 1999 and Executive Vice President and
advisor to the Office of the Chairman from March 1, 1999 until the
Retirement Date. Associate will continue as a part-time employee of
Ingram and advisor to the Office of the Chairman from the Retirement
Date until July 4, 2000 on the terms and conditions hereinafter set
forth at which time he will retire as an employee of Ingram. Associate
understands and agrees that, upon his retirement as an officer of
Ingram, he will no longer be an agent of Ingram or any of its
Affiliates, and he will have no authority to bind Ingram or any such
Affiliate or to act on behalf of Ingram or any such Affiliate. Beginning
April 1, 1999 and continuing until July 4, 2000, Associate's base salary
will be reduced to $1 per month.
2. Health Plan Coverage. Subject to Paragraph 12 hereof, Ingram will assist
Associate in obtaining private family medical and dental insurance
coverage as soon as reasonably practical and will pay directly or
reimburse Associate from the inception of any such policy through July
4, 2000, for the amount by which the monthly premium attributable to
such coverage exceeds the monthly cost for family coverage which Ingram
charges its employees for Ingram's group coverage. Associate agrees to
decline participation in Ingram's group medical and dental insurance at
the time a private policy providing such coverage goes into effect
unless such policy contains an applicable pre-existing coverage clause.
In such event, Associate may continue to participate in Ingram's group
policy on the same terms and conditions as other employees of Ingram
until the earlier of the satisfaction of the pre-existing condition
clause or July 4, 2000. Nothing herein shall alter Associate's rights
under COBRA to acquire insurance coverage from Ingram after July 4,
2000.
3. 1999 Incentive Bonus. Subject to Paragraph 12 hereof, in March 2000,
Associate will receive an incentive payment per the 1999 Executive
Incentive Plan calculated on the terms of Associate's award letter for
such plan, but prorated through the Retirement Date on the assumption
that he has received his pre-April 1, 1999 base salary through the
Retirement Date.
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 granted under Ingram's Rollover Stock
Option Plan will continue to vest as
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<PAGE> 2
scheduled after the Retirement Date. Associate shall have the right to
exercise all vested stock options and grants through March 1, 2001, or
such earlier date as any such options or grants may expire 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.
5. Key Employee Stock Purchase Plan. Subject to Paragraph 12 hereof and
notwithstanding the provisions of Section 6(b)(i) of the Acquisition
Agreement dated June 30, 1996 between Ingram and Associate relating to
Associate's purchase of 85,000 shares of Ingram Class B Common Stock
under the Ingram Key Employee Stock Purchase Plan (the "Acquisition
Agreement"), Ingram shall not exercise its right to repurchase any of
the Shares (as such term is defined in the Acquisition Agreement) for so
long as Associate performs his obligations under this Agreement and will
be permitted to exercise its repurchase rights only with respect to the
Restricted Shares (as such term is defined in the Acquisition
Agreement), owned by Associate, if any, as of the date of any failure by
Associate to perform such obligations. 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 Retirement Date, or earlier if Ingram so requests it.
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<PAGE> 3
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
("Ingram Customers"), including but not limited to names and addresses,
or, at any time on or before December 31, 2000, 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 December 31, 2000, 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 December 31, 2000, 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, Pinacor, Globelle,
Gates Arrow, CHS Electronics, Hallmark, Hamilton Avnet, Daisytek,
Azerti, Azlan, Northamber, Tech Pacific, Synnex, and/or GE Capital
Information Technology Solutions-North America, Inc., 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
December 31, 2000, 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
any 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.
3
<PAGE> 4
d. Subject to Associate's other commitments, upon request of Ingram or any
of its Affiliates through July 4, 2000, 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 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, 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 July 4, 2000, Associate shall continue to
provide such assistance as requested by Ingram and, in such event, shall
be compensated at a rate to be agreed upon.
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),
in addition to all other rights and remedies to which Ingram may be
entitled by law or in equity, 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. 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 Retirement 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. Notices. Any notices, requests, demands and other communications
required or permitted to be given or made hereunder shall be in writing
and shall be deemed to have been duly given (a) on the date delivered if
personally delivered, (b) on the third day after deposit in the U.S.
mail or with a reputable air courier service, properly addressed with
postage or charges prepaid, or (c) on the date transmitted by telefax if
the sender receives electronic confirmation of receipt of such telefax,
to the address or telefax number of Ingram or Associate, as the case may
be, set forth on the signature page of this Agreement.
5
<PAGE> 6
19. 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.
20. Governing Law. This Agreement shall be governed by California law,
without regard to the choice or conflict of law provisions thereof.
21. Paragraph Titles. The paragraph titles used in this Agreement are for
convenience only and do not define or limit the contents of any
paragraph.
22. 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 March 23, 1999 and
executed by Associate on the date set out below.
Notice Information: "Ingram"
Ingram Micro Inc. INGRAM MICRO INC.
1600 E. St. Andrew Place
Santa Ana, California 92705
Attention: Cyndy McGuire
Telephone: (714) 566-1000, ext. 22500
Facsimile: (714) 566-7733
By: /s/ JEFFREY R. RODEK
--------------------------------
Jeffrey R. Rodek,
President and Worldwide
Chief Operating Officer
"Associate"
4/1/99
- ------- ------------------------------------
Date By: /s/ Sanat K. Dutta
Address:
---------------------------
---------------------------
---------------------------
6
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