PART I
Item 1. BUSINESS
Introduction
Intelligent Electronics, Inc. (the "Company") provides information
technology products, services and solutions to its network integrators (the
"Network") and, in partnership with the Network, directly to large and small
corporate customers, educational institutions and governmental agencies ("End
Users"). The Company was founded in 1982 as a Pennsylvania corporation. In
March 1984, the Company commenced the wholesale distribution of microcomputers
to its Network. As a leading supplier of premium brand technology products in
America, the Company provides business solutions to the Network and End Users
through innovative product management, sales demand generation programs and
logistics services. As of January 29, 1994, the Network comprised nearly 2,000
locations.
The Company's principal executive offices are located at 411 Eagleview
Boulevard, Exton, Pennsylvania, 19341, telephone (610)458-5500. As used herein
and unless otherwise required by the context, the "Company" shall mean
Intelligent Electronics, Inc. and its wholly-owned subsidiaries.
Business Strategy
The Company's revenues are derived principally from the wholesale
distribution of microcomputer systems, workstations, networking and
telecommunications equipment and software to its Network. The Company seeks
to enhance its position as the leading delivery system of technology
products and services by leveraging its strengths and maximizing cost
efficiencies. The Company has developed a system to aggregate orders and
provide purchasing economies, product availability, efficient distribution and
technical and marketing support to its Network which offers vendors the ability
to reach geographically-dispersed customers in a cost-effective manner. The
Company also offers a full range of logistics services on a contract basis to
third parties throughout the nation.
OPERATING EFFICIENCIES AND ECONOMIES OF SCALE. The Company provides
wholesale distribution of microcomputers and related equipment to its Network,
which in turn, offers value-added systems solutions to End Users through an
outbound, business-to-business approach. Additionally, the Company provides
product selection, technical support, cost-efficient marketing programs and
promotions, configuration and marketing opportunities for the Network. The
Company's operations are structured to realize operating efficiencies and to
benefit from economies of scale in product purchasing, financing and
distribution, and product integration and configuration, and to provide to its
Network a centralized distribution and logistics system focusing on ease of
order placement, speed of delivery, facilitation of product returns and
reduction of freight costs.
The Company believes that it purchases the majority of the products
distributed to the Network at the lowest published prices available and believes
that its financial strength and purchasing power give it better access to
constrained product lines. The Company consequently passes on to its Network
a portion of the discount which it receives from vendors. This pricing,
together with the Company's growing service offerings and ready access to
expansive product inventories, generally enables the Network to purchase
products from the Company at better terms than they could obtain directly from
vendors and to effectively compete in the marketplace.
Intelligent Distribution Services, Inc., a wholly-owned subsidiary of the
Company ("InteLogistics") was formed to capitalize on the Company's distribution
and logistics capabilities by expanding the logistics services currently
performed for the Network and offering such services to unaffiliated third
parties. Services provided by InteLogistics include inventory warehousing,
distribution and management, freight consolidation, product configuration,
order entry and processing, invoicing, credit and collection services, returns
processing and customized information systems. The Company believes that
InteLogistics will benefit from economies of scale which will result in greater
efficiencies as the logistics customer base expands.
ENHANCEMENT OF NETWORK COMPETITIVENESS. The Company sells products and
provides certain services to the Network. Members of the Network are charged
varying fees based on different levels of services which they select. The
Company believes that its product pricing and its "services-for-fees" approach
enhance the competitiveness of the Network and provide for an efficient
allocation of support for the Network. In addition, the Company provides and
is continuing to develop programs to enhance the competitiveness of the Network,
such as marketing assistance, programs designed to enhance channel sales,
product promotion, technical support and new product evaluation. Programs
designed for specific members of the Network include a nationwide advanced
systems program operated under the name "Intelligent Systems Group", which
targets End Users with a regional or national presence, focusing particularly
on high-end or technically advanced products, the ISG National Service Network
which assists members of the Network in servicing multi-location, regional or
national accounts, the Minority Business Alliance which assists certain Network
members in obtaining business from End Users seeking to purchase from minority-
owned businesses, the Multimedia Dealer Network, which is designed to help the
Network sell multimedia solutions by providing a complete array of programs and
services, and the Business Technology Centers program which assists members of
the Network to position themselves in the small business market.
The Company has introduced new financing programs, under which, for a fee,
it extends up to thirty days credit to qualified End Users and certain Network
members which purchase selected technology products. Under one such program,
the Company, in partnership with the Network, provides products and extends
credit directly to End Users who have been approved both by the Company and a
member of the Network. This program frees up the existing credit line of the
Network member and reduces the carrying cost of inventory by offering direct
shipments to the End User and providing low cost configuration services. Also,
certain members of the Network are receiving credit in order to facilitate their
ability to purchase certain advanced technology products from the Company and
to allow the Company to compete with competitors who offer such credit terms.
As these programs are fully established and marketed, it is anticipated that
they will facilitate incremental sales and profits, contribute gross margin,
increase selling, general and administrative expenses, and increase accounts
receivable.
MARKET PRESENCE. In addition to recruiting members to the Network and
expanding the business generated by the existing Network, the Company is
focusing on various opportunities to enhance its market presence. To keep pace
with changing technology and shifts in End User demands, the Company continues
to assess and to update its product offerings to include more advanced computer
products and to target specialized customers and channel markets. Additionally,
the Company continues to expand its specialized services such as pre-shipment
system configuration. The Company continues to explore new channels of
distribution and to expand its distribution and logistics services.
InteLogistics is enhancing its offering of logistics services to unaffiliated
customers and pursuing additional opportunities to provide these services to
companies seeking to outsource their logistics needs.
Network Structure
FRANCHISE AGREEMENTS. Certain of the relationships between the Company and
its network integrators are governed by franchise agreements. The first
franchise agreement was signed in August 1984, and provided for the operation
of a business center pursuant to a system developed by the Company under the
tradename Todays Computers Business Centers ("TCBC"). At October 31, 1988,
there were 175 centers in operation under the TCBC name. In December 1988, the
Company acquired Entre Computer Centers, Inc. ("Entre"), which consisted of 180
franchised customers and company-owned centers. In August 1989, the Company
acquired Connecting Point of America, Inc. ("CPA") which consisted of a network
of 246 franchised customers.
The franchise agreements provide for the operation of a business center and
the sale of microcomputer systems and related products and services as well as
other advanced technology products under the Company's proprietary trademarks
"Todays Computers Business Centers" and "TCBC," or "Entre Computer Centers" or
"Connecting Point of America". These agreements generally have an initial term
of 10 years which may be renewed for an additional 10 years and provide that the
franchisee will have the right to operate a franchise at a specific location.
The franchisees generally sell products approved for sale which may be purchased
from the Company. Some franchisees have agreed to purchase certain
manufacturers' products only from the Company. The Company may terminate the
franchise agreement, subject to termination requirements under state franchise
laws, either upon the occurrence of certain specified events or upon 30 days'
notice of certain defaults by the franchisee. Certain franchisees may terminate
the agreement with or without cause, at any time upon 60 days' prior written
notice to the Company. Franchisees operating under TCBC or Entre marks are
subject to certain restrictions against competition following termination.
The Company also sells products to various members of the Network who do
not sign franchise agreements. These Network members are not entitled to
conduct business under any of the Company's trademarks but are permitted to
purchase certain products from the Company at competitive prices and terms.
In addition, members of the Network can participate in various supplemental
programs offered by the Company and obtain the right to use other proprietary
service marks of the Company including "Intelligent Systems Group" or "ISG,"
"Business Technology Centers" or "BTC," and "Intelligent Multimedia Dealer
Network."
During the fiscal year ended October 31, 1991 and the three-month
transition period ended February 1, 1992, no individual member of the Network
accounted for more than 10% of the Company's revenues from continuing
operations. During the fiscal years ended January 29, 1994 and January 30,
1993, one Network member accounted for approximately 16% and 10%, respectively,
of the Company's revenues from continuing operations. The Company holds an
ownership interest in this member. See Note 3 to the Company's Consolidated
Financial Statements for the year ended January 29, 1994. The Company is not
dependent for a material part of its business upon any other member of the
Network, and the loss of any other Network member would not have a material
adverse effect on the Company's financial condition.
Products
The Company currently markets technology products consisting of
microcomputer systems, workstations, networking and telecommunications equipment
and software to the Network. The Company's product acquisition staff selects
products on the basis of overall quality, product image, technological
capability, and business applications, as well as the pricing, discount and
rebate programs offered by the manufacturer which enable the Company, and in
turn the Network, to benefit from quantity purchasing economies. The Company
currently distributes products of approximately 40 vendors, principally COMPAQ,
Hewlett-Packard, Apple, IBM, NEC, Toshiba, Microsoft, Epson, Novell, AST,
Digital, AT&T and Lotus.
The Company is in the process of broadening the selection of computer
technology products stocked in its central warehouses. Management believes such
a product line expansion will assist the Company in gaining market share. The
Company has identified specific products which it plans to add to its existing
assortment which include advanced technology central processing units, an
expanded offering of peripheral devices and certain software packages.
Inventory levels would increase in support of this enhanced product offering and
anticipated higher sales volume. The Company has also identified additional
measures to enhance its management of inventory as these lines typically require
expanded inventory levels, shorter supplier payment terms and a longer sell
through cycle.
The Company's agreements with its major vendors permit it to purchase
products from them for sale to Network members which are directly authorized by
such vendors to sell products. In some cases, specific products from the major
vendors may be sold to Network members which do not have specific authorization
from the vendors. The vendor agreements are subject to termination by the
vendors without cause on varying notice periods, and are subject to periodic
renewals or re-authorization by the vendors.
Under the agreements with the vendors, products may be returned to vendors
at restocking fees ranging up to 5%. The agreements generally provide for price
adjustments for specified periods which protect the Company in the event of
price reductions by the vendor. The Company administers certain vendors' price
adjustment programs for the benefit of the Network. In 1994, the Company
instituted a policy allowing the Network to return certain manufacturers'
products, without a restocking fee, within fifteen days of purchase. After
fifteen days, the Company charges restocking fees to the Network ranging
up to 5%. In addition, the Company has favorable volume purchase agreements
with major industry distributors, under which the Network may purchase items
not supplied by the Company directly from the distributors at advantageous
prices and terms.
Products from certain of these manufacturers comprised the following
percentages of the Company's revenues during the years ended January 29, 1994
and January 30, 1993, the transition period ended February 1, 1992 and the year
ended October 31, 1991:
Transition
period Year
Year ended ended ended
January 29, January 30, February 1, October 31,
1994 1993 1992 1991
----------- ----------- ----------- -----------
IBM 15% 18% 24% 24%
COMPAQ 25% 18% 12% 16%
Apple 18% 22% 28% 24%
HP 22% 20% 15% 14%
The Company could be adversely affected should any of these vendors materially
change the way in which they market, price or distribute their products.
Competition
Competition in the microcomputer products market is intense, principally
in the areas of price, breadth of product line, product availability and End
User technical support and service. The Company competes with chains of
computer aggregators and distributors and computer retailers in the sale of its
products. Additionally, several manufacturers have expanded their channels of
distribution, pricing and product positioning and compete with the Company and
its Network. The Company believes that the pricing and product availability
offered to it by its vendors are at least as favorable as are offered to its
competitors, which enables the Company and the Network to compete favorably with
their competitors in terms of pricing and product availability. In addition,
the Company develops customized value-add programs for its Network, including
programs to develop channel markets, such as the market for advanced technology
products, or to target certain End Users seeking to purchase products from
minority-owned businesses, which enhance the competitiveness of the Network.
The Company also provides technical support and service programs which it
believes contribute favorably to the competitiveness of the Network.
The Company is also subject to competition from other aggregators in
recruiting and retaining Network members, as well as competition from
distributors in its efforts to sell products to the Network. The Company
believes that its pricing and value-add programs and services allow it to
compete effectively. Certain competitors may have greater financial resources
than the Company.
InteLogistics competes with a variety of competitors who also provide
contract logistics services to companies which rely on outside sources.
Competitors in the logistics services business include nationwide trucking
companies, overnight delivery companies, freight forwarders, public warehouses
and customs brokers. Management believes that the breadth of services offered
by InteLogistics and the prices charged should allow InteLogistics to compete
effectively for customers. However, contract logistics services is an emerging
industry and the Company may be subject to changing conditions within the
industry, with services and prices subject to change as the industry matures.
In addition, some competitors may have greater resources than the Company.
Trademarks and Service Marks
The service marks "Todays Computers Business Centers," "TCBC," "Entre,"
"Entre Computer Center," "Connecting Point," "Intelligent Systems Group,"
"Minority Business Alliance" and the design of the Entre Computer Center logo
are in use and (except for the logo) are currently registered or are in the
process of registration in the United States Patent and Trademark Office by the
Company. Additionally, the service marks "InteLogistics," the Company's
tradename for its contract logistics business, "BTC," denoting a program to help
network integrators enter new markets and grow their service and training
capabilities, and "Intelligent Multimedia Dealer Network," denoting a program
to aid network integrators in the area of multimedia services, are in the
process of being registered. Although the marks are not otherwise registered
with any states, the Company claims common law rights to the marks based on
adoption and use. To the Company's knowledge, there are no pending
interference, opposition or cancellation proceedings, or litigation, threatened
or claimed, with respect to the marks in any jurisdiction. The Company holds
no patents. Management believes that the Company's marks are valuable; however,
the loss of use of any of the marks would not have a material adverse effect on
the Company's business.
Discontinued Operation
In June 1991, the Company acquired BizMart, Inc. ("BizMart"), a Texas-based
retail chain of 57 high volume office products supercenters. On December 3,
1992, the Company entered into a Stock Purchase Agreement with OfficeMax,
Inc. ("OfficeMax"), a majority-owned subsidiary of Kmart Corporation, for the
sale of BizMart to OfficeMax. On March 4, 1993, the Company completed the sale
of BizMart and accordingly, BizMart is reflected as a discontinued operation
in the Company's Consolidated Financial Statements. See Note 2 to the
Consolidated Financial Statements. Prior to the sale of BizMart, the Company's
Consumer Retail Group operated the BizMart supercenters, providing a wide
assortment of microcomputers, related equipment and traditional office products
to the public utilizing a large-format retail storefront approach. The Company
expanded the traditional product offering of the supercenters to include
prominently featured name brand computer products. The Company's strategy
included increasing the number of supercenters from the 57, at acquisition,
to 105 as of January 30, 1993, and offering franchises for the operation of
certain of the supercenters' computer departments, mainly to established
franchisees in the Network in the general proximity of Bizmart supercenters.
During fiscal 1992, various factors impacted the Company's ability to
implement successfully its strategy for the Consumer Retail Group, including
consolidation and increased competition in the superstore retailing industry,
and increased price competition and changing distribution channels in the
microcomputer industry. These and other factors demonstrated to the Company
that the marketplace had changed substantially since the Company's acquisition
of BizMart in June 1991 such that the concept of an office products superstore
which included a separate and prominent franchised department selling name brand
computer products was no longer unique or sufficiently profitable and,
accordingly, not a viable strategy for the Company to pursue.
Government Regulation
The Company is subject to Federal Trade Commission regulations governing
disclosure requirements in the sale of franchises. The Company is also subject
to a substantial number of United States and state laws regulating franchise
operations. For the most part, such laws impose registration and disclosure
requirements on the Company in the offer and sale of franchises and also
regulate related advertisements. In certain states, there are substantive laws
or regulations affecting the relationship between the Company and the
franchisees, especially in the area of termination of the franchise agreement.
In addition, InteLogistics is subject to various regulations of the Interstate
Commerce Commission. The Company believes it is currently and has been in the
past in substantial compliance with all such regulations.
Employees
As of January 29, 1994, the Company had 809 full-time employees. No
employee is represented by a labor union and the Company believes that its
employee relations are good.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
------------------ --- --------
Richard D. Sanford 50 Chairman of the Board and Chief Executive Officer
Gregory A. Pratt 45 President and Chief Operating Officer
Robert P. May 44 Senior Vice President
Mark R. Briggs 37 Senior Vice President
Edward A. Meltzer 45 Vice President and Chief Financial Officer
Stephanie D. Cohen 32 Vice President, Secretary and Treasurer
Richard D. Sanford has been the Company's Chairman and Chief Executive
Officer since he founded the Company in May 1982.
Gregory A. Pratt joined the Company in March 1992 as Executive Vice
President and was appointed President and Chief Operating Officer of the Company
shortly thereafter. Prior to joining the Company, Mr. Pratt served as President
of Atari Computer Corporation and Vice President of Finance and Chief Financial
Officer of Atari Corporation. He also served on the Board of Directors of Atari
Corporation and was a member of the Board's Executive Committee.
Robert P. May joined the Company in November 1993 as Senior Vice
President. He is also Chief Executive Officer of Intelligent Distribution
Services, Inc. Prior to joining the Company, Mr. May was a Senior Vice
President of Federal Express Corporation and was President of Federal Express'
Business Logistics Services Division. In his 20-year career with Federal
Express, Mr May served in a number of executive operations and corporate
management positions.
Mark R. Briggs joined the Company as Vice President and Chief Financial
Officer in March 1990 and became Vice President and Chief Operating Officer,
Franchise Division (now the Reseller Network) in December 1991. In February
1994, Mr. Briggs was elected Senior Vice President of the Company and Chief
Executive Officer of the Reseller Network. Prior to joining the Company,
Mr. Briggs held various positions with Ingram-Micro D, Inc. (a distributor
of microcomputer products), including Senior Vice President and Chief
Financial Officer.
Edward A. Meltzer became Chief Financial Officer in March 1992 and held
the position of Treasurer of the Company from January 1989 to May 1993 and Vice
President since August 1990. Mr. Meltzer served as Treasurer of Entre from
January 1987 until its acquisition by the Company.
Stephanie D. Cohen was elected Vice President, Secretary and Treasurer in
May 1993 and held the position of Vice President, Investor Relations of the
Company from March 1991 to May 1993. Ms. Cohen joined the Company in 1987 as
Controller, and served as Director, Investor Relations from March 1989 until
March 1991.
Officers are elected at the first meeting of the Board of Directors held
after each Annual Meeting of Shareholders of the Company.
Item 2. PROPERTY
The Company distributes products from five leased facilities in the United
States. One distribution center is located in 121,400 square feet of leased
warehouse space in Chantilly, Virginia, under a lease which expires in August
1994. The Company is currently in negotiations to replace this facility and
move its East Coast distribution center. The remaining distribution centers are
located in the Denver, Colorado area. These warehouses total approximately
643,000 square feet of leased warehouse space under leases which expire over the
next three years.
The Company leases approximately 31,000 square feet in Exton,
Pennsylvania, for its principal executive offices and certain InteLogistics
functions, the occupancy of which commenced in May 1989, for a term expiring in
April 1996. In addition, the Company leases approximately 83,000 square feet
in the Denver, Colorado area, primarily for offices of its Reseller Network,
with terms expiring no later than March, 1995. The Company's facilities needs
are not specialized. As such, should additional facilities be required, the
Company believes such facilities could be leased at rates acceptable to the
Company.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits in the ordinary course of
business. Management of the Company does not expect resolution of these matters
to have a material adverse effect on the Company's financial position.
In March and April, 1992 various actions were filed against the Company
and certain directors and officers of the Company and were ordered consolidated
for consideration for class action treatment in the United States District Court
for the Eastern District of Pennsylvania (In re Intelligent Electronics, Inc.
Securities Litigation, No. 92-CV-1905). The consolidated complaint generally
alleges that the Company and the other defendants caused or permitted a series
of misleading public statements to be made about the Company's operations and
that plaintiffs, relying on this information, purchased stock in the Company and
subsequently suffered financial harm. The plaintiffs seek an unspecified amount
of damages. The case is now proceeding in discovery. Management believes this
complaint to be without merit and the Company intends to vigorously defend
against these allegations. While management of the Company, based on its
investigation of this matter and consultations with counsel, believes resolution
of this matter will not have a material adverse effect on the Company's
financial position, the ultimate outcome of this complaint cannot presently be
determined.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter in the NASDAQ National
Market (symbol INEL). As of March 11, 1994, there were 808 shareholders of
record.
Set forth below is the range of the high and low sale prices for the Company's
common stock as reported by NASDAQ during each fiscal quarter within the two
most recent fiscal years:
Quarter ended High Low
------------- ----- -------
May 2, 1992 $ 30 3/8 $10
August 1, 1992 $ 12 1/2 $ 6 1/4
October 31, 1992 $ 12 1/2 $ 8 7/8
January 30, 1993 $ 15 1/8 $ 8 1/8
May 1, 1993 $ 15 3/8 $12
July 31, 1993 $ 16 1/4 $12 1/4
October 30, 1993 $ 24 3/8 $15
January 29, 1994 $ 28 $21 1/8
The Company instituted a quarterly dividend of $0.08 per share in the second
quarter of fiscal 1993. On June 1, 1993, the Company paid a one-time special
cash dividend of $2.00 per share.
<TABLE>
<CAPTION>
Item 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA (1) (in thousands, except per share data)
Transition
period
Year ended ended
January 29, January 30, February 1, Year ended October 31,
1994 1993 1992 1991 1990 1989
----------- ----------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $2,646,102 $2,016,686 $515,974 $1,753,574 $1,458,541 $711,671
Income from continuing operations 41,117 22,134 9,625 38,529 29,250 10,571
Earnings per common share
from continuing operations $1.13 $0.58 $0.25 $1.12 $1.04 $0.50
Cash dividends declared per
share of common stock $2.24 -- -- -- -- --
BALANCE SHEET DATA (in thousands)
January 29, January 30, February 1, October 31,
1994 1993 1992 1991 1990 1989
----------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total assets $577,011 $630,332 $670,415 $706,515 $442,043 $295,420
Long-term debt -- 97 29,690 29,756 29,496 47,085
Total shareholders' equity 218,850 280,527 289,279 274,477 119,552 78,345
(1) See Note 2 to Consolidated Financial Statements for the fiscal year ended January 29, 1994 for information regarding
the acquisition of BizMart, Inc. on June 19, 1991 and its sale on March 4, 1993, resulting in BizMart's results of
operations being classified as a discontinued operation.
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
In December 1991, the Company changed its fiscal year-end from October 31 to a
fifty-two, fifty-three week period ending on the Saturday nearest January 31,
resulting in a three-month transition period from November 1, 1991 to February
1, 1992. Results of operations for the following periods are being compared:
the fifty-two week period ended January 29, 1994 ("fiscal 1993") compared to the
fifty-two week period ended January 30, 1993 ("fiscal 1992"), fiscal 1992
compared to the fiscal year ended October 31, 1991 ("fiscal 1991"), and the
transition period ended February 1, 1992 (the "transition period") compared to
the unaudited quarter ended January 31, 1991.
RESULTS OF CONTINUING OPERATIONS
Fiscal 1993 Compared to Fiscal 1992
- -----------------------------------
Revenues increased 31% to $2,646,102,000 in fiscal 1993 from $2,016,686,000 in
fiscal 1992. The increase was due primarily to the addition of new network
members and increased revenues from existing members led by continued strong
demand for premium computers and peripherals, despite the inability of certain
manufacturers to supply certain products, offset in part by the sale of the
Company Center Division ("CCD") in May and July 1992 (See Note 3 to the
financial statements).
Gross profit as a percentage of revenues for fiscal 1993 was 4.4% compared to
5.1% for fiscal 1992. This decline was primarily attributable to the sale of
CCD which realized higher gross margins than the Company realizes on wholesale
revenues and continued competitive pressures throughout the microcomputer
industry. The Company reported fourth quarter gross margin of 4.6% as gross
margin percent increased throughout fiscal 1993 as a result of taking advantage
of purchasing opportunities and the introduction of new services and programs.
Selling, general and administrative expenses decreased and as a percentage of
revenues declined from 2.6% in fiscal 1992 to 2.0% in fiscal 1993. The
elimination of costs related to CCD (which had proportionately higher operating
costs than those associated with wholesale operations) in July 1992 accounted
for most of the reduction, offset by cost increases to service the larger
network, higher volume of revenues and new programs. These increases were at
a lower rate than the growth in revenues causing the decline in selling, general
and administrative expenses as a percentage of revenues.
Amortization of intangibles decreased in fiscal 1993 compared to fiscal 1992 due
to the elimination of goodwill included in CCD's net assets sold to The Future
Now, Inc. ("TFN"), a member of the IE network and a publicly traded company.
Investment and other income was $5,144,000 in fiscal 1993 compared to $475,000
in fiscal 1992. This increase was due primarily to income earned on investing
the proceeds from the sale of BizMart. Interest expense decreased primarily as
a result of the early repayment of the Subordinated Notes in January and
February 1993 and the reduced use of inventory financing.
The Company's equity interest in earnings of its affiliate increased to
$2,636,000 from $1,028,000. This increase was due to the inclusion of the
Company's proportionate share of TFN's earnings for a full year and increased
earnings by TFN in fiscal 1993.
The effective tax rate for fiscal 1993 was 38.2% compared to 43.8% in fiscal
1992. Higher pre-tax earnings and tax-exempt investment income in fiscal 1993
and the impact of the incremental tax charge related to the sale of CCD in
fiscal 1992, offset by a rise in the Company's effective state tax rate, were
primarily responsible for the decrease.
Income from continuing operations for fiscal 1993 was $41,117,000 compared to
$22,134,000 for fiscal 1992 due to the factors described above.
The Company established new financing programs under which, for a fee, it
extends credit to qualified end-users and certain network members which purchase
selected technology products. Also, the Company plans to broaden the selection
of computer technology products stocked in its central warehouses. These
programs are expected to facilitate incremental sales, contribute gross margin,
increase selling, general and administrative expenses and increase accounts
receivable and inventory.
As discussed in Note 9 to the financial statements, products of four vendors
comprise 80% of the Company's revenues. The Company could be adversely affected
should these vendors materially change the way in which they market, price or
distribute their products.
Fiscal 1992 Compared to Fiscal 1991
- -----------------------------------
Revenues increased 15% in fiscal 1992 to $2,016,686,000, from $1,753,574,000
reported for fiscal 1991. Increased unit sales to existing customers and sales
to new customers were primarily responsible for this increase. Partially
offsetting this increase were substantial manufacturer price reductions which
the Company generally passed on to its customers and the sale of CCD. During
fiscal 1992, the Company added 77 new franchised locations. A total of 176
franchised locations were eliminated during the year, of which 55 related to the
cessation of the Company's wholesale operations in Canada, and the remainder
from either termination of agreements or consolidation of operations. None of
these changes materially impacted revenues in fiscal 1992.
Gross profit as a percentage of revenues was 5.1% in 1992 compared to 7.6% in
1991. This change reflected the sale of CCD which historically realized higher
gross margins than those generated by the Company's wholesale revenues and
higher freight costs in 1992. Additionally, during fiscal 1992, competitive
pressures throughout the microcomputer industry impacted both vendor pricing and
programs to the Company and the selling prices the Company charged its
customers.
Selling, general and administrative expenses declined to $53,047,000 or 2.6% of
revenues in fiscal 1992 compared to $64,630,000 or 3.7% of revenues in fiscal
1991. Reduced corporate costs and the elimination of costs related to the CCD
operation were primarily responsible for this change. These cost reductions
were offset in part by increased costs to support the higher volume of wholesale
sales.
Amortization of intangibles in fiscal 1992 declined compared to fiscal 1991
following the sale of CCD and the elimination of approximately $7.8 million in
goodwill included in CCD's net assets.
Operating income totaled $45,325,000 in 1992 compared to $64,025,000 in 1991.
This change is primarily due to lower gross margin percent but was partially
mitigated by reduced selling, general and administrative expenses as discussed
above.
Investment and other income in 1992 totaled $475,000 compared to $5,206,000 in
1991. Interest expense did not change significantly from fiscal 1991 to fiscal
1992. The change in investment income resulted primarily from the decreased
amount of invested cash following the June 1991 BizMart acquisition, lower
interest rates in 1992 and increased expenditures for inventory and capital
expenditures associated with the expansion of BizMart in 1992.
As discussed in Note 3 to the financial statements, in May and July 1992, the
Company sold the 10 stores comprising CCD in two transactions for a combination
of cash and common stock of the purchasers. In the July transaction, in
exchange for the common stock of the subsidiaries owning nine of the CCD
locations, the Company received cash and a 31.1% equity interest in TFN. The
sale of CCD resulted in a pre-tax gain of $43,000, and an incremental tax charge
of approximately $1.7 million arising from differences between the tax bases of
net assets sold and their amounts for financial reporting purposes. Following
the sale of CCD, the Company recognized $1,028,000 in income as its equity in
TFN's earnings.
Income from continuing operations before income taxes was $39,408,000 for fiscal
1992 compared to $62,028,000 in fiscal 1991. The change resulted from the
factors described above.
The effective tax rate for fiscal 1992 was 43.8% compared to 37.9% in fiscal
1991. The primary causes of this change were the incremental tax charge
associated with the sale of CCD and the impact of non-deductible goodwill
amortization on lower pre-tax earnings during 1992.
Income from continuing operations was $22,134,000 in 1992 compared to
$38,529,000 in 1991, due to the factors outlined above.
In January and February 1993, the Company repaid the $30 million in Subordinated
Notes which bore interest at 13.25% per annum. As required by the Subordinated
Notes, the Company paid accrued interest and a prepayment premium totaling
$4,454,000. This premium and the related unamortized loan discount and deferred
financing costs were charged to expense in 1992 as an extraordinary item.
Transition Period Compared to Quarter Ended January 31, 1991
- ------------------------------------------------------------
Revenues increased 19.5% to $515,974,000 for the transition period, from
$431,695,000 for the quarter ended January 31, 1991. Increased revenues from
existing network members and the addition of new network members accounted for
this increase.
Gross profit as a percentage of revenues during the transition period decreased
to 7.0% compared to 7.9% for the quarter ended January 31, 1991 in response to
competitive pressure on pricing throughout the industry and increased freight
and handling costs associated with the higher volume of sales.
Selling, general and administrative expenses increased to $17,205,000 for the
transition period from $15,525,000 for the quarter ended January 31, 1991. As
a percentage of revenues, selling, general and administrative expenses declined
to 3.3% from 3.6% as a result of increased revenues without proportionate cost
increases.
Interest expense, net of investment income, increased to $2,170,000 for the
transition period from $602,000 during the quarter ended January 31, 1991, due
to the decreased amount of invested cash following the acquisition of BizMart
and greater inventory levels required to support increased sales.
The Company's effective tax rate decreased from 38.5% for the quarter ended
January 31, 1991, to 37.0% for the transition period, due principally to changes
in the Company's effective state tax rate following the relocation of certain
of the Company's operating activities.
Income from continuing operations was $9,625,000 for the transition period,
compared to $10,236,000 for the quarter ended January 31, 1991 for the reasons
outlined above.
RESULTS OF DISCONTINUED OPERATION AND SALE OF BIZMART
As discussed more fully in Note 2 to the financial statements, on June 19, 1991,
the Company acquired BizMart, a national chain of office products supercenters,
which operated in a separate industry segment from the Company's other
subsidiaries. On March 4, 1993, the Company completed the sale of BizMart to
OfficeMax, Inc. Accordingly, results of BizMart's operations are classified
as a discontinued operation.
During fiscal 1993, BizMart operations resulted in pre-tax losses totaling
$3,544,000 compared to pre-tax losses of $27,124,000 in fiscal 1992, a pre-tax
profit of $910,000 for the period from June 19, 1991 to October 31, 1991 and a
pre-tax profit of $2,695,000 for the transition period. Contributing to such
losses were adjustments to the carrying value of certain assets, including
inventory repurchased from franchisees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth to date from stock offerings, bank and
subordinated borrowings, inventory financing and internally generated funds.
The principal uses of its cash have been to fund its accounts receivable and
inventory and to make acquisitions.
On March 4, 1993, the Company completed the sale of BizMart and received a cash
payment of $275,236,000. During fiscal 1993, cash generated from operating
activities totaled $8,162,000 compared to $31,070,000 in fiscal 1992. At
January 29, 1994, the Company had cash and cash equivalents and marketable
securities totaling $183,379,000 ($52,498,000 at January 30, 1993) and had
working capital of $105,293,000 ($177,380,000 at January 30, 1993). During
fiscal 1993, the Company continued its strong management of assets as days sales
in accounts receivable averaged 1.9 days (2.5 days in fiscal 1992) and inventory
turnover averaged 11.8 times (10.3 times in fiscal 1992). The reduction in
working capital from January 30, 1993, is due primarily to the payments for the
special $2.00 per share and regular quarterly (instituted during the second
quarter) common stock dividends and share repurchases made during fiscal 1993.
With the new financing programs offered by the Company and the planned expanded
selection of inventory stocked in its warehouses, working capital requirements
are expected to increase in the future. The Company also has a $170,000,000
financing agreement with a finance company. At January 29, 1994, the Company
had $146,800,000 outstanding on this facility which was included in accounts
payable on the Consolidated Balance Sheet. On October 22, 1993, the Company
executed a $20,000,000 guarantee to an inventory finance company on behalf of
one of its network members. This guarantee remained in place at January 29,
1994.
The Board of Directors has authorized the repurchase, in open-market
transactions, of up to 7,000,000 shares of the Company's common stock. As of
January 29, 1994, the Company had repurchased 4,196,200 shares at a cost of
approximately $57,181,000.
Based on the Company's current level of operations and expected requirements,
management believes that the Company's cash and marketable securities,
internally generated funds and available financing arrangements and
opportunities will be sufficient to meet the Company's cash requirements for the
foreseeable future.
INFLATION AND SEASONALITY
The Company believes that inflation has not had a material impact on its
operations or liquidity to date. The Company's financial performance does not
exhibit significant seasonality, although certain computer product lines follow
a seasonal pattern with peaks occurring near the end of the calendar year.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Intelligent Electronics, Inc. and
its subsidiaries, listed in the index appearing under Item 14(a)(1) are filed
as part of this annual report on Form 10-K.
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders
Intelligent Electronics, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all material
respects, the financial position of Intelligent Electronics, Inc. and its
subsidiaries at January 29, 1994 and January 30, 1993 and the results of their
operations and their cash flows for each of the two years in the period ended
January 29, 1994, for the transition period ended February 1, 1992, and for the
year ended October 31, 1991, 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 present-
ation. We believe that our audits provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE
Philadelphia, Pennsylvania
March 7, 1994
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheet
(in thousands, except share-related data)
<CAPTION>
January 29, January 30,
1994 1993
----------- -----------
Assets
------
Current assets:
<S> <C> <C>
Cash and cash equivalents (including repurchase $ 122,249 $ 52,498
agreements of $14,381 in 1994 and $1,504 in 1993)
Marketable securities 61,130 --
Accounts receivable (net of allowance for doubtful
accounts of $398 in 1994 and $233 in 1993) 9,524 8,410
Inventory 251,044 196,857
Prepaid expenses and other current assets 8,872 3,576
Deferred income taxes 7,840 3,276
Net assets of discontinued operation -- 261,173
---------- -----------
Total current assets 460,659 525,790
Property and equipment, net 11,371 8,527
Intangible assets, primarily goodwill (net of accumulated
amortization of $21,124 in 1994 and $16,403 in 1993) 71,585 76,306
Investments in affiliates 30,096 18,174
Other assets 3,300 1,535
----------- -----------
Total assets $ 577,011 $ 630,332
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ -- $ 17,619
Accounts payable 334,341 304,045
Accrued liabilities 21,025 26,746
----------- -----------
Total current liabilities 355,366 348,410
----------- -----------
Other liabilities 2,795 1,395
Commitments and contingencies (Notes 4, 5, 11 and 12) -- --
Shareholders' equity:
Preferred stock $1.00 par value per share:
Authorized 15,000,000 shares, none
issued and outstanding -- --
Common stock $.01 par value per share:
Authorized 100,000,000 shares; issued: 39,310,439
in 1994 and 36,961,154 in 1993 393 370
Additional paid-in capital 219,107 196,742
Treasury stock (4,196,200 shares in 1994 and
754,400 shares in 1993) (57,181) (10,896)
Retained earnings 56,531 94,311
----------- -----------
Total shareholders' equity 218,850 280,527
----------- -----------
Total liabilities and shareholders' equity $ 577,011 $ 630,332
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statement of Operations
(in thousands, except per share data)
<CAPTION>
Transition
period Year
Year ended ended ended
January 29, January 30, February 1, October 31,
1994 1993 1992 1991
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 2,646,102 $ 2,016,686 $ 515,974 $ 1,753,574
Cost of goods sold 2,529,242 1,913,393 480,015 1,619,710
----------- ----------- ----------- ------------
Gross profit 116,860 103,293 35,959 133,864
----------- ----------- ----------- ------------
Operating expenses:
Selling, general and
administrative expenses 52,477 53,047 17,205 64,630
Amortization of intangibles,
primarily goodwill 4,721 4,921 1,303 5,209
----------- ----------- ----------- ------------
Total operating expenses 57,198 57,968 18,508 69,839
----------- ----------- ----------- ------------
Income from operations 59,662 45,325 17,451 64,025
Other income (expense):
Investment and other income, net 5,144 475 178 5,206
Interest expense (901) (7,420) (2,348) (7,203)
Equity in earnings of affiliate 2,636 1,028 -- --
----------- ----------- ----------- ------------
Income from continuing operations
before provision for income taxes 66,541 39,408 15,281 62,028
Provision for income taxes 25,424 17,274 5,656 23,499
----------- ----------- ----------- ------------
Income from continuing operations 41,117 22,134 9,625 38,529
Discontinued operation:
Income (loss) from discontinued
operation (net of tax expense
(benefit) of $(1,076), $(6,964),
$1,675 and $1,246) (2,468) (20,160) 1,020 (336)
Gain on sale of BizMart (net of
tax expense of $1,306) 4,276 -- -- --
----------- ----------- ----------- ------------
Income before extraordinary item 42,925 1,974 10,645 38,193
Extraordinary item:
Loss on early repayment of
Subordinated debt (net of tax
benefit of $1,799) -- (3,269) -- --
----------- ----------- ----------- ------------
Net income (loss) $ 42,925 $ (1,295) $ 10,645 $ 38,193
=========== =========== =========== ============
Earnings (loss) per common share
and share equivalents:
Continuing operations $ 1.13 $ 0.58 $ 0.25 $ 1.12
Discontinued operation (0.07) (0.52) 0.03 (0.01)
Sale of BizMart 0.12 -- -- --
Extraordinary item -- (0.09) -- --
----------- ----------- ----------- ------------
Net income (loss) per share $ 1.18 $ (0.03) $ 0.28 $ 1.11
=========== =========== =========== ============
Weighted average number of common
shares and share equivalents
outstanding: 36,521 38,204 38,683 34,497
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statement of Shareholders' Equity
(in thousands)
<CAPTION>
Common Treasury Total
Stock Additional Stock share-
--------------- paid-in Retained --------------- holders'
Shares Amount capital earnings Shares Amount equity
------ ------ ---------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1990 26,330 $ 263 $ 72,521 $ 46,768 $119,552
Issuance of common stock
net of offering costs 5,873 59 92,220 -- 92,279
Issuance of common stock
under acquisition agreement 1,144 12 16,181 -- 16,193
Issuance of common stock on
exercise of warrants 2,333 23 5,227 -- 5,250
Issuance of common stock on
exercise of options and
related tax benefit 424 4 2,635 -- 2,639
Issuance of common stock to
employees 41 -- 365 -- 365
Amortization of deferred
compensation on executive
stock option outstanding -- -- 6 -- 6
Net income -- -- -- 38,193 38,193
------ ------ ---------- -------- --------
Balance at October 31, 1991 36,145 361 189,155 84,961 274,477
Issuance of common stock on
exercise of warrants 40 1 189 -- 190
Issuance of common stock on
exercise of options and
related tax benefit 407 4 3,963 -- 3,967
Net income -- -- -- 10,645 10,645
------ ------ ---------- -------- --------
Balance at February 1, 1992 36,592 366 193,307 95,606 289,279
Issuance of common stock on
exercise of warrants 40 1 189 -- 190
Issuance of common stock on
exercise of options and
related tax benefit 329 3 3,246 -- 3,249
Common stock repurchased -- -- -- -- 754 $(10,896) (10,896)
Net loss -- -- -- (1,295) -- -- (1,295)
------ ------ ---------- -------- ------ -------- --------
Balance at January 30, 1993 36,961 370 196,742 94,311 754 (10,896) 280,527
Issuance of common stock on
exercise of warrants 120 1 569 -- -- -- 570
Issuance of common stock on
exercise of options and
related tax benefit 2,230 22 21,796 -- -- -- 21,818
Common stock repurchased -- -- -- -- 3,442 (46,285) (46,285)
Cash dividends ($2.24 per share) -- -- -- (80,705) -- -- (80,705)
Net income -- -- -- 42,925 -- -- 42,925
------ ------ ---------- -------- ------ -------- --------
Balance at January 29, 1994 39,311 $ 393 $ 219,107 $ 56,531 4,196 $(57,181) $218,850
====== ====== ========== ======== ====== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
<CAPTION>
Transition
period Year
Year ended ended ended
January 29, January 30, February 1, October 31,
1994 1993 1992 1991
----------- ----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $ 42,925 $ (1,295) $ 10,645 $ 38,193
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 9,279 9,196 2,503 9,088
Provision for deferred taxes (3,071) 1,146 (457) 1,624
Provision for losses on trade receivables 375 381 119 622
Provision for write-down of inventory 1,541 1,563 -- 302
(Income) loss from discontinued operation 2,468 20,160 (1,020) 336
Gain on sale of CCD -- (43) -- --
Gain on sale of BizMart (4,276) -- -- --
Equity in earnings of affiliate (2,636) (1,028) -- --
Extraordinary item, loss on early repayment
of Subordinated debt -- 3,462 -- --
Changes in assets and liabilities excluding
effects of business acquisitions and sales:
Accounts receivable (1,489) (4,057) (3,286) 2,296
Inventory (57,047) (32,223) 11,783 (19,833)
Other current assets (10,895) (1,454) (370) (196)
Accounts payable 30,204 42,020 (38,389) 50,938
Accrued liabilities 784 (6,758) 4,450 (2,458)
----------- ---------- ----------- ------------
Net cash provided by (used for)
operating activities 8,162 31,070 (14,022) 80,912
----------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (154,400) -- -- --
Sales and maturities of marketable securities 93,270 -- -- --
Acquisition of property and equipment, net (7,402) (4,571) (499) (4,917)
Payment of CPA contingent purchase price -- -- -- (1,652)
Purchase of net assets of franchised centers -- -- -- (1,702)
Purchase of net assets of BizMart,
less cash acquired -- -- -- (179,533)
Proceeds from sale of BizMart 275,236 -- -- --
Proceeds from sale of CCD -- 2,340 216 --
Repayment of note receivable from affiliate -- 27,850 -- --
Investments in and loans to affiliates (10,247) -- -- --
Tax benefit realized from acquired entities -- -- -- 1,666
Other (804) (804) 102 (314)
----------- ---------- ----------- ------------
Net cash provided by (used for)
investing activities 195,653 24,815 (181) (186,452)
----------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Subordinated debt (17,500) (12,500) -- --
Net proceeds from public offering -- -- -- 92,279
Common stock repurchased (55,375) (1,806) -- --
Cash dividends paid (77,896) -- -- --
Proceeds from exercise of stock options 21,818 3,249 3,967 2,646
Proceeds from exercise of warrants 570 190 190 5,250
Reduction in capital lease obligations (119) (317) (97) (367)
----------- ---------- ----------- ------------
Net cash provided by (used for)
financing activities (128,502) (11,184) 4,060 99,808
----------- ---------- ----------- ------------
Net cash provided by (used for)
continuing operations 75,313 44,701 (10,143) (5,732)
Cash used for discontinued operation (5,562) (56,693) (18,536) (21,820)
----------- ---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 69,751 (11,992) (28,679) (27,552)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 52,498 64,490 93,169 120,721
----------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 122,249 $ 52,498 $ 64,490 $ 93,169
=========== ========== =========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Intelligent Electronics, Inc. (the "Company") provides information technology
products, services and solutions to its network of nearly 2,000 integrators (the
"IE Network" or the "Network") and, in partnership with the Network, directly
to large and small corporate customers, educational institutions and
governmental agencies ("End Users"). As a leading supplier of premium brand
technology products in America, the Company provides business solutions to the
Network and End Users through innovative product management, sales demand
generation programs and logistics services. The principal products sold by the
Company include microcomputer systems, workstations, networking and
telecommunications equipment and software. On March 4, 1993, the Company sold
BizMart, Inc. ("BizMart") and accordingly, BizMart is treated as a discontinued
operation in the accompanying financial statements (see Note 2). Unless
otherwise indicated, amounts and disclosures referred to herein relate to
continuing operations.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Definition of Fiscal Year
- -------------------------
In December 1991, the Company changed its fiscal year-end to a fifty-two, fifty-
three week period ending on the Saturday nearest January 31st. Accordingly, the
Company reported a transition period, which began November 1, 1991 and ended on
February 1, 1992 (referred to herein as the "transition period"). The fifty-two
week periods ended January 29, 1994 and January 30, 1993 and the fiscal year
ended October 31, 1991 are referred to herein as "fiscal 1993," "fiscal 1992,"
and "fiscal 1991," respectively.
Cash, Cash Equivalents and Marketable Securities
- ------------------------------------------------
Cash and cash equivalents comprise the Company's cash balances and short-term
investments with an initial maturity of less than ninety days and include money-
market funds, commercial paper and repurchase agreements. Short-term
investments totaled $121,956,000 and $53,068,000 at January 29, 1994, and
January 30, 1993, respectively. With respect to repurchase agreements, the
Company requires specific assignment of securities as collateral for such
investments, but does not take possession of the collateral. The carrying
amount of cash, short-term investments and marketable securities approximates
fair market value due to the short-term maturity of these instruments.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS 115"), Accounting for Certain
Investments in Debt and Equity Securities, effective for fiscal years beginning
after December 15, 1993. The Company will adopt FAS 115 on January 30, 1994.
The adoption of this statement is not expected to materially affect the
financial position or results of operations of the Company.
Inventory
- ---------
Inventory consists of microcomputers, related peripheral products and software,
and is valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. The cost of additions and
improvements is capitalized, while maintenance and repairs are charged to
operations when incurred. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets (three to five years).
Leasehold improvements are amortized over the shorter of their useful lives or
the remaining lease term. Leases meeting the capitalization requirements of FAS
13 are capitalized and depreciated over the lease term. Depreciation expense
totaled $4,558,000 ($783,000 included in cost of goods sold) and $3,680,000 for
fiscal 1993 and 1992, respectively, $1,084,000 for the transition period, and
$3,404,000 for fiscal 1991. Accumulated depreciation totaled $14,872,000 at
January 29, 1994 and $10,517,000 at January 30, 1993.
Goodwill
- --------
Goodwill resulting from acquisitions accounted for under the purchase method is
amortized using the straight-line method generally over a 20-year period.
Revenue Recognition
- -------------------
Revenue is recognized upon shipment of products or performance of services.
Revenue from the granting of individual franchises is recognized when all
significant obligations have been performed. Revenues and total operating costs
related to company-owned centers were $86,223,000 and $85,212,000, respectively,
for fiscal 1992 (see Note 3), $54,678,000 and $52,721,000, respectively, for the
transition period, and $184,594,000 and $177,546,000, respectively, for fiscal
1991. Funds received from vendors for marketing programs and product rebates
are accounted for as revenue, a reduction of selling, general and administrative
expenses or product cost according to the nature of the program.
Franchising Activities
- ----------------------
The Company or its wholly-owned subsidiaries grant franchises, pursuant to the
terms of standard agreements, for the operation of business centers.
Franchisees are authorized to sell and lease personal computers, related
peripherals, software, support services and training as well as other advanced
technology under the Company's proprietary service marks "Todays Computers
Business Centers" and "TCBC," "Entre," "Connecting Point," "Intelligent Systems
Group," "BTC," and "Intelligent Multimedia Dealer Network".
The Company's franchise agreements generally have initial terms of ten years and
renewal options for an additional ten years. Certain agreements permit
termination by the franchisee upon 60 days notice. In fiscal 1993, 40
franchised business centers were added and 88 were eliminated due to
transferring to an affiliate agreement, closing or terminating their agreement,
resulting in 840 franchised locations at January 29, 1994. Revenues from
initial franchise fees were $0 and $217,000 for fiscal 1993 and 1992,
respectively, $409,000 for the transition period and $761,000 for fiscal 1991.
Investment and Other Income
- ---------------------------
Investment income includes interest and dividend income and realized gains and
losses on marketable securities. Total interest and dividend income was
$5,241,000, $1,086,000, $311,000, and $5,146,000 for fiscal 1993, fiscal 1992,
the transition period, and fiscal 1991, respectively.
Income Taxes
- ------------
Until February 2, 1992, the Company utilized Statement of Financial Accounting
Standards No. 96, Accounting for Income Taxes ("FAS 96"). In February 1992, FAS
96 was superseded by Statement of Financial Accounting Standards No. 109 ("FAS
109"). In accordance with FAS 109, deferred tax assets and liabilities are
recorded for temporary differences which enter into the determination of taxable
income in different periods for financial reporting and income tax purposes.
The Company adopted this statement on a prospective basis in the first quarter
of the fiscal year ended January 30, 1993. Adoption of this statement did not
have a material effect on the Company.
Earnings Per Share
- ------------------
Primary earnings per share is computed using the weighted average number of
common shares and dilutive common share equivalents outstanding based on the
average market price during the period. The amount of dilution is computed by
application of the treasury stock method. Fully diluted earnings per share is
computed in substantially the same manner, but includes the dilutive effect of
all issuable shares, based on the market price at the end of the period, whether
or not they are common share equivalents. Treasury stock transactions are
recorded on their trade date and reduce weighted average shares outstanding from
that date.
(2) DISCONTINUED OPERATION AND SALE OF BIZMART
On June 19, 1991, the Company acquired BizMart, a national chain of office
products supercenters, for an aggregate purchase price of $195,796,000,
including transaction costs. Operations attributed to BizMart included the sale
of microcomputers, related equipment and traditional office products. The
Company accounted for the acquisition using the purchase method. On March 4,
1993, the Company sold BizMart to OfficeMax, Inc. ("OfficeMax"), a majority-
owned subsidiary of Kmart Corporation and received a cash payment totaling
$275,236,000, including the purchase price, as defined, of $269,770,000 and
repayment of other amounts, consisting principally of intercompany advances
after November 28, 1992. The aggregate sale proceeds less the carrying value
of net assets sold and costs related to the sale resulted in a gain before tax
of $5,582,000. The effective tax rate for the sale of BizMart varies from the
effective tax rate for the discontinued operation due to differences between the
tax bases of assets sold and their amounts for financial reporting purposes.
Results of BizMart's operations have been reported separately as a discontinued
operation in the accompanying Consolidated Statement of Operations. BizMart's
operating results excluded from continuing operations are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Fiscal Transition Fiscal
1993 1992 Period 1991
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $ 60,193 $ 634,962 $ 175,124 $ 160,355
Costs and expenses 63,737 662,086 172,429 159,445
-------- --------- -------- ---------
Income (loss) before taxes (3,544) (27,124) 2,695 910
Income tax provision (benefit) (1,076) (6,964) 1,675 1,246
-------- --------- -------- ---------
Income (loss) from
discontinued operation $ (2,468) $ (20,160) $ 1,020 $ (336)
======== ========= ======== =========
BizMart's assets and liabilities were reclassified to a net current asset on the
January 30, 1993 Consolidated Balance Sheet and consisted of the following:
Cash $ 3,099,000
Accounts receivable 8,747,000
Inventory 141,938,000
Prepaid expenses and other current assets 11,615,000
Property and equipment, including
leasehold improvements 49,190,000
Goodwill 120,863,000
Short-term portion of long-term debt (250,000)
Accounts payable and accrued expenses (73,101,000)
Long-term debt (928,000)
------------
Net assets of discontinued operation $261,173,000
============
BizMart was included in the consolidated federal and certain state income tax
returns of the Company. For financial reporting purposes, income tax expense
(benefit) was provided on a separate return basis except that the benefit of net
operating losses was measured on a consolidated basis.
(3) SALE OF COMPANY CENTER DIVISION AND INVESTMENTS IN AFFILIATES
On May 15, 1992, the Company sold certain assets of its Bellevue, WA center to
Random Access, Inc. ("RA"), a network member and publicly traded company. The
consideration received consisted of $400,000 cash and 92,500 (as adjusted for
a reverse two-for-one stock split on June 28, 1993) newly issued unregistered
shares representing approximately 1% of RA common stock. The Company accounts
for its investment in RA common stock using the cost method. The RA common
stock was valued at $294,000 or $3.18 per share. At January 29, 1994, the
aggregate market value, based on RA's quoted market price, of the Company's
investment in RA was approximately $526,000.
On July 2, 1992, the Company sold substantially all of the remaining operations
of its Company Center Division ("CCD") to The Future Now, Inc. ("TFN"), a
network member and publicly traded company. The consideration received by the
Company consisted of 1,638,377 newly issued unregistered shares of TFN valued
at $16,589,000, or $10.12 per share, repayment of intercompany obligations
($27,850,000), warrants valued at $263,000 to purchase 184,498 shares of TFN
common stock at an average exercise price of $10.06 per share, and a cash
payment of $1,940,000.
The aggregate sale proceeds from the above transactions less the carrying value
of net assets sold and costs related to the sales resulted in a gain before tax
of $43,000. An incremental tax charge of approximately $1,700,000, arising from
differences between the tax bases of assets sold and their amounts for financial
reporting purposes, is included in the Company's provision for income taxes for
fiscal 1992.
In March 1993, TFN completed a public offering which reduced the Company's
equity interest in TFN to 24.3%. In October 1993, the Company purchased an
additional 681,447 newly issued unregistered shares of TFN raising the Company's
equity interest to 31.1%. The Company accounts for its investment in TFN using
the equity method. In fiscal 1993, the Company recognized $2,636,000 as its
equity interest in TFN's earnings. At January 29, 1994, the carrying value of
the Company's investment in TFN was approximately $29,290,000 and the aggregate
market value, based on TFN's quoted market price, was approximately $33,057,000.
Summarized financial information for TFN is as follows (in thousands):
Fiscal Fiscal
1993 1992
-------- --------
Current assets $223,850 $119,250
Noncurrent assets 66,709 26,400
Current liabilities 132,150 67,817
Noncurrent liabilities 80,649 34,994
Revenues 701,834 343,000
Gross profit 113,489 59,934
Net income 9,303 5,709
The Company sells products to TFN pursuant to a franchise agreement which
expires in the year 2000. This agreement may be terminated by TFN upon 90 days
notice and payment of certain amounts. During fiscal 1993 and fiscal 1992,
sales to TFN approximated $427,000,000 and $212,000,000, respectively,
representing approximately 16% and 10%, respectively, of the Company's
consolidated revenues from continuing operations.
(4) CREDIT FACILITIES
On April 18, 1989, the Company issued to certain institutional investors
Subordinated Notes in the aggregate principal amount of $30,000,000 and used net
proceeds therefrom to reduce existing borrowings and for working capital
purposes. Interest on the Subordinated Notes was payable quarterly at 13.25%
per annum. On January 11, 1993, and February 24, 1993, the Company prepaid
principal of $12,500,000 and $17,500,000, respectively, to retire the
Subordinated Notes in full. Pursuant to terms outlined in the Subordinated
Notes Agreement, the Company paid accrued interest and a prepayment premium
totaling $4,454,000 in connection with the early repayment of the Subordinated
Notes. The prepayment premium, together with unamortized deferred financing
costs and loan discount are reflected as an extraordinary item, net of the
related tax benefit, in the Consolidated Statement of Operations in fiscal 1992.
The Company and its subsidiaries have agreements with various lenders and other
creditors to finance product purchases from vendors. On January 25, 1994, the
Company amended a financing agreement with a finance company to provide a credit
line of $170,000,000 for inventory financing and for general working capital
purposes. At January 29, 1994, the Company had $146,800,000 outstanding on this
facility which was included in accounts payable on the Consolidated Balance
Sheet. In connection with these arrangements, such creditors have a lien on all
of the Company's assets at January 29, 1994. In addition, certain of these
arrangements impose financial covenants relating to working capital, net worth,
current ratio, liabilities to net worth and earnings.
(5) LEASE OBLIGATIONS
The Company has noncancelable operating leases for offices, warehouse
facilities, and equipment that expire over the next three years. Most of the
facilities' leases include renewal options and certain of the equipment leases
have purchase options.
Future minimum lease payments under noncancelable leases are as follows:
1994 - $3,441,000, 1995 - $1,814,000, and 1996 - $225,000. Rent expense
recorded for fiscal 1993, fiscal 1992, the transition period and fiscal 1991
amounted to $3,836,000, $3,947,000, $1,216,000, and $4,977,000, respectively.
The Company is guarantor of certain real estate leases of BizMart. OfficeMax
has indemnified the Company against potential losses which may result pursuant
to such guarantees.
(6) CAPITAL STOCK
On April 18, 1989, in connection with the issuance of the Subordinated Notes
(see Note 4), the Company granted warrants for the purchase of 1,200,000 shares
of common stock at an exercise price of $4.75 per share, exercisable until April
30, 1995, subject to adjustment under certain circumstances. The value of these
warrants ($1,090,000) was credited to paid-in capital and was charged to
interest expense over the term of the loan. Shares of the Company's common
stock have been issued pursuant to the exercise of 120,000 warrants during
fiscal 1993, 40,000 warrants during fiscal 1992, 40,000 warrants during the
transition period and 1,000,000 warrants during fiscal 1991.
In connection with the August 1989 acquisition of Connecting Point of America,
Inc. ("CPA"), the Agreement and Plan of Merger (as amended) provided for the
payment of contingent purchase consideration aggregating up to $29,852,000 based
on achievement of certain operating results during the 12-month periods ended
March 31, 1990 and 1991. On June 11, 1990, the Company paid the maximum 1990
contingent purchase consideration of $12,000,000 to the former CPA
securityholders in cash of approximately $1,200,000 and 1,143,644 shares of the
Company's common stock. On May 20, 1991, the Company paid the final additional
purchase consideration amount of $17,845,000 comprising $1,652,000 in cash and
1,143,766 shares of common stock.
On March 5, 1991, the Company completed a public offering of 5,873,000 shares
of common stock. Proceeds to the Company, net of offering costs, totaled
$96,079,000, including $3,800,000 from the contemporaneous exercise of 800,000
warrants issued in connection with the Subordinated Notes.
Stock Options
- -------------
The Company has a non-qualified stock option plan for employees and directors
which permits the granting of options to purchase an aggregate of 8,000,000
shares of common stock to employees and directors of the Company. This plan is
intended to provide an incentive for employees to maximize their efforts and
enhance the success of the Company. Options are generally granted at option
prices equivalent to fair market value on the date of grant. The options are
generally exercisable commencing one year after the date of grant in five equal
annual installments (unless otherwise provided in the grant) and expire six to
ten years after the date of grant, subject to earlier termination and other
rules relating to the cessation of employment.
Changes in stock options are summarized as follows:
Number of Option price
shares Range per share
--------- ---------------
Balance outstanding October 31, 1990 3,704,200 $ 0.50-$ 9.31
Granted 1,492,400 $11.50-$14.13
Exercised (407,000) $ 0.50-$ 9.22
Canceled (52,400) $ 2.85-$11.50
---------
Balance outstanding October 31, 1991 4,737,200 $ 1.25-$14.13
Granted 1,079,400 $10.38-$15.50
Exercised (403,600) $ 1.25-$ 9.31
Canceled (456,600) $ 5.75-$11.50
---------
Balance outstanding February 1, 1992 4,956,400 $ 1.25-$15.50
Granted 450,000 $10.25-$24.25
Exercised (278,860) $ 1.25-$11.50
Canceled (891,240) $ 2.85-$24.25
---------
Balance outstanding January 30, 1993 4,236,300 $ 1.56-$15.50
Granted 1,014,100 $15.00-$24.88
Exercised (1,977,160) $ 1.56-$15.50
Canceled (666,300) $ 5.81-$17.00
---------
Balance outstanding January 29, 1994 2,606,940 $ 2.85-$24.88
=========
As of January 29, 1994, there were 318,220 options exercisable under the
employee and director stock option plan at exercise prices ranging from $2.85
to $15.50 per share.
The Company also has a non-qualified stock option plan which permits the
granting of options to purchase an aggregate of 2,000,000 shares of common stock
to franchisees of the Company. This plan is intended to reward franchisees'
performance and commitment to the Company. Options are generally granted at
option prices equivalent to fair market value on the date of grant. The options
are generally exercisable commencing one year after the date of the grant in
five equal annual installments. The options expire six years after the date of
grant, subject to earlier termination and other rules relating to default under
the terms of the franchise agreement. As of January 29, 1994, there were
145,155 options outstanding under this plan. Of this amount, 58,635 were
exercisable at prices ranging from $5.81 to $14.75 per share.
The Company granted 200,000 options (100,000 each in May 1990 and May 1989) to
an outside advisor to the Board of Directors of the Company with the same
general terms and conditions as those in the non-qualified stock option plan for
employees and directors. At January 29, 1994, 100,000 of these options were
outstanding. In addition, 200,000 options were granted to an officer of BizMart
in connection with the June 1991 acquisition, of which 50,000 were exercised on
March 17, 1992 and 150,000 were exercised during fiscal 1993.
As of January 29, 1994, shares of common stock are reserved for issuance for the
following purposes:
Shares
---------
Exercise of employee and director stock options 4,296,720
Exercise of franchisee stock options 1,934,875
Exercise of other stock options 100,000
---------
Total 6,331,595
=========
(7) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
</TABLE>
<TABLE>
Charge
in lieu
Current Deferred of taxes Total
--------- -------- -------- ---------
January 29, 1994
<S> <C> <C> <C>
Federal $ 24,632 $ (1,780) $ 22,852
State 2,760 (188) 2,572
--------- -------- ---------
Total $ 27,392 $ (1,968) $ 25,424
========= ======== =========
January 30, 1993
Federal $ 15,159 $ 1,106 $ 16,265
State 969 40 1,009
--------- -------- ---------
Total $ 16,128 $ 1,146 $ 17,274
========= ======== =========
February 1, 1992
Federal $ 6,061 $ (433) $ 5,628
State 52 (24) 28
--------- -------- ---------
Total $ 6,113 $ (457) $ 5,656
========= ======== =========
October 31, 1991
Federal $ 19,444 $ 1,288 $ 1,583 $ 22,315
State 765 336 83 1,184
--------- -------- --------- ---------
Total $ 20,209 $ 1,624 $ 1,666 $ 23,499
========= ======== ========= =========
</TABLE>
The charge in lieu of taxes reflects the tax benefit of cumulative temporary
differences scheduled to reverse after the acquisition dates of Entre and CPA
and the benefit of CPA's pre-acquisition net operating loss carryforward
recognized during fiscal 1991. These amounts were credited to goodwill recorded
in connection with the Entre and CPA acquisitions.
Deferred income tax balances, and the deferred component of the provision for
income taxes, relate to the following cumulative temporary differences (in
thousands):
January 29, January 30,
1994 1993
----------- -----------
Inventory $ 1,879 $ 1,653
Accounts receivable reserves 490 83
Acquisition and sale accruals 3,378 972
Lease termination accruals -- 95
Employee benefits 834 169
Depreciation 537 --
Other accruals 722 304
----------- -----------
Deferred tax asset $ 7,840 $ 3,276
=========== ===========
Deferred gain on sale of CCD $ 989 $ 933
Equity in earnings of affiliate 1,372 364
Other 429 --
----------- -----------
Non-current deferred tax liability $ 2,790 $ 1,297
=========== ===========
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
<TABLE>
Fiscal Fiscal Transition Fiscal
1993 1992 period 1991
------ ------ ---------- ------
<S> <C> <C> <C> <C>
Federal statutory rate 35.0% 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.5 1.7 0.1 1.3
Amortization of intangibles 2.7 4.4 3.0 3.0
Basis difference from sale of CCD -- 4.5 -- --
Tax-exempt investment income (2.1) -- -- (0.6)
Other 0.1 (0.8) (0.1) 0.2
------ ------ ---------- ------
38.2% 43.8% 37.0% 37.9%
====== ====== ========== ======
</TABLE>
(8) SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows (in thousands):
<TABLE>
Fiscal Fiscal Transition Fiscal
1993 1992 period 1991
------- -------- ---------- --------
Details of acquisitions:
<S> <C> <C> <C> <C>
Fair value of assets acquired -- -- -- $246,407
Liabilities assumed and
acquisition-related accruals -- -- -- 48,909
Cash acquired -- -- -- 16,263
Payment of contingent purchase
consideration with common stock -- -- -- 16,193
Details of other investing activities:
Common stock and warrants received
from sale of CCD -- $ 17,146 -- --
Details of other financing activities:
Capital lease obligations entered
into for equipment -- -- -- 422
Accrual for repurchase of
common stock -- 9,090 -- --
Accrual of cash dividends declared $ 2,809 -- -- --
Cash paid during the year for:
Interest 767 10,099 $ 2,033 6,970
Income taxes 22,833 11,559 2,824 19,117
</TABLE>
(9) MAJOR SUPPLIERS
The Company has authorized dealership or distributorship agreements with various
manufacturers. Products from certain of these manufacturers comprised the
following percentages of the Company's revenues during fiscal 1993, fiscal 1992,
the transition period and fiscal 1991:
Fiscal Fiscal Transition Fiscal
1993 1992 period 1991
------ ------ ---------- ------
IBM 15% 18% 24% 24%
Compaq Computer Corp. 25% 18% 12% 16%
Apple Computer, Inc. 18% 22% 28% 24%
Hewlett-Packard Company 22% 20% 15% 14%
(10) EMPLOYEE BENEFIT PLAN
The Company adopted a 401(K) Tax Deferred Savings Plan (the "Plan") in 1989.
CPA had a separate plan covering eligible CPA employees with similar provisions.
These two plans were merged in July 1991. Eligible employees may defer a
portion of their total compensation through contributions to the Plan. Until
February 1992, the Company matched $0.50 for each dollar contributed by
participants subject to certain limitations. Employer matching contributions
were temporarily suspended during fiscal 1992, and were reinstated on
February 1, 1993. The Company's contributions under the Plan for fiscal 1993,
fiscal 1992, the transition period and fiscal 1991 were $313,000, $162,000,
$113,000 and $474,000, respectively.
(11) COMMITMENTS
The Company and its subsidiaries have arrangements with certain finance
companies which provide inventory financing facilities for its Network. Five
finance companies are currently approved by the Company for use by its Network.
The Company monitors the financial stability of the finance companies and
requires payment within two days of product shipment. If these arrangements are
terminated, the Company would have to develop alternative financing
arrangements. In conjunction with these arrangements, the Company has inventory
repurchase agreements with the finance companies that would require it to
repurchase certain inventory which might be repossessed from the Network by the
finance companies. To date, such repurchases have been insignificant.
On October 22, 1993, the Company executed a $20,000,000 guarantee to an
inventory finance company on behalf of one of its network integrators, which
remained outstanding at January 29, 1994.
(12) CONTINGENCIES
The Company is involved in various lawsuits in the ordinary course of business.
Management of the Company does not expect resolution of these matters to have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
In March and April, 1992 various actions were filed against the Company and
certain directors and officers of the Company and were ordered consolidated for
consideration for class action treatment in the United States District Court for
the Eastern District of Pennsylvania (In re Intelligent Electronics, Inc.
Securities Litigation, No. 92-CV-1905). The consolidated complaint generally
alleges that the Company and the other defendants caused or permitted a series
of misleading public statements to be made about the Company's operations and
that plaintiffs, relying on this information, purchased stock in the Company and
subsequently suffered financial harm. The plaintiffs seek an unspecified amount
of damages. The case is now proceeding in discovery. Management believes this
complaint to be without merit and the Company intends to vigorously defend
against these allegations. While management of the Company, based on its
investigation of this matter and consultations with counsel, believes resolution
of this matter will not have material adverse effect on the Company's financial
position, the ultimate outcome of this complaint cannot presently be determined.
(13) QUARTERLY FINANCIAL DATA (unaudited)
Selected quarterly financial data for the years ended January 29, 1994 and
January 30, 1993, is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
January 29, 1994 Quarter Quarter Quarter Quarter Year
- ---------------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $616,948 $613,245 $675,902 $740,007 $2,646,102
Gross profit 25,785 26,809 30,156 34,110 116,860
Loss from discontinued
operation (2,468) -- -- -- (2,468)
Sale of BizMart 6,298 -- -- (2,022) 4,276
Net income 12,151 9,194 10,851 10,729 42,925
Earnings (loss) per share:
Continuing operations $ 0.23 $ 0.26 $ 0.30 $ 0.35 $ 1.13
Discontinued operation (0.07) -- -- -- (0.07)
Sale of BizMart 0.17 -- -- (0.05) 0.12
-------- -------- -------- -------- ----------
Net income $ 0.33 $ 0.26 $ 0.30 $ 0.30 $ 1.18
======== ======== ======== ======== ==========
January 30, 1993
- ----------------------------
Revenues $495,809 $466,560 $484,076 $570,241 $2,016,686
Gross profit 32,960 24,278 22,252 23,803 103,293
Loss from discontinued
operation (1,161) (6,106) (8,061) (4,832) (20,160)
Income (loss) before
extraordinary item 6,796 (4,295) (2,406) 1,879 1,974
Extraordinary item -- -- -- (3,269) (3,269)
Net income (loss) 6,796 (4,295) (2,406) (1,390) (1,295)
Earnings (loss) per share:
Continuing operations $ 0.21 $ 0.05 $ 0.15 $ 0.18 $ 0.58
Discontinued operation (0.03) (0.16) (0.21) (0.13) (0.52)
Extraordinary item -- -- -- (0.09) (0.09)
-------- -------- -------- -------- ----------
Net income (loss) $ 0.18 $ (0.11) $ (0.06) $ (0.04) $ (0.03)
======== ======== ======== ======== ==========
</TABLE>
The sum of the quarterly net earnings per share amounts does not equal the
annual amount reported, as per share amounts are computed independently for each
quarter and for the full year based on respective weighted average common shares
and share equivalents outstanding.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained in the sections titled "Election of Directors"
and "Other Matters" in the Proxy Statement for the Annual Shareholders' Meeting
to be held on or about May 24, 1994 (the "Proxy Statement"), with respect to
directors of the Company, and the information contained in the section titled
"Item 1. Business - Executive Officers of the Company" in Part I of this Form
10-K, with respect to executive officers of the Company, are incorporated herein
by reference in response to this item.
Item 11. EXECUTIVE COMPENSATION
The information contained in the section titled "Executive Compensation"
in the Proxy Statement (other than the portion thereof contained under the
headings "Stock Performance Chart" and "Compensation and Stock Option Committee
Report on Executive Compensation"), with respect to executive compensation
and the information contained in the section titled "Director Compensation"
in the Proxy Statement with respect to Director compensation are incorporated
herein by reference in response to this item.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section titled "Principal Shareholders
and Holdings of Officers and Directors" in the Proxy Statement, with respect to
security ownership of certain beneficial owners and management, is incorporated
herein by reference in response to this item.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section titled "Certain Relationships and
Related Transactions" in the Proxy Statement, with respect to certain
relationships and related transactions, is incorporated herein by reference in
response to this item.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report :
Page
(1) Financial statements:
Report of Independent Accountants 13
Consolidated Balance Sheet, January 29, 1994
and January 30, 1993 14
Consolidated Statement of Operations, Years
ended January 29, 1994 and January 30, 1993,
Transition Period ended February 1, 1992 and
Year ended October 31, 1991 15
Consolidated Statement of Shareholders'
Equity, Years ended January 29, 1994 and
January 30, 1993, Transition Period ended
February 1, 1992 and Year ended October 31, 1991 16
Consolidated Statement of Cash Flows,
Years ended January 29, 1994 and January 30, 1993,
Transition Period ended February 1, 1992
and Year ended October 31, 1991 17
Notes to Consolidated Financial Statements 18
(2) Financial Statement Schedules:
Schedule I - Marketable Securities - Other Security Investments 33
Schedule II - Amounts Receivable from Related Parties
and Underwriters, Promoters, and Employees other
than Related Parties 34
Schedule VIII - Valuation and Qualifying Accounts
and Reserves 35
Schedule IX - Short-term Borrowings 35
Schedule XIII - Other Investments 36
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
<PAGE>
(a) (3) Exhibits:
* 3.1 Articles of Incorporation of the Company, as amended. (Exhibit
3.1 of the Company's Registration Statement No. 33-14436 filed
on May 20, 1987 [the "1987 Registration Statement"].)
* 3.2 Amendment to the Articles of Incorporation of the Company
effective June 22, 1987. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1987
[the "1987 Form 10-K"].)
* 3.3 By-Laws of the Company. (Exhibit 3.3 to the 1987 Registration
Statement.)
* 3.4 Specimen Certificate of Common Stock, $.01 par value. (Exhibit
3.4 to the 1987 Registration Statement.)
* 3.5 Amendments to By-Laws of the Company effective June 2, 1987.
(Exhibit 3.5 to the 1987 Form 10-K.)
* 3.6 Amendments to By-Laws of the Company effective March 28, 1990.
(Exhibit 3.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1990 [the "1990 Form 10-K"].)
* 3.7 Amendments to By-Laws of the Company effective July 4, 1990.
(Exhibit 3.7 to the 1990 Form 10-K.)
* 3.8 Articles of Amendment to the Articles of Incorporation of the
Company filed on April 9, 1990. (Exhibit 3.8 to the 1990 Form
10-K.)
*10.1 Amended and Restated Non-Qualified Stock Option Plan for
Employees and Directors. (Exhibit 10.1 to the 1990 Form
10-K.)**
*10.2 Amended and Restated Non-Qualified Stock Option Plan for
Franchisees. (Exhibit 10.2 to the 1990 Form 10-K.)
*10.3 IBM Personal Computer Agreement between the Company and IBM, as
amended. (Exhibit 10.5 to the 1987 Registration Statement.)
*10.4 COMPAQ Computer Corporation United States Central Purchase
Agreement among the Company, TCBC and COMPAQ. (Exhibit 10.5 to
the Company's Registration Statement No. 33-27573 filed on
March 16, 1989 [the "1989 Registration Statement"].)
*10.5 Lease dated September 15, 1989 between the Company and Project
73, a Limited Partnership (Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1989
[the "1989 Form 10-K"].)
*10.6 Letter Agreement dated September 1, 1986 between the Company and
ERT Associates. (Exhibit 10.9 to the 1987 Registration
Statement.)
*10.7 Loan and Security Agreement ("Loan and Security Agreement")
dated as of December 16, 1988 among Intelligent Acquisition
Corporation, the Company, Intelligent Investments, Inc. and TCBC
and Continental Bank. (Exhibit (b)(3) to the Company's Schedule
14D-1 filed with the Securities and Exchange Commission ("SEC")
on November 18, 1988, as amended ["1988 Schedule 14D-1"].)
*10.8 Joinder to Loan and Security Agreement. (Exhibit 2.7 to the
Company's Current Report on Form 8-K filed with the SEC on
January 18, 1989.)
*10.9 Lease Agreement dated January 20, 1989 between the Company and
Hankin/Crow Associates. (Exhibit 10.13 to the 1989 Registration
Statement.)
*10.10 IBM Personal Computer Agreement between Entre and IBM. (Exhibit
10.14 to the 1989 Registration Statement.)
*10.11 COMPAQ Computer Corporation Central Purchase Agreement between
Entre and COMPAQ. (Exhibit 10.15 to the 1989 Registration
Statement.)
*10.12 Agreement of Lease dated November 25, 1986 between Entre and
Tysons Dulles Associates Limited Partnership, as amended.
(Exhibit 10.16 to the 1989 Registration Statement.)
*10.13 Agreement of Lease dated May 2, 1984 among Entre, E.V.E. Joint
Venture, Cecil Pruit, Jr., Trustee. (Exhibit 10.17 to the 1989
Registration Statement.)
*10.14 Note Agreement dated as of March 15, 1989 among the Company,
TCBC and Entre and Massachusetts Mutual Life Insurance Company,
MassMutual Corporate Investors, MassMutual Participation
Investors, Household Commercial Financial Services, Inc. and The
Penn Mutual Life Insurance Company, with Schedules and Exhibits.
(Exhibit 10.19 to the 1990 Form 10-K.)
*10.15 Pledge and Security Agreement dated as of March 15, 1989 between
the Company and Household Commercial Financial Services, Inc.
(Exhibit 10.22 to the 1989 Form 10-K.)
*10.16 Subordinated Guaranty Agreement dated as of March 15, 1989 of
the Company, TCBC and Entre. (Exhibit 10.23 of the 1989 Form
10-K.)
*10.17 Subordinated Guaranty Agreement of CPA. (Exhibit 10.34 of the
1989 Form 10-K.)
*10.18 IBM Personal Computer Agreement between CPA and IBM. (Exhibit
10.24 to the 1989 Registration Statement.)
*10.19 Dealer Sales Agreement between CPA and Apple. (Exhibit 10.25
to the 1989 Registration Statement.)
*10.20 Addendum to Dealer Sales Agreement between CPA and IBM (and
related documents). (Exhibit 10.29 to the 1989 Registration
Statement.)
*10.21 Lease Agreement dated as of March 1, 1989 between CPA and
Travelers Insurance Company. (Exhibit 10.27 to the 1989
Registration Statement.)
*10.22 Agreement and Plan of Merger dated as of November 11, 1988 among
the Company, Intelligent Acquisition Corporation and Entre.
(Exhibit (c)(1) to the 1988 Schedule 14D-1.)
*10.23 Agreement and Plan of Merger dated as of May 16, 1989 among the
Company, Condor Acquisition Corp. ("Condor") and CPA. (Exhibit
2.1 to the Company's Current Report on Form 8-K filed with the
SEC on May 3, 1989.)
*10.24 First Amendment to Agreement and Plan of Merger dated June 16,
1989 among the Company, Condor and CPA . (Exhibit 2.2 to the
Company's Form 8-K filed with the SEC on December 7, 1990 [the
"1990 Form 8-K"].)
*10.25 Second Amendment to Agreement and Plan of Merger dated September
14, 1990 among the Company, Condor and CPA. (Exhibit 2.3 to the
1990 Form 8-K).
*10.26 Agreement dated July 20, 1990 between the Company and Sun
Microsystems, Inc. (Exhibit 10.33 to the 1990 Form 10-K.)
*10.27 Lease Agreement between MYM Liquidating Trust and the Company
dated December 17, 1990. (Exhibit 10.34 to the 1990 Form 10-K.)
*10.28 Agreement and Plan of Merger dated as of May 10, 1991 among the
Company, IEI Acquisition Corp. ("IEI") and BizMart. (Exhibit
(c)(1) to the Company's Schedule 14D-1 filed with the SEC on May
17, 1991 [the "1991 Schedule 14D-1"].)
*10.29 Stock Option Agreement dated as of May 10, 1991 among the
Company, IEI and James E. Berk. (Exhibit (c)(3) to the 1991
Schedule 14D-1.) **
*10.30 Severance Agreement dated as of April 8, 1991 between BizMart
and James E. Berk (Exhibit 8 to BizMart's Schedule 14D-9 dated
May 17, 1991.) **
*10.31 Stock Purchase Agreement between Intelligent Electronics, Inc.
and OfficeMax, Inc. dated December 3, 1992. (Exhibit 2 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
October 31, 1992.)
10.32 Amendment to Addendum to Agreement for Wholesale Financing
(Security Agreement) and Addendum to Addendum to Agreement for
Wholesale Financing - Flexible Payment Plan dated January 25,
1994.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse.
(b) Reports filed on Form 8-K during last fiscal quarter of 1993.
None
* Incorporated by reference
** Management contract or compensatory plan or arrangement
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Schedule I
Marketable Securities - Other Security Investments
At January 29, 1994
<CAPTION>
Amount at
Which Carried
Principal Market on Balance
Description Amount Cost Value Sheet
- ---------------------------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Various tax-exempt mutual funds(1) $17,530,000 $17,528,205 $17,530,000 $17,530,000
Various tax-exempt variable rate
demand notes(1) 43,600,000 43,612,713 43,600,000 43,600,000
-----------
$61,130,000
===========
(1) Securities of any one individual issuer do not exceed 2 percent of the total assets of the Company.
</TABLE>
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Schedule II
Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other than
Related Parties
Year ended October 31, 1991, Transition Period ended
February 1, 1992 and Years ended January 30, 1993 and January 29, 1994
<CAPTION>
Deductions
-------------- Balance at
Balance at Amounts end of period
Beginning Amounts Written ----------------------
Name of Debtor of Period Additions Collected Off Current Non-current
<C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- ----------- --------- --------- ------- ------- -----------
Year ended October 31, 1991:
Michael R. Shabazian
unsecured loan agreement
bearing interest at 9.5%
per annum, due on demand
but no later than
December 31, 1991 (1): $113,000 $10,000 ($50,000) -- $ 73,000 --
======== ======== ========== ======= ======== ==========
Transition Period ended February 1, 1992:
Michael R. Shabazian
unsecured loan agreement
bearing interest at 9.5%
per annum, due on demand
but no later than
December 31, 1991: $73,000 -- ($73,000) -- -- --
======== ======== ========== ======= ======== ==========
Year ended January 30, 1993:
Gregory A. Pratt
unsecured loan agreement
bearing interest at 6.375%
per annum, due on demand
but no later than
August 4, 1993: -- $250,000 -- -- $250,000 --
======== ======== ========== ======= ======== ==========
Year ended January 29, 1994:
Gregory A. Pratt
unsecured loan agreement
bearing interest at 6.375%
per annum, due on demand
but no later than
August 4, 1993: $250,000 -- ($250,000) -- -- --
======== ======== ========== ======= ======== ==========
(1) Interest rate was reduced to 9.5% in April 1991.
</TABLE>
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Schedule VIII
Valuation and Qualifying Accounts and Reserves
Year ended October 31, 1991, Transition Period ended
February 1, 1992 and Years ended January 30, 1993 and January 29, 1994
<CAPTION>
Additions
-------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions/ end
Description of period expenses accounts write-offs of period
- ---------------------------------------- ---------- ---------- ---------- ----------- -----------
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1991 $1,750,000 $622,000 ($368,000) ($1,396,000) $608,000
========== ======== ========== =========== ==========
Transition Period ended February 1, 1992 $608,000 $119,000 -- ($125,000) $602,000
========== ======== ========== =========== ==========
Year ended January 30, 1993 $602,000 $381,000 -- ($750,000) $233,000
========== ======== ========== =========== ==========
Year ended January 29, 1994 $233,000 $375,000 -- ($210,000) $398,000
========== ======== ========== =========== ==========
</TABLE>
<TABLE>
Short-term Borrowings Schedule IX
Year ended October 31, 1991, Transition Period ended
February 1, 1992 and Years ended January 30, 1993 and January 29, 1994
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate at end Interest during the during the during the
Short-term Borrowings of Period Rate Period (2) Period (3) Period (4)
- ----------------------------------- --------- -------- ----------- ----------- -------------
Year ended October 31, 1991:
<S> <C> <C> <C> <C> <C>
Notes payable - Bank (1) -- -- $418,000 $958,000 8.5%
Transition Period ended
February 1, 1992:
Notes payable - Bank (1) -- -- -- $498,000 7.6%
Year ended January 30, 1993:
Notes payable - Finance Company (1) -- -- $21,600,000 $2,795,000 7.2%
Year ended January 29, 1994:
Notes payable - Finance Company (1) -- -- -- $1,094,000 7.1%
(1) Notes payable to bank and finance company represent borrowings classified as short-term obligations under line of credit
borrowing arrangements.
(2) Highest month-end balance during the period.
(3) The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances
by 360.
(4) The weighted average interest rate during the year was computed by dividing the actual interest expense during the period
by average short-term debt outstanding.
</TABLE>
<PAGE>
<TABLE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Schedule XIII
Other Investments
At January 29, 1994
<CAPTION>
Amount at
Which Carried
Number of Market on Balance
Description Shares Cost Value Sheet
- ---------------------------------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Investment in The Future Now, Inc. 2,319,824 $29,290,137 $33,057,492 $29,290,137
Investment in Random Access, Inc. 92,500 294,225 526,094 294,225
Other investments(1) 33,102 511,736 N/A 511,736
-------------
$30,096,098
=============
(1) The Company has an investment in a privately-held corporation. The market value of this corporation is not
readily determinable.
</TABLE>
<PAGE>
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.
INTELLIGENT ELECTRONICS, INC.
Date: April 21, 1994 /s/Richard D. Sanford
-------------------------------------
Richard D. Sanford, Chief
Executive Officer and
Chairman of the Board
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.
Date: April 21, 1994 /s/ Richard D. Sanford
------------------------------------
Richard D. Sanford, Chief Executive
Officer and Chairman of the Board
Date: April 21, 1994 /s/ Gregory A. Pratt
-------------------------------------
Gregory A. Pratt, President
Chief Operating Officer
Date: April 21, 1994 /s/ Edward A. Meltzer
-------------------------------------
Edward A. Meltzer, Chief Financial
Officer, Vice President, Principal
Accounting Officer
Date: April 21, 1994 /s/ Arnold S. Hoffman
-------------------------------------
Arnold S. Hoffman, Director
Date: April 21, 1994 /s/ William Rulon-Miller
-------------------------------------
William Rulon-Miller, Director
Date: April 21, 1994 /s/ Barry M. Abelson
-------------------------------------
Barry M. Abelson, Director
Date: April 21, 1994 /s/ Roger J. Fritz
-------------------------------------
Roger J. Fritz, Director
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential Page No.
10.32 Amendment to Addendum to Agreement for
Wholesale Financing (Security Agreement)
and Addendum to Addendum to Agreement for
Wholesale Financing - Flexible Payment Plan
dated January 25, 1994. 40
11 Statement re: computation of per share earnings. 52
21 Subsidiaries of the Company. 54
23 Consent of Price Waterhouse. 55
January 25, 1994
Intelligent Electronics, Inc. ("IE")
Today's Computer Business Centers, Inc ("TCBC")
Entre Computer Centers, Inc. ("Entre")
Entre Computer Centers International, Inc. ("Entre International")
Connecting Point of America, Inc. ("Connecting Point")
Re: Amendment to Addendum to Agreement for Wholesale Financing
(Security Agreement) and Addendum to Addendum to Agreement
for Wholesale Financing - Flexible Payment Plan
Attention: Edward A. Meltzer
Ladies and Gentlemen:
Reference is made to the Addendum to Agreement for Wholesale Financing
(Security Agreement) dated January 29, 1992 (as amended, supplemented or
otherwise modified prior to the date hereof, the "Existing AWF") among IE, TCBC,
Entre, Entre International, Connecting Point (each of IE, TCBC, Entre, Entre
International and Connecting Point being referred to herein as a "Customer" and,
collectively, the "Customers") and IBM Credit Corporation ("IBM Credit"), as
amended and supplemented by the Addendum to Addendum to Agreement for Wholesale
Financing Flexible Payment Plan dated January 29, 1992 (as such Addendum has
been amended, supplemented or otherwise modified prior to the date hereof, the
"Existing FPP") (the Existing AWF and the Existing FPP, collectively, the
"Existing Agreement"). The Customers have requested IBM Credit to increase the
credit line under the Existing Agreement to $170 million and to modify certain
current collateral reporting requirements under the Existing Agreement. IBM
Credit is willing to increase the credit line to $170 million and to modify the
current collateral reporting requirements subject to the terms and conditions
of this letter agreement.
In connection with the foregoing, the parties hereto agree that the
Existing AWF, the Existing FPP and the Existing Agreement shall be amended and
supplemented by the terms and conditions set forth in this letter agreement.
Unless otherwise specifically defined in this letter agreement, each term used
herein which is defined in the Existing Agreement shall have the meaning
assigned to such term in the Existing Agreement.
A. Amendment of the Existing Agreement
-----------------------------------
1. Each reference to "hereof", "hereunder", "herein", and "hereby" and
each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Existing Agreement shall from and
after the date of this letter agreement refer to the Existing Agreement as
as amended by this letter agreement. Each reference to "the AWF" and each
other similar reference contained in the Existing FPP shall from and after
the Effective Date of this letter agreement refer to the Existing AWF as
amended by this letter agreement.
2. Attached to this letter agreement is a revised Exhibit A which shall
replace the Current Exhibit A to the Existing Agreement in its entirety (the
attached Exhibit A shall hereinafter be referred to as "Exhibit A"). Each
Customer hereby agrees to the terms, fees, rates and financial covenants set
forth on Exhibit A.
3. The Existing AWF shall be amended to add the following provisions
relating to the modification of the Customers' collateral reporting
requirements.
(a) In addition to the financial statements to be delivered to IBM
Credit pursuant to Section 17(j), the Customers agree to furnish to IBM Credit,
no later than the last day of each month, the consolidated balance sheet and
statement of operations of the Customers as of the close of, and for, the
"immediately preceding month (the "Monthly Financial Statements), all prepared
in such detail, form and scope as is consistent with good business practice.
Each delivery of the Monthly Financial Statements by the Customers to IBM Credit
shall be deemed to be a representation and warranty by the Customers that such
Monthly Financial Statements have been so prepared and that they fairly
represent the Customers' financial position as of the close of, and for, the
immediately preceding month.
(b) Customers also agree to deliver the Compliance Certificate in the
form attached hereto as Annex I and a schedule of the calculations used by the
Customers to determine the financial covenants set forth therein together with
their delivery of the financial statements required to be delivered to IBM
Credit pursuant to Section 17(j).
(c) The Customers shall not be required to deliver the reports
described in Sections 22(a)(i), 22(a)(ii), 22(a)(iii), 22(a)(iv), 22(a)(v) and
22(a)(vi) (all such reports shall be referred to herein as the "Monthly
Collateral Reports") to IBM Credit during any Tier I Period, provided, however,
that the Customers shall deliver the reports referred to in Sections 22(a)(i),
22(a)(ii), 22(a)(iv) and 22(a)(vi) as IBM Credit may reasonably request from
time to time no later than fifteen (15) days after IBM Credit makes any such
request. During any Tier II Period or Tier III Period, the Customers shall be
required to deliver the Monthly Collateral Reports together with the Monthly
Financial Statements; provided, however, that if the immediately preceding
period (as the term "period" is defined in Exhibit A) was a Tier I Period, then
the Customers shall, within two (2) days of their delivery of the Monthly
Financial Statements to IBM Credit, deliver to IBM Credit Monthly Collateral
Reports which contain information as of a date no earlier than two (2) days
prior to the date that such Monthly Collateral Reports are delivered to IBM
Credit.
4. The collateral valuation methodology utilized to determine Collateral
Value as described and defined in Section 22(a)(v) of the Existing AWF has been
replaced by the valuation methodology described in the definition of "Qualifying
Collateral" contained in the Existing FPP. Exhibit A specifically sets forth
the valuation percentages applied to specified assets to determine Qualifying
Collateral. As such, Sections 22(b) and 22(c) of the Existing AWF are not
applicable so long as the Existing FPP is in effect.
5. The Existing FPP shall be amended to add the following provisions
relating to the modification of the Customers' collateral reporting
requirements.
a. The fifth (5th) paragraph of Section 3.2 shall not apply during
any Tier I Period or Tier II Period; provided, that such paragraph shall apply
during any Tier III Period.
b. The third (3rd) paragraph of Section 3.3 shall not apply during
any Tier I Period or Tier II Period; provided, that such paragraph shall apply
during any Tier III Period.
c. If, on any date during any Tier III Period, the Dealer's
Obligations exceed the value of Qualifying Collateral (such excess, the
"Shortfall Amount"), then the Dealer shall pay to IBM Credit an amount equal to
such Shortfall Amount within five (5) days of such date.
d. The Dealer shall not be required to deliver the reports described
in Section 6.1 during any Tier I Period; provided, however, that the Customers
shall deliver the reports referred to in Sections 22(a)(i), 22(a)(ii), 22(a)(iv)
and 22(a)(vi) of the Existing AWF as IBM Credit may reasonably request from time
to time no later than fifteen (15) days after IBM Credit makes any such request.
The Dealer shall be required to deliver the reports described in Section 6.1
during any Tier II Period or Tier III Period.
6. The Existing FPP shall also be amended to add the following provision:
(a) Working Capital Option
Provided that Dealer is not in default under the Agreement and has
been approved for ACH wire transactions, IBM Credit will provide advances
pursuant to the Working Capital Option ("WCO") (each such advance, a "WCO
Advance") to the Dealer for the term and rate set forth in Exhibit A,
respectively, as the "WCO Term" and the "WCO Interest Rate". Dealer
acknowledges that, notwithstanding anything to the contrary contained in this
Agreement, IBM Credit shall not be obligated to make more than one WCO Advance
per month. Dealer shall provide IBM Credit with a written request for a WCO
Advance in a form to be specified by IBM Credit. Provided that Dealer is not
in default under the Agreement, each WCO Advance that remains outstanding at the
end of the "WCO Term" shall automatically renew for an additional "WCO Term"
unless IBM Credit notifies Dealer in writing at least thirty (30) days prior to
the end of the applicable "WCO Term" that such WCO Advance shall not
automatically renew. Dealer shall repay any WCO Advance for which it has
received such a notice at the end of the "WCO Term" for such WCO Advance.
Notwithstanding, and in addition to the conditions of, the foregoing,
during any Tier III Period, IBM Credit shall not be required to make any WCO
Advance nor shall any WCO Advance automatically renew if, either before or after
giving effect to the making of a WCO Advance or the automatic renewal of a WCO
Advance (as the case may be), a Shortfall Amount exists.
Dealer may at any time prepay in whole or in part amounts owed under
this Agreement. IBM Credit may apply payments made to it (whether by Dealer or
otherwise) to pay finance charges and other amounts owing under this Agreement
first and then to the principal amount owed by Dealer.
B. Ratification and Effectiveness
------------------------------
Except as specifically amended or waived by this letter agreement, the
Existing AWF, the Existing FPP and the Existing Agreement shall continue to be
in full force and are hereby ratified and confirmed in all respects. Each of
IE, TCBC, Entre, Entre International and Connecting Point represent that it has
taken all corporate action necessary to authorize it to execute, deliver and
perform this letter agreement and to perform the Existing AWF, the Existing FPP
and the Existing Agreement as amended and supplemented by this letter agreement.
This letter agreement and the Existing AWF, the Existing FPP and the Existing
Agreement as amended and supplemented by this letter agreement are valid and
binding obligations of IE, TCBC, Entre, Entre International and Connecting
Point.
The Existing AWF, the Existing FPP and the Existing Agreement, as amended
by this letter agreement, shall remain in force until the earlier of (a) the
date a continuing agreement amending and restating the Existing Agreement is
executed between IBM Credit, the Customers (or any successors thereto) and any
other entity within the IE corporate group which IBM Credit may become a party
to the Existing Agreement, as amended by this letter agreement, (b) one year
from the date set forth above (the "Anniversary Date"), (c) the date which is
45 days after receipt by IBM Credit of written notice by the Customers that they
intend to terminate the Existing AWF, the Existing FPP and the Existing
Agreement, as amended by this letter agreement, and (d) termination by IBM
Credit upon the occurrence of an event of default under the Existing Agreement.
Until the indefeasible payment in full of all of Customers' Obligations, no
termination shall in any way affect or impair the Customers' Obligations to IBM
Credit including, without limitation, any transaction or event occurring prior
to such termination and IBM Credit's security interest in the Goods. IBM Credit
will notify the Customers 90 days prior to the Anniversary Date of whether it
desires to renew the Existing AWF, the Existing FPP and the Existing Agreement,
as amended by this letter agreement, and if so, the terms and conditions of such
renewal.
This letter agreement shall be governed by and construed in accordance with
the internal laws of the State of Illinois.
This letter agreement may be signed in counterparts, each of which shall
be an original, with the same effect as if the signatures thereto and hereto
were upon the same instrument.
If this letter satisfactorily outlines our agreement, please have an
authorized representative of each of IE, Entre, Entre International and
Connecting Point execute and return this letter to IBM Credit at the address
noted above.
Very truly yours,
Paul M. Leiba
Credit Manager, Working Capital Financing
Read and agreed as of the date set forth above
Intelligent Electronics, Inc.
By: /s/ Edward A. Meltzer
-----------------------------------
Print Name: Edward A. Meltzer
Title: Vice President & CFO
Read and agreed as of the date set forth above
Today's Computer Business Centers, Inc.
By: /s/ Edward A. Meltzer
-----------------------------------
Print Name: Edward A. Meltzer
Title: Vice President & CFO
Read and agreed as of the date set forth above
Entre Computer Centers, Inc.
By: /s/ Edward A. Meltzer
-----------------------------------
Print Name: Edward A. Meltzer
Title: Vice President & CFO
Read and agreed as of the date set forth above
Entre Computer Centers International, Inc.
By: /s/ Edward A. Meltzer
-----------------------------------
Print Name: Edward A. Meltzer
Title: Vice President & CFO
Read and agreed as of the date set forth above
Connecting Point of America, Inc.
By: /s/ Edward A. Meltzer
-----------------------------------
Print Name: Edward A. Meltzer
Title: Vice President & CFO
<PAGE>
ANNEX I
COMPLIANCE CERTIFICATE
----------------------
To: IBM CREDIT CORPORATION
2707 West Butterfield Road, Suite 205
Oak Brook, IL 60521
The undersigned authorized officer of Intelligent Electronics, Inc.
("IE"), hereby certifies, on behalf of itself and each of TCBC, Entre, Entre
International and Connecting Point (collectively, the "Customers") that (A) the
Customers' actual compliance with its financial covenants for the period from -
________________ to __________________ (the "Period") is set forth below,
(B) the Customers are in compliance with the financial covenants set forth in
Exhibit A as of the end of the Period and, to the best of Customers' knowledge,
after due inquiry, has been in compliance with such financial covenants during
such Period, (C) no event of default has occurred and is continuing as of the
date hereof and (D) each of the Monthly Financial Statements attached hereto
were prepared in such detail, form and scope as is consistent with good business
practice and fairly represent the Customers' financial position during the
Period.
All capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Existing AWF, the Existing FPP, the Existing
Agreement (each of which is defined in the letter agreement between the
Customers and IBM Credit Corporation dated January 25, 1994) and such letter
agreement.
FINANCIAL COVENANT ACTUAL AS OF
- ------------------ ------------
1. Total Liabilities to Tangible Net Worth _______
2. Current Assets to Current Liabilities _______
3. Tangible Net Worth _______
4. Net Profit After Tax to Revenue (in each
case determined without regard to amount
attributable to discontinued operations)
for the immediately preceding four fiscal
quarters _______
Submitted By: INTELLIGENT ELECTRONICS, INC.
By:____________________________ Date: _____________________
Print Name:____________________ Title: ____________________
<PAGE>
Addendum to Agreement for Wholesale Financing
Flexible Payment Plan
Exhibit A
Commencement Date: January l, 1992 - Effective Date: January 25, 1994
1. FPP Fees, Rates and Repayment Terms
FPP Credit Line: $170.0 Million
Qualifying Collateral to the extent that IBM Credit has a perfected first
position security interest ("IBM Credit Collateral") will be determined using
the following Collateral Valuation Percentages for the type Collateral indicated
with each such Percentage:
- 100% on IBM Inventory
- 80% on Eligible Accounts
- 40% on approved Non-IBM Inventory
Approved non-IBM inventory is new inventory which the Dealer and IBM
Credit have agreed by specific classification to count as collateral.
- 80% on Additional Collateral (the then-current outstanding unpaid balance
of the Intercompany Payables Note ("Note") as long as (a) Note is in the
possession of IBM Credit and (b) The Future Now, Inc. is current in its
payment obligations under the Note).
- 50% on Additional Collateral (the value of the stock ("Stock") of The
Future Now, Inc. an Ohio corporation, owned by Dealer and pledged by
Dealer to IBM Credit in a manner which gives IBM Credit the rights, in
the event of default by Dealer and in IBM Credit's sole discretion,
to (a) register the Stock and (b) liquidate the Stock with proceeds to
IBM Credit to the extent of Dealer's obligations to IBM Credit. Stock
will be valued at the lower of (a) cost or (b) the market price of the
registered shares of stock of The Future Now, Inc. In the event that
IBM Credit includes the Stock in Dealer's Qualifying Collateral and in
the further event that the pledge of Stock is terminated, the Stock will
no longer be included in Dealer's Qualifying Collateral.)
Payment due dates: 5th, 15th, and 25th of each month
Base Period (BP) Repayment Term:
- 130 days from date of invoice for product invoices purchased by IBM
Credit from the IBM Personal Computer Company and Lexmark
International, Inc.
BP Non-Fee Period: 45 Days
Interest Rate after BP Non-Fee Period ("Base Rate"): Prime Rate
Working Capital Loan Option (WCO) Terms: 180 Days
- WCO Interest Rate: Base Rate Plus .25%
Payment Reschedule Option (PRO) Term: 30 Days
- PRO Interest Rate: Base Rate plus .500%
Cash Advance Option (CAO) Term: 30 Days
- CAO Interest Rate: Base Rate plus .750%
Delinquency Fee Rate: Prime Rate plus 6.5%
2. Definitions
The following terms shall have the following respective meanings in this FPP
Exhibit. All amounts shall be determined in accordance with generally accepted
accounting principles (GAAP).
"Current Assets" means, as of any date of determination, the consolidated
assets of Dealer that would be classified as current assets in accordance
with GAAP.
"Current Liabilities" means, as of any date of determination, the
consolidated liabilities of the Dealer, that would be classified as
current liabilities in accordance with GAAP, including, without
limitation, all indebtedness of the Dealer payable on demand or maturing
within one year of such date, or renewable at the option of the Dealer for
a period of not more than one year from such date, and all serial maturity
and periodic or installment payments (including, without limitation,
sinking fund payments) on any indebtedness, to the extent such payments
are required to be made within one year from such date.
"Net Profit After Tax" means, for any period in respect of which the
amount thereof shall be determined, the aggregate of the consolidated net
income after taxes for such period (taken as a cumulative whole) of the
Dealer all as determined in accordance with GAAP.
"Revenue" means, for any period in respect of which the amount thereof
shall be determined, the aggregate of the consolidated total or gross
income or sales for such period (taken as a cumulative whole) of the
Dealer as determined in accordance with GAAP.
"Tangible Net Worth" means, as of any date of determination, Total Net
Worth minus:
(a) goodwill, organizational expenses, research and development expenses,
software development costs, trademarks, names, trade names,
copyrights, patents, patent applications, privileges, franchises,
licenses and rights in any thereof, and other similar intangibles
(but not including contract rights);
(b) all deferred charges or unamortized debt discounts and expenses; and
(c) all accounts receivable from officers, directors and stockholders; and
(d) all callable/redeemable preferred stock
"Total Liabilities" means, as of any date of determination, consolidated
liabilities of the Dealer at such date, determined in accordance with
GAAP.
"Total Net Worth" means, as of any date of determination, the consolidated
stockholders' equity of the Dealer as determined in accordance with GAAP.
3. Dealer's Financial Covenants
Dealer agrees to maintain the following financial covenants at all times:
(a) Total Liabilities to Tangible New Worth ratio equal to or less than
6.5 to 1, provided that Tangible Net Worth must be greater than zero
at all times;
(b) Current Assets to Current Liabilities ratio greater than or equal to
1.05 to 1;
(c) Tangible New Worth greater than or equal to $60 million;
(d) Net Profit After Tax to Revenue (in each case determined without
regard to amounts attributable to discontinued operations) ratio for
the immediately preceding four fiscal quarters greater than or equal
to 0.5%.
Dealer understands and agrees that its failure to maintain the preceding
financial covenants shall be an event of Default.
4. Tier Periods
As used in the definitions of "Tier I Period", "Tier II Period" and "Tier III
Period" below, a "period" shall mean an interval of time commencing from the
date Dealers deliver to IBM Credit financial statements with respect to a fiscal
period and ending on the date Dealers deliver to IBM Credit financial statements
with respect to the immediately succeeding fiscal period. As used in the
preceding sentence, a "fiscal period" means (i) in the case of each of the first
three fiscal quarters of a fiscal year, such fiscal quarter and (ii) in the case
of the fourth fiscal quarter of a fiscal year, such fiscal year. Dealers'
failure to deliver the above referenced financial reports within the number of
days specified in the Agreement will constitute a default under the Agreement.
"Tier I Period" means each period with respect to which (i) the ratio of
Dealer's Total Liabilities to Tangible Net Worth (the "Leverage Ratio") during
the immediately preceding fiscal period is greater than zero and is less than
or equal to 5.5 to 1, (ii) the ratio of Dealer's Current Assets to Dealer's
Current Liabilities (the "Current Ratio") during such fiscal period is greater
than or equal to 1.15 to 1, (iii) Tangible Net Worth during such fiscal period
is greater than or equal to $70 million and (iv) the ratio of Dealer's Net
Profit After Tax to Dealers Revenue (in each case determined without regard to
amounts attributable to discontinued operations) (the "NAT Ratio"), for the four
consecutive fiscal quarters ending on the last day of such fiscal period is
greater than or equal to 1.0%.
"Tier II Period" means each period (x) with respect to which (i) the Leverage
Ratio during the immediately preceding fiscal period is greater than zero and
is less than or equal to 6.0 to 1, (ii) the Current Ratio during such fiscal
period is greater than or equal to 1.10 to 1, (iii) Tangible Net Worth during
such fiscal period is greater than or equal to $65 million and (iv) the NAT
Ratio for the four consecutive fiscal quarters ending on the last day of such
fiscal period is greater than or equal to 0.5% and (y) which is not a Tier I
Period.
"Tier III Period" means each period (x) with respect to which (i) the Leverage
Ratio at all times during the immediately preceding fiscal period is greater
than zero and is less than or equal to 6.5 to 1, (ii) the Current Ratio at all
times during such fiscal period is greater than or equal to 1.05 to 1, (iii)
Tangible Net Worth at all times during such fiscal period is greater than or
equal to $60 million and (iv) the NAT Ratio for the four consecutive fiscal
quarters ending on the last day of such fiscal period is greater than or equal
to 0.5% and (y) which is not a Tier I Period or a Tier II Period.
<TABLE>
INTELLIGENT ELECTRONICS, INC. and subsidiaries Exhibit 11
Primary Earnings Per Share Calculation Page 1 of 2
<CAPTION>
Year ended
------------------------------------------------- Transition period ended Year ended
January 29, 1994 January 30, 1993 February 1, 1992 October 31, 1991
----------------------- ----------------------- ----------------------- -----------------------
$ Per Share $ Per Share $ Per Share $ Per Share
----------- --------- ------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing Operations 41,117,000 $1.14 22,134,000 $0.58 9,625,000 $0.25 38,529,000 $1.12
Discontinued operation (2,468,000) (0.07) (20,160,000) (0.52) 1,020,000 0.03 (336,000) (0.01)
Sale of BizMart 4,276,000 0.12 -- -- -- -- -- --
Extraordinary item -- -- (3,269,000) (0.09) -- -- -- --
------------ --------- ------------ --------- ----------- --------- ------------ ---------
Net income (loss) 42,925,000 $1.19 (1,295,000) ($0.03) 10,645,000 $0.28 38,193,000 $1.11
============ ========= ============ ========= ============ ========= ============ =========
Weighted average common
shares and share equivalents 36,127,061 37,947,071 38,010,647 34,497,034
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Computation of Common Shares and Common Share Equivalents:
Year ended
----------------------------------------------------- Transition period ended Year ended
January 29, 1994 January 30, 1993 February 1, 1992 October 31, 1991
------------------------- ----------------------- ----------------------- -------------------
End of Weighted End of Weighted End of Weighted End of Weighted
Period Average Period Average Period Average Period Average
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common shares outstanding 39,310,439 35,028,207 36,961,154 36,807,833 36,592,294 36,313,918 36,144,694 32,810,864
Common share equivalents:
Options 2,852,095 3,150,026 4,750,300 5,201,258 5,562,200 5,182,144 5,349,800 3,858,894
Assumed repurchased
@ average price (2,114,506) (4,137,041) (3,612,133) (2,569,768)
Warrants 0 86,374 120,000 120,000 160,000 183,556 200,000 605,000
Assumed repurchased
@ average price (23,040) (44,979) (56,838) (207,956)
---------- ---------- ---------- ----------
Total common share equivalents 1,098,854 1,139,238 1,696,729 1,686,170
---------- ---------- ---------- ----------
Total common shares and common
share equivalents 36,127,061 37,947,071 38,010,647 34,497,034
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and subsidiaries Exhibit 11
Fully Diluted Earnings Per Share Calculation Page 2 of 2
Year ended
----------------------------------------------- Transition period ended Year ended
January 29, 1994 January 30, 1993 February 1, 1992 October 31, 1991
---------------------- ----------------------- ----------------------- ---------------------
$ Per Share $ Per Share $ Per Share $ Per Share
----------- --------- ----------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing operations 41,117,000 $1.13 22,134,000 $0.58 9,625,000 $0.25 38,529,000 $1.12
Discontinued operations (2,468,000) (0.07) (20,160,000) (0.52) 1,020,000 0.03 (336,000) (0.01)
Sale of BizMart 4,276,000 0.12 -- -- -- -- -- --
Extraordinary item -- -- (3,269,000) (0.09) -- -- -- --
----------- --------- ----------- -------- ---------- --------- ---------- ---------
Net income (loss) 42,925,000 $1.18 (1,295,000) ($0.03) 10,645,000 $0.28 38,193,000 $1.11
=========== ========= =========== ======== ========== ========= ========== =========
Weighted average common
shares and share equivalents 36,520,787 38,204,419 38,683,015 34,497,034
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Computation of Common Shares and Common Share Equivalents:
Year ended
------------------------------------------------- Transition period ended Year ended
January 29, 1994 January 30, 1993 February 1, 1992 October 31, 1991
---------------------- ----------------------- ------------------------ -----------------------
End of Weighted End of Weighted End of Weighted End of Weighted
Period Average Period Average Period Average Period Average
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common shares outstanding 39,310,439 35,028,207 36,961,154 36,807,833 36,592,294 36,313,918 36,144,694 32,810,864
Common share equivalents:
Options 2,852,095 3,150,026 4,750,300 5,201,258 5,562,200 5,670,680 5,349,800 3,858,894
Assumed repurchased
@ ending price (1,728,625) (3,885,362) (3,443,372) (2,569,768)
Warrants 0 86,374 120,000 120,000 160,000 183,556 200,000 605,000
Assumed repurchased
@ ending price (15,195) (39,310) (41,767) (207,956)
---------- ---------- ---------- ----------
Total common share equivalents 1,492,580 1,396,586 2,369,097 1,686,170
---------- ---------- ---------- ----------
Weighted average common shares and
common share equivalents 36,520,787 38,204,419 38,683,015 34,497,034
========== ========== ========== ==========
(1) For 1991, fully diluted earnings per share is antidilutive because the average market price for the year exceeds
the ending market price.
</TABLE>
Exhibit 21
SUBSIDIARIES OF INTELLIGENT ELECTRONICS, INC.
The following is a list of the Company's subsidiaries. Omitted from the
list are certain subsidiaries of the Company which, considered in the aggregate
as a single subsidiary, would not constitute a significant subsidiary.
Intelligent Advanced Systems, Inc., a Delaware corporation
Intelligent Distribution Services, Inc., a Delaware corporation
Intellinet, Ltd., a Pennsylvania corporation
Intelligent Express, Inc., a Pennsylvania corporation
Intelligent SP, Inc., a Colorado corporation
RND, Inc., a Colorado corporation
Missing Link Communications, Inc., a Colorado corporation
Wireless Telecom, Inc., a Delaware corporation
Intelligent Systems Group, Inc., a Colorado corporation
Intelevest Holdings, Inc., a Delaware corporation
Intelevest Business Trust, a Pennsylvania trust
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (File No. 33-39398)
and Forms S-8 (File Nos. 33-14436, 33-35174, 33-42119, and 33-44655) of
Intelligent Electronics, Inc. of our report dated March 7, 1994, appearing on
page 13 of this Form 10-K.
PRICE WATERHOUSE
Philadelphia, Pennsylvania
April 21, 1994
