SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED July 29, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _____________ TO ____________.
Commission file number 0-15991
Intelligent Electronics, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2208404
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(610) 458-5500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 34,524,731 shares of Common
Stock, par value $0.01 per share were outstanding at September 1, 1995.
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
July 29, 1995 and January 28, 1995 3
Consolidated Statements of Operations
Three and Six Months Ended July 29, 1995 and
July 30, 1994 4
Consolidated Statements of Cash Flows
Six Months Ended July 29, 1995 and
July 30, 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION FORM 10-Q
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
July 29, January 28,
1995 1995
----------- -----------
(unaudited)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 73,436 $ 69,027
Marketable securities available for sale 6,272 8,398
Accounts receivable, net 114,091 77,890
Inventory 367,927 364,606
Prepaid expenses and other current assets 3,391 3,973
Deferred income taxes 12,816 11,256
----------- -----------
Total current assets 577,933 535,150
Property and equipment 54,344 36,463
Intangible assets, primarily goodwill, net 72,336 71,693
Investments in affiliates 12,537 18,692
Other assets 6,493 8,776
----------- -----------
Total assets $ 723,643 $ 670,774
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 525,527 $ 467,109
Accrued liabilities 32,746 36,181
----------- -----------
Total current liabilities 558,273 503,290
----------- -----------
Commitments and contingencies -- --
Shareholders' equity:
Common stock $.01 par value per share:
Authorized 100,000,000 shares,
issued and outstanding:
39,897,449 and 39,519,949 shares 399 395
Additional paid-in capital 224,185 221,312
Treasury stock (105,677) (105,677)
Retained earnings 44,416 51,758
Unrealized holding gain (loss) on securities and investments 2,047 (304)
----------- -----------
Total shareholders' equity 165,370 167,484
----------- -----------
Total liabilities and shareholders' equity $ 723,643 $ 670,774
=========== ===========
See accompanying notes to consolidated financial statements.
/TABLE
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries FORM 10-Q
Consolidated Statements of Operations
(in thousands, except per-share data)
(unaudited)
Three months ended Six months ended
------------------ ----------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 881,614 $ 793,274 $ 1,709,053 $ 1,555,588
Cost of goods sold 854,576 755,300 1,644,340 1,482,147
----------- ----------- ------------ ------------
Gross profit 27,038 37,974 64,713 73,441
----------- ----------- ------------ ------------
Operating expenses:
Selling, general and administrative expenses 30,233 18,610 57,051 33,858
Amortization of intangibles, primarily goodwill 1,293 1,180 2,586 2,360
----------- ----------- ------------ ------------
Total operating expenses 31,526 19,790 59,637 36,218
----------- ----------- ------------ ------------
Income (loss) from operations (4,488) 18,184 5,076 37,223
Other income (expense):
Investment and other income, net 1,183 1,214 1,681 2,310
Interest expense (392) (459) (1,380) (623)
----------- ----------- ------------ ------------
Income (loss) before provision (benefit) for
income taxes and equity in loss of affiliate (3,697) 18,939 5,377 38,910
Provision (benefit) for income taxes (914) 7,245 3,024 14,817
----------- ----------- ------------ ------------
Income (loss) before equity in loss of affiliate (2,783) 11,694 2,353 24,093
Equity in loss of affiliate (net of tax benefit
of $0, $5,285, $0, and $5,053) (3,151) (8,999) (3,397) (8,605)
----------- ----------- ------------ ------------
Net income (loss) $ (5,934) $ 2,695 $ (1,044) $ 15,488
=========== =========== ============ ============
Income (loss) per common share $ (0.19) $ 0.08 $ (0.03) $ 0.43
=========== =========== ============ ============
Dividends declared per share $ 0.10 $ 0.10 $ 0.20 $ 0.18
=========== =========== ============ ============
Weighted average number of common shares
and share equivalents outstanding: 31,483 35,850 31,346 35,952
See accompanying notes to consolidated financial statements.
/TABLE
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries FORM 10-Q
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
----------------
July 29, July 30,
1995 1994
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (1,044) $ 15,488
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,673 4,598
Provision for deferred taxes (1,560) (4,288)
Provision for losses on trade receivables 641 63
Provision for write-down of inventory 3,670 564
Equity in loss of affiliate 3,397 13,658
Changes in assets and liabilities:
Accounts receivable (35,342) (13,512)
Inventory (6,991) (79,348)
Other current assets 1,298 (4,418)
Accounts payable 58,418 78,689
Accrued liabilities (3,473) (1,873)
----------- -----------
Net cash provided by operating activities 25,687 9,621
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities -- (27,319)
Sales and maturities of marketable securities 4,500 52,592
Acquisition of property and equipment (21,968) (5,297)
Investment in and loan to affiliates -- (1,018)
Other (427) --
----------- -----------
Net cash provided by (used for) investing activities (17,895) 18,958
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchased -- (719)
Cash dividends paid (6,260) (5,624)
Proceeds from exercise of stock options 2,877 1,648
Reduction in capital lease obligations -- (92)
----------- -----------
Net cash used for financing activities (3,383) (4,787)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,409 23,792
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,027 122,249
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 73,436 $ 146,041
=========== ===========
See accompanying notes to consolidated financial statements.
/TABLE
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share-related data)
(unaudited)
(1) Basis of Presentation
---------------------
The consolidated financial statement information included herein is unaudited
but, in the opinion of management, reflects all adjustments, consisting of
normal recurring adjustments and changes in accounting estimates, necessary for
a fair statement of the results for the interim periods presented. These
financial statements should be read in conjunction with the audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended January 28, 1995.
(2) Investments in Affiliates
-------------------------
The Company has an investment in The Future Now, Inc. ("FNOW"), a network member
and publicly-traded company. The Company accounts for this investment using the
equity method. For the quarter ended July 29, 1995, the Company recognized a
loss of $3,151 as its proportionate share of FNOW's net loss. As of July 29,
1995, the carrying value of the FNOW Common Stock was approximately $11,817, and
the aggregate market price, based on FNOW's quoted market price, was
approximately $16,408.
On August 17, 1995, the Company's previously announced acquisition of FNOW was
consummated. The Company issued approximately 3 million shares of its Common
Stock in exchange for all of the shares of FNOW Common Stock. The total
purchase price including acquisition-related costs approximated $39 million.
The allocation of the purchase price to assets acquired and liabilities assumed
is still in process.
Summarized financial information for FNOW for the quarter and six months ended
June 30, 1995 and 1994, is as follows:
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
Revenues $164,811 $204,583 $316,805 $398,270
Gross profit 26,127 23,416 53,098 52,418
Net loss (9,969) (46,357) (10,535) (45,334)
The Company also has an investment in Random Access, Inc. ("RA"), a network
member and publicly-traded company. The Company accounts for this investment as
available-for-sale in accordance with FAS 115, and accordingly, the carrying
value of the RA Common Stock is recorded at fair market value with changes in
fair value recorded in shareholders' equity. At July 29, 1995, the aggregate
market value of the Company's investment, based on RA's quoted market price of
$2.81 per share, was approximately $260. In June 1995, RA announced that it was
being acquired by an unrelated third party for $3.25 per share. The original
cost of the Company's investment in RA was $3.18 per share.
(3) Credit Facilities
-----------------
As of July 29, 1995, the Company was not in compliance with certain financial
ratio covenants under two of its inventory financing agreements. The Company
has obtained waivers of such non-compliance.
<PAGE>
(4) Common Stock Dividends
----------------------
On July 27, 1995, the Board of Directors of the Company declared a $0.10 per
share cash dividend to shareholders of record on August 15, 1995, which was paid
on September 1, 1995.
On June 1, 1995, the Company paid the $0.10 per share cash dividend which was
declared on April 27, 1995.
On July 28, 1994, the Board of Directors of the Company declared a $0.10 per
share cash dividend to shareholders of record on August 18, 1994, which was paid
on September 1, 1994.
On June 1, 1994, the Company paid the $0.08 per share cash dividend which was
declared on May 4, 1994.
(5) Supplemental Cash Flow Information
----------------------------------
Cash payments during the six-month periods ended July 29, 1995 and July 30, 1994
included interest of $1,204 and $662, respectively, and income taxes of $2,633
and $14,526, respectively.
(6) Contingencies
-------------
In December 1994, several purported class action lawsuits were filed in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action Nos. 94-3753, 94-CV-7410, 94-CV-7388 and 94-CV-7405) against the Company
and certain directors and officers; these lawsuits have been consolidated with
a class action lawsuit filed several years ago against the Company, certain
directors and officers, and the Company's auditors (who are not named in the
most recent complaint) in the United States District Court for the Eastern
District of Pennsylvania (Civil Action No. 92-CV-1905). A purported derivative
lawsuit was also filed in December 1994 in the Court of Common Pleas of
Philadelphia County (No. 803) against the Company and certain of its directors
and officers. These lawsuits allege violations of certain disclosure and
related provisions of the federal securities laws and breach of fiduciary
duties, including allegations relating to the Company's practices regarding
vendor marketing funds, and seeks damages in unspecified amounts as well as
other monetary and equitable relief. In addition, the Company is subject to a
Securities and Exchange Commission investigation. The Company believes that all
such allegations and lawsuits are without merit and intends to defend against
them vigorously. While management of the Company, based on its investigation
of these matters and consultations with counsel, believes resolution of these
matters will not have a material adverse effect on the Company's financial
position, the ultimate outcome of these matters cannot presently be determined.
In addition, the Company is involved in various litigation and arbitration
matters in the ordinary course of business. The Company believes that it has
meritorious defenses in and is vigorously defending against all such matters.
During fiscal 1994, based in part of the advice of legal counsel, the Company
established a reserve of $9 million in respect of all litigation and arbitration
matters, some of which has been used to pay legal fees and settle various claims
and suits during fiscal 1995. Although the aggregate amount of the claims may
exceed the amount of the reserve, management believes that the resolution of
these matters will not have a material adverse effect on the Company's financial
position or results of operations in any subsequent period.
PAGE
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
---------------------
Revenues increased 11% to $881.6 million for the quarter ended July 29, 1995
compared to $793.3 million for the quarter ended July 30, 1994. For the six
months ended July 29, 1995, revenues increased to $1.7 billion compared to $1.6
billion for the six months ended July 30, 1994. These increases were primarily
due to the addition of new members to the network, increased revenues from
existing network members, revenues generated by the Company's branch locations
acquired in December 1994 and industry growth.
Gross profit as a percentage of revenues for the quarter ended July 29, 1995
decreased to 3.1% compared to 4.8% for the quarter ended July 30, 1994. For the
six months ended July 29, 1995, gross profit as a percentage of revenues was
3.8% compared to 4.7% for the same period last year. Margins have decreased
during fiscal 1995 due to continued competitive pricing pressures experienced
as a result of manufacturers expanding their distribution channels. These
declines have been partially offset by the higher gross margins realized by the
Company's branch locations which sell directly to end-users. In addition,
during the quarter ended July 29, 1995, the Company recorded an inventory
related charge of approximately $10.2 million in connection with warehouse
consolidations and information systems improvements. This charge reflected
current estimates of inventory obsolescence, damaged merchandise and inventory
losses. Competitive pressures and their impact on margins are expected to
continue in the future.
During the last half of fiscal 1994, the Company experienced systems stresses
and outages which adversely impacted gross margins. Management has taken and
continues to take actions including consolidating warehouses and upgrading
existing and implementing new management information systems and believes these
actions will mitigate the systems stresses and outages and their impact on gross
margins by the end of fiscal 1995.
Selling, general and administrative expenses increased to $30.2 million and
$57.1 million for the quarter and six months ended July 29, 1995, respectively,
from $18.6 million and $33.9 million, respectively, for the comparable periods
last year. Costs to operate the Company's branch locations, service the higher
volume of revenues and larger network, support new programs, vendors and SKU's,
and strengthen its management information systems, and certain operating
inefficiencies, were primarily responsible for the increases. The Company
expects recurring costs associated with systems improvements and operating
inefficiencies through the end of fiscal 1995.
Investment and other income decreased slightly for the quarter ended July 29,
1995 compared to the quarter ended July 30, 1994 and decreased from $2.3 million
for the six months ended July 30, 1994 to $1.7 million for the six months ended
July 29, 1995. These decreases can be primarily attributable to the use of
available cash for the payment of cash dividends, share repurchases, the
acquisition of certain assets of branch locations from FNOW in December 1994 and
capital expenditures, partly offset, in the quarter ended July 29, 1995, by
termination fees resulting from the discontinuation of a third-party warehousing
contract. Interest expense decreased for the quarter ended July 29, 1995, but
increased for the six months ended July 29, 1995, when compared to the
comparable periods last year. The increase for the six months ended July 29,
1995, is primarily due to the Company's more frequent use of its available
financing arrangements for working capital needs.
The Company's effective tax rate decreased to 24.7% for the quarter ended July
29, 1995, compared to 38.3% for the quarter ended July 30, 1994. This decrease
is primarily due to the effect of non-deductible goodwill on the taxable loss
for the current quarter. For the six months ended July 29, 1995, the effective
tax rate increased to 56.2% compared to 38.1%. This increase resulted primarily
from the effect of non-deductible goodwill on lower pre-tax earnings, decreased
tax-exempt investment income and a change in the Company's effective state tax
rate.
For the quarter and six months ended July 29, 1995, the Company recognized
losses of $3.2 million and $3.4 million, respectively, as its proportionate
share of FNOW's net loss, compared to losses of $9.0 million and $8.6 million
for the comparable periods last year.
As a result of the Company's acquisition of FNOW on August 17, 1995, gross
profit, selling, general and administrative expenses and interest expense are
expected to increase as a percentage of revenues.
In September 1995, the Company reduced its future employment costs, in virtually
all areas of the Company, by eliminating and consolidating positions and cutting
certain compensation. In part, these reductions were in furtherance of the
Company's IE 2000 strategy and also reflects the elimination of redundant
positions following the acquisition of FNOW. It is anticipated that these
reductions will somewhat mitigate increases in selling, general and
administrative expenses as a result of the acquisition of FNOW.
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, make acquisitions, repurchase Common Stock and pay cash dividends.
During the six months ended July 29, 1995, the Company's operating activities
generated $25.7 million in cash. At July 29, 1995, the Company had cash, cash
equivalents and marketable securities totaling $79.7 million ($77.3 million at
January 28, 1995). Working capital totaled $19.7 million at July 29, 1995
compared to $31.9 million at January 28, 1995. The increase in accounts
receivable from January 28, 1995 is primarily due to higher receivables from
certain finance companies and from the Company's branch locations. The Company
expects accounts receivable to continue to increase as it extends credit to its
network and end-users and as a result of the acquisition of FNOW. The Company
may outsource some of its financing programs, which could slow the growth or
reduce the level of accounts receivable. The Company has a $170 million
financing agreement with a finance company. At July 29, 1995, the Company had
approximately $85.9 million available from this facility. In September 1995,
this financing agreement was increased to $270 million. The Company's $20
million guarantee to an inventory finance company on behalf of FNOW remained in
place at July 29, 1995 (subsequently cancelled with the acquisition of FNOW).
During the quarter ended July 29, 1995, the Company paid the quarterly dividend
of $0.10 per share which was declared on April 27, 1995. On July 27, 1995, the
Company's Board of Directors declared a dividend of $0.10 per share to
shareholders of record on August 15, 1995, which was paid on September 1, 1995.
The Company's Board of Directors has authorized the repurchase, in open-market
transactions, of up to 13.6 million shares of its Common Stock. As of July 29,
1995, the Company had repurchased approximately 8.3 million shares at a cost
of approximately $105.7 million.
IE 2000, a strategy designed to transform the Company to a process-driven model,
is expected to be completed by the end of fiscal 1996 and is estimated to cost
up to $40 million, primarily due to upgrades in its management information
systems, including costs of approximately $24 million through July 29, 1995.
Based on the Company's current level of operations, capital expenditure
requirements and the cash needs for the repayment of FNOW's bank debt of
approximately $50 million (which was repaid on August 17, 1995) and the
integration of FNOW's operations following the acquisition, 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 current fiscal year and at least
through the end of fiscal 1996.
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 have
displayed a seasonal pattern with peaks occurring near the end of the calendar
year. <PAGE>
Intelligent Electronics, Inc. and Subsidiaries
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on
June 8, 1995. Shareholders voted on the following items:
(a) For the Election of Directors:
<TABLE>
<CAPTION>
Term Votes Votes Broker
Director Expiration For Withheld Non-Votes
----------------------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Barry M. Abelson 1998 27,856,075 168,759 0
William L. Rulon-Miller 1998 27,855,895 168,939 0
William E. Johnson 1998 27,851,475 173,359 0
</TABLE>
Other directors whose term of office as a director continued after
the meeting were as follows:
James M. Ciccarelli
Christopher T.G. Fish
Roger J. Fritz
Arnold S. Hoffman
Gregory A. Pratt
John A. Porter
Richard D. Sanford
Alex A.C. Wilson
(b) Approval of the adoption of the 1995 Long-Term Incentive Plan.
The Shareholder vote was as follows: 15,655,822 for;
6,603,517 against; 144,518 abstained; and 5,620,977
Broker Non-votes.
(c) Approval of the adoption of the 1995 Employee Stock Purchase
Plan.
The Shareholder vote was as follows: 21,094,734 for;
1,239,347 against; 120,264 abstained; and 5,570,488
Broker Non-votes.
(d) Appointment of Price Waterhouse LLP as independent accountants
for fiscal 1995.
The Shareholder vote was as follows: 27,871,899 for;
102,267 against; and 50,668 abstained.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligent Electronics, Inc.
/s/ Thomas J. Coffey
--------------------------------------
Thomas J. Coffey
Vice President, Chief Financial
Officer and Chief Accounting Officer
Date: September 12, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-3-1996
<PERIOD-END> JUL-29-1995
<CASH> 73,436
<SECURITIES> 6,272
<RECEIVABLES> 115,559
<ALLOWANCES> 1,468
<INVENTORY> 367,927
<CURRENT-ASSETS> 577,933
<PP&E> 70,916
<DEPRECIATION> 16,572
<TOTAL-ASSETS> 723,643
<CURRENT-LIABILITIES> 558,273
<BONDS> 0
<COMMON> 399
0
0
<OTHER-SE> 164,971
<TOTAL-LIABILITY-AND-EQUITY> 723,643
<SALES> 1,709,053
<TOTAL-REVENUES> 1,709,053
<CGS> 1,644,340
<TOTAL-COSTS> 1,644,340
<OTHER-EXPENSES> 58,996
<LOSS-PROVISION> 641
<INTEREST-EXPENSE> 1,380
<INCOME-PRETAX> 5,377
<INCOME-TAX> 3,024
<INCOME-CONTINUING> (1,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,044)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
