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 August 3, 1996.
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: 34,789,062 shares of Common
Stock, par value $0.01 per share were outstanding at September 4, 1996.
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
August 3, 1996 and February 3, 1996 3
Consolidated Statements of Operations
Three and Six Months Ended August 3, 1996
and July 29, 1995 4
Consolidated Statements of Cash Flows
Three and Six Months Ended August 3, 1996
and July 29, 1995 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 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION FORM 10-Q
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
August 3, February 3,
1996 1996
----------- -----------
(unaudited)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 23,944 $ 34,618
Accounts receivable, net 240,041 192,687
Inventory 307,671 346,058
Prepaid expenses and other current assets 5,090 3,411
Deferred income taxes 16,902 16,041
----------- ----------
Total current assets 593,648 592,815
Property and equipment 64,971 68,213
Intangible assets, primarily goodwill, net 150,606 155,390
Other assets 21,491 22,931
----------- ----------
Total assets $ 830,716 $ 839,349
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 15,252 $ 8,744
Accounts payable 498,176 508,747
Accrued liabilities 50,044 49,718
----------- ----------
Total current liabilities 563,472 567,209
----------- ----------
Long-term debt 78,898 80,025
Other long-term liabilities 13,726 14,079
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value per share:
Authorized 100,000,000 shares,
issued and outstanding:
40,119,121 and 39,910,649 shares 401 399
Additional paid-in capital 226,165 224,260
Treasury stock (67,650) (68,207)
Retained earnings 15,704 21,584
----------- ----------
Total shareholders' equity 174,620 178,036
----------- ----------
Total liabilities and shareholders' equity $ 830,716 $ 839,349
=========== ==========
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
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 866,700 $ 881,614 $ 1,744,639 $ 1,709,053
Cost of goods sold 821,985 854,576 1,654,340 1,644,340
--------- --------- ----------- -----------
Gross profit 44,715 27,038 90,299 64,713
--------- --------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 41,324 30,233 84,259 57,051
Amortization of intangibles, primarily goodwill 2,384 1,293 4,784 2,586
--------- --------- ----------- -----------
Total operating expenses 43,708 31,526 89,043 59,637
--------- --------- ----------- -----------
Income (loss) from operations 1,007 (4,488) 1,256 5,076
Other income (expense):
Investment and other income (expense), net (321) 1,183 (426) 1,681
Interest expense (3,057) (392) (6,924) (1,380)
--------- -------- ----------- -----------
Income (loss) before provision (benefit) for
income taxes and equity in loss of affiliate (2,371) (3,697) (6,094) 5,377
Provision (benefit) for income taxes 5 (914) (524) 3,024
--------- -------- ----------- -----------
Income (loss) before equity in loss of an affiliate (2,376) (2,783) (5,570) 2,353
Equity in loss of affiliate - (3,151) - (3,397)
--------- -------- ----------- -----------
Net loss $ (2,376) $ (5,934) $ (5,570) $ (1,044)
========= ======== =========== ===========
Loss per common share $ (0.07) $ (0.19) $ (0.16) $ (0.03)
========= ======== =========== ===========
Dividends declared per share $ 0.00 $ 0.10 $ 0.00 $ 0.20
========= ======== =========== ===========
Weighted average number of common shares
and share equivalents outstanding: 34,718 31,483 34,627 31,346
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
-------------------------
August 3, July 29,
1996 1995
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (5,570) $ (1,044)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 13,893 6,673
Write-off of property and equipment 1,057 --
Deferred taxes (861) (1,560)
Provision for losses on trade receivables 1,708 641
Provision for write-down of inventory 5,485 3,670
Equity in loss of affiliate -- 3,397
Changes in assets and liabilities:
Accounts receivable (49,062) (35,342)
Inventory 32,902 (6,991)
Other current assets (246) 1,298
Accounts payable (10,571) 58,418
Accrued liabilities 1,487 (3,473)
----------- -----------
Net cash provided by (used for) operating activities (9,778) 25,687
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of marketable securities -- 4,500
Acquisition of property and equipment, net of disposals (7,820) (21,968)
Other 47 (427)
----------- -----------
Net cash used for investing activities (7,773) (17,895)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from working capital advances 6,240 --
Cash dividends paid -- (6,260)
Proceeds from exercise of stock options 1,867 2,877
Proceeds from employee stock purchase plan 247 --
Reduction in capital lease obligations (1,477) --
----------- -----------
Net cash provided by (used for) financing activities 6,877 (3,383)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,674) 4,409
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,618 69,027
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,944 $ 73,436
=========== ===========
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, 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 and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended February 3,
1996.
Certain amounts in prior periods have been reclassified to conform with the
current year presentation.
(2) Acquisition of Business
-----------------------
On August 17, 1995, the Company acquired The Future Now, Inc. ("FNOW") by
issuing 2,952,282 shares of its Common Stock (valued at $36,534, excluding
acquisition-related costs of approximately $1,700) in exchange for all of the
remaining shares (approximately 69%) of FNOW Common Stock not previously owned
by the Company. The acquisition was accounted for using the purchase method
and, accordingly, the operating results of FNOW have been included in the
consolidated operating results since the date of acquisition.
Unaudited pro forma results of operations of the Company for the three and six
months ended July 29, 1995, assuming the FNOW acquisition was consummated on
January 29, 1995, are as follows:
Three months Six months
ended ended
July 29, 1995 July 29, 1995
------------- -------------
Revenues $937,347 $1,819,792
Net loss (11,842) (8,202)
Loss per share (0.34) (0.24)
Pro forma financial information presented above is not necessarily indicative
of the results of operations that would have occurred had the acquisition taken
place at the beginning of the period presented or of future results of
operations of the combined companies.
(3) Credit Facilities
-----------------
In April 1996, the Company's $270 million financing agreement was replaced by
a new financing agreement, which has an eighteen month term and is renewable
thereafter for successive six-month periods with the consent of the lender and
allows for total borrowings of up to $225 million, subject to a borrowing base
formula. A portion of this facility can be classified as long-term with a due
date of October 5, 1997 (which was subsequently extended until April 5, 1998)
and an interest rate of prime plus 2.50%. The remaining portion of the
facility can be used for inventory financing, equipment financing and working
capital purposes and has an interest rate of prime plus 1.50%. This facility
also imposes certain financial covenants relating to working capital, tangible
net worth, long-term debt to tangible net worth and fixed charge coverage.
The Company has obtained a waiver for non-compliance with one of these covenants
as of August 3, 1996.
(4) Common Stock Dividends
----------------------
In the fourth quarter of fiscal 1995, the Board of Directors suspended the
Company's quarterly dividend. There is no assurance that the quarterly
dividend will be resumed. Any resumption will depend upon the Company's
financial performance, capital requirements, financial condition and other
relevant factors.
On July 27, 1995, the Board of Directors declared a $0.10 per share cash
dividend to shareholders of record on August 15, 1995, which was paid on
September 1, 1995.
On April 27, 1995, the Board of Directors declared a $0.10 per share cash
dividend to shareholders of record on May 15, 1995, which was paid on June 1,
1995.
(5) Supplemental Cash Flow Information
----------------------------------
Cash payments during the six-month periods ended August 3, 1996 and July 29,
1995 included interest of $9,782 and $1,204, respectively, and income taxes of
$85 and $2,633, respectively.
During the quarter ended August 3, 1996, the Company entered into capital
leases totaling $618 for computer equipment and services.
(6) Contingencies
-------------
In December 1994, several class action lawsuits were filed in the United States
District Court for the Eastern District of Pennsylvania against the Company and
certain directors and officers. On February 13, 1996, the Court certified the
class for these lawsuits as purchasers of Common Stock from January 29, 1991
through December 5, 1994. 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 in the United States District Court
for the Eastern District of Pennsylvania. A derivative lawsuit was also filed
in December 1994 in the Court of Common Pleas of Philadelphia County 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 seek 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 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 matters, some
of which has been used to pay legal fees and settle various claims and suits
during fiscal 1995 and fiscal 1996. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The following table shows revenues by division for the indicated periods (in
millions).
<TABLE>
<CAPTION>
Quarter ended Six months ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Indirect Business $ 795 $ 867 $ 1,609 $ 1,674
Direct Business 220 41 409 80
Intercompany eliminations * (148) (26) (273) (45)
---------- --------- ---------- ---------
Total revenues $ 867 $ 882 $ 1,745 $ 1,709
========== ========= ========== =========
</TABLE>
* Intercompany eliminations consist primarily of sales from the Indirect
Business to the Direct Business.
Revenues decreased 2% for the quarter ended August 3, 1996 ("Q2 1996") compared
to the quarter ended July 29, 1995 ("Q2 1995"). The decrease in revenues from
Q2 1995 to Q2 1996 was primarily due to less revenues generated by the Company's
Indirect Business (sales to resellers), offset in part by increased revenues
generated by the Company's Direct Business (the former operations of FNOW,
which were acquired in August 1995, plus the branch locations purchased from
FNOW in December 1994), which includes sales and services to end users.
Revenues for the six months ended August 3, 1996 increased slightly from the
six months ended July 29, 1995. This increase was due to increased revenues
generated by the Direct Business as a result of the acquisition of FNOW in
August 1995. The decrease in revenues from the Indirect Business for the
periods presented was due primarily to certain manufacturers' products being
constrained in 1996 and decreased sales to existing resellers as a result of
continued consolidation in the reseller channel.
The following table shows gross margin as a percent of revenues by division
for the indicated periods.
<PAGE>
Quarter ended Six months ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------- -------- --------- --------
Indirect Business 2.6% 2.5% 2.8% 3.2%
Direct Business 10.9 13.7 11.2 14.9
--------- -------- --------- ---------
Total gross margin percent 5.2% 3.1% 5.2% 3.8%
========= ======== ========= =========
The increase in gross margin percent was primarily due to more revenues
generated by the Direct Business which realizes a higher gross margin percent
than the Indirect Business and an inventory-related charge of approximately
$10.2 million taken in Q2 1995, partially offset by continued competitive
pricing pressures in both the Indirect and Direct Businesses. Competitive
pressures and their impact on margins are expected to continue in the future.
Selling, general and administrative expenses increased to $41.3 million (4.8%
of revenues) for Q2 1996 from $30.2 million (3.4% of revenues) for Q2 1995.
For the six months ended August 3, 1996, selling, general and administrative
expenses increased to $84.3 million (4.8% of revenues) compared to $57.1
million (3.3% of revenues) for the same period last year. These costs
increased primarily as a result of higher operating costs associated with the
Direct Business and increased depreciation in the Indirect Business related to
the implementation of new management information systems. Depreciation expense
in the Indirect Business was $3.0 million and $6.3 million for the three and
six months ended August 3, 1996, respectively, compared to $1.7 million and
$3.3 million for the three and six months ended July 29, 1995, respectively.
These increases were partially offset by savings as a result of workforce
reductions in the Indirect Business in October 1995. As a percent of
revenues, selling, general and administrative expenses for the Indirect
Business were 2.0% and 2.2% for the quarter and six months ended August 3,
1996, respectively, compared to 2.3% and 2.2% for the quarter and six months
ended July 29, 1995, respectively. It is anticipated that these workforce
reductions, increased efficiencies and other cost control measures implemented
by the Company will somewhat mitigate the higher selling, general and adminis-
trative costs required to support the operations of the Direct Business.
Amortization of intangibles increased for both the quarter and six months ended
August 3, 1996 compared to the same periods last year due to goodwill related
to the acquisition of the Direct Business.
Investment and other income (expense) declined for the quarter and six months
ended August 3, 1996 compared to the same periods last year. This decline is
primarily attributable to the use of available cash during fiscal 1995 for the
payment of cash dividends, capital expenditures and the repayment of FNOW's
bank and finance company debt following the acquisition in August 1995. Interest
expense increased for the quarter and six months ended August 3, 1996 as a
result of the Company's more frequent use of its available financing arrange-
ments for inventory financing and working capital purposes and the addition of
$75 million of long-term debt in October 1995.
The Company's effective tax rate was 0.2% for Q2 1996 compared to a 24.7%
benefit for Q2 1995. For the six months ended August 3, 1996, the effective
tax rate was an 8.6% benefit compared to 56.2% for the same period last year.
The effect of non-deductible goodwill amortization on the pre-tax loss in the
current year was the primary reason for the differences in the effective tax
rate.
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 August 3, 1996, the Company's operating activities
used $9.8 million in cash primarily due to an increase in accounts receivable
as a result of higher sales in the Direct Business and higher sales in the
Indirect Business during the end of Q2 1996, partially offset by improved
inventory management. At August 3, 1996, the Company had cash and cash
equivalents totaling $23.9 million ($34.6 million at February 3, 1996). Working
capital totaled $30.2 million at August 3, 1996 compared to $25.6 million at
February 3, 1996. The Company may outsource some of its financing programs
which could reduce the level of accounts receivable. The Company has a $225
million financing agreement with a finance company, of which approximately
$11.8 million was available at August 3, 1996 after considering the borrowing
base formula, working capital advances and trade payables outstanding to a
vendor related to the finance company.
In the fourth quarter of fiscal 1995, the Board of Directors suspended the
Company's quarterly dividend. There is no assurance that the quarterly dividend
will be resumed. Any resumption will depend upon the Company's financial
performance, capital requirements, financial condition and other relevant
factors.
The Board of Directors had previously authorized the repurchase, in open-market
transactions, of up to 13.6 million shares of the Company's Common Stock. As of
August 3, 1996, the Company had repurchased approximately 8.3 million shares at
a cost of approximately $105.7 million. Approximately 3 million of the
repurchased shares were reissued in connection with the acquisition of FNOW.
The Company currently has no plans to repurchase additional shares of its
Common Stock.
In July 1996, XLConnect Solutions, Inc. ("XLC"), a wholly-owned subsidiary of
the Company, filed a registration statement with the Securities and Exchange
Commission for a public offering of approximately 20% of its common stock.
There is no certainty as to the occurrence, timing or amount of such public
offering. XLC will use the proceeds to repay intercompany obligations to the
Company.
Based on the Company's current level of operations and capital expenditures
requirements, management believes that the Company's cash, internally-generated
funds, and available financing arrangements and opportunities will be sufficient
to meet the Company's cash requirements at least for the next twelve months.
Forward Looking Statements
- --------------------------
The matters discussed in this Form 10-Q that are forward looking statements are
based on current management expectations that involve risks and uncertainties.
Potential risks and uncertainties include, without limitation: the impact of
economic conditions generally and in the industry for microcomputer products
and services; the potential decline in the level of demand for the Company's
products and services; the potential termination or non-renewal of a supply
agreement with a major vendor; continued competitive and pricing pressures in
the industry; product supply shortages; open sourcing of products from vendors;
rapid product improvement and technological change, short product life cycles
and resulting obsolescence risks; legal proceedings; and capital and financing
availability.
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 and
the Direct business follow a seasonal pattern with peaks occurring near the end
of the calendar year.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports filed 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 under-
signed thereunto duly authorized.
Intelligent Electronics, Inc.
/s/ Thomas J. Coffey
---------------------------------
Thomas J. Coffey
Senior Vice President
Chief Financial Officer
and Chief Accounting Officer
Date: September 17, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-1-1997
<PERIOD-START> FEB-4-1996
<PERIOD-END> AUG-3-1996
<CASH> 23,944
<SECURITIES> 0
<RECEIVABLES> 247,847
<ALLOWANCES> 7,806
<INVENTORY> 307,671
<CURRENT-ASSETS> 593,648
<PP&E> 105,554
<DEPRECIATION> 40,583
<TOTAL-ASSETS> 830,716
<CURRENT-LIABILITIES> 563,472
<BONDS> 0
0
0
<COMMON> 401
<OTHER-SE> 174,219
<TOTAL-LIABILITY-AND-EQUITY> 174,620
<SALES> 1,744,639
<TOTAL-REVENUES> 1,744,639
<CGS> 1,654,340
<TOTAL-COSTS> 1,654,340
<OTHER-EXPENSES> 87,335
<LOSS-PROVISION> 1,708
<INTEREST-EXPENSE> 6,924
<INCOME-PRETAX> (6,094)
<INCOME-TAX> (524)
<INCOME-CONTINUING> (5,570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,570)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
