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 November 2, 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: 35,609,877 shares of
Common Stock, par value $0.01 per share were outstanding at December 6,
1996.
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
November 2, 1996 and February 3, 1996 3
Consolidated Statements of Operations
Three and Nine Months Ended November 2, 1996
and October 28, 1995 4
Consolidated Statements of Cash Flows
Three and Nine Months Ended November 2, 1996
and October 28, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION FORM 10-Q
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
November 2, February 3,
1996 1996
----------- -----------
(unaudited)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 58,823 $ 34,618
Accounts receivable, net 194,750 192,687
Inventory 309,911 346,058
Prepaid expenses and other current assets 5,621 3,411
Deferred income taxes 16,902 16,041
----------- ----------
Total current assets 586,007 592,815
Property and equipment 56,991 68,213
Intangible assets, primarily goodwill, net 84,808 155,390
Other assets 18,193 22,931
----------- ----------
Total assets $ 745,999 $ 839,349
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 4,599 $ 8,744
Accounts payable 485,257 508,747
Accrued liabilities 46,399 49,718
----------- ----------
Total current liabilities 536,255 567,209
----------- ----------
Long-term debt 58,531 80,025
Other long-term liabilities 18,779 14,079
Commitments and contingencies
Minority interest 10,440 -
Shareholders' equity:
Preferred stock $50 par value per share:
Authorized 200,000 shares, 5,000 shares
issued and outstanding 250 -
Common stock $.01 par value per share:
Authorized 100,000,000 shares,
issued and outstanding:
40,939,936 and 39,910,649 shares 409 399
Additional paid-in capital 266,320 224,260
Treasury stock (67,650) (68,207)
Retained earnings (deficit) (77,335) 21,584
---------- ----------
Total shareholders' equity 121,994 178,036
---------- ----------
Total liabilities and shareholders' equity $ 745,999 $ 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 Nine months ended
----------------------- ------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 861,986 $ 944,223 $ 2,612,988 $ 2,653,276
Cost of goods sold 831,968 895,796 2,491,081 2,540,136
---------- --------- ----------- -----------
Gross profit 30,018 48,427 121,907 113,140
---------- --------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 52,784 55,432 138,329 112,483
Amortization of intangibles, primarily goodwill 2,279 2,132 7,063 4,718
Branch closure costs 9,790 - 9,790 -
Impairment losses 61,576 - 61,576 -
---------- --------- ----------- -----------
Total operating expenses 126,429 57,564 216,758 117,201
---------- --------- ----------- -----------
Loss from operations (96,411) (9,137) (94,851) (4,061)
Other income (expense):
Investment and other income (expense), net (96) (27) (528) 1,654
Interest expense (3,039) (2,502) (10,043) (3,882)
---------- --------- ----------- -----------
Loss before income tax benefit, equity in
loss of affiliate and minority interest (99,546) (11,666) (105,422) (6,289)
Income tax benefit (6,116) (3,814) (6,532) (790)
---------- --------- ----------- -----------
Loss before equity in loss of affiliate
and minority interest (93,430) (7,852) (98,890) (5,499)
Equity in loss of affiliate - (5,681) - (9,078)
---------- --------- ----------- -----------
Loss before minority interest (93,430) (13,533) (98,890) (14,577)
---------- --------- ----------- -----------
Minority interest (10) - (10) -
---------- --------- ----------- -----------
Net loss $ (93,440) $ (13,533) $ (98,900) $ (14,577)
========== ========= =========== ===========
Loss per common share $ (2.62) $ (0.40) $ (2.79) $ (0.45)
========== ========= =========== ===========
Dividends declared per share $ 0.00 $ 0.10 $ 0.00 $ 0.30
========== ========= =========== ===========
Weighted average number of common shares
and share equivalents outstanding: 35,599 33,947 35,498 32,213
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)
Nine months ended
-------------------------
November 2, October 28,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (98,900) $ (14,577)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 21,222 13,193
Write-down of property and equipment 1,384 7,978
Impairment losses 61,576 -
Branch closure costs 9,790 -
Deferred taxes (861) (3,544)
Provision for losses on trade receivables 3,944 1,717
Provision for write-down of inventory 9,335 5,615
Minority interest in net income of XLConnect 10 -
Equity in loss of affiliate - 9,078
Changes in assets and liabilities:
Accounts receivable (1,492) (25,184)
Inventory 27,456 (13,608)
Other current assets 2,951 2,456
Accounts payable (25,149) (20,738)
Accrued liabilities 1,006 3,758
----------- -----------
Net cash provided by (used for) operating activities 12,272 (33,856)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of marketable securities - 4,500
Acquisition of property and equipment, net of disposals (11,560) (29,726)
Other (88) (351)
----------- -----------
Net cash used for investing activities (11,648) (25,577)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 75,000
Repayment of long-term debt (20,000) -
Net repayments from working capital advances (6,271) -
Proceeds from initial public offering of subsidiary 45,254 -
Net proceeds from sale of preferred stock and warrants 4,692 -
Cash dividends paid - (9,417)
Repayment of FNOW's bank debt - (50,009)
Proceeds from exercise of stock options 1,981 2,990
Proceeds from employee stock purchase plan 247 -
Reduction in capital lease obligations (2,322) (82)
----------- -----------
Net cash provided by financing activities 23,581 18,482
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,205 (40,951)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,618 69,027
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 58,823 $ 28,076
=========== ===========
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 and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
February 3, 1996.
(2) Acquisition of Businesses
-------------------------
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
nine months ended October 28, 1995, assuming the FNOW acquisition was
consummated on January 29, 1995, are as follows:
Three months Nine months
ended ended
October 28, 1995 October 28, 1995
---------------- ----------------
Revenues $ 949,775 $2,769,567
Net loss (17,040) (25,242)
Loss per share (0.46) (0.72)
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.
On October 23, 1996, the Company issued 807,415 shares of its Common Stock
in exchange for all of the common stock of E-C Computer Technical Services,
Inc. ("E-C"), a computer reseller. The merger has been accounted for as a
pooling of interests and accordingly, the Company's consolidated financial
statements for the nine months ended November 2, 1996 have been restated to
include the accounts and operations of E-C. The merger with E-C did not
have a material effect on the Company's results of operations or financial
position. Therefore, the prior year's Consolidated Balance Sheet and
Statements of Operations and Cash Flows have not been restated.
(3) Branch Closure Costs
--------------------
During the quarter ended November 2, 1996, the Company closed the Direct
hardware sales portion of five branch locations. Four of these branches
were acquired from FNOW in December 1994 and one was acquired from FNOW in
August 1995 when the Company purchased the remaining 69% of FNOW. As a
result of these closures, the Company recorded an $8 million charge
relating to the allocable portion of goodwill for these locations. In
addition to the goodwill write-down, the Company also recorded a charge of
approximately $1.8 million to reflect the write-off of property and
equipment and remaining lease obligations related to these branches.
(4) Impairment Losses
-----------------
During the quarter ended November 2, 1996, a decision to adopt open-
sourcing was made by two of the Company's largest vendors. These vendors'
products have represented approximately 31% to 40% of the Company's revenues
during the last several years. Under open-sourcing, franchisees and other
resellers are no longer required to purchase product exclusively from the
Company. This change and a trend of declining sales, gross margins,
earnings and cash flows in the Indirect Business caused the Company to
undertake a review of its long-lived assets in this business unit. As a
result of this review, which was based on estimated future cash flows of
the business, it was determined that certain assets were impaired. The
Company determined that the carrying value of its goodwill relative to the
Indirect Business will not be recovered from future operations.
Accordingly, this goodwill, amounting to approximately $55.5 million, was
written-off as of November 2, 1996. This goodwill was recorded in 1988 and
1989 with the acquisitions of Entre Computer Centers, Inc. ("Entre") and
Connecting Point of America, Inc. ("CPA"), respectively. Both Entre and CPA
had substantial franchise operations when they were acquired.
Also, as a result of this review it was determined that certain technology
investments will not be fully recovered from estimated future cash flows.
The Company's configuration software, primarily consisting of licenses
purchased from a third party in 1994 for the use of this system, was
written down to its estimated recoverable value. This write-down,
approximating $6 million, was due to a continuing trend of expenses
exceeding revenues in this portion of the business and the introduction of
competitive technology available through the use of the Internet.
(5) Third Quarter of Fiscal 1996 Charges
------------------------------------
During the quarter ended November 2, 1996, the Company recorded charges
totaling approximately $21.7 million. Approximately $15.7 million of these
charges were recorded as cost of sales and relate to the following. During
the quarter ended November 2, 1996, a major customer of the Direct
Business' rental program announced the adoption of a new technology
platform resulting in the reassessment by the Company of the estimated
future revenue stream under this program. This resulted in an estimated
shortfall in future rental revenue compared to the Company's future related
lease obligations of approximately $8 million. In addition, the Company
provided for changes in estimates for inventory reserves ($3.2 million) and
vendor payables and receivable issues ($4.5 million) in the Direct
Business. Charges recorded as selling, general and administrative expenses
consist of reserves for certain accounts receivable in the Indirect
Business ($2.2 million) and write-offs for unutilized property and
equipment and miscellaneous accruals totaling approximately $3.8 million.
(6) Credit Facilities
-----------------
In April 1996, the Company's $270 million financing agreement was replaced
by a new financing agreement, as amended, 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
is classified as long-term with a due date of April 5, 1998. The remaining
portion of the facility can be used for inventory financing, equipment
financing and working capital purposes. On November 1, 1996, the interest
rate for the short and long-term portions of this agreement was lowered to
prime plus 0.875% and prime plus 1.5%, respectively. 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 November 2, 1996. During the quarter ended November 2,
1996, the Company reduced its long-term borrowing under this facility to
$55 million.
(7) Initial Public Offering of XLConnect Solutions, Inc.
----------------------------------------------------
On October 17, 1996, XLConnect Solutions, Inc. ("XLConnect"), formerly a
wholly-owned subsidiary, completed an initial public offering of 3,330,000
shares of its common stock at $15 per share, raising approximately $45.3
million, net of offering costs. As a result of this offering, the Company
now owns 80.0% of XLConnect. The net proceeds were primarily used by
XLConnect to repay intercompany obligations to the Company. The Company
repaid $20 million of its long-term debt and used the remainder for working
capital purposes.
(8) Preferred Stock
---------------
On October 16, 1996, the Company sold 5,000 shares of its Series B
Convertible Preferred Stock ("Preferred Stock") and warrants to purchase
225,000 shares of its Common Stock in a private placement for $5 million
(approximately $4.7 million, net of fees and expenses). In addition, the
investor has agreed, subject to satisfaction of certain conditions
including the effectiveness of a registration statement covering the resale
of the Common Stock issuable upon the conversion of the Preferred Stock and
the exercise of the warrants, to purchase an additional 10,000 shares of
Preferred Stock and warrants to purchase 225,000 shares of Common Stock,
for $10 million. Assuming the sale of the additional shares of Preferred
Stock and warrants (but not assuming any exercise of the warrants), the net
proceeds to the Company from the private placement will be approximately
$14.3 million after fees and expenses.
The Preferred Stock is convertible into Common Stock at the option of the
holder at a conversion ratio based on the average trading prices of the
Company's Common Stock, but in any event not exceeding $9.175 per share
(subject to anti-dilution adjustments), and converts automatically into
Common Stock in five years. The warrants sold on October 16, 1996 are
exercisable for five years at an exercise price of $11.469 per share. The
warrants to be issued in connection with the issuance of the additional
10,000 shares of Preferred Stock will have an exercise price based on the
average trading prices of the Company's Common Stock prior to the issuance
of the warrants.
(9) 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 October 26, 1995, the Board of Directors declared a $0.10 per share cash
dividend to shareholders of record on November 15, 1995, which was paid on
December 1, 1995.
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.
(10) Supplemental Cash Flow Information
----------------------------------
Cash payments during the nine-month periods ended November 2, 1996 and
October 28, 1995 included interest of $14,081 and $2,046, respectively, and
income taxes of $155 and $2,633, respectively.
During the quarter ended November 2, 1996, the Company entered into capital
leases totaling $496 for computer equipment and services.
(11) 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 is defending 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 on 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.
<PAGE>
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 Nine months ended
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Indirect Business $ 798 $ 863 $ 2,406 $ 2,537
Direct Business 194 180 616 260
Intercompany eliminations * (130) (99) (409) (144)
----------- ----------- ----------- ------------
Total revenues $ 862 $ 944 $ 2,613 $ 2,653
=========== =========== =========== ============
</TABLE>
* Intercompany eliminations consist primarily of sales from the Indirect
Business to the Direct Business.
Revenues decreased 9% for the quarter ended November 2, 1996 ("Q3 1996")
compared to the quarter ended October 28, 1995 ("Q3 1995"). The decrease in
revenues from Q3 1995 to Q3 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 includes hardware sales and services
to end users. Revenues for the nine months ended November 2, 1996
decreased slightly from the nine months ended October 28, 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 open-sourcing
and continued consolidation in the reseller channel. The inclusion of the
Direct Business for all three quarters in fiscal 1996 compared to only ten
weeks in fiscal 1995 was the primary reason for the increase in revenues in
the Direct Business.
The following table shows gross margin as a percent of revenues by division
for the indicated periods.
<TABLE>
<CAPTION>
Nine months ended
November 2, October 28,
Q3 1996 Q3 1995 1996 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Indirect Business 2.6% 3.5% 2.7% 3.3%
Direct Business 5.0 10.0 9.2 11.5
--------- --------- ----------- -----------
Total gross margin percent 3.5% 5.1% 4.7% 4.3%
========= ========= ========== ===========
</TABLE>
The decrease in gross margin percent for the Direct Business for Q3 1996
and the nine months ended November 2, 1996 compared to the same periods
last year was primarily due to approximately $15.7 million of charges
recorded in Q3 1996. During Q3 1996, a major customer of the Direct
Business' rental program announced the adoption of a new technology
platform resulting in the reassessment by the Company of the estimated
future revenue stream under this program. This resulted in an estimated
shortfall in future rental revenue compared to the Company's future related
lease obligations of approximately $8 million. In addition, charges for
changes in estimates for inventory reserves ($3.2 million) and vendor
payables and receivable issues ($4.5 million) in the Direct Business were
also recorded. Excluding these charges, the gross margin percent for the
Direct Business for Q3 1996 and the nine months ended November 2, 1996
would have been 13.1% and 11.8%, respectively, reflecting an increase in
revenues from the services sector (XLConnect) of the Direct Business, which
generates a higher gross margin percent. In the Indirect Business,
increased freight and configuration costs and continued competitive
pressures were primarily responsible for the decline in gross margin
percent for Q3 1996 and the nine months ended November 2, 1996 compared to
the same periods last year. Exclusive of the charges recorded in Q3 1996,
consolidated gross margin percent would have been 5.3% for Q3 1996 and the
nine months ended November 2, 1996. These changes from the comparable
periods of the prior year were primarily attributable to the higher
proportion of total revenues generated by the Direct Business, resulting
from the inclusion of the Direct Business, which realizes a higher gross
margin percent, for all three quarters in the current fiscal year,
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 decreased to $52.8 million
(6.1% of revenues) for Q3 1996 from $55.4 million (5.9% of revenues) for Q3
1995. In Q3 1995, charges of approximately $15 million were incurred,
consisting primarily of severance costs in connection with a reduction in
the Company's workforce and a charge related to certain management
information systems projects. In Q3 1996, charges of approximately $6.0
million were recorded consisting of reserves for certain account receivable
in the Indirect Business ($2.2 million) and unutilized property and
equipment and miscellaneous accruals. Excluding the charges, selling,
general and administrative expenses would have been approximately $46.8
million in Q3 1996 compared to approximately $40.4 million in Q3 1995,
primarily as a result of higher support costs required in the Direct
Business, which was included for the full quarter in Q3 1996 compared to
only ten weeks in Q3 1995.
For the nine months ended November 2, 1996, selling, general and
administrative expenses increased to $138.3 million (5.3% of revenues)
compared to $112.5 million (4.2% of revenues) for the same period last
year. After considering the charges booked in both Q3 1996 and Q3 1995
discussed above, the primary reasons for the change were the inclusion of
operating costs for the Direct Business for the full nine months of fiscal
1996 compared to only ten weeks in fiscal 1995 and increased depreciation
in the Indirect Business related to the implementation of certain
management information systems, offset by the savings realized as a result
of the workforce reductions which took place in Q3 1995. Depreciation
expense in the Indirect Business was $9.3 million for the nine months ended
November 2, 1996 compared to $6.3 million for the nine months ended October
28, 1995. It is anticipated that the workforce reductions and other cost
control measures implemented by the Company will somewhat mitigate the
higher selling, general and administrative costs required to support the
operations of the Direct Business.
During the quarter ended November 2, 1996, the Company closed the Direct
hardware sales portion of five branch locations. Four of these branches
were acquired from FNOW in December 1994 and one was acquired from FNOW in
August 1995 when the Company purchased the remaining 69% of FNOW. As a
result of these closures, the Company recorded an $8 million charge
relating to the allocable portion of goodwill for these locations. In
addition to the goodwill write-down, the Company also recorded a charge of
approximately $1.8 million to reflect the write-off of property and
equipment and remaining lease obligations related to these branches.
During the quarter ended November 2, 1996, a decision to adopt open-
sourcing was made by two of the Company's largest vendors. These vendors'
products have represented approximately 31% to 40% of the Company's revenues
during the last several years. Under open-sourcing, franchisees and other
resellers are no longer required to purchase product exclusively from the
Company. This change and a trend of declining sales, gross margins,
earnings and cash flows in the Indirect Business caused the Company to
undertake a review of its long-lived assets in this business unit. As a
result of this review, which was based on estimated future cash flows of
the business, it was determined that certain assets were impaired. The
Company determined that the carrying value of its goodwill relative to the
Indirect Business will not be recovered from future operations.
Accordingly, this goodwill, amounting to approximately $55.5 million, was
written-off as of November 2, 1996. This goodwill was recorded in 1988 and
1989 with the acquisitions of Entre Computer Centers, Inc. ("Entre") and
Connecting Point of America, Inc. ("CPA"), respectively. Both Entre and CPA
had substantial franchise operations when they were acquired.
Also, as a result of this review it was determined that certain technology
investments will not be fully recovered from estimated future cash flows.
The Company's configuration software, primarily consisting of licenses
purchased from a third party in 1994 for the use of this system, was
written down to its estimated recoverable value. This write-down,
approximating $6 million, was due to a continuing trend of expenses
exceeding revenues in this portion of the business and the introduction of
competitive technology available through the use of the Internet.
Amortization of intangibles increased for both the quarter and nine months
ended November 2, 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 nine
months ended November 2, 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 nine months
ended November 2, 1996 as a result of the Company's more frequent use of
its available financing arrangements for inventory financing and working
capital purposes, higher average borrowing rates and the addition of
$75 million of long-term debt in October 1995.
The Company's effective tax rate was a 6.1% benefit for Q3 1996 compared to
a 32.7% benefit for Q3 1995. For the nine months ended November 2, 1996,
the effective tax rate was a 6.2% benefit compared to a 12.6% benefit for
the same period last year. The effect of the non-deductible write-down of
goodwill and goodwill amortization on the pre-tax loss and the recording of
a reserve against the tax benefit of the charges recorded in the Direct
Business in the current year were the primary reasons 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, make
investments in systems technology and pay cash dividends.
During the nine months ended November 2, 1996, the Company's operating
activities generated $12.3 million in cash primarily due to a reduction in
inventory in both the Indirect and Direct Businesses. At November 2, 1996,
the Company had cash and cash equivalents totaling $58.8 million ($34.6
million at February 3, 1996). Working capital totaled $49.8 million at
November 2, 1996 compared to $25.6 million at February 3, 1996. The
Company has a $225 million financing agreement with a finance company, of
which approximately $21.5 million was available at November 2, 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 December 12, 1994, the Company had repurchased approximately
8.3 million shares at a cost of approximately $105.7 million and no
repurchases have been made since that date. 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.
On October 16, 1996, the Company sold 5,000 shares of Preferred Stock and
warrants to purchase 225,000 shares of its Common Stock in a private
placement for $5 million (approximately $4.7 million, net of fees and
expenses). In addition, the investor has agreed, subject to satisfaction
of certain conditions including the effectiveness of a registration
statement covering the resale of the Common Stock issuable upon the
conversion of the Preferred Stock, to purchase an additional 10,000 shares
of Preferred Stock and warrants to purchase 225,000 shares of Common Stock,
for $10 million. Assuming the sale of the additional shares of Preferred
Stock and warrants (but not assuming any exercise of the warrants), the net
proceeds to the Company from the private placement will be approximately
$14.3 million after fees and expenses.
On October 17, 1996, XLConnect completed an initial public offering of
3,330,000 shares of its common stock at $15 per share, raising
approximately $45.3 million, net of offering costs. As a result of this
offering, the Company now owns 80.0% of XLConnect. The net proceeds were
primarily used by XLConnect to repay intercompany obligations to the
Company. The Company repaid $20 million of its long-term debt and used the
remainder for working capital purposes.
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 the risk of
unavailability of adequate capital or financing.
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 2. Changes in Securities
---------------------
B.
On October 16, 1996, the Company issued 5,000 shares of its Series B
Convertible Preferred Stock ("Preferred Stock"), stated value $1,000 per
share ("Stated Value"). The Preferred Stock ranks prior to the Company's
common stock, par value $.01 per share ("Common Stock") and prior to any
class or series of capital stock of the Company thereafter created (unless,
with the consent of the holders of the Preferred Stock, such class or
series of capital stock specifically, by its terms, ranks senior to or on a
par with the Preferred Stock). The Series B Preferred Stock will bear no
dividends, however, the Preferred Stock is subject to a premium as described
below. The holders of the Preferred Stock have no voting power, except as
otherwise required by the Pennsylvania Business Corporation Law of 1988, as
amended.
The Preferred Stock is convertible into Common Stock at the option of any
holder thereof at any time and from time to time (an "Optional
Conversion"), into such number of shares of Common Stock as is determined
by dividing (i) the sum of (A) the Stated Value thereof, plus (B) the Premium
Amount (as defined below), unless the Company has timely redeemed such Premium
Amount in cash as described below, by (ii) the then effective Conversion Price
(as defined below). The "Premium Amount" shall be the product of the Stated
Value, multiplied by .06, multiplied by a fraction, the numerator of which is
"N" and the denominator of which is 365 (where "N" equals the number of days
elapsed from the date of issuance of the Preferred Stock to and including the
conversion date). The "Conversion Price" shall be the lesser of (i) the
average of the closing bid prices for the Common Stock as reported by the
Nasdaq National Market ("NASDAQ-NM"), or on the principal securities exchange
or other securities market on which the Common Stock is then being traded, for
the five consecutive Trading Days (as defined below) ending one Trading Day
prior to the Conversion Date (as defined below) , and (ii) $9.175 (subject
to equitable adjustments from time to time pursuant to the anti-dilution
provisions contained in the Statement With Respect to Shares relating to
the Preferred Stock filed with the Pennsylvania Secretary of State (the
"Statement")). "Trading Day" shall mean any day on which the Common Stock
is traded for any period on NASDAQ-NM, or on the principal securities
exchange or other securities market on which the Common Stock is then being
traded. Each share of Preferred Stock issued and outstanding on October
15, 2001 automatically shall be converted into shares of Common Stock on such
date at the then effective Conversion Price (the "Automatic Conversion").
The Company shall have the right, in its sole discretion, in the event of
an Optional Conversion or an Automatic Conversion to redeem all or any portion
of the Premium Amount subject to such conversion for a sum of cash equal to the
Premium Amount being so redeemed.
Upon any liquidation, dissolution or winding up of the Company, no
distribution shall be made to the holders of Common Stock unless prior
thereto, the holders of Preferred Stock shall have received the Liquidation
Preference with respect to each share of Preferred Stock. The "Liquidation
Preference" with respect to a share of Preferred Stock shall be equal to
the sum of the Stated Value thereof plus an amount equal to six percent per
annum of such Stated Value for the period beginning on the date of issuance
of such share and ending on the date of final distribution to the holder
thereof. At the option of any holder of Preferred Stock, the sale,
conveyance or disposition of all or substantially all of the assets of the
Company, the effectuation of a transaction or series of related
transactions approved by the Company's Board of Directors through either a
resolution of the Board or a redemption of rights granted under the Rights
Agreement dated as of March 22, 1996 by and between the Company and
Chemical Mellon Shareholder Services L.L.C. or any successor agreement in
which more than 50% of the voting power of the Company is disposed of, or
the consolidation, merger or other business combination of the Company with
or into any other person or entity when the Company is not the survivor
shall either: (i) be deemed to be a liquidation, dissolution or winding up
of the Company; or (ii) give each such holder the right to receive upon
conversion of the Preferred Stock, in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the holders of Preferred Stock would have been entitled to
receive in such transaction had the Preferred Stock been converted in full
immediately prior to such transaction.
The Statement contains certain protective provisions and also provides for
the Company to pay certain penalties to the holders of Preferred Stock in
the event it is unable to, or otherwise does not, perform its obligations
as required under the Statement under certain circumstances.
The transaction in which the Preferred Stock was issued is described in the
Company's Current Report on Form 8-K dated October 16, 1996 filed with the
Securities and Exchange Commission, to which the Statement was filed as an
exhibit. The within summary description of the Preferred Stock does not
purport to be a complete description of the terms of the Preferred Stock.
A complete description of the rights, preferences, designations and
privileges of the Preferred Stock is contained in the Statement, which is
incorporated herein by reference.
C.
On October 16, 1996, the Company raised $5,000,000 by the sale of 5,000 shares
of Preferred Stock and Warrants to purchase 225,000 shares of its Common
Stock in a private placement. In addition, the investor has agreed, subject
to the satisfaction of certain conditions, to purchase an additional 10,000
shares of Preferred Stock and Warrants to purchase 225,000 shares of Common
Stock, for $10,000,000. Included among the conditions is the effectiveness
of a registration statement to be filed with the Securities and Exchange
Commission to register the resale of the Common Stock issuable upon conversion
of the Preferred Stock and the exercise of the Warrants. Assuming the sale
of the additional shares of Preferred Stock and Warrants (but not assuming
any exercise of the Warrants), the net proceeds to the Company from the
private placement will be approximately $14,330,000 after deduction of
placement fees and transaction expenses. The placement agents in the
private placement were Susquehanna Financial Group, Inc. and Janney
Montgomery Scott, Inc.
The conversion, redemption, liquidation and other rights of the holders
of Preferred Stock are described above in response to Part II, Item 2(B)
of this Report. The Warrants to be issued in connection with the issuance
of the additional 10,000 shares of Preferred Stock will have an exercise
price based on average trading prices of the Company's Common Stock prior
to the issuance of the Warrants.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on August
22, 1996. Shareholders voted on the following item:
(a) For the Election of Directors:
<TABLE>
<CAPTION>
Term Votes Votes Broker
Director Expiration For Withheld Non-Votes
--------------------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Christopher T.G. Fish 1999 30,544,318 336,154 0
Gregory A. Pratt 1999 30,537,570 342,902 0
Richard D. Sanford 1999 30,538,238 342,234 0
</TABLE>
Other directors whose term of office as a director continued after
the meeting were as follows:
Barry M. Abelson
Roger J. Fritz
Arnold S. Hoffman
William E. Johnson
John A. Porter
William L. Rulon-Miller
Alex A.C. Wilson (resigned effective September 12, 1996)
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
* 3. Statement with Respect to Shares of the Company, filed with the
Pennsylvania Secretary of State on October 16, 1996. (Exhibit 99.2 to
the Company's Current Report on Form 8-K dated October 16, 1996.)
(b) Reports on Form 8-K.
The Company's Report on Form 8-K dated October 16, 1996 reporting,
under Item 5, the sale of 5,000 shares of Preferred Stock and
Warrants and the initial public offering of shares of common stock of
XLConnect Solutions, Inc., a subsidiary of the Company.
____________________________________________________
* Incorporated by reference
<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
Senior Vice President, Chief
Financial Officer and
Chief Accounting Officer
Date: December 17, 1996
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-1-1997
<PERIOD-START> FEB-4-1996
<PERIOD-END> NOV-2-1996
<CASH> 58,823
<SECURITIES> 0
<RECEIVABLES> 204,883
<ALLOWANCES> 10,133
<INVENTORY> 309,911
<CURRENT-ASSETS> 586,007
<PP&E> 102,601
<DEPRECIATION> 45,610
<TOTAL-ASSETS> 745,999
<CURRENT-LIABILITIES> 536,255
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250
0
<COMMON> 409
<OTHER-SE> 121,994
<TOTAL-LIABILITY-AND-EQUITY> 745,999
<SALES> 2,612,988
<TOTAL-REVENUES> 2,612,988
<CGS> 2,491,081
<TOTAL-COSTS> 2,491,081
<OTHER-EXPENSES> 212,814
<LOSS-PROVISION> 3,944
<INTEREST-EXPENSE> 10,043
<INCOME-PRETAX> (105,422)
<INCOME-TAX> (6,532)
<INCOME-CONTINUING> (98,900)
<DISCONTINUED> 0
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