SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended February 3, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (IRS Employer
of incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
(Address of principal executive offices, including zip code)
(610)458-5500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
[Title of Class]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 8, 1996:
Common Stock, $.01 Par Value - $190,632,930
The number of shares outstanding of the issuer's common stock as of
April 8, 1996:
Common Stock, $.01 Par Value - 34,536,731
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1996 Annual Shareholders'
Meeting are incorporated by reference into Items 10, 11, 12 and 13 (Par III)
of this Report. Such Proxy Statement, except for the parts therein which
have been specifically incorporated by reference, shall not be deemed "filed"
for the purposes of this report on Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE>
PART I
Item 1. BUSINESS
Introduction
Intelligent Electronics, Inc. (the "Company") provides information
technology products, services and solutions to network integrators and
resellers (the "Network"), and to large and small corporate customers,
educational institutions and governmental agencies in the United States. The
Company was founded in 1982 and is a Pennsylvania corporation. In March
1984, the Company commenced the wholesale distribution of microcomputers. On
August 17, 1995, the Company exchanged shares of its Common Stock for all of
the remaining shares (approximately 69%) of The Future Now, Inc. ("FNOW"),
not previously owned by the Company (See Note 2 to the Consolidated Financial
Statements). The merger with FNOW, a computer sales and services company,
expanded the Company's offerings through the acquisition of a direct hardware
sales organization ("Direct business") and a professional services
organization providing a wide range of sophisticated customer support and
consulting services. The principal products sold, installed and serviced by
the Company include microcomputers, workstations, local and wide area network
systems, computer software and peripherals and telecommunications equipment.
As of February 3, 1996, the Network comprised more than 3,000 locations.
The Company's principal executive offices are located at 411
Eagleview Boulevard, Exton, Pennsylvania, 19341, telephone (610)458-5500. As
used herein and unless otherwise required by the context, the "Company" shall
mean Intelligent Electronics, Inc. and its wholly-owned subsidiaries.
The matters discussed in this Form 10-K 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.
Distribution to the Network ("Indirect business")
The Company provides distribution of microcomputers and related
equipment to its customers through a business-to-business approach.
Specifically, the Company provides product selection, technical support,
cost-efficient marketing programs and promotions and configuration. The
Company believes that it purchases the majority of the products distributed
at the lowest published prices available and believes that its purchasing
power gives it better access to constrained product lines. The Company
consequently passes on to its customers a portion of the discount which it
receives from vendors. This pricing, together with the Company's service
offerings and ready access to expansive product inventories, generally
enables its customers to purchase products from the Company at better terms
than they could obtain directly from vendors and to effectively compete in
the marketplace.
The Company sells products and provides certain services to its
Network members, who are charged varying fees based on different levels of
services which they select. The Company believes that its product pricing and
its "services-for-fees" approach enhance the competitiveness of its Network
and provide for an efficient allocation of support. In addition, the Company
provides and is continuing to develop programs to enhance the competitiveness
of its Network, such as marketing assistance, programs designed to enhance
channel sales, product promotion, pre-shipment configuration, technical
support and new product evaluation. Programs designed for specific members
of the Network include a nationwide advanced systems program operated under
the name "Intelligent Systems Group", which targets end-users with a regional
or national presence and focuses primarily on high-end or technically
advanced products, the National Service Network, which assists members of the
Network in servicing multi-location, regional or national accounts, The
Retail Reseller Group, which addresses the specific needs of Network members
who focus on the retail channel, and the Business Technology Centers program,
which assists Network members in positioning themselves in the small-to-
medium business market.
The Company also offers financing programs, under which, for a fee,
it extends up to thirty days credit to qualified end-users and certain Network
members who purchase selected products. Under one such program, the Company,
in partnership with Network members, provides products and extends credit
directly to end-users who have been approved both by the Company and the
Network member. This program frees up the existing credit line of the
Network member. Also, certain members of the Network are receiving credit in
order to facilitate their ability to purchase certain products from the
Company and to allow the Company to compete with competitors who offer such
credit terms.
Network Structure
Certain of the relationships between the Company and its Network are
governed by franchise agreements. These franchise agreements provide for the
operation of a business center and the sale of microcomputer systems and
related products and services as well as other advanced technology products
under the Company's proprietary trademarks "Todays Computers Business
Centers" and "TCBC," or "Entre Computer Centers" or "Connecting Point of
America". These agreements generally have an initial term of 10 years which
may be renewed for an additional 10 years and provide that the franchisee
will have the right to operate a franchise at a specific location. The
franchisees generally sell products approved for sale which may be purchased
from the Company. The Company may terminate the franchise agreement, subject
to termination requirements under state franchise laws, either upon the
occurrence of certain specified events or upon 30 days' notice of certain
defaults by the franchisee. Certain franchisees may terminate the agreement
with or without cause, at any time upon 60 days' prior written notice to the
Company. Franchisees operating under TCBC or Entre marks are subject to
certain restrictions against competition following termination.
The Company also sells products to various members of the Network
who do not sign franchise agreements and, therefore, are not entitled to
conduct business under any of the Company's trademarks but are permitted to
purchase certain products from the Company at competitive prices and terms.
In addition, members of the Network can participate in various
supplemental programs offered by the Company and obtain the right to use
other proprietary service marks of the Company including "Intelligent Systems
Group" or "ISG," and "Business Technology Centers" or "BTC."
FNOW accounted for approximately 16% of the Company's revenues from
continuing operations during the fiscal years ended January 28, 1995 and
January 29, 1994. Through August 17, 1995, FNOW accounted for
approximately 12% of the Company's revenues. FNOW, now a wholly-owned
subsidiary of the Company, remains a significant member of the Network.
Products
The Company currently markets technology products consisting of
microcomputer systems, workstations, networking and telecommunications
equipment and software. The Company's product acquisition staff selects
products on the basis of overall quality, product image, technological
capability, and business applications, as well as the pricing, discount,
marketing and rebate programs offered by the manufacturer which enable the
Company, and in turn the Network, to benefit from quantity purchasing
economies. The Company currently distributes products of approximately 100
vendors, principally Hewlett-Packard Company ("Hewlett-Packard"), COMPAQ
Computer Corporation ("COMPAQ"), International Business Machines Corporation
("IBM"), Apple Computer, Inc. ("Apple"), NEC Technologies, Inc., Toshiba
America Information Systems, Inc., Microsoft Corporation, Epson America,
Inc., Novell, Inc., Digital Equipment Corporation and Lotus Development
Corporation.
In the past, certain vendors of the Company required resellers to
purchase products from only one source. A large majority of these vendors
have changed their policy, allowing "open sourcing," which permits resellers
to purchase products from more than one source. As a result of open
sourcing, competitive pricing pressures throughout the industry have
intensified and customer and brand loyalty has been reduced. In response to
open sourcing and to enhance other services, the Company has broadened the
selection of computer technology products stocked in its central warehouses.
Products which the Company added to its existing assortment include advanced
technology central processing units, an expanded offering of peripheral
devices and certain software. Inventory levels increased in support of this
enhanced product offering and higher sales volume. These lines typically
require expanded inventory levels and a longer sell through cycle.
The Company's agreements with its major vendors permit it to
purchase products from them for sale to Network members which are directly
authorized by such vendors to sell products. In some cases, specific products
from the major vendors may be sold to Network members which do not have
specific authorization from the vendors. The vendor agreements are subject to
termination by the vendors without cause on varying notice periods, and are
subject to periodic renewals or re-authorization by the vendors. The
termination or non-renewal of an agreement with a major vendor could have a
material adverse effect on the Company.
Under the agreements with the vendors, products may be returned to
vendors at restocking fees ranging up to 5%. The agreements generally
provide for price adjustments for specified periods which protect the Company
in the event of price reductions by the vendor. The Company administers
certain vendors' price adjustment programs for the benefit of the Network.
In 1995, the Company instituted a policy allowing members of the Network to
return up to 3% of the previous quarter's purchases without a restocking fee
and if returns exceed 3%, a restocking fee of up to 10% is charged.
Products from the following manufacturers comprised the following
percentages of the Company's revenues during the years ended February 3,
1996, January 28, 1995 and January 29, 1994:
Year ended
---------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
----------- ----------- -----------
IBM 15% 15% 15%
COMPAQ 24% 25% 25%
Apple 8% 12% 18%
Hewlett-Packard 25% 24% 22%
No other manufacturers' products comprised more than 10% of the
Company's revenues during fiscal 1995, fiscal 1994 or fiscal 1993.
Direct Business
Through its acquisition of FNOW in August 1995 and five branch
locations in December 1994 from FNOW, the Company acquired a direct
hardware sales organization operating in 24 sales offices in 19 states.
The Direct business purchases the majority of its products from the
Indirect business and is an authorized dealer or a reseller at some or all
of its 24 locations for the products of over 100 manufacturers. The
strategy of the Direct business, in conjunction with XLConnect (defined
below), is to focus its marketing efforts towards medium-sized businesses,
Fortune 1000 corporations, professional firms, and governmental and
educational institutions. These customers are relying more on business
partners and suppliers to provide a complete solution to their information
technology needs, in addition to competitive pricing. Also, many larger
customers are outsourcing their information technology needs. In order to
meet these complex needs, the Direct business supplies the hardware and
partners with XLConnect which provides the sophisticated information
technology services described below.
XLConnect
Following the acquisition of FNOW, the Company combined the operations
of one of its existing subsidiaries with FNOW's professional services
organization to form XLConnect Solutions, Inc. ("XLConnect"). XLConnect
offers a wide range of professional services including project and network
management, consulting services, enterprise design, training, technology
deployment and telecommunications services.
XLConnect focuses on three specific areas, emphasizing total
connectivity solutions:
Internetworking Solutions: The Internetworking group provides network and
communication systems management, local and wide area network design
services, web site development, connectivity consulting and
telecommunications services such as frame relay, Internet access and
integrated services digital networks (ISDN).
Managed Service Solutions: Managed Service Solutions maximizes the
productivity of its customers' networks and the equipment on the network. It
offers a full range of services including PC, local and wide area network
outsourcing, asset management, workgroup collaboration, electronic mail and
electronic commerce services.
Application Services Group: The Application Services Group provides
Internet and intranet solutions, training, and help desk solutions. It
designs, develops, installs and supports Internet and intranet applications
running over enterprise-wide networks. It also trains personnel, agents and
its customers on how to sell and support these complex solutions.
Competition
Competition in the microcomputer industry is intense, principally
in the areas of price, breadth of product line, product availability and
technical support and service. The Company and its Network compete with
computer aggregators, distributors, resellers and retailers in the sale of
its products and services as well as firms offering information technology
implementation consulting services. The Company faces competition from
microcomputer manufacturers that sell their products through direct sales
forces and from distributors that emphasize mail order and telemarketing.
The Company believes that the pricing and product availability offered to it
by its vendors are at least as favorable as are offered to its competitors,
which enables the Company and the Network to compete favorably with their
competitors in terms of pricing and product availability. In addition, the
Company develops customized value-add programs for its Network, including
programs to develop channel markets, such as the market for advanced
technology products, which enhance the competitiveness of the Network. The
Company also provides technical support and service programs which it
believes contribute favorably to the competitiveness of the Network.
The Company is subject to competition from other aggregators in
recruiting and retaining Network members, as well as competition from
distributors in its efforts to sell products to the Network. The Company
believes that its pricing and value-add programs and services allow it to
compete effectively. Certain competitors may have greater financial
resources than the Company.
The Company's competitors in the total connectivity solutions
industry include computer resellers, Internet service providers, long-distance
carriers, regional Bell operating companies and traditional hardware and
software providers. Management believes that the breadth of services offered
by XLConnect (and the prices charged) should allow XLConnect to compete
effectively for customers. However, XLConnect operates in an emerging
industry, which is likely to undergo continuous change, and there can be no
assurance that it will be able to achieve and sustain a strong competitive
position. In addition, certain competitors may have greater technical,
marketing and financial resources than the Company.
Trademarks and Service Marks
The trademarks or service marks "The Future Now, Inc.," "Future
Connection," "FutureFile," "FutureCare," "Power By the Hour," "IE Intelligent
Electronics," "TCBC Todays Computers Business Centers," "Entre," "Entre
Computer Center," "Connecting Point," "Intelligent Systems Group," "ISG,"
"Intelligent Electronics BTC Business Technology Center," "FAMA,"
"Intelligent Lease," "The Intelligent Lease Center," "The Resellers' Complete
Leasing Solution," "IC Plus Intelligent Coverage Plus," "XLConnect,"
"XLConnect Solutions," "XLConnect Services," "XLConnect Systems," and the
design of the Entre Computer Center logo are in use and (except for the logo)
are currently registered or are in the process of registration in the United
States Patent and Trademark Office or in a state by the Company. Although
the marks may not be registered with any states, the Company claims common
law rights to the marks based on adoption and use. To the Company's
knowledge, there are no pending interference, opposition or cancellation
proceedings, or litigation, threatened or claimed, with respect to the marks
in any jurisdiction, except for a claim of infringement against the Company
which has not yet been resolved regarding the XLConnect trademark. The
Company holds no patents. Management believes that the Company's marks are
valuable; however, the loss of use of any of the marks would not have a
material adverse effect on the Company's business.
Government Regulation
The Company is subject to Federal Trade Commission regulations
governing disclosure requirements in the sale of franchises. The Company is
also subject to a substantial number of United States and state laws regulating
franchise operations. For the most part, such laws impose registration and
disclosure requirements on the Company in the offer and sale of franchises
and also regulate related advertisements. In certain states, there are
substantive laws or regulations affecting the relationship between the
Company and the franchisees, especially in the area of termination of the
franchise agreement. The Company has also registered with various regulatory
agencies with respect to its sale of telecommunications services. The
Company believes it is currently and has been in the past in substantial
compliance with all such regulations.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
---- -- --------
Richard D. Sanford 52 Chairman of the Board, President
and Chief Executive Officer
Gregory A. Pratt 47 Executive Vice President
Timothy D. Cook 35 Senior Vice President - Fulfillment
Thomas J. Coffey 43 Senior Vice President and Chief
Financial Officer
Stephanie D. Cohen 34 Vice President, Secretary and
Treasurer
Richard D. Sanford has been the Company's Chairman and Chief
Executive Officer since he founded the Company in May 1982. Mr. Sanford was
named President of the Company in April 1996.
Gregory A. Pratt joined the Company in March 1992 as Executive Vice
President and was appointed President and Chief Operating Officer of the
Company shortly thereafter. Mr. Pratt resigned as President and Chief
Operating Officer and was elected Executive Vice President in April 1996.
Prior to joining the Company, Mr. Pratt served as President of Atari Computer
Corporation and Vice President of Finance and Chief Financial Officer of
Atari Corporation. He also served on the Board of Directors of Atari
Corporation and was a member of the Board's Executive Committee.
Timothy D. Cook joined the Company as Senior Vice President -
Fulfillment in October 1994. Prior to joining the Company, Mr. Cook held
various positions at IBM since 1983, including Director of Brand Management
and Site Services, and Director of North American Fulfillment for the IBM PC
Company.
Thomas J. Coffey joined the Company as Vice President and Chief
Financial Officer in July 1995. On April 1, 1996, Mr. Coffey was named
Senior Vice President. Prior to joining the Company, Mr. Coffey was a
partner in the international accounting firm of KPMG Peat Marwick which
position he held since 1985.
Stephanie D. Cohen was elected Vice President, Secretary and
Treasurer in May 1993 and was appointed Chief Financial Officer of FNOW in
August 1995. Prior to that, Ms. Cohen held the position of Vice President,
Investor Relations of the Company from March 1991 to May 1993. Ms. Cohen
joined the Company in 1987 as Controller, and served as Director, Investor
Relations from March 1989 until March 1991.
Employees
As of February 3, 1996, the Company had 2,569 full-time employees.
No employee is represented by a labor union and the Company believes that its
employee relations are good.
Item 2. PROPERTY
The Company currently distributes products from two leased facilities
in the United States. One distribution center is located in approximately
488,000 square feet of space in Memphis, Tennessee, under a lease which
expires in February 2005. The other distribution center is located in
Denver, Colorado in approximately 200,000 square feet of space under a lease
expiring in November 1996.
The Company leases approximately 31,000 square feet in Exton,
Pennsylvania, primarily for its principal executive offices with a lease term
expiring in June 1997 and approximately 122,000 square feet in the Denver,
Colorado area, primarily for its Reseller Network Division offices, under a
lease expiring in December 2001. In addition, the Company leases facilities
for FNOW's 24 sales offices expiring at various dates between 1996 and 2004.
The Company believes that its facilities are adequate for its present needs.
Item 3. LEGAL PROCEEDINGS
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 auditor's 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 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 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 on 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter in the Nasdaq National
Market (symbol INEL). As of April 5, 1996, there were 1,061 shareholders of
record.
Set forth below is the range of the high and low sale prices for the
Company's Common Stock as reported by Nasdaq during each fiscal quarter
within the two most recent fiscal years:
Quarter ended High Low
---------------- -------- --------
February 3, 1996 $ 8 1/4 $ 4 1/2
October 28, 1995 $ 13 5/8 $ 7 1/4
July 29, 1995 $ 14 1/2 $ 8 5/8
April 29, 1995 $ 10 1/2 $ 9
January 28, 1995 $ 17 $ 7 1/2
October 29, 1994 $ 18 1/8 $ 13 7/8
July 30, 1994 $ 23 1/4 $ 13 5/8
April 30, 1994 $ 27 3/8 $ 18 1/2
The Company instituted a quarterly dividend of $0.08 per share in the second
quarter of fiscal 1993. On June 1, 1993, the Company paid a one-time special
cash dividend of $2.00 per share. In the second quarter of fiscal 1994, the
quarterly dividend was increased to $0.10 per share. In the fourth quarter
of fiscal 1995, the quarterly dividend was suspended. 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.
Item 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA (1) (in thousands, except per share data)
<TABLE>
<CAPTION>
Transition
period Year
Year ended ended ended
February 3, January 28, January 29, January 30, February 1, October 31,
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 3,588,099 $ 3,208,083 $ 2,646,102 $ 2,016,686 $ 515,974 $ 1,753,574
Income (loss ) from continuing operations (19,488) 8,060 41,117 22,134 9,625 38,529
Income (loss) per common share
from continuing operations $(0.59) $ 0.23 $ 1.13 $ 0.58 $ 0.25 $ 1.12
Cash dividends declared per
share of Common Stock $ 0.30 $ 0.38 $ 2.24 -- -- --
BALANCE SHEET DATA
February 3, January 28, January 29, January 30, February 1, October 31,
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 839,349 $ 670,774 $ 577,011 $ 630,332 $ 670,415 $ 706,515
Long-term debt 80,025 -- -- 97 29,690 29,756
Total shareholders' equity 178,036 167,484 218,850 280,527 289,279 274,477
(1) See Notes 2 and 3 to the Consolidated Financial Statements for the fiscal year ended February 3, 1996 for information
regarding the acquisition of The Future Now, Inc. on August 17, 1995, and the acquisition of BizMart, Inc. on June 19, 1991 and
its sale on March 4, 1993, resulting in BizMart's results of operations being classified as a discontinued operation.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal 1995 Compared to Fiscal 1994
- -----------------------------------
Revenues for the year ended February 3, 1996 ("fiscal 1995") were $3.6
billion, an increase of approximately $400 million or 12% over the year ended
January 28, 1995 ("fiscal 1994"). This increase was primarily due to the
revenues generated by the branch locations acquired from FNOW in December
1994 and the acquisition of FNOW in August 1995, the addition of new network
integrators, an additional week of sales in fiscal 1995 due to the Company's
52-53 week fiscal year and industry growth.
Gross profit as a percentage of revenues increased from 4.1% in fiscal 1994
to 4.3% in fiscal 1995. This increase was primarily due to the higher gross
margin percent realized by the FNOW locations which sell directly to end-
users, partially offset by continued competitive pricing pressures throughout
the industry and special inventory-related charges of approximately $10.0
million recorded in the second quarter of fiscal 1995 which represented
estimates of inventory obsolescence, damaged merchandise and inventory
losses.
Management has taken and continues to take actions which it believes will
minimize the inventory-related charges in the future, including consolidating
warehouses and upgrading existing and implementing new management information
systems. These actions have reduced and are expected to eliminate the
systems stresses and outages and their impact on gross margins that the
Company experienced during the last half of fiscal 1994. Competitive
pressures and their impact on margins are expected to continue in the future.
Selling, general and administrative expenses increased to $154.4 million
(4.3% of revenues) in fiscal 1995 compared to $96.2 million (3.0% of
revenues) in fiscal 1994. During fiscal 1995, the Company incurred charges
of approximately $14 million 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 reevaluated and realigned
following the acquisition of FNOW. Other causes of the increase in selling,
general and administrative expenses include: operating costs for the FNOW
locations; costs to service the higher volume of revenues, larger network,
new programs and expanded vendor and SKU base; and expenses and depreciation
relative to the enhancement of existing and implementation of new management
information systems. These increases were offset in part by savings
following the elimination of certain peripheral ventures. In addition,
certain costs were incurred in fiscal 1994, including a $9 million reserve
for litigation and arbitration matters and costs relating to the
implementation of IE 2000. IE 2000 is a project designed to transform the
Company to a process-driven model.
It is anticipated that the workforce reductions and other cost cutting
measures implemented by the Company will somewhat mitigate the higher
selling, general and administrative costs required to support the operations
of FNOW.
Amortization of intangibles increased in fiscal 1995 compared to fiscal 1994
due to goodwill related to the FNOW acquisition.
Investment and other income declined in fiscal 1995 compared to fiscal 1994
due to the use of available cash for the payment of cash dividends and share
repurchases, the acquisition of certain assets of branch locations from FNOW
in December 1994, capital expenditures and the repayment of FNOW's bank and
finance company debt following the acquisition in August 1995. Interest
expense increased from fiscal 1994 compared to fiscal 1995 as a result of the
Company's more frequent use of its available financing arrangements 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 for fiscal 1995 was a 14.2% benefit compared
to a 39.7% provision for fiscal 1994. The effect of non-deductible goodwill
amortization on the pre-tax loss in fiscal 1995 was the primary reason for
the difference in the effective tax rate.
Fiscal 1994 Compared to Fiscal 1993
- -----------------------------------
Revenues for fiscal 1994 were $3.2 billion compared to $2.6 billion for the
year ended January 29, 1994 ("fiscal 1993"), representing an increase of 21%.
The addition of new network integrators, continued demand from existing
network integrators for premium brand name and advanced technology products
and industry growth were primarily responsible for the increase in revenues.
However, the Company believes that operating inefficiencies caused by systems
stresses and outages, discussed below, during the last half of fiscal 1994
caused a loss of potential sales.
Gross profit as a percentage of revenues decreased to 4.1% for fiscal 1994
compared to 4.4% for fiscal 1993. The decrease in gross margin percent is
primarily attributable to intensified competitive pricing pressures as
certain manufacturers expanded their distribution channels and the impact of
management information systems stresses and outages, offset in part by the
higher volume of revenues generated from higher margin advanced technology
products and as a result of taking advantage of purchasing and early payment
discount opportunities. The systems-related stresses and outages were caused
by the cumulative effect of operating out of multiple warehouses, the
addition of new vendors and SKU's and the expansion of on-line services to
the Company's network integrators. This resulted in reduced customer service
levels and unfavorably impacted gross margins as the Company reduced prices
to customers, incurred inventory losses, and incurred additional freight
costs to expedite shipments.
Selling, general and administrative expenses increased to $96.2 million (3.0%
of revenues) for fiscal 1994 from $52.5 million (2.0% of revenues) for fiscal
1993. The increase was primarily due to costs to service the higher volume
of revenues and to support new programs, vendors and SKU's; systems stresses
and outages and related inefficiencies; a $9 million reserve for litigation
and arbitration matters; and approximately $9 million of costs incurred in
connection with the elimination of certain peripheral ventures noted below
and the implementation of IE 2000, including costs associated with personnel
reductions, closing and consolidating facilities, relocating personnel and
consultant fees.
During fiscal 1994, the Company closed its cable television programming
operation, discontinued its direct fulfillment agreement with a third-party
and sold substantially all of its wireless telecommunications operation. In
fiscal 1994 and fiscal 1993, revenues from these eliminated peripheral
ventures were less than 1% of consolidated revenues and operating losses were
$4.3 million and $1.3 million, respectively. These eliminations were
substantially completed in the fourth quarter of fiscal 1994.
Investment and other income decreased from fiscal 1993 to fiscal 1994
primarily due to less investable cash as a result of the use of the Company's
available cash for payment of common stock dividends and repurchases of its
common stock. Interest expense increased as the Company used its available
inventory financing arrangements to finance inventory purchases.
During fiscal 1994, FNOW announced the implementation of a company-wide
restructuring, which included the closing and consolidation of duplicate
facilities. For fiscal 1994, the Company recognized an after-tax loss of $13
million as its equity in FNOW's net loss compared to after-tax income of $1.7
million for fiscal 1993.
The Company's effective tax rate increased to 39.7% for fiscal 1994 compared
to 38.2% for fiscal 1993. The impact of non-deductible goodwill amortization
on lower pre-tax earnings, partially offset by a reduction in the Company's
effective state tax rate, was primarily responsible for this increase.
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 fiscal 1995, cash used by operating activities totaled $23.5 million
compared to $23.3 million of cash generated in fiscal 1994. The primary
causes for this decrease can be attributed to losses incurred in fiscal 1995,
higher accounts receivable and the payment of accounts payable assumed as
part of the FNOW acquisition. At February 3, 1996, the Company had cash and
cash equivalents of $34.6 million ($69.0 million at January 28, 1995). This
decrease is primarily a result of the repayment of FNOW's bank debt and
inventory-related payables and payments for capital expenditures and cash
dividends during the year. Working capital totaled $25.6 million at February
3, 1996 compared to $31.9 million at January 28, 1995. New financing
programs offered by the Company and the acquisition of FNOW have increased
working capital requirements. During fiscal 1995, days sales in accounts
receivable averaged 15.0 days (4.5 days in fiscal 1994) and inventory
turnover averaged 9.4 times (8.4 times in fiscal 1994). The increase in
accounts receivable from January 28, 1995 to February 3, 1996 is related
primarily to the acquisition and operations of FNOW, which has higher days
sales in accounts receivable due to receivables from end-users. The Company
may outsource some of its financing programs which could slow the growth or
reduce the level of accounts receivable. At February 3, 1996, the Company
had a $270 million financing agreement with a finance company, of which $61.5
million was available after considering the borrowing base formula and trade
payables outstanding to a vendor related to the finance company. This
facility was renegotiated in April 1996 (See Note 4 to the Consolidated
Financial Statements).
In the fourth quarter of fiscal 1995, the Board of Directors suspended the
Company's quarterly dividend. During fiscal 1995, the Company declared and
paid cash dividends totaling $0.30 per share.
The Board of Directors has authorized the repurchase, in open-market
transactions, of up to 13.6 million shares of the Company's Common Stock. As
of February 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 is currently considering a public offering of common stock of
XLConnect which would only be made pursuant to a prospectus included in a
registration statement filed with the Securities and Exchange Commission.
There is no certainty as to the occurrence, timing or amount of any such
public offering.
Based on the Company's current level of operations and capital expenditure
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 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
and the Direct business follow a seasonal pattern with peaks occurring near
the end of the calendar year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Intelligent Electronics,
Inc. and its subsidiaries, listed in the index appearing under Item 14(a)(1)
are filed as part of this annual report on Form 10-K.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
To the Board of Directors and Shareholders
Intelligent Electronics, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all
material respects, the financial position of Intelligent Electronics, Inc.
and its subsidiaries at February 3, 1996 and January 28, 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended February 3, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
April 17, 1996
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
February 3, January 28,
1996 1995
----------- -----------
Assets
------
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 34,618 $ 69,027
Marketable securities available for sale -- 8,398
Accounts receivable (net of allowance for doubtful
accounts of $8,909 in 1995 and $298 in 1994) 192,687 77,890
Inventory 346,058 364,606
Prepaid expenses and other current assets 3,411 3,973
Deferred income taxes 16,041 11,256
----------- ------------
Total current assets 592,815 535,150
Property and equipment, net 68,213 36,463
Intangible assets, primarily goodwill (net of accumulated
amortization of $32,941 in 1995 and $25,984 in 1994) 155,390 71,693
Other assets 22,931 27,468
----------- ------------
Total assets $ 839,349 $ 670,774
=========== ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
<S> <C> <C> <C> <S>
Short-term debt $ 8,744 $ --
Accounts payable 508,747 467,109
Accrued liabilities 49,718 36,181
----------- ------------
Total current liabilities 567,209 503,290
----------- ------------
Long-term debt 80,025 --
Other long-term liabilities 14,079 --
Commitments and contingencies (Notes 4, 5, 11 and 12)
Shareholders' equity:
Preferred stock $1.00 par value per share:
Authorized 15,000,000 shares, none
issued and outstanding -- --
Common stock $.01 par value per share:
Authorized 100,000,000 shares; issued: 39,910,649
in 1995 and 39,519,949 in 1994 399 395
Additional paid-in capital 224,298 221,312
Treasury stock (5,373,918 shares in 1995 and
8,326,200 shares in 1994) (68,207) (105,677)
Unrealized loss on marketable securities and investments (38) (304)
Retained earnings 21,584 51,758
----------- ------------
Total shareholders' equity 178,036 167,484
----------- ------------
Total liabilities and shareholders' equity $ 839,349 $ 670,774
=========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Year ended
--------------------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 3,588,099 $ 3,208,083 $ 2,646,102
Cost of goods sold 3,432,262 3,075,342 2,529,242
------------ ------------ ------------
Gross profit 155,837 132,741 116,860
------------ ------------ ------------
Operating expenses:
Selling, general and
administrative expenses 154,403 96,193 52,477
Amortization of intangibles,
primarily goodwill 6,957 4,758 4,721
------------ ------------ ------------
Total operating expenses 161,360 100,951 57,198
------------ ------------ ------------
Income (loss) from operations (5,523) 31,790 59,662
Other income (expense):
Investment and other income, net 3,679 4,374 5,144
Interest expense (8,331) (1,238) (901)
------------ ------------ ------------
Income (loss) from continuing operations before
provision (benefit) for income taxes and
equity in earnings (loss) of affiliate (10,175) 34,926 63,905
Provision (benefit) for income taxes (1,449) 13,853 24,443
------------ ------------ ------------
Income (loss) from continuing operations before
equity in earnings (loss) of affiliate (8,726) 21,073 39,462
Equity in earnings (loss) of affiliate (net
of tax expense/(benefit) of $(1,123),
$(2,497) and $981) (10,762) (13,013) 1,655
------------ ------------ ------------
Income (loss) from continuing operations (19,488) 8,060 41,117
Discontinued operation:
Loss from discontinued operation
(net of tax benefit of $1,076) -- -- (2,468)
Gain on sale of BizMart (net of tax expense
of $1,306) -- -- 4,276
------------ ------------ ------------
Net income (loss) $ (19,488) $ 8,060 $ 42,925
============ ============ ============
Income (loss) per common share:
Continuing operations $ (0.59) $ 0.23 $ 1.13
Discontinued operation -- -- (0.07)
Sale of BizMart -- -- 0.12
------------ ------------ ------------
Net income (loss) per share $ (0.59) $ 0.23 $ 1.18
============ ============ ============
Weighted average number of common shares
and share equivalents outstanding: 32,794 34,848 36,521
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands, except share-related data)
Unrealized
loss Total
Additional on marketable share-
Common paid-in Treasury securities and Retained holders'
stock capital stock investments earnings equity
------ ---------- --------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1993 $ 370 $ 196,742 $ (10,896) $ 94,311 $ 280,527
Issuance of 120,000 shares on
exercise of warrants 1 569 -- -- 570
Issuance of 2,229,285 shares on exercise
of options and related tax benefit 22 21,796 -- -- 21,818
Repurchase of 3,441,800 shares -- -- (46,285) -- (46,285)
Cash dividends ($2.24 per share) -- -- -- (80,705) (80,705)
Net income -- -- -- 42,925 42,925
------ ---------- --------- -------------- -------- ---------
Balance at January 29, 1994 393 219,107 (57,181) 56,531 218,850
Issuance of 209,510 shares on exercise
of options and related tax benefit 2 2,205 -- -- 2,207
Repurchase of 4,130,000 shares -- -- (48,496) -- (48,496)
Cash dividends ($0.38 per share) -- -- -- (12,833) (12,833)
Unrealized loss on marketable
securities and investments -- -- -- $ (304) -- (304)
Net income -- -- -- -- 8,060 8,060
------ ---------- --------- -------------- -------- ---------
Balance at January 28, 1995 395 221,312 (105,677) (304) 51,758 167,484
Issuance of 390,700 shares on exercise
of options and related tax benefit 4 2,986 -- -- -- 2,990
Reissuance of 2,952,282 shares of treasury
stock for the acquisition of FNOW -- -- 37,470 -- (936) 36,534
Cash dividends ($0.30 per share) -- -- -- -- (9,750) (9,750)
Net change in unrealized loss on marketable
securities and investments -- -- -- 266 -- 266
Net loss -- -- -- -- (19,488) (19,488)
------ ---------- --------- ------------- -------- ---------
Balance at February 3, 1996 $ 399 $ 224,298 $ (68,207) $ (38) $ 21,584 $ 178,036
====== ========== ========= ============= ======== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended
---------------------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (19,488) $ 8,060 $ 42,925
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 20,081 10,108 9,279
Deferred taxes (5,624) (6,206) (3,071)
Write-off of property and equipment 7,978 -- --
Provision for losses on trade receivables 3,875 336 375
Provision for write-down of inventory 7,766 1,796 1,541
Provision for litigation and arbitration matters -- 9,000 --
Loss from discontinued operation -- -- 2,468
Gain on sale of BizMart -- -- (4,276)
Equity in (earnings) loss of affiliate 11,885 15,510 (2,636)
Changes in assets and liabilities excluding
effects of business acquisitions and sales:
Accounts receivable (23,683) (46,027) (1,489)
Inventory 41,814 (110,620) (57,047)
Other current assets 4,554 2,159 (10,895)
Accounts payable (78,649) 132,964 30,204
Accrued liabilities 5,946 6,224 784
----------- ------------ ------------
Net cash provided by (used for)
operating activities (23,545) 23,304 8,162
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities -- (31,709) (154,400)
Sales and maturities of marketable securities 8,675 84,164 93,270
Acquisition of property and equipment, net (34,437) (28,001) (7,402)
Purchase of net assets of franchised centers -- (39,101) --
Proceeds from sale of BizMart -- -- 275,236
Investments in and loans to affiliates -- (2,162) (10,247)
Other 56 (762) (804)
----------- ------------ ------------
Net cash provided by (used for)
investing activities (25,706) (17,571) 195,653
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of subordinated debt -- -- (17,500)
Common stock repurchased -- (48,496) (55,375)
Cash dividends paid (12,869) (12,523) (77,896)
Proceeds from exercise of stock options 2,990 2,207 21,818
Proceeds from exercise of warrants -- -- 570
Proceeds from long-term debt 75,000 -- --
Repayment of FNOW's bank debt (50,009) -- --
Reduction in capital lease obligations (270) (143) (119)
----------- ------------ ------------
Net cash provided by (used for)
financing activities 14,842 (58,955) (128,502)
----------- ------------ ------------
Net cash provided by (used for)
continuing operations (34,409) (53,222) 75,313
Cash used for discontinued operation -- -- (5,562)
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (34,409) (53,222) 69,751
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,027 122,249 52,498
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,618 $ 69,027 $ 122,249
=========== ============ ===========
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)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Intelligent Electronics, Inc. (the "Company") provides information technology
products, services and solutions to its network of more than 3,000 integrators
and resellers (the "Network"), and to large and small corporate customers,
educational institutions and governmental agencies in the United States. On
August 17, 1995, the Company exchanged shares of its Common Stock for all of
the remaining shares (approximately 69%) of The Future Now, Inc. ("FNOW"), not
previously owned by the Company (See Note 2). The principal products sold,
installed and serviced by the Company include microcomputers, workstations,
local and wide area network systems, computer software and peripherals and
telecommunications equipment. It also offers a wide range of sophisticated
customer support and consulting services. On March 4, 1993, the Company sold
BizMart, Inc. ("BizMart") and accordingly, BizMart is treated as a
discontinued operation in the accompanying financial statements (See Note 3).
Unless otherwise indicated, amounts and disclosures referred to herein
relate to continuing operations.
Preparation of Financial Statements
- -----------------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect certain reported amounts and disclosures.
Actual results could differ from those estimates. All material intercompany
accounts and transactions have been eliminated in consolidation. Certain
amounts in prior periods have been reclassified to conform with the current
year presentation.
Definition of Fiscal Year
- -------------------------
The fifty-three week period ended February 3, 1996 and the fifty-two week
periods ended January 28, 1995 and January 29, 1994 are referred to herein as
"fiscal 1995," "fiscal 1994" and "fiscal 1993," respectively.
Cash, Cash Equivalents and Marketable Securities
- ------------------------------------------------
Cash and cash equivalents comprise the Company's cash balances and short-term
investments with an initial maturity of less than ninety days and include money-
market funds and commercial paper. Short-term investments totaled $34,702 and
$69,548 at February 3, 1996 and January 28, 1995, respectively. The carrying
amount of cash, short-term investments and marketable securities approximates
fair market value due to the short-term maturity of these instruments.
On January 30, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS 115 requires certain invest-
ments in debt and equity securities be classified into one of three categories:
held-to-maturity, available-for-sale, or trading. Adoption of this statement
did not have a material effect on the financial position or results of
operations of the Company.
Inventory
- ---------
Inventory consists of microcomputers, related peripheral products and software,
and is valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. The cost of additions and
improvements is capitalized, while maintenance and repairs are charged to
operations when incurred. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets (three to ten years).
Leasehold improvements are amortized over the shorter of their useful lives
or the remaining lease term. Leases meeting the capitalization requirements
of SFAS 13 are capitalized and depreciated over the lease term. Depreciation
expense totaled $13,124 ($1,143 included in cost of goods sold), $5,350 ($1,154
included in cost of goods sold) and $4,558 ($783 included in cost of goods
sold) for fiscal 1995, fiscal 1994 and fiscal 1993, respectively. Accumulated
depreciation totaled $25,209 at February 3, 1996 and $14,791 at January 28,
1995.
IE 2000 is a project designed to transform the Company to a process-driven
model. Certain costs associated with IE 2000, including purchased software,
outside consulting fees for custom software development and related incremental
internal costs are being capitalized and amortized over the estimated useful
life of the software (5 years). Approximately $24,309 was capitalized (net of
accumulated amortization of $2,164) pursuant to IE 2000 at February 3, 1996.
Goodwill
- --------
Goodwill, resulting from acquisitions accounted for under the purchase method,
is amortized using the straight-line method over a 20-year period.
Revenue Recognition
- -------------------
Revenue from product sales is recognized at the time of shipment to the
customer. Revenue associated with maintenance service contracts is recorded
ratably over the service period of the contract. Costs related to these
contracts are recorded when incurred. Revenue from professional service
contracts is recognized as the services are provided to the customer
on a percentage-of-completion basis. Revenues and total operating costs
related to direct hardware and services locations were $461,265 and $458,362,
respectively for fiscal 1995 and $9,897 and $10,197, respectively for fiscal
1994 (See Note 2). Funds received from vendors for marketing programs
and product rebates are accounted for as revenue, a reduction of selling,
general and administrative expenses or product cost according to the nature
of the program.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109. Pursuant
to SFAS No. 109, deferred tax assets and liabilities are recorded for temporary
differences which enter into the determination of taxable income in different
periods for financial reporting and income tax purposes.
Income (Loss) Per Share
- -----------------------
Income per share is computed using the weighted average number of common shares
(34,262,118 in fiscal 1994 and 35,028,207 in fiscal 1993) and dilutive common
share equivalents outstanding based on the average or ending market price during
the period. The amount of dilution is computed by application of the treasury
stock method. Loss per share is computed using the weighted average number of
common shares outstanding. Treasury stock transactions are recorded on their
trade date and reduce weighted average shares outstanding from that date.
Recent Pronouncements
- ---------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets and certain identifiable
intangibles and goodwill related both to assets to be held and used,
and assets to be disposed. The new standard is effective for fiscal
years beginning after December 15, 1995. The Company will adopt SFAS No. 121
in the first quarter of fiscal 1996. Upon adoption, the Company does not
expect SFAS No. 121 to have a material effect on its financial condition or
results of operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires that companies with stock-based compen-
sation plans either recognize compensation expense based on new fair value
accounting methods or continue to apply the existing accounting rules and
disclose pro forma net income and income per share assuming the fair value
method had been applied. The new standard is effective for fiscal years
beginning after December 15, 1995. The Company is evaluating SFAS No. 123
and has not determined whether it will adopt the recognition or disclosure
alternative. Therefore, the impact of adoption on the Company's financial
statements has not been determined.
(2) ACQUISITIONS
On August 17, 1995, the Company acquired 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. The allocation of the purchase price
was based on the estimated fair value of the assets acquired and liabilities
assumed as follows:
Accounts receivable $ 94,087
Inventory 31,032
Other current assets 4,460
Property and equipment 11,488
Intangible assets, primarily goodwill 90,841
Other long-term assets 13,342
Short-term debt (50,564)
Accounts payable (126,558)
Accrued liabilities, including
acquisition-related accruals (29,934)
Long-term debt (286)
Other long-term liabilities (1,374)
----------
$ 36,534
==========
Unaudited pro forma results of operations of the Company for the fiscal 1995
and fiscal 1994, assuming the FNOW acquisition was consummated on January 30,
1994, are as follows:
Fiscal Fiscal
1995 1994
Revenues $3,704,390 $3,489,103
Net loss (28,469) (15,156)
Loss per share $ (0.80) $ (0.40)
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.
Prior to August 17, 1995, as a result of the Company's July 1992 sale of its
Company Center Division and subsequent purchases of shares of FNOW's Common
Stock, the Company owned approximately 31% of FNOW, which was accounted for by
the equity method. During fiscal 1995, fiscal 1994 and fiscal 1993, the
Company recorded equity in earnings (loss) of affiliate of $(10,762), $(13,013)
and $1,655, respectively, in the accompanying Consolidated Statements of
Operations.
On December 30, 1994, the Company purchased certain assets of branch locations
in five major-metropolitan cities from FNOW. The aggregate purchase price was
approximately $39,101 in cash and was accounted for by the purchase method. The
aggregate purchase price was allocated to the assets and liabilities assumed
based on their estimated fair market values as follows:
Accounts receivable $ 23,000
Inventory 4,936
Property and equipment 2,714
Goodwill 8,838
Other assets 13
Other current liabilities (400)
---------
Total purchase price $ 39,101
=========
Prior to the FNOW acquisition, these locations were operated by FNOW under a
management agreement. The acquisition of these locations had no material effect
on the consolidated results of operations in fiscal 1994.
(3) DISCONTINUED OPERATION AND SALE OF BIZMART
On June 19, 1991, the Company acquired BizMart, a national chain of office
products supercenters, for an aggregate purchase price of $195,796 including
transaction costs. BizMart's operations included the sale of traditional office
products, microcomputers and related equipment. The Company accounted for the
acquisition using the purchase method. On March 4, 1993, the Company sold
BizMart to OfficeMax, Inc. ("OfficeMax") and received a cash payment totaling
$275,236, including the purchase price, as defined, of $269,770 and repayment
of other amounts, consisting principally of intercompany advances after
November 28, 1992. The aggregate sale proceeds less the carrying value of net
assets sold and costs related to the sale resulted in a gain before tax of
$5,582. The effective tax rate for the sale of BizMart varies from the
effective tax rate for the discontinued operation due to differences between
the tax bases of assets sold and their amounts for financial reporting
purposes.
Results of BizMart's operations have been reported separately as a discontinued
operation in the accompanying Consolidated Statements of Operations. BizMart's
operating results excluded from continuing operations are summarized as follows:
Fiscal
1993
----------
Revenues $ 60,193
Costs and expenses 63,737
----------
Loss before taxes (3,544)
Income tax benefit (1,076)
----------
Loss from discontinued operation $ (2,468)
==========
BizMart was included in the consolidated federal and certain state income tax
returns of the Company. For financial reporting purposes, income tax benefit
was provided on a separate return basis except that the benefit of net operating
losses was measured on a consolidated basis.
(4) CREDIT FACILITIES
On April 18, 1989, the Company issued to certain institutional investors
Subordinated Notes in the aggregate principal amount of $30,000 and used net
proceeds therefrom to reduce existing borrowings and for working capital
purposes. Interest on the Subordinated Notes was payable quarterly at 13.25%
per annum. On January 11, 1993 and February 24, 1993, the Company prepaid
principal of $12,500 and $17,500, respectively, to retire the Subordinated
Notes in full. The Company and its subsidiaries have agreements with
several lenders and other creditors to finance product purchases from
vendors and for working capital requirements. Amounts outstanding for
inventory financing are included in accounts payable on the Consolidated
Balance Sheets. In September 1995, the Company's $170 million financing
agreement was increased to $270 million for both inventory financing and
general working capital requirements, subject to a borrowing base formula.
This agreement was amended in October 1995 to reclassify $75 million
as a term loan with a due date of February 3, 1997. At February 3, 1996,
the interest rate was prime plus 2.25% on the $75 million loan and prime
plus 1.25% on the balance of the facility. Approximately $61,500 was available
under this credit line, after considering the borrowing base formula and trade
payables outstanding to a vendor related to the finance company, at February 3,
1996. In connection with these arrangements, such creditors have a lien on all
of the Company's assets.
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. The portion of this facility collateralized by accounts
receivable can be classified as long-term with a due date in October 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.
(5) LEASE OBLIGATIONS
The Company has noncancelable operating leases for offices, warehouse
facilities, and equipment that expire over the next ten years. Most of the
facilities' leases include renewal options and certain of the equipment leases
have purchase options. Rent expense recorded for fiscal 1995, fiscal 1994
and fiscal 1993 amounted to $7,660, $6,020, and $3,836, respectively.
Future minimum lease payments under noncancelable operating and capital leases
are as follows:
<TABLE>
<CAPTION>
Fiscal Operating Capital
Year leases leases
------ --------- --------
<C> <C> <C>
1996 $ 8,109 $ 2,675
1997 8,088 2,653
1998 6,380 1,996
1999 6,070 432
2000 5,120 --
Thereafter 11,604 --
--------
7,756
Less interest portion (rates ranging from 4.9% to 9.2%) 829
--------
Present value of capital lease obligations 6,927
Less current portion 2,250
--------
$ 4,677
========
</TABLE>
The Company is guarantor of certain real estate leases of BizMart. OfficeMax
has indemnified the Company against potential losses which may result pursuant
to such guarantees.
(6) CAPITAL STOCK
On April 18, 1989, in connection with the issuance of certain Subordinated
Notes (See Note 4), the Company granted warrants for the purchase of 1,200,000
shares of Common Stock at an exercise price of $4.75 per share, exercisable
until April 30, 1995, subject to adjustment under certain circumstances. The
value of these warrants ($1,090) was credited to paid-in capital and was
charged to interest expense over the term of the loan. Shares of the
Company's Common Stock have been issued pursuant to the exercise of 120,000
warrants during fiscal 1993 and the remaining 1,080,000 warrants prior to
fiscal 1993.
The Board of Directors of the Company has authorized the repurchase of up to
13.6 million shares, in open-market transactions, of its Common Stock. As of
February 3, 1996, the Company has repurchased approximately 8.3 million shares
at a cost of approximately $105,677, of which approximately 3 million shares
were reissued in connection with the acquisition of FNOW (See Note 2).
Stock Options
On June 8, 1995, the Company adopted the 1995 Long-Term Incentive Plan,
permitting the grant of stock, stock-related and performance-based awards to
employees and directors of the Company. A total of five million shares
of the Company's Common Stock have been reserved for grant under the
1995 Long-Term Incentive Plan. The Company also has a non-qualified stock
option plan for employees and directors. After June 8, 1995, no new options
may be granted under the stock option plan for employees and directors,
however, previous options granted will continue to vest as per the original
terms of the grant. These plans are intended to provide an incentive for
employees to maximize their efforts and enhance the success of the Company.
Options are generally granted at option prices equivalent to fair market
value on the date of grant. The options are generally exercisable commencing
one year after the date of grant in five equal annual installments (unless
otherwise provided in the grant) and expire six to ten years after the date
of grant, subject to earlier termination and other rules relating to the
cessation of employment.
On February 25, 1995, the Board of Directors of the Company authorized the
repricing of all outstanding options with exercise prices in excess of $13.25
per share to $13.25 per share.
Changes in stock options are summarized as follows:
<TABLE>
<CAPTION>
Number of Option price
shares Range per share
---------- ---------------
<S> <C> <C>
Balance outstanding - January 30, 1993 4,236,300 $ 1.56-$15.50
Granted 1,014,100 $15.00-$24.88
Exercised (1,977,160) $ 1.56-$15.50
Canceled (666,300) $ 5.81-$17.00
----------
Balance outstanding - January 29, 1994 2,606,940 $ 2.85-$24.88
Granted 945,300 $13.25-$24.00
Exercised (208,070) $ 2.85-$15.50
Canceled (233,780) $ 7.63-$24.00
----------
Balance outstanding - January 28, 1995 3,110,390 $ 5.75-$24.88
Granted 3,618,695 $ 6.25-$13.38
Exercised (370,700) $ 5.75-$13.25
Canceled (2,710,230) $ 5.75-$24.88
----------
Balance outstanding - February 3, 1996 3,648,155 $ 6.25-$13.38
==========
</TABLE>
As of February 3, 1996, there were 845,324 options exercisable under the 1995
Long-Term Incentive Plan and the employee and director stock option plan at
exercise prices ranging from $7.31 to $13.25 per share.
The Company also has a non-qualified stock option plan which permits the
granting of options to purchase an aggregate of two million shares of Common
Stock to franchisees of the Company. This plan is intended to reward
franchisees' performance and commitment to the Company. Options are generally
granted at option prices equivalent to fair market value on the date of
grant. The options are generally exercisable commencing one year after the
date of the grant in five equal annual installments. The options expire
six years after the date of grant, subject to earlier termination and other
rules relating to default under the terms of the franchise agreement. As of
February 3, 1996, there were 131,555 options outstanding under this plan. Of
this amount, 101,755 were exercisable at prices ranging from $14.75 to
$16.625 per share.
The Company granted 200,000 options (100,000 each in May 1990 and May 1989)
to an outside advisor to the Board of Directors of the Company with the same
general terms and conditions as those in the non-qualified stock option plan
for employees and directors. At February 3, 1996, 80,000 of these options were
outstanding. In addition, 200,000 options were granted to an officer of BizMart
in connection with the June 1991 acquisition, of which 50,000 were exercised on
March 17, 1992 and 150,000 were exercised during fiscal 1993.
In connection with the acquisition of FNOW, all outstanding options and
warrants to purchase FNOW Common Stock were converted into options and warrants
to purchase the Company's Common Stock. Generally, these options and warrants
will continue to vest in accordance with the original terms of the grant
expiring at various dates between 2001 and 2004. As of February 3, 1996,
there were 323,454 options outstanding. Of this amount, 289,198 were exercis-
able at prices ranging from $15.07 to $21.94 per share.
As of February 3, 1996, shares of Common Stock are reserved for issuance for the
following purposes:
Shares
---------
Exercise of employee and director stock options 7,603,180
Exercise of franchisee stock options 1,933,435
Exercise of other stock options 403,454
---------
Total 9,940,069
=========
On March 4, 1996, the Board of Directors of the Company authorized the re-
pricing of all outstanding options, with exercise prices in excess of $8.00 per
share to $8.00 per share, held by currently-active employees, except certain
executive officers. As of that date, 1,767,447 options were repriced, of
which 412,998 were exercisable at February 3, 1996.
Employee Stock Purchase Plan
In June 1995, shareholders approved the 1995 Employee Stock Purchase Plan
("ESPP"). Under the ESPP, a total of 500,000 shares of the Company's Common
Stock may be purchased by employees (except executive officers) of the Company
through payroll deductions. There are two separate six-month offering periods
per year, whereby the purchase price per share is equal to 90% of the lower of
the beginning or ending quoted closing market price of each offering period.
Shareholders' Rights Plan
On March 8, 1996, the Board of Directors of the Company adopted a Shareholders'
Rights Plan (the "Plan") and declared a distribution of one right for each
outstanding share of the Company's Common Stock to shareholders of record at
the close of business on March 25, 1996 and for each share of Common Stock
issued by the Company thereafter and prior to the subsequent distribution date
of the rights.
Under the Plan, each right entitles the holder to buy one-thousandth of a share
of Series A Junior Participating Preferred Stock (a "Unit") at a purchase price
of $28.00 per unit, subject to adjustment. The rights will expire in ten years
unless redeemed earlier and will not be exercisable or transferable separately
from the shares of Common Stock to which the rights are attached until the
earlier of (i) ten business days following a public announcement ("Stock
Acquisition Date") that a person or group of affiliated or associated persons
(other than the Company, any subsidiary of the Company or any employee
benefit plan of the Company or such subsidiary) (an "Acquiring Person") has
acquired, obtained the right to acquire, or otherwise obtained beneficial
ownership of 15% or more of the then outstanding shares of the Company Common
Stock, and (ii) ten business days following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 15% or more of the then outstanding shares of Company Common Stock.
At any time until ten business days following the Stock Acquisition Date, a
majority of independent directors of the Company may redeem the rights in whole,
but not in part, at a price of $0.001 per right, subject to adjustment.
In the event that (i) the Company is the surviving corporation in a merger with
an Acquiring Person and shares of Company Common Stock remain outstanding, (ii)
a person becomes the beneficial owner of 15% or more of the then outstanding
shares of Company Common Stock, (iii) an Acquiring Person engages in one or
more "self-dealing" transactions as set forth in the Rights Agreement, or (iv)
during such time as there is an Acquiring Person, an event occurs which results
in such Acquiring Person's ownership interest being increased by more than 1%,
then each holder of a right will have the right to receive, upon exercise,
Units of Preferred Stock having a current market value equal to two times the
exercise price of the right. The exercise price is the purchase price
multiplied by the number of Units of Preferred Stock issuable upon
exercise of a right prior to the events described in this paragraph.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, all rights that were beneficially owned
by any Acquiring Person will be null and void.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction and
the Company is not the surviving corporation, (ii) any person consolidates or
merges with the Company and all or part of the Company Common Stock is
converted or exchanged for securities, cash or property of any other person or
(iii) 50% or more of the Company's assets or earning power is sold or trans-
ferred, then each holder of a right will have the right to receive, upon
exercise, common stock of the Acquiring Person having a current market value
equal to two times the exercise price of the right.
(7) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Current Deferred Total
--------- --------- ---------
Fiscal 1995
Federal $ 4,327 $ (5,539) $ (1,212)
State 1,139 (1,376) (237)
--------- -------- ---------
Total $ 5,466 $ (6,915) $ (1,449)
========= ======== =========
Fiscal 1994
Federal $ 19,011 $ (5,923) $ 13,088
State 1,109 (344) 765
--------- -------- ---------
Total $ 20,120 $ (6,267) $ 13,853
========= ======== =========
Fiscal 1993
Federal $ 24,900 $ (2,916) $ 21,984
State 2,803 (344) 2,459
--------- -------- ---------
Total $ 27,703 $ (3,260) $ 24,443
========= ======== =========
Deferred income tax balances, and the deferred component of the provision for
income taxes, relate to the following cumulative temporary differences:
February 3, January 28,
1996 1995
----------- ------------
Inventory $ 8,377 $ 2,107
Accounts receivable reserves 5,316 363
Acquisition accruals 10,034 2,457
Employee benefits 3,378 851
Depreciation 653 592
Litigation and related contingencies 3,297 3,266
Net operating loss carryforwards 15,236 --
Other accruals 4,850 1,620
----------- ------------
51,141 11,256
Valuation allowance (22,381) --
----------- ------------
Deferred tax asset $ 28,760 $ 11,256
=========== ============
As a result of the acquisition of FNOW, the Company has available approximately
$38,000 of net operating loss carryforwards that expire in various years
ranging from 2008 to 2011. Utilization of certain of these losses is subject
to an annual limit. A valuation allowance has been provided to the extent the
Company has estimated that it is more likely than not that a portion of the
gross deferred tax asset will not be realized, principally for the tax effect
of the net operating loss carryforwards and certain other accruals recorded
upon the acquisition of FNOW. In the event that the tax benefits relating to
the net operating loss carryforwards are subsequently realized, the valuation
allowance will be reduced and the related benefit will be recorded as a credit
to good-will.
The long-term portion of the deferred tax asset ($12,719) is recorded in other
assets on the Consolidated Balance Sheets.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
Fiscal Fiscal Fiscal
1995 1994 1993
------- ------ ------
Federal statutory rate (35.0)% 35.0% 35.0%
State income taxes,
net of federal benefit (1.5) 1.4 2.5
Amortization of intangibles 23.9 4.9 2.7
Tax-exempt investment income (0.8) (2.0) (2.1)
Other (0.8) 0.4 0.1
------- ----- -----
(14.2)% 39.7% 38.2%
======= ===== =====
(8) SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows:
Fiscal Fiscal Fiscal
1995 1994 1993
-------- -------- ------
Details of acquisitions:
Fair value of assets acquired $245,250 $ 39,501 --
Liabilities assumed and acquisition-
related accruals 208,716 400 --
Details of other financing activities:
Accrual of dividends declared -- 3,119 $ 2,809
Capital leases 6,927 -- --
Cash paid during the year for:
Interest 4,656 1,518 767
Income taxes 2,526 19,865 22,833
(9) MAJOR SUPPLIERS
The Company has authorized dealership or distributorship agreements with
various manufacturers. Products from certain of these manufacturers comprised
the following percentages of the Company's revenues during fiscal 1995, fiscal
1994 and fiscal 1993:
Fiscal Fiscal Fiscal
1995 1994 1993
------ ------ ------
IBM Corp. 15% 15% 15%
Compaq Computer Corp. 24% 25% 25%
Apple Computer, Inc. 8% 12% 18%
Hewlett-Packard Company 25% 24% 22%
No other manufacturers' products comprised more than 10% of the Company's
revenues during fiscal 1995, fiscal 1994 or fiscal 1993.
(10) EMPLOYEE BENEFIT PLAN
The Company has a 401(K) tax deferred savings plan (the "Plan") permitting
eligible employees to defer a portion of their total compensation through
contributions to the Plan. FNOW also had a 401(K) tax deferred savings plan
prior to the acquisition. These plans were merged on January 1, 1996. The
Company matches $0.50 for each dollar contributed by participants subject to
certain limitations. The Company's contributions under the Plan for fiscal
1995, fiscal 1994 and fiscal 1993 were $722, $426 and $313, respectively.
(11) COMMITMENTS
The Company and its subsidiaries have arrangements with six finance companies
which provide inventory financing facilities for its Network. The Company
monitors the financial stability of the finance companies and requires payment
within two days of product shipment. If these arrangements are terminated, the
Company would have to develop alternative financing arrangements. In
conjunction with these arrangements, the Company has inventory repurchase
agreements with the finance companies that would require it to repurchase
certain inventory which might be repossessed from the Network by the finance
companies. To date, such repurchases have been insignificant.
(12) CONTINGENCIES
In December 1994, several purported 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; 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
purported 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 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 on the advice of legal counsel, the Company
established a reserve of $9 million in respect of all litigation and arbi-
tration 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.
(13) SEGMENT INFORMATION
Commencing with the acquisition of FNOW, the Company began operating in two
segments: sales of computer-related products primarily to its Network ("Indirect
business") and sales and services of computer-related products to end-users
("Direct business").
The following summarizes certain financial data by industry segment.
<TABLE>
<CAPTION>
Indirect Direct Elimi-
Fiscal 1995 Business Business nations Total
- --------------------------------- ---------- -------- --------- ----------
<S> <C> <C> <C> <S> <C>
Sales to unaffiliate customers $3,121,723 $466,376 $ -- $3,588,099
Inter-segment sales 277,417 2,890 (280,307) --
---------- -------- --------- ----------
Total revenues (1) 3,399,140 469,266 (280,307) 3,588,099
Operating loss (2,914) (2,609) -- (5,523)
Identifiable assets 530,300 309,049 -- 839,349
Capital expenditures 31,443 2,994 -- 34,437
Depreciation
and amortization 14,418 5,663 -- 20,081
(1) Total revenues for the Indirect business include transfers to the Direct
business at cost plus a fee for handling and distribution.
</TABLE>
(14) QUARTERLY FINANCIAL DATA (unaudited)
Selected quarterly financial data for fiscal 1995 and fiscal 1994, are as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Fiscal 1995 Quarter Quarter Quarter Quarter Year
- ---------------------------------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 827,439 $ 881,614 $ 944,223 $934,823 $3,588,099
Gross profit 37,675 27,038 48,427 42,697 155,837
Net income (loss) 4,890 (5,934) (13,533) (4,911) (19,488)
Income (loss) per share $ 0.16 $ (0.19) $(0.40) $(0.14) $ (0.59)
First Second Third Fourth Fiscal
Fiscal 1994 Quarter Quarter Quarter Quarter Year
- -------------------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 762,314 $ 793,274 $ 831,122 $ 821,373 $3,208,083
Gross profit 35,467 37,974 25,314 33,986 132,741
Net income (loss) 12,793 2,695 (3,020) (4,408) 8,060
Income (loss) per share $ 0.36 $ 0.08 $(0.09) $(0.14) $ 0.23
The sum of the quarterly net income (loss) per share amounts does not equal the
annual amount reported, as per share amounts are computed independently for
each quarter and for the full year based on the respective weighted average
common shares outstanding (includes share equivalents outstanding in 1994).
</TABLE>
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained in the sections titled "Election of
Directors" in the Proxy Statement for the 1996 Annual Shareholders'
Meeting (the "Proxy Statement"), with respect to directors of the Company,
and the information contained in the section titled "Item 1. Business -
Executive Officers of the Company" in Part I of this Form 10-K, with
respect to executive officers of the Company, are incorporated herein by
reference in response to this item.
Item 11. EXECUTIVE COMPENSATION
The information contained in the section titled "Executive Compen-
sation" in the Proxy Statement (other than the portion thereof contained
under the headings "Stock Performance Chart" and "Compensation and Stock
Option Committee Report on Executive Compensation"), with respect to executive
compensation and the information contained in the section titled "Director
Compensation" in the Proxy Statement with respect to Director compensation are
incorporated herein by reference in response to this item.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section titled "Principal Shareholders
and Holdings of Officers and Directors" in the Proxy Statement, with respect
to security ownership of certain beneficial owners and management, is
incorporated herein by reference in response to this item.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section titled "Certain Relation-
ships and Related Transactions" in the Proxy Statement, with respect to
certain relationships and related transactions, is incorporated herein
by reference in response to this item.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements:
Report of Independent Accountants
Consolidated Balance Sheets, February 3, 1996
and January 28, 1995
Consolidated Statements of Operations, Years
ended February 3, 1996, January 28, 1995,
January 29, 1994
Consolidated Statements of Shareholders'
Equity, Years ended February 3, 1996, January 28, 1995,
and January 29, 1994
Consolidated Statements of Cash Flows,
Years ended February 3, 1996, January 28, 1995,
and January 29, 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule VIII - Valuation and Qualifying Accounts
and Reserves
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes thereto.
(a) (3) Exhibits:
* 3.1 Articles of Incorporation of the Company, as amended.
(Exhibit 3.1 of the Company's Registration Statement
No. 33-14436 filed on May 20, 1987 [the "1987
Registration Statement"].)
* 3.2 Amendment to the Articles of Incorporation of the
Company effective June 22, 1987. (Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1987 [the "1987
Form 10-K"].)
* 3.3 By-Laws of the Company. (Exhibit 3.3 to the 1987
Registration Statement.)
* 3.4 Specimen Certificate of Common Stock, $.01 par value.
(Exhibit 3.4 to the 1987 Registration Statement.)
* 3.5 Amendments to By-Laws of the Company effective June 2,
1987. (Exhibit 3.5 to the 1987 Form 10-K.)
* 3.6 Amendments to By-Laws of the Company effective
March 28, 1990. (Exhibit 3.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended October
31, 1990 [the "1990 Form 10-K"].)
* 3.7 Amendments to By-Laws of the Company effective July 4,
1990. (Exhibit 3.7 to the 1990 Form 10-K.)
* 3.8 Articles of Amendment to the Articles of Incorporation
of the Company filed on April 9, 1990. (Exhibit 3.8 to
the 1990 Form 10-K.)
*10.1 Amended and Restated Non-Qualified Stock Option Plan
for Employees and Directors. (Exhibit 10.1 to the
1990 Form 10-K.) **
*10.2 Amended and Restated Non-Qualified Stock Option Plan
for Franchisees. (Exhibit 10.2 to the 1990 Form 10-K.)
*10.3 IBM Personal Computer Agreement between the Company
and IBM, as amended. (Exhibit 10.5 to the 1987
Registration Statement.)
*10.4 COMPAQ Computer Corporation United States Central
Purchase Agreement among the Company, TCBC and
COMPAQ. (Exhibit 10.5 to the Company's Registration
Statement No. 33-27573 filed on March 16, 1989 [the
"1989 Registration Statement"].)
*10.5 Lease Agreement dated January 20, 1989 between the
Company and Hankin/Crow Associates. (Exhibit 10.13 to
the 1989 Registration Statement.)
*10.6 IBM Personal Computer Agreement between Entre and IBM.
(Exhibit 10.14 to the 1989 Registration Statement.)
*10.7 COMPAQ Computer Corporation Central Purchase
Agreement between Entre and COMPAQ. (Exhibit 10.15
to the 1989 Registration Statement.)
*10.8 IBM Personal Computer Agreement between CPA and IBM.
(Exhibit 10.24 to the 1989 Registration Statement.)
*10.9 Dealer Sales Agreement between CPA and Apple.
(Exhibit 10.25 to the 1989 Registration Statement.)
*10.10 Addendum to Dealer Sales Agreement between CPA and
IBM (and related documents). (Exhibit 10.29 to the 1989
Registration Statement.)
*10.11 Agreement and Plan of Merger dated as of May 10, 1991
among the Company, IEI Acquisition Corp. ("IEI") and
BizMart. (Exhibit (c)(1) to the Company's Schedule
14D-1 filed with the SEC on May 17, 1991 [the "1991
Schedule 14D-1"].)
*10.12 Stock Purchase Agreement between Intelligent
Electronics, Inc. and OfficeMax, Inc. dated December 3,
1992. (Exhibit 2 to the Company's Quarterly Report on
Form 10-Q for the Quarter ended October 31, 1992.)
*10.13 Amendment to Addendum to Agreement for Wholesale
Financing (Security Agreement) and Addendum to Addendum
to Agreement for Wholesale Financing - Flexible
Payment Plan dated January 25, 1994. (Exhibit 10.32
to the Company's Annual Report on Form 10-K for the
year ended January 29, 1994.)
*10.14 Richard D. Sanford Deferred Compensation Agreement.
(Exhibit 10.33 to the Company's Quarterly Report on
Form 10-Q for the Quarter ended July 30, 1994.) **
*10.15 Lease Agreement between Harbin Group, L.P. and the
Company dated May 17, 1994. (Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year
ended January 28, 1995 [the 1994 Form 10-K"].)
*10.16 Lease Agreement between Quebec Court Joint Venture
No. 2 and the Company dated June 3, 1995. (Exhibit 10.17
to the 1994 Form 10-K.)
*10.17 Addendum to Addendum to Agreement for Wholesale
Financing (Security Agreement) and Addendum to Addendum
to Agreement for Wholesale Financing - Flexible Payment
Plan dated January 26, 1995. (Exhibit 10.18 to the 1994
Form 10-K.)
*10.18 Agreement and Plan of Merger dated as of April 28,
1995 among the Company, IE Ohio Acquisition Corp. and
The Future Now, Inc. (Exhibit 2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
April 29, 1995.)
*10.19 1995 Long-Term Incentive Plan (Exhibit 4.1 of the
Company's Registration Statement No. 33-60771 filed on
June 30, 1995 [the "1995 Registration Statement"].) **
*10.20 1995 Employee Stock Purchase Plan (Exhibit 4.2 to the
1995 Registration Statement.) **
*10.21 Amendment No. 1 to Agreement and Plan of Merger dated
July 6, 1995 (Exhibit 2.2 of the Company's Registration
Statement No. 33-61605 filed on August 4, 1995)
*10.22 Amendment to Addendum to Agreement for Wholesale
Financing and Addendum to Addendum to Agreement for
Wholesale Financing - Flexible Payment Plan dated
October 27, 1995. (Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
October 28, 1995.)
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
* Incorporated by reference
** Management contract or compensatory plan or arrangement
(b) Reports filed on Form 8-K during last fiscal quarter of 1995.
The Company's Report on Form 8-K dated February 2, 1996 relating to
the suspension of the quarterly cash dividend.
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Valuation and Qualifying Accounts and Reserves Schedule VIII
Years ended January 29, 1994, January 28, 1995 and February 3, 1996
Additions
--------------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions/ end
Description of period expenses accounts write-offs of period
- -------------------------------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended January 29, 1994 $233,000 $375,000 -- ($210,000) $398,000
======== ========== ========== =========== ==========
Year ended January 28, 1995 $398,000 $336,000 -- ($436,000) $298,000
======== ========== ========== =========== ==========
Year ended February 3, 1996 $298,000 $3,875,000 $5,748,000 * ($1,012,000) $8,909,000
======== ========== ========== =========== ==========
* Allowance for doubtful accounts acquired as part of the acquisition of The Future Now, Inc.
</TABLE>
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTELLIGENT ELECTRONICS, INC.
Date: May 2, 1996 /s/Richard D. Sanford
---------------------------------
Richard D. Sanford, Chief
Executive Officer, President
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: May 2, 1996 /s/ Richard D. Sanford
---------------------------------
Richard D. Sanford, Chief
Executive Officer, President
and Chairman of the Board
Date: April 30, 1996 /s/ Thomas J. Coffey
---------------------------------
Thomas J. Coffey, Chief Financial
Officer, Senior Vice President,
Principal Accounting Officer
Date: April 30, 1996 /s/ Gregory A. Pratt
---------------------------------
Gregory A. Pratt, Director
Date: April 30, 1996 /s/ Arnold S. Hoffman
---------------------------------
Arnold S. Hoffman, Director
Date: April 30, 1996 /s/ William L. Rulon-Miller
---------------------------------
William L. Rulon-Miller, Director
Date: April 30, 1996 /s/ Barry M. Abelson
---------------------------------
Barry M. Abelson, Director
Date: April 30, 1996 /s/ Roger J. Fritz
---------------------------------
Roger J. Fritz, Director
Date: April 30, 1996 /s/ Christopher T.G. Fish
---------------------------------
Christopher T.G. Fish, Director
Date: April 30, 1996 /s/ Alex A.C. Wilson
---------------------------------
Alex A.C. Wilson, Director
Date: April 30, 1996 /s/ John A. Porter
---------------------------------
John A. Porter, Director
Date: April 30, 1996 /s/ William E. Johnson
----------------------------------
William E. Johnson, Director
Exhibit 21
SUBSIDIARIES OF INTELLIGENT ELECTRONICS, INC.
The following is a list of the Company's subsidiaries.
Intelligent Advanced Systems, Inc., a Delaware corporation
Intelligent Distribution Services, Inc., a Delaware corporation
Intellinet, Ltd., a Pennsylvania corporation
Intelligent Express, Inc., a Pennsylvania corporation
Intelligent SP, Inc., a Colorado corporation
RND, Inc., a Colorado corporation
Missing Link Communications, Inc., a Colorado corporation
Intelligent Systems Group, Inc., a Colorado corporation
Intelevest Holdings, Inc., a Delaware corporation
IntelliCom Solutions, Inc., A Pennsylvania corporation
CS Computers, Inc., a Colorado corporation
CS Computers of California, Inc., a California corporation
XLConnect Solutions, Inc., a Pennsylvania corporation
The Future Now, Inc., an Ohio corporation
The Future Now, Inc. of Arkansas, an Arkansas corporation
The Future Now, Inc. of Delaware, a Delaware corporation
The Future Now, Inc. of Massachusetts, a Massachusetts corporation
The Future Now, Inc. of Texas, a Texas corporation
Entre Computer Centers of New York, Inc., a New York corporation
Entre Computer Centers of Virginia, Inc., a Virginia corporation
Monterey-Waldec, Inc., a Pennsylvania corporation
Premium Computer Corporate Center, Inc., a California corporation
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in both the
Prospectus constituting part of the Registration Statement on Form S-3
(No. 33-39398) and the Registration Statements on Forms S-8 (Nos. 33-14436,
33-35174, 33-42119 and 33-60771) of Intelligent Electronics, Inc. of our
report dated April 17, 1996, appearing on page 12 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
May 1, 1996
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