SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED May 3, 1997 .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-15991
Intelligent Electronics, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2208404
----------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 458-5500
----------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 39,166,814 shares of
Common Stock, par value $0.01 per share were outstanding at June 9, 1997.
PAGE
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Intelligent Electronics, Inc. and Subsidiaries
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
May 3, 1997 and February 1, 1997 3
Consolidated Statements of Operations
Three Months Ended May 3, 1997 and May 4, 1996 4
Consolidated Statements of Cash Flows
Three Months Ended May 3, 1997 and May 4, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PAGE
<PAGE>
PART I - FINANCIAL INFORMATION FORM 10-Q
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
<TABLE>
<CAPTION>
May 3, February 1,
1997 1997
----------- -----------
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 37,997 $ 42,881
Accounts receivable, net 139,673 149,107
Inventory 240,228 311,669
Prepaid expenses and other current assets 4,240 4,834
Deferred income taxes 11,861 11,861
---------- ----------
Total current assets 433,999 520,352
Property and equipment, net 58,409 58,712
Intangible assets, primarily goodwill, net 90,653 91,914
Other assets 27,799 28,103
---------- ----------
Total assets $ 610,860 $ 699,081
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 34,135 $ 3,486
Accounts payable 325,032 430,107
Accrued liabilities 42,089 50,034
Long-term debt reclassified as current 55,000 55,000
---------- ----------
Total current liabilities 456,256 538,627
---------- ----------
Long-term debt 8,051 3,496
Other long-term liabilities 12,238 11,015
Commitments and contingencies
Minority interest 10,643 10,472
Shareholders' equity:
Series B Convertible Preferred stock $50 par value per share:
Authorized 200,000 shares, issued and outstanding:
14,000 and 15,000 shares 700 750
Common stock $.01 par value per share:
Authorized 100,000,000 shares,
issued: 41,723,335 and 41,352,973 shares 417 413
Additional paid-in capital 285,027 284,666
Treasury stock (67,311) (67,311)
Retained earnings (deficit) (95,161) (83,047)
---------- ----------
Total shareholders' equity 123,672 135,471
---------- ----------
Total liabilities and shareholders' equity $ 610,860 $ 699,081
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
PAGE
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share data)
(unaudited)
Three months ended
-------------------------
May 3, May 4,
1997 1996
----------- -----------
Revenues $ 668,256 $ 877,939
Cost of goods sold 635,596 832,355
----------- -----------
Gross profit 32,660 45,584
----------- -----------
Operating expenses:
Selling, general and administrative expenses 44,456 42,935
Amortization of intangibles, primarily goodwill 1,261 2,400
----------- -----------
Total operating expenses 45,717 45,335
----------- -----------
Income (loss) from operations (13,057) 249
Other income (expense):
Investment and other income (expense), net 170 (105)
Interest expense (3,805) (3,867)
----------- -----------
Loss before income tax benefit and
and minority interest (16,692) (3,723)
Income tax benefit (4,902) (529)
----------- -----------
Loss before minority interest (11,790) (3,194)
Minority interest (99) -
----------- -----------
Net loss (11,889) (3,194)
Preferred stock dividend 225 -
----------- -----------
Net loss applicable to common shareholders $ (12,114) $ (3,194)
=========== ===========
Net loss per common share applicable
to common shareholders $ (0.34) $ (0.09)
=========== ===========
Weighted average number of common shares
and share equivalents outstanding: 36,066 34,537
See accompanying notes to the consolidated financial statements.
PAGE
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
---------------------
May 3, May 4,
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,889) $ (3,194)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,361 6,879
Write-down of property and equipment - 1,057
Deferred taxes - (861)
Provision for losses on trade receivables 1,313 803
Provision for write-down of inventory 3,588 2,617
Minority interest in net income of XLConnect 99 -
Changes in assets and liabilities:
Accounts receivable 8,121 (5,381)
Inventory 67,853 11,121
Other current assets 898 770
Accounts payable (105,075) (28,653)
Accrued liabilities (6,982) (2,426)
---------- ---------
Net cash used for operating activities (35,713) (17,268)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net of disposals (4,693) (3,704)
Other - 30
---------- ---------
Net cash used for investing activities (4,693) (3,674)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 5,500 -
Net proceeds from working capital advances 31,200 9,079
Reduction in capital lease obligations (1,178) (893)
---------- ---------
Net cash provided by financing activities 35,522 8,186
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,884) (12,756)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,881 34,618
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,997 $ 21,862
========== =========
See accompanying notes to the consolidated financial statements.
PAGE
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share-related data)
(unaudited)
(1) Basis of Presentation
---------------------
The consolidated financial statement information included herein is
unaudited but, in the opinion of management, reflects all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. These financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in Intelligent Electronics, Inc.'s
(the "Company") Annual Report on Form 10-K for the year ended February 1,
1997.
(2) New Accounting Standards
------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No.
128") which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 simplifies the previous standards
for computing earnings per share and requires the disclosure of basic and
diluted earnings per share. For the fiscal year ended February 1, 1997, the
quarter ended May 3, 1997 (the "first quarter of fiscal 1997") and the quarter
ended May 4, 1996, the amount reported as net loss per share applicable to
common shareholders is no different than that which would have been reported
for basic and diluted net loss per share applicable to common shareholders
in accordance with SFAS No. 128.
(3) Sale of the Reseller Network
The Company provides information technology products, services and
solutions to network integrators and resellers, through its Reseller
Network (the "Indirect Business") and to large and small corporate
customers, educational institutions and governmental agencies in the United
States, primarily through its branch locations (the "Direct Business"). On
April 29, 1997, the Company entered into a definitive agreement with Ingram
Micro Inc. ("Ingram") to sell the stock and related assets and liabilities
of the Indirect Business for $78 million, subject to reduction (but not
below $68 million) depending on the date of closing and also on certain
revenues during the period through closing. The purchase price will be
payable by assumption of liabilities, based on the balance sheet of the
Indirect Business at the time of closing and cash if the purchase price
exceeds such liabilities. The Company will be required, at closing, to pay
to Ingram any amount by which the estimated net assumed liabilities exceed
the adjusted purchase price and to fund a $10 million escrow for final
settlement for any purchase price adjustments and indemnity claims. The
consummation of the transaction is subject to the approval of the Company's
shareholders and required government approvals, as well as other customary
conditions. It is currently anticipated that the transaction will close
during the Company's second quarter of fiscal 1997 or shortly thereafter.
However, there can be no assurance that the sale will be completed. The
Company expects, on a preliminary basis, that the sale of the Indirect
Business will result in a pre-tax gain, subject to reduction depending on
the date of closing and also on certain revenues during the period through
closing. Additionally, pursuant to a separate agreement, Ingram will provide
XLSource, the Company's direct hardware sales organization, with its product
requirements over an initial term of up to three years following the closing.
The agreement requires XLSource to purchase 100% of its requirements of
products available from Ingram and requires minimum annual product purchases
of $600 million (a total of $1.8 billion). In any year in which XLSource
purchases less than the minimum requirement, XLSource can either pay Ingram
liquidated damages in an amount equal to 1.5% of the shortfall or extend
the term of the agreement and defer the amount of the shortfall multiplied
by a factor based on the year in which the shortfall occurred into a fourth
or fifth year. The Company has guaranteed to Ingram performance by XLSource
of its obligations under the agreement. On May 14, 1997, pursuant to the
definitive agreement, the Company obtained an irrevocable letter of credit
in the amount of $5 million to secure the Company's obligation to make
certain payments to Ingram in the event the definitive agreement is
terminated under certain circumstances.
As a result of the definitive agreement, the Company has been advised that
it is unlikely that a spin-off of XLConnect Solutions, Inc. ("XLConnect"),
would qualify as a tax-free distribution of stock. Accordingly, the
Company does not currently intend to effect the spin-off of XLConnect.
The Company is continuing to explore its strategic alternatives relative to
XLSource, including the sale of all or a portion of XLSource, and is
currently in negotiations with an unaffiliated third party for the sale of
a substantial portion of XLSource (representing approximately 60% of the
Company's Direct Business' revenues during the first quarter of fiscal
1997). There can be no assurance that any such sale will be completed.
(4) Credit Facilities
-----------------
In April 1996, the Company signed a financing agreement, which has a
rolling eighteen month term and is renewable for 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 facility can be used for
inventory financing, equipment financing and working capital purposes.
This facility imposes certain financial covenants relating to the Company's
current ratio, working capital, and tangible net worth. The Company was in
compliance with these covenants as of May 3, 1997 and believes that it will
remain in compliance during fiscal 1997, if the sale of the Indirect
Business is completed and the operating plans to improve XLSource are
successfully implemented. Until necessary shareholder approval for the
sale of the Indirect Business is obtained, the $55 million long-term portion
of the facility (due October 5, 1998) will be classified as a current
liability on the Company's Consolidated Balance Sheets. Notwithstanding
such classification, the lender has agreed that this long-term portion will
not be treated as short-term debt for purposes of the financing agreement.
The Company had borrowings of $31.2 million under this financing agreement
for working capital purposes, which are classified as short-term debt on
the Company's Consolidated Balance Sheets as of May 3, 1997. All other
borrowings under this agreement (other than the $55 million long-term
portion indicated above) are included in accounts payable on the Company's
Consolidated Balance Sheets. As of May 3, 1997, $6.9 million was available
after considering the borrowing base formula and trade payables principally
outstanding to a vendor related to the lender.
In March 1997, the financing agreement was amended to delete the assets of
XLConnect, the Company's 80%-owned professional services subsidiary, and
XLConnect's subsidiaries from the borrowing base, which in effect reduces
the amount the Company can borrow under this agreement by $20 million. In
conjunction with the March 1997 amendment, XLConnect entered into a
separate secured credit agreement with this lender in the amount of $25
million, which the Company has guaranteed.
On May 14, 1997, pursuant to the definitive agreement for the sale of the
Indirect Business, the Company obtained an irrevocable letter of credit from
the above lender in the amount of $5 million to secure the Company's obligation
to make certain payments to Ingram, in the event the definitive agreement is
terminated under certain circumstances. A portion of the financing agreement
has been reserved for the letter of credit and will be subtracted from the
borrowing base.
On May 15, 1997, the Company through XLSource, pledged its 80% ownership
of XLConnect's common stock to the above lender as security for the
Company's obligations to such lender. The Company can borrow under the
financing agreement up to 50% of the market value (calculated daily) of the
XLConnect pledged stock.
On February 28, 1997, XLConnect entered into a transaction with a third
party whereby the third party agreed to provide an unsecured loan of up to
$11 million (the "Loan") to be used for specific business purposes. Up to
$5.5 million is available to be drawn prior to August 28, 1997. The
remaining amount may be drawn after August 28, 1997 and prior to February
28, 1998, subject to XLConnect satisfying certain financial criteria.
Interest is payable at an initial annual rate of 4% for the first two
years, adjusts to 5% for the next two years and then adjusts to 6% for the
remaining term. Principal payments of $0.75 million will be made quarterly
beginning in August 1999 with a final payment of $1.25 million due on
August 28, 2002. As of May 3, 1997, $5.5 million was outstanding under the
Loan. In connection with the Loan, XLConnect issued to the third party a
warrant to purchase up to 325,000 shares of XLConnect's common stock, which
becomes exercisable on February 28, 1998, August 28, 1998 or February 28,
2002, depending on the occurrence of certain events, at a per share
exercise price of $6.65, and expires on February 27, 2007. After
considering the effects of the issuance of the warrant and the resultant
discounting of the Loan, the effective interest rate is 7.4%.
(5) Preferred Stock
---------------
On April 30, 1997, 1,000 shares of the Company's Series B Convertible
Preferred Stock were converted into 370,362 shares of the Company's Common
Stock.
From May 16, 1997 through June 9, 1997, an additional 7,000 shares of the
Company's Series B Convertible Preferred Stock were converted into
2,746,811 shares of Common Stock.
(6) Supplemental Cash Flow Information
----------------------------------
Cash payments during the three-month periods ended May 3, 1997 and May 4,
1996 included interest of $2,982 and $5,272, respectively, and income taxes
of $120 and $3, respectively.
(7) Contingencies
-------------
On May 14, 1997, pursuant to the definitive agreement for the sale of the
Indirect Business, the Company obtained an irrevocable letter of credit in
the amount of $5 million to secure the Company's obligation to make certain
payments to Ingram in the event the definitive agreement is terminated under
certain circumstances.
In December 1994, several 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 were
consolidated with a class action lawsuit filed in 1992 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 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
alleged 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 sought damages in unspecified amounts as well as other monetary
and equitable relief. The Company has reached a tentative settlement of
the class and derivative actions, without admitting any liability, under
which the class and derivative plaintiffs will receive a total of $10
million. Of the $10 million, the Company will be contributing $3.8 million
and the balance will be funded by insurance. The settlements are subject
to court approval. Management cannot predict when the final settlements
will be approved. The amount required to be paid by the Company was accrued
in fiscal 1994.
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. Management believes the resolution of these matters will not have
a material adverse effect on the Company's financial position or results of
operations.
PAGE
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The following table shows revenues and gross margins as a percentage of
revenues, by business segment, for the quarter ended May 3, 1997 (the
"first quarter of fiscal 1997") and for the quarter ended May 4, 1996 (the
"first quarter of fiscal 1996") (dollars in millions).
<TABLE>
<CAPTION>
1st Quarter of Fiscal 1997 1st Quarter of Fiscal 1996
Gross Gross
Revenues Margin Revenues Margin
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Indirect Business $ 590 1.3% $ 814 2.8%
Direct Business 203 12.2% 189 11.5%
Intercompany eliminations * (125) -- (125) --
-------- -------- -------- --------
Totals $ 668 4.9% $ 878 5.2%
======== ======== ======== ========
</TABLE>
* Intercompany eliminations consist primarily of sales from the Indirect
Business to the Direct Business.
Revenues in the Indirect Business declined 27.5% in the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996 as a result of
continued competitive pressures throughout the industry primarily due to
open sourcing and the uncertainty regarding the future of the Indirect
Business. The Indirect Business has experienced a trend of declining sales
in recent quarters caused by the Company's inability to retain and attract
customers resulting from a number of factors. These factors include: fewer
product lines offered by the Company compared to its larger competitors; a
less favorable allocation of constrained products (which can command a
higher gross margin) compared to the prior year; increased competition due
to open sourcing; and continued consolidation in the reseller channel.
The decrease in the gross profit percentage in the Indirect Business in the
first quarter of fiscal 1997 from the first quarter of fiscal 1996 was due
primarily to the pricing structure adopted by the Company to retain
business, which was caused by the uncertainty regarding the future of the
Indirect Business, a less favorable allocation of constrained products and
continued competitive pressures in the industry.
Revenues in the Direct Business increased 7.4% in the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996. The majority of
the increase was due to increased revenues from XLConnect, which is the
services sector of the Direct Business.
The increase in the gross margin percentage for the Direct Business in the
first quarter of fiscal 1997 compared to the first quarter of fiscal 1996
was attributable to a higher proportion of revenues from XLConnect, which
generates a higher gross margin percent than direct hardware sales.
Selling, general and administrative expenses ("SG&A") increased 3.5% or
$1.5 million in the first quarter of fiscal 1997 (6.7% of revenues) as
compared to the first quarter of fiscal 1996 (4.9% of revenues). The
increase was due to increased SG&A at XLConnect, partially offset by
decreased SG&A in the Indirect Business and at XLSource. XLConnect's SG&A
increased $3.9 million due to higher overhead costs to support XLConnect's
growth and enable it to operate as a separate public company, as well as
the continued development of XLConnect's direct sales force combined with
an increase in marketing programs.
Amortization of intangibles decreased in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996 due to the write-off in the
third quarter of fiscal 1996 of approximately $55.5 million of goodwill
related to the Indirect Business.
The Company's effective tax rate for the first quarter of fiscal 1997 was a
29.4% benefit compared to a 14.2% benefit for the first quarter of fiscal
1996. The increase in the effective tax rate was due primarily to a lower
proportion of non-deductible goodwill amortization compared to the taxable
loss.
Liquidity Outlook
During fiscal 1996 and the first quarter of fiscal 1997, both of the
Company's segments incurred operating losses. Management has been
exploring the Company's strategic alternatives, and in connection
therewith, on April 29, 1997, the Company entered into a definitive
agreement with Ingram to sell the stock and related assets and liabilities
of the Indirect Business for $78 million, subject to reduction (but not
below $68 million) depending on the date of closing and also on certain
revenues during the period through closing. The purchase price will be
payable by assumption of liabilities, based on the balance sheet of the
Indirect Business at the time of closing and cash if the purchase price
exceeds such liabilities. The Company will be required, at closing, to pay
to Ingram any amount by which the estimated net assumed liabilities exceed
the adjusted purchase price and to fund a $10 million escrow for final
settlement for any purchase price adjustments and indemnity claims. The
consummation of the transaction is subject to the approval of the Company's
shareholders and required government approvals, as well as other customary
conditions. It is currently anticipated that the transaction will close
during the Company's second quarter of fiscal 1997 or shortly thereafter.
However, there can be no assurance that the sale will be completed. The
Company expects, on a preliminary basis, that the sale of the Indirect
Business will result in a pre-tax gain, subject to reductions depending on
the date of closing and also on certain revenues during the period through
closing. On May 14, 1997, pursuant to the definitive agreement for the sale
of the Indirect Business, the Company obtained an irrevocable letter of credit
in the amount of $5 million to secure the Company's obligation to make certain
payments to Ingram in the event the definitive agreement is terminated under
certain circumstances. In the event the transaction is not consummated,
and management's operating plans are not achieved, the Company's operating
results will continue to adversely affect cash flows and liquidity.
The Company is continuing to explore its strategic alternatives with respect
to XLSource, including the implementation of operating plans to improve its
results and the possible sale of all or a part of XLSource. The Company is
currently in negotiations with an unaffiliated third party for the sale of
a substantial portion of XLSource (representing approximately 60% of the
Company's Direct Business' revenues during the first quarter of 1997).
There can be no assurance that such results will improve or that any such
sale will be completed. In the event management's plans relative to XLSource
are not achieved, the Company's operating results will continue to adversely
affect cash flows and liquidity.
The Company believes it will be in compliance with all of the financial
covenants of its $225 million financing agreement throughout fiscal 1997,
if the sale of the Indirect Business is completed and the operating plans
to improve XLSource are successfully implemented. Until necessary
shareholder approval is obtained for such sale, the $55 million long-term
portion of the agreement will be classified as a current liability on the
Company's Consolidated Balance Sheets. Notwithstanding such classification,
the lender has agreed that the long-term debt, which is due October 5, 1998,
will not be treated as short-term debt for purposes of the financing agreement.
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,
invest in systems technology, and pay cash dividends.
As of May 3, 1997, the Company had cash and cash equivalents of $38.0
million compared to $42.9 million at February 1, 1997. Working capital was
negative $22.3 million at May 3, 1997 compared to negative working capital
of $18.3 million at February 1, 1997. The reason for the negative working
capital is the reclassification of $55 million of long-term debt to a
current liability, as discussed above in 'Liquidity Outlook'. Without this
reclassification, the Company would have had positive working capital of
$32.7 million as of May 3, 1997 and $36.7 million as of February 1, 1997.
During the first quarter of fiscal 1997, cash used for operating activities
totaled $35.7 million compared to $17.3 million of cash used for operating
activities during the first quarter of fiscal 1996. The increase in the
cash used for operating activities can be attributed to increased operating
losses plus the increase in the net usage of cash for working capital
purposes (accounts receivable, inventory and accounts payable).
As of May 3, 1997, the Company had a $225 million financing agreement, of
which $6.9 million was available after considering the borrowing base
formula and trade payables principally outstanding to a vendor related to
the lender. The Company had borrowings of $31.2 million under this
agreement for working capital purposes as of May 3, 1997, which are
classified as short-term debt on the Company's Consolidated Balance Sheets.
The Company believes it will be in compliance with all of the financial
covenants of its financing agreement throughout fiscal 1997, if the sale of
the Indirect Business is completed and the operating plans to improve
XLSource are successfully implemented. Until necessary shareholder
approval is obtained for such sale, the $55 million long-term portion of
the agreement will be classified as a current liability in the Company's
Consolidated Balance Sheets. Notwithstanding such classification, the
lender has agreed that the long-term debt, which is due October 5, 1998,
will not be treated as short-term debt for purposes of the financing agreement.
In March 1997, the financing agreement was amended to delete the assets of
XLConnect, the Company's 80%-owned professional services subsidiary, and
XLConnect's subsidiaries from the borrowing base, which in effect reduces
the amount the Company can borrow under this agreement by $20 million. In
conjunction with the March 1997 amendment, XLConnect entered into a
separate secured credit agreement with this lender in the amount of $25
million, which the Company has guaranteed.
On May 14, 1997, pursuant to the definitive agreement for the sale of the
Indirect Business, the Company obtained an irrevocable letter of credit
from the above lender in the amount of $5 million to secure the Company's
obligation to make certain payments to Ingram in the event the definitive
agreement is terminated under certain circumstances. A portion of the
financing agreement has been reserved for the letter of credit and will
be subtracted from the borrowing base.
On May 15, 1997, the Company through XLSource, pledged its 80% ownership
of XLConnect's common stock to the above lender as security for the
Company's obligations to such lender. The Company can borrow under the
financing agreement up to 50% of the market value (calculated daily) of the
XLConnect pledged stock.
Based on the Company's expected level of operations, including plans to
reduce the operating losses of XLSource, and capital expenditure
requirements, management believes that the Company's cash, internally
generated funds and available financing arrangements, will be sufficient to
meet the Company's cash requirements at least through the end of fiscal
1997. However, if the Company is unable to complete the transaction with
Ingram, or continues to experience losses and negative operating cash
flows, the Company's vendors could elect to restrict product availability
and modify credit terms, which could have a material adverse effect on the
Company's liquidity position. In such circumstances, there can be no
assurance that alternative sources of financing could be obtained.
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.
PAGE
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
Part II - Other Information
Item 2. Changes in Securities
---------------------
(c) During the first quarter of fiscal 1997, the holder of the
Company's Series B Convertible Preferred Stock ("Preferred
Stock") converted 1,000 shares of Preferred Stock having a
stated value of $1,000,000, together with the accrued premium
thereon of $32,384, into 370,362 shares of Common Stock. The
sale of the shares of Common Stock was exempt from the
registration provisions of the Securities Act (the "Act")
pursuant to Section 3(a)(9) for exchanges with existing security
holders. A registration statement covering the resale of the
Common Stock issued upon conversion of the Preferred Stock has
been declared effective under the Act.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10. Volume Purchase Agreement dated April 29, 1997 between
XLSource, Inc. (a wholly-owned subsidiary) and Ingram Micro
Inc. *
(b) Reports filed on Form 8-K.
The Company's Report on Form 8-K dated February 10, 1997
relating to the approval by the Board of Directors of the
distribution of 13,325,000 shares of XLConnect Solutions, Inc.
in a spin-off to the Company's shareholders.
* Portions of this Agreement have been omitted pursuant to a request
for confidential treatment.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligent Electronics, Inc.
/s/ Thomas J. Coffey
-------------------------------------
Thomas J. Coffey
Senior Vice President, Chief
Financial Officer and
Chief Accounting Officer
Date: June 16, 1997
Exhibit 10
VOLUME PURCHASE AGREEMENT
This Agreement ("Agreement") dated as of April 29, 1997, is by and between
XLSource, Inc. ("XLS"), with its principal place of business at 411
Eagleview Boulevard, Exton, PA 19341 and Ingram Micro Inc. "Ingram"),
including its Ingram Alliance division ("Alliance"), with its principal
place of business at 1600 East St. Andrew Place, Santa Ana, California
92705.
RECITALS
A. Ingram is a wholesale distributor of microcomputer and technology
products and services.
B. XLS is a reseller of microcomputer and technology products and is a
wholly owned subsidiary of Intelligent Electronics, Inc. ("IE").
C. Ingram, XLS and IE have entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") dated as of April 29, 1997 pursuant to
which Ingram will purchase from IE all of the capital stock of
certain subsidiaries of IE.
D. Ingram's willingness to enter into the Stock Purchase Agreement is
conditioned on XLS's agreeing to guarantee the obligations of IE
under the Stock Purchase Agreement on the terms and conditions set
forth therein.
E. XLS is willing to guarantee IE's obligations as described above in
exchange for the ability to purchase substantially all of its
product requirements from Ingram on the terms and conditions set
forth herein.
F. Ingram agrees to sell to XLS all of the product requirements of XLS
on the terms and conditions set forth herein.
Now therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Definitions.
The following terms used in this Agreement shall be defined as
follows:
1.1. "Alliance Products" shall, initially, be those products offered by
Apple, IBM, Compaq, Hewlett-Packard, Toshiba, NEC, Acer, AST,
Digital, Epson, and Lexmark for distribution through Alliance; the
"Alliance Products" may be updated or modified from time to time by
Ingram on thirty (30) days prior notice to XLS.
1.2. "Non-Alliance Products" shall mean all other products in Ingram's
product inventory and available for distribution on the date an
order is placed for such product.
1.3. "Configured Products" shall mean those products which have been
configured with or installed on other Products by Ingram's
Configuration Services group pursuant to this Agreement.
1.4. "Product" or "Products" shall mean Alliance Products, Non-Alliance
Products, Configured Products and/or Excluded Products, all of which
are subject to product availability from the Product Vendors.
1.5. "Excluded Products" shall mean those Products which Ingram is not
authorized to distribute or those Products for which Ingram has
restrictive distribution rights.
1.6. "Vendors" shall mean the vendors or publishers of the Products
offered by Ingram hereunder.
1.7. "Cost" shall mean the applicable Vendor's invoiced replacement cost
to Ingram.
1.8. "Net Purchases" shall mean total invoice amounts, net of all rebates,
of all Products purchased under this Agreement, net of returns.
2. Term of the Agreement
The term of the Agreement shall commence on the date hereof and
shall continue for a period of three (3) years following the Closing
Date, as defined below, unless terminated sooner pursuant to the
terms hereof.
3. Products
3.1. Commencing on the Closing Date and thereafter during the term of this
Agreement, XLS shall order 100% of its requirements from time to
time for Products which are listed on Ingram's on-line ordering
system on the date the Products are ordered. In the event Ingram
cannot fulfill the order in the required time frame designated by
XLS, it shall order the product in XLS's behalf from other sources
in order to meet its service level requirements.
3.2. It is acknowledged by Ingram that in the event this Agreement is
assigned with Ingram's consent in accordance with Paragraph 28, the
assignee may have a different ordering process than described herein
and may not order 100% of its requirements from Ingram.
3.3. During the term of this Agreement, Ingram shall use best efforts to
provide and deliver the Products in a timely and efficient manner in
accordance with the performance metrics described in Exhibit A
attached to this Agreement.
3.4. All Products purchased pursuant to this Agreement shall be for resale
only within the United States.
3.5. If authorization for resale is required by the Vendor of a Product,
Ingram shall not be obligated to sell such Product to XLS unless
Ingram has received notice that XLS has been authorized by the
Vendor.
4. Purchase Commitment
4.1. XLS hereby agrees that its Net Purchases will equal a minimum of $1.8
billion of Products ("Guaranteed Minimum Revenue") under this
Agreement during the term of this Agreement. The intention of both
parties is that the Net Purchases will be at a rate of $600 million
annually ("Annual Minimum Revenue"). For purposes of determining
XLS's performance under this Section 4, a "year" shall mean a period
of 365 or 366 days commencing on the day following the date that the
transaction contemplated by the Stock Purchase Agreement have been
consummated (the "Closing Date") and the first and second
anniversaries of the Closing Date and ending on the first, second
and third anniversaries of the Closing Date, respectively.
4.2. Promptly following the end of each year under this Agreement, Ingram
will determine if XLS has Net Purchases equal to the Annual Minimum
Revenue. In the event it has not, Ingram will deliver an invoice to
XLS setting forth an amount established as follows: Annual Minimum
Revenue minus actual Net Purchases under this Agreement ("Deficiency
Amount") **. In determining Net Purchases in this calculation,
product ordered from other sources pursuant to Paragraph 3.1 will be
included. XLS may either pay the invoice within ten days following
receipt by XLS or, at its option, extend the contract beyond the
scheduled end of the term of this Agreement. In the event XLS elects
to extend the term of this Agreement, the Deficiency Amount will be
multiplied by ** if the deficiency occurs during the first year of
this Agreement, ** if the deficiency occurs during the second year
of this Agreement and ** thereafter and that amount will become the
"Remaining Guaranteed Minimum Revenue" for the period beyond the
term of this Agreement. The amount of time the term is extended
will be calculated by dividing the Remaining Guaranteed Minimum
Revenue by $50 million, rounding up, and adding that number of
months to the term of the Agreement. In no event will XLS have the
option of extending this Agreement more than an additional 24
months.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
4.3. In the event XLS exceeds the Annual Minimum Revenue in any year of
this Agreement, then the Remaining Guaranteed Minimum Revenue, if
any, will be reduced by an amount equal to ** of any excess and, if
applicable, the extended term reduced accordingly or, if there is no
Remaining Guaranteed Minimum Revenue, the Annual Minimum Revenue for
the subsequent year of this Agreement shall be reduced by an amount
equal to such excess.
4.4. This Agreement will terminate when Net Purchases by XLS exceeds the
sum of $1.8 billion plus the Remaining Guaranteed Minimum Revenue,
if any, less the aggregate Deficiency Amounts, if any, deferred to
the extended term of this Agreement at XLS's election.
4.5. If in any one year, XLS's Net Purchases are less than ** of Products
under this Agreement (unless the Agreement shall have terminated in
said year pursuant to Section 4.4), then in addition to the remedies
under Paragraph 4.2 above, XLS agrees it will pay an additional
amount equal to ** of the difference between ** million and the Net
Purchases under this Agreements in that year.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
5. Pricing
5.1. All Product prices will be as shown in Ingram's on-line ordering
system as of the date of order, except as otherwise provided below.
5.2. Prices for the following Alliance Products will be calculated at
Ingram's Cost on the date of purchase plus the percentage listed
below:
(a) **
(b) **
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
5.3. Prices for all Alliance Products other than those described in
Section 5.2 above will be established by Ingram, through the
assignment to Alliance's standard pricing matrix, and will be
substantially consistent with that to other customers with similar
volumes.
5.4. Prices for Non-Alliance Products (except for those Products noted in
Sections 5.5 and 5.6 below) will be calculated at Cost divided by
the factor applicable to the Product type. The Product types and
factors will be as follows:
Product Type Factor
------------ ------
Software **
Hardware **
Accessory Product **
Technical Product **
5.5. Prices for Products from those Vendors and/or product groups listed
on ** shall be calculated at Cost divided by the factor listed
beside it on **. In the event of a conflict between ** and
Paragraph 5.4 above, ** will prevail.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
5.6. Specialized Products, including memory and licenses, shall be priced
consistent with prices charged to other customers with similar
volumes.
5.7. As Cost changes, Ingram may adjust the pricing shown on its on-line
ordering system to reflect such changes without notice to XLS.
5.8. Ingram agrees that all programmatic promotional pricing programs will
be offered to XLS.
5.9. Ingram and XLS agree that in the event of a substantial change in the
competitive market environment for the products offered by Ingram,
they will make a good faith effort to agree on amended prices for
this Agreement, which will be substantially consistent with prices
for customers with substantially equivalent volumes.
5.10. Ingram will pass through price protection for Products purchased or
in transit to XLS or its customers at the time the Product's Vendor
reduces its price to Ingram. Such price protection shall be in the
form of a credit equal to the amount of the price decrease per unit
of Product multiplied by the number of units in XLS's inventory or
in transit from Ingram to XLS or its customers on the date the price
decrease became effective. In order to obtain such price
protection, XLS must provide Ingram with a completed Ingram Price
Protection form and a computer-generated inventory report listing
the Product qualified for the price protection. Once the price
protection credit has been approved by and received from the Vendor,
a credit memo will be issued and appear on XLS's account within
forty-eight (48) hours. XLS agrees not to deduct any anticipated
price protection credits from amounts owed to Ingram without
Ingram's express prior written consent. Ingram will not be
responsible for passing through price protection relating to any
price protection requests which are rejected by the Product's Vendor
for reasons other than Ingram's performance.
6. Rebate
6.1. XLS shall be entitled to receive a performance-based rebate equal to
the percentage of Net Purchases from Ingram during each fiscal
quarter as determined by the following schedule:
For the period from Each quarter Rebate
May 1 - September 30, 1997 thereafter Percentage
Quarterly Net Purchases ** ** **
Quarterly Net Purchases ** ** **
Quarterly Net Purchases ** ** **
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
6.2. Products ordered from Ingram that it must buy from other sources in
accordance with Paragraph 3.1 above will count towards rebate goals
but rebates will not be earned on those purchases.
6.3. Within thirty days following the end of any quarter in which XLS
achieves a rebate, Ingram will issue XLS a credit in the amount of
the rebate.
7. Ordering
7.1. There shall be no minimum order size restriction on XLS orders.
7.2. The pricing offered to XLS under this Agreement is contingent upon
XLS placing a majority of its Product orders via electronic ordering
methods offered by Ingram, including its CAPS and EDI services,
beginning after the first six months of the term of this Agreement.
Ingram and XLS will mutually cooperate and commit the necessary
resources to ensure that electronic ordering and order management
systems are put in place within the first six months of the term of
this Agreement in order to permit achievement of the electronic
ordering goal set forth in this Section.
8. Payment Terms
8.1. Ingram will invoice XLS upon Product shipment and/or shipment of the
Configured Products to the location specified on the XLS purchase
order, with all invoices due and payable net thirty (30) days from
date of invoice.
8.2. Alliance Product pricing applies only to those Products purchased on
approved flooring accounts. XLS agrees to utilize Alliance approved
flooring companies as listed in Exhibit C, as it may be modified and
amended from time to time, in order to assure that the associated
flooring fees are subsidized by the Vendor. If XLS uses a flooring
company not listed on Exhibit C, XLS agrees to pay all flooring fees
and related costs charged by such flooring company.
8.3. In the event XLS elects to place an order for Alliance Products on a
net terms account, Ingram will invoice XLS upon Product shipment,
and all such invoices will be due and payable net thirty (30) days
from invoice date. A net terms fee of ** of the total invoice
amount will be added to Alliance Product orders placed on XLS's net
terms account.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
8.4. If XLS has a reasonable dispute with any invoice received from
Ingram, it agrees that it will pay the undisputed portion of the
invoice and will immediately notify Ingram of the amount remaining
in dispute. The parties will then have thirty (30) days in which to
resolve the dispute before such unpaid amounts will be considered
overdue or delinquent under this Agreement.
8.5. A service charge of the lesser of one and one-half percent (1.5%)
per month or the maximum amount allowed by law may be charged on all
balances past due except disputed amounts ultimately resolved in
XLS's favor.
8.6. XLS shall pay and be responsible for applicable federal, state,
municipal, and other government taxes (such as sales, use, etc.) for
each Product purchased except any applicable income taxes on such
sale. Unless otherwise specified, list prices do not include such
taxes, and they will appear, if applicable, as separate, additional
items on the invoice. Exemption certificates, valid in the place of
delivery, must be presented to Ingram prior to shipment if they are
to be honored.
9. Credit
9.1. XLS shall furnish to Ingram all financial information reasonably
requested by Ingram from time to time for the purpose of
establishing or continuing XLS's credit limit, it being understood
that Ingram shall have the right from time to time, without notice,
to change or revoke XLS's credit limit on the basis of changes in
Ingram's credit policies or XLS's financial conditions and/or
payment record. In such event, the applicable purchase price shall
be paid prior to shipment.
9.2. In the event XLS fails to make timely payment of any undisputed
amount invoiced hereunder, Ingram shall have the right, in addition
to any and all other rights and remedies available to Ingram, at law
or in equity, to immediately revoke any or all credit extended, to
delay or cancel future deliveries and/or to reduce or cancel any or
all quantity discounts extended to XLS. All costs of collection,
including reasonable attorneys' fees, shall be paid by XLS.
9.3. Any obligation of Ingram under this Agreement to deliver Products on
credit terms shall terminate without notice if XLS files a voluntary
petition under a bankruptcy statute, or makes an assignment for the
benefit of creditors, or if an involuntary petition under a
bankruptcy statute is filed against XLS, or if a receiver or trustee
is appointed to take possession of the assets of XLS.
10. Freight, Shipping, Delivery
10.1. Delivery will be made F.O.B origin, ground service, paid by Ingram,
on Ingram's carrier of choice. Ingram will comply with all
reasonable shipping and handling instructions received prior to
shipment. In the event XLS requires shipment on an expedited basis
via XLS's carrier of choice, delivery will be made F.O.B origin at
XLS's expense. When Ingram's "Base Rate" system is operational, XLS
will receive credit on each expedited shipment for the amount of
ground service freight Ingram would have paid on that shipment.
10.2. Ingram will ship Products directly to XLS customers in the United
States at no additional charge.
10.3. XLS shall examine all Products promptly upon receipt thereof. No
later than ten days after delivery, XLS shall notify Ingram of all
claimed shortages or damaged Products, or if rejection is intended,
shall specify all grounds therefor. Failure to give such notice
within ten days after delivery shall be deemed an acceptance of the
Products as of the date of shipment. This paragraph does not cover
defective returns which are addressed in Paragraph 13.
11. Configuration
11.1. Provided XLS has furnished Ingram properly approved forecasts five
(5) business days in advance of receipt of order from XLS, Ingram
will use all reasonable efforts to ship Configured Products within
two (2) business days. Such shipping will occur only if the orders
do not contain product incompatibility issues. In that event,
Ingram must notify XLS within two (2) hours. In addition, for each
unique configuration, all necessary building instructions and other
pertinent work instructions must be on hand and understood by Ingram
Configuration Services Personnel. Product expedited between Ingram
locations to meet service level requirements will be at Ingram's
expense.
11.2. Orders in excess of 100 units will require review and scheduling
based on Ingram's capacity and the complexity of the Configured
Product.
11.3. Ingram will not be responsible for schedule slippage or related
expenses, including but not limited to overtime labor and freight
associated with expediting the production or delivery of Configured
Product containing product supplied by XLS or supplied by a third
party arranged by XLS, if scheduled delivery of Configured Product
is delayed due to unavailability, late delivery or inoperative
product provided by XLS or a third party arranged by XLS. However,
if the delay is due to Ingram's performance, Ingram will pay
expedited freight.
11.4. All fees for configuration services shall be as set forth in Exhibit
D. During the first six months of the term, Ingram will (a) charge
a flat fee of ** per configured unit and (b) provide XLS with a per
unit rebate amount based on the following schedule:
Number of units
configured during month Rebate per unit
----------------------- ---------------
** **
** **
** **
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
After the end of the first six months, Ingram agrees to provide XLS
with a discount off normal published rates that are substantially
comparable to those given to other customers with substantially
equivalent volume.
12. Stock Balancing
12.1. XLS may return Products which are not defective within one hundred
fifty (150) days after invoice date. All returns will be subject to
the returns fees listed in the table below which is based on the
percentage of returns as compared with the gross sales during the
fiscal quarter in which the return is made, determined by reference
to invoiced prices. Returns will be processed at the lower of
either the invoice unit price paid by XLS or the current price as
shown in Ingram's on-line ordering system as of the date of return
request and will be credited as soon as possible but no later than
the end of the fiscal quarter in which returned. All Products
returned must be undamaged, in the Vendor's original packaging,
unused and in resalable condition.
Fee
Returns Percent (as a % of gross sales)
----------------- -----------------------
** **
** **
** **
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
12.2. Ingram reserves the right to not accept the return of Products if the
Vendor of such Products has placed restrictions upon the return of
such Products provided Ingram has communicated those restrictions to
XLS prior to shipment. Ingram also reserves the right to not accept
Products which are discontinued or which are being produced or
published by a Vendor which is insolvent or which has declared
bankruptcy. XLS shall pay all costs and bear all risks of loss when
returning Products to Ingram.
12.3. Products purchased under special orders are not eligible to be
returned pursuant to this Section 12 unless Ingram has return rights
with those Vendors. Special orders include Products which the
Vendor has not authorized Ingram to distribute.
12.4. Products purchased as part of Configured Products are not eligible to
be returned unless such returns are due to errors made by Ingram.
The errors will be corrected and the Products reshipped to XLS with
no charge to XLS.
12.5. XLS may return Open Box product without charge in an amount equal to
** of net purchases during the fiscal quarter in which the return is
made. Open Box returns exceeding the allowable percentage will be
charged a fee equal to ** of the invoice price, net of rebates.
12.6. A rebox fee of ** per item will be charged on all Products returned
in a damaged box.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
13. Defective Returns
Within ninety (90) days after the date of purchase by XLS, XLS may
return to Ingram for replacement or credit any Product found to be
defective; provided that, XLS shall obtain Ingram's approval prior
to returning any such Product. Ingram reserves the right to require
XLS to return defective Products directly to the Products' Vendor
for replacement according to the Vendor's defective Products return
policy. Defective Returns are not included in the Returns
Percentages in Paragraph 12.
14. On Site Personnel
14.1. **
14.2. **
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
14.3. XLS may, at its option, assign an appropriate number of its full-time
employees to be officed in Ingram's Configuration Center(s). All
such employees will be employees of XLS for all purposes under this
Agreement and will be subject to the workplace rules applicable to
Ingram's own employees while they are employed on Ingram's premises.
Ingram will provide each XLS employee work spaces similar in size to
the work space Ingram provides its employees of similar job grades.
Ingram will provide each XLS employee with a telephone and will
cover the costs of all telephone services used by the XLS employee
in the conduct of business under this Agreement.
15. Large Account Inventory Program
For up to fifteen days, Ingram will hold for XLS's account at **
those Products which have been designated by a Vendor for sale to a
specific customer of XLS ("LAIP Products"). After the fifteenth
day, XLS agrees that it will pay Ingram an amount equal to ** of the
LAIP Product's total invoice value ** that it holds the LAIP
Products in its inventory.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
16. Marketing Funds
Ingram will pass through to XLS on a dollar-for-dollar basis any co-
op, rebate or marketing funds which it receives from Vendors which
have been designated for XLS's use.
17. Limitation of Warranty
XLS acknowledges and agrees that the Products are provided to XLS
without any warranty other than the warranty which a Vendor may
provide with its Product. INGRAM EXPRESSLY DISCLAIMS ALL EXPRESS
AND/OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
18. Patent, Copyright and Trademark Indemnity
Ingram shall have no duty to defend, indemnify, or hold harmless XLS
from and against any damages or costs incurred by XLS arising from
the infringement of patents or trademarks or the violation of
copyrights by Products which were not manufactured by Ingram or were
not manufactured specifically for resale by Ingram alone.
Ingram shall have the option at any time to replace or modify any
Products sold to XLS to avoid patent or trademark infringement or
copyright violations; provided such replacement or modification does
not materially affect performance hereunder.
Notwithstanding any other terms or conditions to the contrary,
Ingram's liability under this Section shall not exceed (i) the
purchase price of the infringing Product, less (ii) reasonable
depreciation computed on a five-year straight line basis.
19. Limitation of Liability
Ingram shall not be liable to XLS, any affiliate of XLS, any
customer of XLS or any other party for any loss, damage, or injury
which results from the use or application by XLS, any affiliate of
XLS, any customer of XLS or any other party of Products and/or
services delivered to XLS or any person or entity designated by XLS,
unless the loss or damage results directly from the intentionally
tortuous or fraudulent acts or omissions of Ingram. In no event
shall Ingram be liable to XLS, any affiliate of XLS, any customer of
XLS or any other party for loss, damage or injury of XLS or any
person or entity designated by XLS, of any kind or nature arising
out of or in connection with this Agreement, or any performance or
non-performance under this Agreement by Ingram, in excess of the net
purchase price of Products and/or services actually delivered to and
paid for by XLS or any other person or entity designated by XLS
hereunder. In no event (including events of loss, damage, or injury
provided for in this Section) shall Ingram be liable to XLS, any
affiliate of XLS, any customer of XLS or any other party for
indirect, special or consequential damages, even if notification has
been given as to the possibility of such damages. XLS hereby
expressly waives any and all claims for such damages.
20. Default
Each of the following events shall be an event of default under this
Agreement:
(a) In the case of either party, if such party has failed to
perform a material obligation under this Agreement and such
failure has continued for a period of thirty days from the date
such party was notified by the other party of such failure.
(b) In the case of either party, if such party (i) makes a general
assignment for the benefit of creditors; (ii) commences any
case, proceeding or other action seeking to have an order for
relief entered on its behalf as a debtor or to adjudicate it a
bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, liquidation, dissolution or composition of it or
its debts or seeking appointment of a receiver, trustee,
custodian or other similar official for it or for all or of any
substantial part of its property (collectively a "proceeding
for relief"); or (iii) becomes the subject of any proceeding
for relief which is not dismissed within sixty days of its
filing or entry.
21. Termination
21.1. Upon the occurrence of an event of default referred to in clauses
(a) or (b) of Section 20 above, the party not in default may
terminate this Agreement upon thirty (30) days' written notice to
the other party.
21.2. This Agreement will terminate automatically concurrently with
termination of the Stock Purchase Agreement.
22. Confidentiality
This Agreement is confidential and contains confidential
information, and as such will not be disclosed to any third party
without the express written consent of both parties. This Section
shall not restrict the rights of either party to disclose
confidential information if required to do so by law or by lawful
order of any governmental entity; provided that in the event any
such disclosure is required, the party making the disclosure shall
advise the other prior to the disclosure and limit the disclosure to
only that confidential information which must be disclosed in order
to comply with the law or order. The parties agree to disclose the
terms and conditions of this Agreement only to their respective
personnel on a need to know basis. The parties agree to develop
jointly a synopsis of this Agreement which will not be subject to
the provisions of this Paragraph.
23. Force Majeure
Neither party shall be liable for delay or failure to perform this
Agreement, in whole or in part, by reason of contingencies beyond
the reasonable control of the party affected, whether herein
specifically enumerated or not, including among others, acts of God,
war, acts of war, revolution, civil commotion, riots, acts of public
enemies, blockage or embargo, delays of carriers, car shortage,
fire, explosion, breakdown of equipment or facilities, strike,
lockout, labor dispute, casualty or accident, earthquake, epidemic,
flood, cyclone, tornado, hurricane or other windstorm, delays of
vendors or other contingencies interfering with production or with
customary or usual means of transportation of products, or by reason
of any law, order, proclamation, regulation, ordinance, demand,
requisition or requirement or any other act of any governmental
authority, local, state or federal, including court orders,
judgments or decrees, or actions of any governmental authority
respecting the registration, re-registration, cancellation,
suspension, labeling and/or ability to transport or sell products,
or any other cause whatsoever, whether similar or dissimilar to
those enumerated above; provided, that the party so affected shall
give prompt written notice to the other party of the event causing
the delay or impediment and shall use all due diligence to overcome
the effects of the event as promptly as possible. Neither party
shall be required to resolve a strike, lockout or other labor
problem in a manner which it alone does not deem proper and
advisable. The party other than the party affected by an event of
the sort enumerated in or contemplated by this Section may, by
written notice to the other party, elect to extend the term of this
Agreement for a period of time equal to the duration of the event
excusing such performance.
24. Notices
All notices and other communications relating to this Agreement or
its terms will be in writing and mailed via first class United
States Postal Service, certified or registered with return receipt
requested or via facsimile. All notices so mailed will he deemed
received four (4) days after postmark date and facsimiles will be
deemed received upon notification of successful transmission.
25. Entire Agreement
This Agreement (including any Exhibits and Addenda) constitutes the
entire Agreement between the parties regarding the purchase and sale
of Products and will cancel, terminate, and supersede any and all
previous agreements, proposals, representations, or statements,
whether oral or written. The terms of this Agreement will supersede
the terms of any invoice or purchase order issued by either party.
Any modifications of this Agreement must be in writing and signed by
an authorized representative of each party.
26. Governing Law
This Agreement will be deemed made in the State of California and
will be governed by and construed in accordance with California
laws, excluding its conflicts or choice of law rule or principles
which might refer to the law of another jurisdiction. The state and
federal courts situated in Orange County, California will have non-
exclusive jurisdiction and venue over any dispute or controversy
which arises out of this Agreement.
27. Counterparts and Headings
This Agreement may be executed in any number of original
counterparts, each of which when executed and delivered will be
deemed to be an original and all of which taken together will
constitute but one and the same instrument. Headings in this
Agreement are included for convenience of reference only and will
not constitute a part of this Agreement for any other purpose.
28. Assignment
28.1. XLS shall not assign any Product order or any interest therein
without the written consent of Ingram. Any such actual or attempted
assignment without Ingram's prior written consent shall entitle
Ingram to cancel such order upon written notice to XLS.
28.2. Neither party shall assign its rights and interests under this
Agreement, either wholly or partially, to any other party without
the express written consent of the other party hereto.
28.3. In the event Ingram agrees to a partial assignment of this Agreement,
due to the sale of branches representing a portion of the assets of
XLS, all revenue requirements, rebate provisions and other economic
provisions specified herein will be prorated based upon the end-user
revenue for the last four (4) fiscal quarters of all of the XLS
branches.
29. Severability
A judicial determination that any provision hereunder is invalid in
whole or in part shall not affect the enforceability of those
provisions found not to be invalid.
30. Independent Parties
The parties agree that each operates as a business independent of
the other. Both parties agree that neither of them will hold itself
out to be the agent, partner or related party of the other.
Agreed on the 29th day of April, 1997.
"XLS" "Ingram"
XLSource, Inc. Ingram Micro Inc.
By: /s/ Michael Norris By: /s/ Michael Grainger
-------------------------- -------------------------------
(Officer of the Company) (Officer of the Company)
Its: President Its: Executive Vice President
Worldwide Chief Financial Officer
PAGE
<PAGE>
EXHIBIT A
-----------
Page 1 of 3
DISTRIBUTION/CONFIGURATION SERVICE LEVELS
(except as stated)
** ** **
_______________________________________________________________________
Shipping Accuracy ** ** **
Configuration Accuracy
product DOA/defective ** ** **
configured properly ** ** **
Fill Rate ** ** **
_________________________________________________________________________
Service Level - Configuration (not subject to technical hold/review)
within 2 days* ** ** **
within 3 days ** ** **
within 4 days ** ** **
_________________________________________________________________________
*These numbers are based on receipt of 5 day forecast.
Service Level - Distribution ** ** **
Price Book Accuracy
updated within 24 hours ** ** **
Hot Orders ** ** **
_________________________________________________________________________
(same day shipment as configuration unless stipulated at time of order
receipt)
Customer Satisfaction:
Ingram agrees to monitor customer satisfaction by utilizing mutually
agreeable surveys to XLSource branches and formulating action plans to
address differences.
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
PAGE
<PAGE>
EXHIBIT A
-----------
Page 2 of 3
XLS DISTRIBUTOR/CONFIGURATION MEASUREMENT PROGRAM
KEY METRIC DEFINITIONS:
- ----------------------
SHIPPING ACCURACY:
% of orders which have zero defects (as measured by all of the following
criteria) versus total orders:
- - Order without warehouse picking/shipping errors (wrong SKU, wrong count,
inventory accuracy, used product shipped in error, etc...)
- - Order shipped same day as order entry
- - Order shipped to correct place with proper documentation (serial
numbers, tracking numbers, packing slips, proper labels, etc...)
CONFIGURATION ACCURACY (numbers based on getting proper instructions from
customer)
- - Order configured correctly
- - Configured product operates (i.e...no DOA's)
FILL RATE (without constrained product):
- - % of orders that are filled at time of order versus total orders, plus
total legitimate back orders, less constrained, new and/or discontinued
product.
SERVICE LEVEL CONFIGURATION:
- - % of all orders without back orders (reported by XLS account) that meet
or beat the contracted SLA for that account versus total orders for the
account.
SLA measure will begin at time of order entry to the date the complete
order arrives at the customer.
SERVICE LEVEL - DISTRIBUTION:
- - % of orders which from time of shipment to time of arrival at the
customer does not exceed 2 days
PRICE BOOK ACCURACY:
- - % of days that the price book is not updated to current prices versus
total business days.
HOT ORDERS
- - % of configuration orders shipped same day or within one day versus
total configuration orders.
PAGE
<PAGE>
EXHIBIT A
-----------
Page 3 of 3
**
**
**
**
**
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
PAGE
<PAGE>
EXHIBIT B
---------
Vendor # Vendor Name ** ** **
- --------------------------------------------------------------------------
1153 3COM ** ** **
2794 3COM AUTHORIZED PRODUCTS ** ** **
3703 3M DATA STORAGE ** ** **
ADOBE COMMERCIAL ** ** **
ADOBE UNIX ** ** **
4044 AMERICAN POWER CONVERSION ** ** **
2722 ATTACHMATE CORPORATION ** ** **
4815 ATTACHMATE CORPORATION ** ** **
1567 ATTACHMATE DCA ** ** **
BANYAN SYSTEMS ** ** **
2936 BAY NETWORKS ** ** **
BAY NETWORKS WELL FLEET DIVISION ** ** **
1280 BORLAND INTERNATIONAL ** ** **
1357 BORLAND INTERNATIONAL ACADEMIC ** ** **
1335 CAERE CORPORATION ** ** **
CANON COMPUTER SYSTEMS ** ** **
1655 CHEYENNE SOFTWARE ** ** **
3122 CISCO SYSTEMS ** ** **
2622 CISCO SYSTEMS ** ** **
1397 COREL CORPORATION ** ** **
7474 COREL CORPORATION ** ** **
7497 COREL CORPORATION ** ** **
7498 COREL CORPORATION ** ** **
7499 COREL CORPORATION ** ** **
7951 COREL WORDPERFECT ** ** **
1305 CORNERSTONE ** ** **
CREATIVE LABS ** ** **
2063 CTX ** ** **
CURTIS MANUFACTURING ** ** **
EXTENDED SYSTEMS ** ** **
1373 GLOBAL VILLAGE CORPORATION ** ** **
2000 HAYES ** ** **
2125 INTEL ** ** **
3714 INTEL NETWORKING ** ** **
7372 IOMEGA DITTO ** ** **
7297 IOMEGA JAZZ ** ** **
7296 IOMEGA ZIP ** ** **
KINGSTON TECHNOLOGY ** ** **
2439 LOTUS (NOTES) ** ** **
LOTUS DEVELOPMENT ** ** **
2400 LOTUS DEVELOPMENT ** ** **
3249 LOTUS PASSPORT ** ** **
4872 LOTUS PASSPORT ACADEMICS ** ** **
1252 MADGE ADAPTERS ** ** **
MICROSOFT ACADEMIC ** ** **
3124 MICROSOFT ACADEMIC ** ** **
MICROSOFT CONSUMER PRODUCTS ** ** **
2500 MICROSOFT CORPORATION ** ** **
5118 MICROSOFT INPUT ** ** **
MICROSOFT ** ** **
2495 MS BACKOFFICE ** ** **
NOKIA ** ** **
2733 NOVELL ** ** **
NOVELL GROUPWARE ** ** **
NOVELL GROUPWARE ** ** **
NOVELL UPGRADES ** ** **
9716 NOVELL UPGRADES ** ** **
3717 PORT DICORPORATE ** ** **
3335 SEAGATE SOFTWARE NSMG ** ** **
SMART MODULAR ** ** **
3200 SOFTWARE PUBLISH ** ** **
SYMANTEC ** ** **
1639 SYMANTEC ACADEMIC ** ** **
2176 US ROBOTICS NETWORKING ** ** **
US ROBOTICS ** ** **
2609 US ROBOTICS/MOBIL ** ** **
3923 XIRCOM, INC. ** ** **
Note: As Manufacturer costs change, Ingram pricing may be adjusted to
reflect such changes.
* Vendor with Revised Pricing
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
PAGE
<PAGE>
EXHIBIT C
---------
<TABLE>
<CAPTION>
INGRAM ALLIANCE
VENDOR SUBSIDIZED FLOORING CHART
VENDOR IBM CO AT&T NATIONS FINOVA
- --------------------------------------------------------------------------------------------------------------
<S> <C> <S>
ACER IA only N/A All but Monitors Yes Yes Yes Yes Yes Yes
APPLE IA only N/A All but S/W No Yes No Yes Yes Yes
AST IM & IA N/A All Yes Yes Yes Yes Yes No
COMPAQ IM & IA Primary & Secondary All No(pilots only) Yes Yes Yes Yes Yes
DIGITAL IA only N/A 4344 only Yes Yes Yes Yes Yes Yes
EPSON IM & IA N/A All Yes Yes Yes Yes Yes Yes
HEWLETT IA only Primary and Dual Source All No Yes Yes Yes Yes Yes
PACKARD
IBM IM & IA Primary and Secondary All but S/W Yes No No No No No
LEXMARK IM & IA N/A All Yes Yes No Yes No No
NEC IM & IA N/A All Yes Yes Yes Yes Yes Yes
TOSHIBA IM & IA N/A All but disk Yes Yes Yes Yes Yes Yes
Notes: Toshiba, Epson, and DEC flooring billed directly to Ingram (we bill
vendor); flooring companies bill all other vendors directly. If the wrong
flooring company is used, then the flooring company will bill the customer
the 1.35% fees directly.
Special HP Note: Subsidized flooring only relates to HP dealers, not HP
VAR's or direct accounts. If a VAR places an order on his Ingram Alliance
account on flooring, he will be billed the flooring fees from the flooring
company.
</TABLE>
PAGE
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
---------
CONFIGURATION SERVICES PRICING
Service ** Service **
- ------------------------------------------------------------------------------------------------------
<S> <C> <S> <C> <C> <S> <C> <S> <C>
Base System Charge (charged to every unit; ** DOS Windows 3.1 Single Software **
covers handling through configuration process.) Applications
H/W ** Software suits (MS Office) **
Memory, NIC, I/O board, Modems, Windows 95, OS/2 **
Sound Blaster Cards, Video Cards, Windows NT (wkst) **
Floppy Drive, CD-ROM, Hand Drive Windows NT (server) **
Rack Mount ** Network OS (Novell, Microsoft, LAN) **
Attached Devices (Primers, Monitors, etc.) ** Network Applications (ArcServer, etc.) **
Burn-In 2 Hours ** UNIX, SCO **
Burn-In: 24 Hours ** Decompress - Win 3.X. Win95, **
WinNT (Dual Bootable O/S)
Burn-In: 48 Hours **
"Special" burn in, testing **
- ------------------------------------------------------------------------------------------------------
*Single SKU order quantities in excess of 25 units quoted on request.
Service **
- ------------------------------------------------------------------------------------------------------
<S> <C>
Image Download (Proprietary Software) **
Asset Tags **
Special Engineering Services* **
(Image Development, Prototyping, Compatibility
Testing, Future Development)
Depopulation **
- ------------------------------------------------------------------------------------------------------
* Special Engineering Services required for Image Development (** fee per Image)
Service ** ** Service ** **
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <S> <C> <C>
Base System Charge ** ** Base System Charge ** **
4Mb Memory ** ** 2Mb Memory ** **
NIC ** ** PCMCIA - Fax/Modem ** **
Sound Blaster Board ** ** PCMCIA - Flash Mem ** **
Modem/Fax Board ** ** Install Microsoft Office ** **
Total: ** ** Total: ** **
- ------------------------------------------------------------------------------------------------------
Service ** ** Service ** **
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <S> <C> <C>
Base System Charge ** ** Base System Charge ** **
Novell ** ** 8Mb Memory ** **
32 Mb Memory ** ** NIC ** **
CD-ROM Drive ** ** Install Microsoft Office ** **
NIC ** ** Windows NT (wkst ) ** **
Rack Mount ** ** 100 Mb Image download * ** **
Total: ** ** Total: ** **
- ------------------------------------------------------------------------------------------------------
PRICES ARE SUBJECT TO CHANGE WITHOUT NOTICE
CONTACT YOUR SALES REPRESENTATIVE FOR CURRENT PRICING
FEBRUARY 1997
</TABLE>
** Confidential treatment has been requested for the deleted text, which
has been filed separately with the Securities and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> MAY-3-1997
<CASH> 37,997
<SECURITIES> 0
<RECEIVABLES> 147,886
<ALLOWANCES> 8,213
<INVENTORY> 240,228
<CURRENT-ASSETS> 433,999
<PP&E> 105,061
<DEPRECIATION> 46,652
<TOTAL-ASSETS> 610,860
<CURRENT-LIABILITIES> 456,256
<BONDS> 0
0
700
<COMMON> 417
<OTHER-SE> 122,555
<TOTAL-LIABILITY-AND-EQUITY> 610,860
<SALES> 668,256
<TOTAL-REVENUES> 668,256
<CGS> 635,596
<TOTAL-COSTS> 635,596
<OTHER-EXPENSES> 44,204
<LOSS-PROVISION> 1,313
<INTEREST-EXPENSE> 3,805
<INCOME-PRETAX> (16,692)
<INCOME-TAX> (4,902)
<INCOME-CONTINUING> (12,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,114)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
