SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED November 1, 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: 41,786,137 shares of
Common Stock, par value $0.01 per share were outstanding at December 1,
1997.
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INTELLIGENT ELECTRONICS, INC. and Subsidiaries
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
November 1, 1997 and February 1, 1997 3
Consolidated Statements of Operations
Three and Nine Months Ended November 1, 1997
and November 2, 1996 4
Consolidated Statements of Cash Flows
Nine Months Ended November 1, 1997 and November 2, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 2. Change in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART I - FINANCIAL INFORMATION FORM 10-Q
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
November 1, February 1,
1997 1997
----------- -----------
(unaudited)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 48,666 $ 42,881
Escrow receivables 26,313 -
Accounts receivable, net 46,329 149,107
Inventory 1,226 311,669
Prepaid expenses and other current assets 2,292 4,834
Deferred income taxes 7,646 11,861
----------- -----------
Total current assets 132,472 520,352
Property and equipment, net 8,446 58,712
Intangible assets, primarily goodwill, net 44,205 91,914
Other assets 21,335 28,103
----------- -----------
Total assets $ 206,458 $ 699,081
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 34 $ 3,486
Accounts payable 26,742 430,107
Accrued liabilities 58,925 50,034
Long-term debt reclassified as current - 55,000
----------- -----------
Total current liabilities 85,701 538,627
----------- -----------
Long-term debt 5,119 3,496
Other long-term liabilities 13,524 11,015
Commitments and contingencies
Minority interest 11,222 10,472
Shareholders' equity:
Series B Convertible Preferred stock $50 par value per share:
Authorized 200,000 shares, issued and outstanding:
None and 15,000 shares - 750
Common stock $.01 par value per share:
Authorized 100,000,000 shares,
issued: 47,052,959 and 41,352,973 shares 471 413
Additional paid-in capital 286,145 284,666
Treasury stock (66,847) (67,311)
Retained deficit (128,877) (83,047)
----------- -----------
Total shareholders' equity 90,892 135,471
----------- -----------
Total liabilities and shareholders' equity $ 206,458 $ 699,081
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
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<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share data)
(unaudited)
Three months ended Nine months ended
------------------------ ------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 85,636 $189,637 $471,843 $598,525
Cost of goods sold 70,301 179,980 406,647 543,291
----------- ----------- ----------- -----------
Gross profit 15,335 9,657 65,196 55,234
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 13,613 32,072 67,778 80,585
Branch closure costs - 9,790 - 9,790
Amortization of intangibles, primarily goodwill
630 1,162 3,152 3,712
----------- ----------- ----------- -----------
Total operating expenses 14,243 43,024 70,930 94,087
----------- ----------- ----------- -----------
Income (loss) from operations 1,092 (33,367) (5,734) (38,853)
Other income (expense):
Investment and other income, net
639 52 807 24
Interest expense (449) (2,931) (2,806) (7,791)
Loss on XL Transaction - - (27,194) -
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income tax provision (benefit) and minority interest
1,282 (36,246) (34,927) (46,620)
Income tax provision (benefit) - (3,458) 4,277 (6,311)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest 1,282 (32,788) (39,204) (40,309)
Minority interest (259) (10) (678) (10)
----------- ----------- ----------- -----------
Income (loss) from continuing operations
1,023 (32,798) (39,882) (40,319)
Discontinued operation:
Loss from discontinued operation (net of
tax benefit of $2,658, $6,875, and $329) - (60,642) (12,095) (58,581)
Gain on sale of discontinued operation (net
of tax provision of $4,582) - - 6,875 -
----------- ----------- ----------- -----------
Net income (loss) 1,023 (93,440) (45,102) (98,900)
Preferred stock dividend 2 - 357 -
----------- ----------- ----------- -----------
Net income (loss) applicable to
common shareholders $ 1,021 $(93,440) $(45,459) $(98,900)
=========== =========== =========== ===========
Income (loss) per share:
Continuing operations $ 0.02 $ (0.92) $ (1.04) $ (1.14)
Discontinued operation - (1.70) (0.31) (1.65)
Sale of discontinued operation - - 0.18 -
----------- ----------- ----------- -----------
Net income (loss) per common share applicable
to common shareholders $ 0.02 $ (2.62) $ (1.17) $ (2.79)
=========== =========== =========== ===========
Weighted average number of common shares
and share equivalents outstanding: 41,761 35,599 38,788 35,498
See accompanying notes to the consolidated financial statements.
</TABLE>
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INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands, unaudited)
Nine months ended
------------------------
November 1, November 2,
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (45,102) $ (98,900)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 7,733 8,530
Write-down of property and equipment 2,768 227
Branch closure costs - 9,790
Deferred taxes 2,940 (275)
Provision for losses on trade receivables 5,172 1,104
Provision for write-down of inventory 2,919 3,340
Minority interest in net income of XLConnect 678 10
Loss from discontinued operation 12,095 58,581
Gain on RND Transaction (6,875) -
Changes in assets and liabilities excluding effects
of business sales:
Accounts receivable (16,548) (909)
Inventory (6,228) 21,062
Prepaid expenses and other current assets (269) 2,410
Accounts payable (305) (50,052)
Accrued liabilities 34,821 263
----------- -----------
Net cash used for operating activities (6,201) (44,819)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net of disposals (5,337) (3,099)
Proceeds from XL Transaction 135,740 -
Transfers to escrow receivables (50,313) -
Transfers from escrow receivables 19,000 -
Other (744) (673)
----------- -----------
Net cash provided by (used for) investing activities 98,346 (3,772)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt reclassified as current (55,000) -
Repayment of long-term debt - (20,000)
Proceeds from initial public offering by subsidiary - 45,254
Net proceeds from sale of preferred stock and warrants - 4,692
Net repayments from working capital advances - (6,271)
Proceeds from exercise of stock options - 1,981
Proceeds from employee stock purchase plan 93 247
Proceeds from loans on cash value of life insurance policies 4,220 -
Repayment of loans on cash value of life insurance policies (4,220) -
Proceeds from long-term debt 5,500 -
Reduction in capital lease obligations (588) (414)
----------- -----------
Net cash provided by (used for) financing activities (49,995) 25,489
----------- -----------
Net cash provided by (used for) continuing operations 42,150 (23,102)
Cash provided by (used for) discontinued operation (36,365) 47,307
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,785 24,205
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,881 34,618
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,666 $ 58,823
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
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INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
---------------------
The consolidated financial statement information of Intelligent
Electronics, Inc. (the "Company") 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 consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended February 1, 1997.
On July 18, 1997, the Company sold its business (the "Indirect Business")
of providing information technology products, services and solutions to
network integrators and resellers to Ingram Micro Inc. ("Ingram") in the
RND Transaction (as defined in Note 3) and, accordingly, the Indirect
Business is treated as a discontinued operation in the accompanying
financial statements. Unless otherwise indicated, amounts and disclosures
referred to herein relate to continuing operations.
(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, and the three and nine months ended November 1, 1997 and November
2, 1996, the amount reported as net income (loss) per share applicable to
common shareholders is no different than that which would have been
reported for basic and diluted net income (loss) per share applicable to
common shareholders in accordance with SFAS No. 128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS 130"), which is effective for financial statements issued for
periods beginning after December 15, 1997. The Company does not expect the
adoption of SFAS 130 to have a material effect on its reported financial
condition or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which is effective for
financial statements issued for periods beginning after December 15, 1997.
SFAS 131 establishes standards for the way publicly-traded companies report
information about operating segments as well as disclosures about products
and services, geographic areas and major customers. The Company does not
expect the adoption of SFAS 131 to have a material effect on its reported
financial condition or results of operations.
(3) Sale of Businesses
------------------
On July 18, 1997, the Company and certain of its direct and indirect
wholly-owned subsidiaries and XLConnect Solutions, Inc. ("XLConnect"), an
80% owned subsidiary, consummated the sale of certain assets under an Asset
Purchase Agreement, as amended (the "Purchase Agreement") with GE Capital
Information Technology Solutions Acquisition Corp. (the "Buyer"), a
subsidiary of GE Capital Information Technology Solutions, Inc.
("GECITS"), pursuant to which:
(a) The Company sold to the Buyer certain assets related to the
Company's direct computer hardware sales business ("XLSource"),
consisting primarily of the inventory, accounts receivable and customer
contracts relating to 20 of the 24 XLSource locations and real property
leases and fixed assets related to six of such 20 locations; and
(b) XLConnect sold to the Buyer certain specified services
contracts and related assets, consisting principally of accounts receivable
and fixed assets.
The purchase price paid by the Buyer in the transaction pursuant to the
Purchase Agreement (the "XL Transaction") was approximately $136.5
million, based on the estimated net book value of the assets being sold of
approximately $95.0 million. Of the total purchase price paid in the XL
Transaction, XLConnect received approximately $10.3 million (based on the
estimated net book value of the assets acquired from it of approximately
$5.6 million). The Company delivered a Balance Sheet as of the closing
date (the "Closing Balance Sheet") to the Buyer on August 29, 1997. The
Buyer has reviewed the Closing Balance Sheet and the Company and the Buyer
are currently discussing resolution of the issues related thereto. Of the
purchase price, approximately $102.9 million was paid in cash at closing,
with approximately $32.8 million paid into escrow.
Approximately $22.8 million of the total escrow was subject to release if
and when the consent of two customers, whose contracts with XLSource were
assigned in the transaction, are obtained. On September 15, 1997, $19.0
million was released as a result of obtaining one of the required consents.
As of December 12, 1997, the other consent was still pending and the
Company has therefore deferred the recognition of the premium allocated to
that contract, totaling approximately $0.9 million.
The remaining $10.0 million in escrow is to be retained for up to 240 days
to fund purchase price adjustments and obligations of the Company and
XLConnect under the Purchase Agreement, including the obligation to
repurchase from the Buyer any accounts receivable which were sold to the
Buyer and remain uncollected 120 days after the closing date. The Company has
received a notice from the Buyer that it is obligated to repurchase certain
receivables from the Buyer. The Company has not yet determined whether it
is so obligated, or the amount, if any, of the obligation.
As a result of the XL Transaction, the Company has preliminarily recorded a
pre-tax loss of approximately $27.2 million, net of transaction costs, plus
a tax provision of approximately $1.9 million. The tax provision is due to
differences between the tax bases of the assets being sold and their
amounts for financial reporting purposes (primarily goodwill). The loss
from the XL Transaction will be finalized after the resolution of the
remaining required consent and the Closing Balance Sheet issues, which are
expected to take place in the quarter ending January 31, 1998.
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 $78.0 million (the "RND Transaction"). On July 16, 1997,
the shareholders of the Company approved the sale of the Indirect Business
and on July 18, 1997, the sale was consummated. The purchase price was
paid by assumption of liabilities, based on the estimated balance sheet of
the Indirect Business at the time of closing. The Company paid to Ingram
approximately $4.5 million, which was the amount by which the estimated net
assumed liabilities exceeded the purchase price.
Three separate escrow accounts were established as part of the RND
Transaction. An escrow in the amount of $10.0 million was established for
final settlement of any purchase price adjustments and indemnity claims.
This escrow was funded by an intercompany payable due from the Indirect
Business to the Company, which was paid by Ingram into escrow. A portion
of this escrow (no more than $8.0 million) will be released upon settlement
of the Closing Balance Sheet, to the extent not used to fund any
adjustments. The remaining $2.0 million will remain in escrow for at least
six months after the closing date to cover any indemnity claims.
Another escrow account in the amount of $2.5 million was established
pending resolution of certain issues between the Company and Ingram
relating to pre-closing revenues. This issue is expected to be resolved in
conjunction with the Closing Balance Sheet and the escrow will be disbursed
to the Company to the extent not used to fund any adjustments.
A third escrow account in the amount of $5.0 million was established to
secure the Company's obligations under the Amended and Restated Volume
Purchase Agreement ("Supply Agreement"), as more fully described below.
This escrow will be released after the Company completes its obligations
under the Supply Agreement in three to five years.
As a result of the RND Transaction, the Company has preliminarily recorded
a pre-tax gain of approximately $11.5 million, net of transaction costs,
and a tax provision of approximately $4.6 million. The gain on the RND
Transaction will be finalized after resolution of the Closing Balance Sheet
and the issue relating to pre-closing revenues, which are expected to take
place in the quarter ending January 31, 1998. Results of the Indirect
Business have been reported separately as a discontinued operation in the
accompanying Consolidated Statements of Operations.
The Company and Ingram are currently finalizing resolution of purchase
price adjustments and Supply Agreement issues. The Company believes that
such resolution will not have a material adverse effect on the Company.
The results of operations of the Indirect Business excluded from continuing
operations are summarized as follows (in thousands):
Three
months
ended Nine months ended
November 2, November 1, November 2,
1996 1997 1996
----------- ----------- -----------
Revenues $ 672,349 $ 787,821 $2,008,100
Costs and expenses 735,649 806,791 2,067,010
----------- ----------- -----------
Loss before taxes (63,300) (18,970) (58,910)
Income tax benefit 2,658 6,875 329
----------- ----------- -----------
Loss from discontinued operation $ (60,642) $ (12,095) $ (58,581)
=========== =========== ===========
Pro forma results of operations of the Company for the three months ended
November 2, 1996 and the nine months ended November 1, 1997 and November 2,
1996, assuming the XL Transaction and the RND Transaction were consummated
on February 4, 1996, are as follows (in thousands):
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<CAPTION>
Three
months
ended Nine months ended
November 2, November 1, November 2,
1996 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from continuing operations $ 74,370 $ 250,546 $ 227,516
Loss from continuing operations (1,716) (28,731) (7,864)
Loss from continuing operations per share (0.05) (0.74) (0.22)
</TABLE>
Pro forma financial information presented above is not necessarily
indicative of the results of operations that would have occurred had the XL
Transaction and the RND Transaction taken place at the beginning of the
periods presented or of future results of operations.
Under the terms of the Supply Agreement, XLSource agreed to order 100% of
its product requirements available from Ingram, of no less than $1.8
billion, over a three-year period. If the minimum annual commitment is not
met, the Company may elect to extend this contract for up to two years. In
addition, if in any one year, purchases are below a certain level, an
adjustment may be made to the cost of products purchased from Ingram. The
Company has guaranteed to Ingram performance by XLSource of its obligations
under the Supply Agreement. In connection with the Supply Agreement,
Ingram agreed that certain product purchases by GE Capital Information
Technology Solutions - North America, Inc., an affiliate of the Buyer
("GECITS-NA"), from Ingram which are in excess of GECITS-NA's current
purchases from Ingram will be credited against XLSource's $1.8 billion
purchase commitment under the Supply Agreement. The Company believes that
GECITS-NA is not required to purchase any minimum amount of product from
Ingram. XLSource and the Company have not been released from any of their
obligations regarding the $1.8 billion commitment, and the Company has
delivered to Ingram a $7.5 million irrevocable letter of credit and the
$5.0 million escrow account discussed above to secure the purchase
commitment and other obligations of the Company. At the Company's
election, the $5.0 million escrow account can be replaced by a $5.0
million irrevocable letter of credit.
Although the Company believes that its purchases from Ingram and those of
GECITS-NA will satisfy XLSource's purchase obligations under the Supply
Agreement, there can be no assurance in that regard. In the event such
purchase obligations are not satisfied within the original term of the
Supply Agreement or any extension period, certain liquidated damages, in
the amount of 1.5% of any short-fall, are due to Ingram. Although the
Company does not currently believe that the payment of any such liquidated
damages will have a material adverse effect on the Company, there can be no
assurance in that regard.
(4) Credit Facilities
-----------------
In September 1997, the Company's financing agreement was amended to reduce
the allowable borrowings from $225 million to $55 million, subject to a
borrowing base formula, as a result of the RND and XL Transactions and the
Company's resultant decreased need for financing. This financing
agreement was originally signed in April 1996, has a rolling eighteen month
term and is renewable for six-month periods with the consent of the lender.
The facility can be used for inventory financing, equipment financing and
working capital purposes. The Company and the lender are currently
finalizing an amended financing agreement to further reduce the size of the
facility to $40 million, subject to a borrowing base formula. The Company
repaid the $55 million long-term debt reclassified as current plus all
current interest-bearing borrowings with proceeds from the XL Transaction.
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 November 1, 1997 and believes that it
will remain in compliance during fiscal 1997.
In March 1997, the financing agreement was amended to delete the assets of
XLConnect and XLConnect's subsidiaries from the borrowing base, which in
effect reduced 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 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 25% of the market value (calculated daily) of the XLConnect
pledged stock.
On July 18, 1997, the Company obtained a $7.5 million irrevocable letter of
credit to secure the Company's obligations under the Supply Agreement. A
portion of the financing agreement has been reserved for the letter of
credit and 120% of the face amount of the letter of credit is subtracted
from the borrowing base.
All borrowings under this agreement are included in accounts payable on the
Company's Consolidated Balance Sheets. As of November 1, 1997,
approximately $19.3 million was available after considering the borrowing
base formula (including the reduction of the $7.5 million irrevocable
letter of credit) and trade payables outstanding to a vendor affiliated
with the lender.
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 was available and was 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, which
have been met. 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 November 1, 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
---------------
During the quarter ended May 3, 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.
During the quarter ended August 2, 1997, 10,000 shares of the Company's
Series B Convertible Preferred Stock were converted into 3,894,461 shares
of Common Stock.
During the quarter ended November 1, 1997, the remaining 4,000 shares of
the Company's Series B Convertible Preferred Stock were converted into
1,435,163 shares of the Company's Common Stock.
Assuming the conversion of all shares of the Preferred Stock had taken
place at the beginning of the periods presented, the income (loss) per
share from continuing operations would have been $0.02 and $(0.96) for the
three and nine months ended November 1, 1997, respectively, and $(0.79) and
$(0.98) for the three and nine months ended November 1, 1996, respectively.
(6) Supplemental Cash Flow Information
----------------------------------
Cash payments during the nine-month periods ended November 1, 1997 and
November 2, 1996 included interest of $3,662,000 and $8,460,000,
respectively, and income taxes of $480,000 and $95,000, respectively.
(7) Contingencies
-------------
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 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. This
settlement was approved by the Court on November 26, 1997, but will not
become final until a thirty day appeal period has past. Of the $10
million, the Company contributed $3.8 million and the balance was funded by
insurance. The amount 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
- ---------------------
Continuing Operations
Revenues declined in the quarter and nine months ended November 1, 1997
compared to the quarter and nine months ended November 2, 1996. These
decreases resulted from the sale of certain XLSource locations and certain
specified services contracts of XLConnect as part of the XL Transaction
consummated in July 1997. On a pro forma basis assuming that the RND and
XL Transactions were consummated on February 4, 1996, revenues for the
quarter ended November 2, 1996 ("Q396") were $74.4 million compared to
$85.6 million for the quarter ended November 1, 1997 ("Q397"). Revenues
were $227.5 million for the nine months ended November 2, 1996 compared to
$250.5 million for the nine months ended November 1, 1997. Both XLSource
and XLConnect contributed to these pro forma increases.
Gross margin as a percent of revenues was 17.9% and 13.8% for Q397 and the
nine months ended November 1, 1997, respectively, compared to 5.1% and 9.2%
for Q396 and the nine months ended November 2, 1996, respectively. The
increase in the gross margin percent for Q397 and the nine months ended
November 2, 1997 compared to the same periods last year was attributable to
a higher proportion of revenues from XLConnect, which generates a higher
gross margin percent than the direct hardware sales of XLSource. In
addition, certain charges were taken during Q396, totaling approximately
$15.7 million, which reduced the reported gross margin percent for Q396 and
the nine months ended November 2, 1996. On a pro forma basis, gross margin
percent for Q396 and the nine months ended November 2, 1996 was 19.4% and
16.0%, respectively, compared to 17.9% and 18.8% for Q397 and the nine
months ended November 1, 1997, respectively. The decrease in the pro forma
gross margin percent for Q397 compared to Q396 was due to declining margins
in the hardware business resulting from continued competitive pricing
pressures and the loss of certain vendor discounts as a result of decreased
purchase volumes.
Selling, general and administrative expenses ("SG&A") decreased by
approximately $18.5 million in Q397 (15.9% of revenues) as compared to Q396
(16.9% of revenues). SG&A decreased by approximately $12.8 million for the
nine months ended November 1, 1997 (14.4% of revenues) as compared to the
nine months ended November 2, 1996 (13.5% of revenues). These decreases
were primarily due to the consummation of the XL Transaction in July 1997
and the reduction in the corporate staff as a result of the RND and XL
Transactions. On a pro forma basis, SG&A for Q396 and the nine months
ended November 2, 1996 was $16.0 million (21.6% of revenues) and $44.1
million (19.3% of revenues), respectively, compared to $13.6 million (15.9%
of revenues) and $46.9 million (18.7 % of revenues) for Q397 and the nine
months ended November 1, 1997, respectively. The pro forma decrease from
Q396 to Q397 was due primarily to continued headcount reductions in the
Company's corporate staff and at XLSource, partially offset by an increase
in XLConnect's SG&A to support continued growth of the services business.
It is anticipated that the decrease in the corporate staff will somewhat
mitigate the continued increase in SG&A related to XLConnect's growth.
Interest expense decreased for both Q397 and the nine months ended November
1, 1997 compared to the same periods last year as a result of the receipt
of proceeds from the XLConnect initial public offering in October 1996, the
sale of Preferred Stock in October 1996 and January 1997 and proceeds from
the XL Transaction which were used to repay outstanding debt. Investment
and other income increased as the Company's investable cash increased due
to the factors above.
For Q397, the Company did not record a tax provision due to the use of net
operating losses to offset taxable income. The Company's effective tax rate
for Q396 was a 9.5% benefit. For the nine months ended November 1, 1997,
the effective tax rate was an 12.3% provision compared to a 13.5% benefit
for the same period last year. These changes were primarily due to the
write-off of non-deductible goodwill as part of the XL Transaction.
Discontinued Operation
- ----------------------
For the nine months ended November 1, 1997, the pre-tax loss on
discontinued operations was approximately $19.0 million compared to a pre-
tax loss of approximately $58.9 million for the same period last year,
which included an impairment loss totaling approximately $61.6 million.
This change was due to lower revenues and gross margin percent as a result
of increased competitive pressures throughout the industry primarily due to
open-sourcing and the uncertainty of the future of the Indirect Business.
The Indirect Business experienced a trend of declining sales caused by the
Company's inability to retain and attract customers resulting from a number
of factors. These factors included: 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
prior periods; increased competition due to open-sourcing; and continued
consolidation in the reseller channel.
Liquidity and Capital Resources
- -------------------------------
The Company has been financed to date from stock offerings, bank and
subordinated borrowings, inventory financing, sales of businesses 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 November 1, 1997, the Company had cash and cash equivalents of
approximately $48.7 million compared to approximately $42.9 million at
February 1, 1997. In addition, the Company has approximately $26.3 million
in escrow classified as a current asset pending resolution of the Closing
Balance Sheets and any indemnity claims in the XL and RND Transactions, the
obligation to repurchase uncollected sold accounts receivables from GECITS
and certain other issues. There is also a $5 million escrow included in
Other assets on the Consolidated Balance Sheets which was established to
secure the Company's obligations under the Ingram Supply Agreement. It is
anticipated that approximately $21.3 million of the escrows will be resolved
by January 31, 1998 (the end of the Company's first fiscal quarter). An
additional $5 million in escrow is expected to be resolved by May 2, 1998
(the end of the Company's first fiscal quarter). The remaining $5 million
escrow will be held until the Company has satisfied its obligations
under the Ingram Supply Agreement in three to five years. The Company has
received a notice from GECITS that it is obligated to repurchase certain
receivables from GECITS. The Company has not yet determined whether it is
so obligated, or the amount, if any, of the obligation.
Working capital was approximately $46.8 million at November 1, 1997
compared to negative working capital of approximately $18.3 million at
February 1, 1997. The increase was primarily due to the cash proceeds from
the XL Transaction, net of the repayment of the $55 million long-term debt
reclassified as current.
As of November 1, 1997, the Company had a $55 million financing agreement,
of which approximately $19.3 million was available after considering the
borrowing base formula (including the reduction of the $7.5 million
irrevocable letter of credit to secure the Company's obligations under the
Ingram Supply Agreement) and trade payables outstanding to a vendor
affiliated with the lender. The Company and the lender are currently
finalizing an amended financing agreement to further reduce the size of the
facility to $40 million, subject to a borrowing base formula.
Based on the Company's expected level of operations, including plans to
improve the performance of the remaining locations 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 for the next
twelve months.
Inflation and Seasonality
- -------------------------
The Company believes that inflation has not had a material impact on its
operations or liquidity to date. The Company believes that its business is
subject to some seasonality, and that weaker sales in the services part of
the business (XLConnect) may be experienced during the fourth quarter due
to fewer business days and plant closings around the holidays. The
hardware part of the business (XLSource) follows a seasonal pattern with
peaks occurring near the end of the calendar year.
Forward-Looking Statements
- --------------------------
The matters discussed in this Form 10-Q that are forward-looking statements
within the meaning of the federal securities laws 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 generally in the level of demand for the
Company's products and services; the potential termination or non-renewal
of a supply or services agreement with a major vendor or customer;
continued competitive and pricing pressures in the industry; billable
technical employee and product supply shortages; open-sourcing of products
from vendors; changes in the mix of utilization to provide billable
services between employees and subcontractors; rapid product improvement
and technological change, short product life cycles and resulting
obsolescence risks; legal proceedings; risks associated with the
transaction purchase price adjustments and the return of transaction
escrows; and risks of unavailability of adequate products, credit, capital
or financing.
PAGE
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
Part II - Other Information
Item 2. Changes in Securities
---------------------
(c) During the third quarter ended November 1, 1997, the holder
of the Company's Series B Convertible Preferred Stock
("Preferred Stock") converted 4,000 shares of Preferred Stock
having a stated value of $4,000,000, together with the
accrued premium thereon of $133,890, into 1,435,163 shares of
Common Stock. The issuance of the shares of Common Stock was
exempt from the registration provisions of the Securities Act
of 1933 (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
None
(b) Reports filed on Form 8-K.
The Company's Report on Form 8-K/A dated July 18, 1997 and
filed with the Securities and Exchange Commission on
September 30, 1997 reporting, under Item 7, pro forma
financial information for the sale of certain assets of its
direct computer hardware sales business and certain
specified services contracts and related assets of
XLConnect to GECITS and the consummation of sale of the
Company's Indirect Business to Ingram.
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/ Eugene E. Marinelli, Jr.
----------------------------
Eugene E. Marinelli, Jr.
Vice President, Chief
Financial Officer and
Chief Accounting Officer
Date: December 16, 1997
<PAGE>
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