1
EXHIBIT 13.1
INDEX TO
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
CONSOLIDATED BALANCE SHEET 30
CONSOLIDATED STATEMENT OF INCOME 31
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 32
CONSOLIDATED STATEMENTS OF CASH FLOWS 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY 51
REPORT OF INDEPENDENT ACCOUNTANTS 51
COMPANY INFORMATION 52
2
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of Ingram
Micro Inc. ("Ingram Micro" or the "Company"). The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements and notes thereto, included elsewhere in this Annual Report
to Shareowners.
The fiscal year of the Company is a 52- or 53-week period ending on the
Saturday nearest to December 31. References below to 1994, 1995, 1996, 1997 and
1998 represent the fiscal years ended December 31, 1994 (52 weeks), December 30,
1995 (52 weeks), December 28, 1996 (52 weeks), January 3, 1998 (53 weeks), and
January 2, 1999 (52 weeks), respectively.
FISCAL YEAR
------------------------------------------------------------------------------------
(In 000s, except per share data) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
SELECTED OPERATING INFORMATION
NET SALES $ 22,034,038 $ 16,581,539 $ 12,023,451 $ 8,616,867 $ 5,830,199
GROSS PROFIT 1,391,168 1,085,689 812,384 605,686 438,975
INCOME FROM OPERATIONS(1) 486,605 376,579 247,508 186,881 140,290
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST(1) 406,860 326,489 196,757 134,616 100,705
NET INCOME(1) 245,175 193,640 110,679 84,307 63,344
BASIC EARNINGS PER SHARE(1) 1.76 1.43 0.99 0.79 0.59
DILUTED EARNINGS PER SHARE(1) 1.64 1.32 0.88 0.74 0.57
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 139,263,810 135,764,053 112,285,058 107,251,362 107,251,362
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 149,537,870 146,307,532 125,436,376 114,517,371 110,641,131
------------ ------------ ------------ ------------ ------------
SELECTED BALANCE SHEET INFORMATION
CASH $ 96,682 $ 92,212 $ 48,279 $ 56,916 $ 58,369
TOTAL ASSETS 6,733,404 4,932,151 3,366,947 2,940,898 1,974,289
TOTAL DEBT(2) 1,720,456 1,141,131 304,033 850,548 552,283
STOCKHOLDERS' EQUITY 1,399,257 1,038,206 825,150 310,795 221,344
------------ ------------ ------------ ------------ ------------
- -------------
(1) Reflects a noncash compensation charge in 1998, 1997, and 1996 of $4.6
million ($3.7 million, or $0.02 per share, net of tax) and $7.2 million
($5.9 million, or $0.04 per share, net of tax) and $23.4 million ($19.5
million, or $0.16 per share, net of tax), respectively, in connection with
the granting of Rollover Stock Options and certain restricted stock. See
Notes 12 and 13 of Notes to Consolidated Financial Statements.
(2) Includes long-term debt, convertible debentures, current maturities of
long-term debt and debt due to Ingram Industries.
18
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In evaluating the business of Ingram Micro Inc., readers should carefully
consider the important factors discussed under Exhibit 99.01 to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1999 and
"--Cautionary Statements for the Purpose of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995."
OVERVIEW
Ingram Micro is the leading wholesale distributor of computer-based
technology products and services worldwide. The Company's net sales have grown
to $22.0 billion in 1998 from $5.8 billion in 1994 while net income has grown to
$245.2 million in 1998 from $63.3 million in 1994. The growth reflects
substantial expansion of the Company's existing operations, resulting from the
successful integration of 19 acquisitions worldwide, the addition of new
customers, increased sales to the existing customer base, as well as the
addition of new product categories and suppliers. Overall, however, even
adjusting for the fact that 1997 was a 53-week year, the Company's revenue and
income grew at a slower rate in 1998 than in 1997.
The Company's gross margins declined to 6.3% in 1998 from 7.5% in 1994. The
computer-based technology products wholesale distribution industry in which the
Company operates is characterized by narrow gross and operating margins that
have declined industrywide in recent years primarily due to intense price
competition. The Company expects these competitive pricing pressures to continue
in the foreseeable future. In addition, in late 1994 the Company entered the
master reseller business, which typically has lower gross margins with a lower
operating cost model and reduced financing costs. The increase in the master
reseller business as a percentage of net sales also contributed to the reduction
in gross margins during the period.
The Company's operating margins have declined less than gross margins.
Operating margins declined to 2.2% in 1998 from 2.4% in 1994. To partially
offset the decline in gross margins, the Company has continually instituted
operational and expense controls that have reduced selling, general, and
administrative ("SG&A") expenses as a percentage of net sales to 4.1% in 1998
from 5.1% in 1994. The U.S. operations have benefited from greater economies of
scale compared to the non-U.S. operations, thereby producing higher operating
margins. There can be no assurance that the Company will be able to continue to
reduce operating expenses as a percentage of net sales to mitigate any further
reductions in gross margins. Net margins, excluding noncash compensation
charges, have remained constant at approximately 1.1% since 1994. Operating
margins and net margins were impacted in 1996, 1997 and 1998 by the noncash
compensation charges described below.
Frameworks(TM), Total Integration Services(TM) ("Frameworks"), a
value-added initiative launched in 1997, allows the Company to provide channel
assembly and custom configuration, and to produce private-label or unbranded
systems for its customers. Start-up costs associated with its initial investment
included the acquisition of assembly facilities and related business in The
Netherlands and the startup of a manufacturing facility in Memphis, Tennessee.
Additionally, during its development phase in 1998, Frameworks formed an
alliance with Solectron Corporation, a leading contract manufacturer in computer
technology, which is expected to result in increased manufacturing and assembly
capacity around the world.
Ingram Micro entered the master reseller business in late 1994 with the
launch of Ingram Alliance. The Company further expanded its master reseller
business by acquiring Intelligent Electronics, Inc.'s Reseller Network Division
("RND") in July 1997 and integrating RND into Ingram Alliance. Concurrent with
the RND acquisition, the Company more fully integrated its master reseller
business into its wholesale distribution business. A substantial majority of the
Company's master reseller sales were funded by floor plan financing companies
whose fees were previously subsidized by the Company's suppliers. Prior to 1998,
the Company typically received payment from these financing institutions within
three business days from the date of the sale, allowing the Company's master
reseller business to operate at much lower relative working capital levels than
the Company's wholesale distribution business. During the third and fourth
quarters of 1998, two of the industry's leading hardware manufacturers reduced
their flooring fee subsidies. As a result, payment from the floor plan financing
companies is now received generally within 15 days, which has increased working
capital requirements within the master reseller business and consequently
increased average borrowing levels and interest costs.
The computer-based technology products and services distribution business
is capital-intensive. The Company has relied heavily on debt financing for its
increasing working capital needs to grow both organically and through
acquisitions. The Company's business also requires significant levels of capital
to finance accounts receivable and product inventory that is not financed by
trade creditors. On June 9, 1998, the Company sold $1.33 billion aggregate
principal amount at maturity of its Zero Coupon Convertible Senior Debentures
due 2018 in a private placement. The Company has subsequently registered the
resale of these debentures with the Securities and Exchange Commission (the
"SEC").
19
4
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Gross proceeds from this offering were $460.4 million. The Company also has
revolving credit facilities of approximately $1.65 billion, as well as
uncommitted facilities of approximately $260 million. The Company's interest
expense for any current or future indebtedness will be subject to fluctuations
in interest rates and may cause fluctuations in the Company's net income.
In November 1996, the Company was split-off (the "Split-Off") from Ingram
Industries Inc. ("Ingram Industries"), the former parent company, and Ingram
Entertainment Inc. ("Ingram Entertainment"), and the Company completed an
initial public offering (the "IPO") of its Class A Common Stock that raised
$393.8 million, net of underwriters' discounts and expenses, of which
approximately $366.3 million was used to repay certain indebtedness to Ingram
Industries.
In connection with the Split-Off, certain outstanding Ingram Industries
stock options, incentive stock units ("ISUs"), and stock appreciation rights
("SARs") held by certain employees of Ingram Industries, Ingram Entertainment,
and Ingram Micro were converted to options to purchase up to an aggregate of
approximately 10,989,000 shares of Class A Common Stock ("Rollover Stock
Options"). The Company recorded a pre-tax noncash compensation charge of
approximately $23.4 million ($19.5 million, net of tax) in 1996, $7.2 million
($5.9 million, net of tax) in 1997 and $4.6 million ($3.7 million, net of tax)
in 1998 primarily related to the vested portion of certain Rollover Stock
Options grants based on the difference between the estimated fair value of the
Company's common stock at the applicable measurement dates and the exercise
price of such options. The Company will record additional noncash compensation
charges over the remaining vesting periods of the Rollover Stock Options. These
additional charges, including charges for certain 1996 restricted stock grants,
are expected to be approximately $2.7 million ($1.9 million, net of tax) for
1999 and $1.1 million ($0.7 million, net of tax) for 2000.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by geographic region
(excluding intercompany sales), and the percentage of total net sales
represented thereby, for each of the periods indicated.
FISCAL YEAR
1998 1997 1996
--------------------- -------------------- ----------------------
(Dollars in millions)
NET SALES BY GEOGRAPHIC REGION:
UNITED STATES $14,393 65.3% $11,540 69.6% $ 8,058 67.0%
EUROPE 5,624 25.5% 3,353 20.2% 2,590 21.6%
OTHER INTERNATIONAL 2,017 9.2% 1,689 10.2% 1,375 11.4%
------- ------- ------- ------- ------- -------
TOTAL $22,034 100.0% $16,582 100.0% $12,023 100.0%
======= ======= ======= ======= ======= =======
The following table sets forth certain items from the Company's Consolidated
Statement of Income as a percentage of net sales, for each of the periods
indicated.
PERCENTAGE OF NET SALES
FISCAL YEAR
--------------------------------
1998 1997 1996
------ ------ ------
NET SALES 100.0% 100.0% 100.0%
COST OF SALES 93.7% 93.5% 93.2%
----- ----- -----
GROSS PROFIT 6.3% 6.5% 6.8%
EXPENSES:
SG&A EXPENSES 4.1% 4.2% 4.5%
NONCASH COMPENSATION CHARGE 0.0% 0.0% 0.2%
----- ----- -----
INCOME FROM OPERATIONS 2.2% 2.3% 2.1%
OTHER EXPENSE, NET 0.4% 0.3% 0.5%
----- ----- -----
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1.8% 2.0% 1.6%
PROVISION FOR INCOME TAXES 0.7% 0.8% 0.7%
MINORITY INTEREST 0.0% 0.0% 0.0%
----- ----- -----
NET INCOME 1.1% 1.2% 0.9%
===== ===== =====
20
5
1998 Compared to 1997
Consolidated net sales increased 32.9% to $22.0 billion in 1998 from $16.6
billion in 1997. The increase in worldwide net sales was primarily attributable
to the addition of new customers, increased sales to the existing customer base,
expansion of the Company's product offerings, growth in the computer-based
technology products and services industry in general, and the July 1998
acquisition of a 95% ownership interest in Munich, Germany-based Macrotron AG
("Macrotron").
Net sales from U.S. operations increased 24.7% to $14.4 billion in 1998
from $11.5 billion in 1997 primarily due to growth of its current business,
which was favorably impacted by the RND acquisition in July 1997. The U.S. sales
increase was tempered, however, by manufacturers making more product directly
available to resellers during the fourth quarter of 1998, resulting in less
business through wholesale distribution. Net sales from European operations
increased 67.8% to $5.6 billion in 1998 from $3.4 billion in 1997 due primarily
to the acquisition of Macrotron, as well as to the overall growth in the
Company's existing European operations. Other international net sales increased
19.4% to $2.0 billion in 1998 from $1.7 billion in 1997 primarily due to the
acquisition of Computacion Tecnica, S.A. ("Computek") in Latin America as well
as growth in the Company's Canadian operations.
Gross profit, as a percentage of net sales, decreased to 6.3% in 1998 from
6.5% in 1997. During the fourth quarter of 1998, the Company's operations
experienced a significant decrease in gross profit percentage compared to the
fourth quarter of 1997, which has continued into 1999. These decreases were
largely attributable to significant competitive pricing pressures experienced
primarily in the U.S. and the larger countries in Europe. The Company expects
these competitive pricing pressures to continue in the foreseeable future.
Furthermore, during 1998, the Company incurred significant costs associated with
its investment in Frameworks, which negatively impacted gross profit. The
Company expects that its losses associated with Frameworks will continue in
fiscal 1999, but to a lesser extent due to expected revenue growth, the
reduction of start-up costs, and continued cost-control measures.
Total SG&A expenses increased 28.2% to $900.0 million in 1998 from $702.0
million in 1997, but decreased as a percentage of net sales to 4.1% in 1998 from
4.2% in 1997. The increase in SG&A spending was attributable to the acquisitions
in July 1998 of Macrotron, a manufacturing facility and related business in The
Netherlands in June 1998, the full year's effect of the 1997 acquisitions of RND
and Computek, as well as the increased expenses required to support the
expansion of the Company's business. Expenses related to expansion consisted of
incremental personnel and support costs, lease expenses relating to new
operating facilities, and expenses associated with the development and
maintenance of information systems. The overall decrease in SG&A expenses as a
percentage of sales is attributable to economies of scale from greater sales
volume as well as continued cost-control measures.
Excluding the noncash compensation charges, total income from operations
decreased as a percentage of net sales to 2.2% in 1998 from 2.3% in 1997. U.S.
income from operations, excluding the noncash compensation charge, increased as
a percentage of net sales to 2.8% in 1998 from 2.7% in 1997; however, European
income from operations, excluding the noncash compensation charge, decreased as
a percentage of net sales to 1.1% in 1998 from 1.2% in 1997. For geographic
regions outside the U.S. and Europe, income from operations, excluding noncash
compensation charges, decreased as a percentage of net sales to 1.4% in 1998
from 1.9% in 1997, primarily due to currency devaluations and overall weaker
economies in Latin America. During 1998, the Company recorded a noncash
compensation charge of $4.6 million ($3.7 million, net of tax) in connection
with the Rollover Stock Options, while in 1997, the Company recorded a noncash
compensation charge of $7.2 million ($5.9 million, net of tax) in connection
with the Rollover Stock Options. Income from operations, including noncash
compensation charges, increased 29.2% to $486.6 million in 1998 from $376.6
million in 1997, and, as a percentage of net sales, decreased to 2.2% in 1998
from 2.3% in 1997.
Other expense, net, consisting primarily of interest, foreign currency
exchange losses and miscellaneous nonoperating expenses, increased 59.2% to
$79.7 million in 1998 from $50.1 million in 1997. Other expense, net, also
increased as a percentage of net sales to 0.4% in 1998 from 0.3% in 1997. Toward
the end of 1998, the Company's interest expense grew as a result of increased
borrowings to finance acquisitions; the investment in SOFTBANK Corp.
("SOFTBANK"), Japan's largest distributor of software, peripherals and
networking products; expansion of the Company's business; ongoing sales growth;
and maintenance of higher accounts receivable levels. Accounts receivable levels
were higher primarily due to a reduction in master reseller sales as a
percentage of total sales and due to the changing vendor terms and conditions
associated with floor plan financing arrangements of those sales. In 1999, the
Company expects its interest expense to grow due to increased working capital
requirements needed to support the growth of the Company's business, the 1998
acquisition of Macrotron, and the increase of the Company's ownership interest
in Electronic Resources Ltd. ("ERL") to approximately 95% in the first quarter
of 1999. In addition, as discussed above, if the Company continues to experience
less favorable floor plan financing terms, interest expense will likely
increase. The increase in other expense also reflects an increase in foreign
currency exchange losses primarily attributable to ongoing international
economic conditions that have led to weaker currencies in Latin America as
compared to the U.S. dollar.
21
6
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The provision for income taxes increased 23.0% to $161.7 million in 1998
from $131.5 million in 1997, reflecting the 24.6% increase in the Company's
income before income taxes. The Company's effective tax rate was 39.7% in 1998
compared to 40.3% in 1997. The decrease in the effective tax rate was primarily
due to the reduction in the noncash compensation charge, much of which is not
deductible for tax purposes, as well as the effect of certain international
taxes in 1998.
Excluding the noncash compensation charges, net income increased 24.7% to
$248.8 million in 1998 from $199.6 million in 1997 and, as a percentage of net
sales, decreased to 1.1% in 1998 from 1.2% in 1997. Pro forma diluted earnings
per share, excluding the noncash compensation charges, increased 22.1% to $1.66
in 1998 from $1.36 in 1997. Net income, including the noncash compensation
charges, increased 26.6% to $245.2 million in 1998 from $193.6 million in 1997.
Diluted earnings per share, including the noncash compensation charge, increased
24.2% to $1.64 in 1998 from $1.32 in 1997.
1997 Compared to 1996
Consolidated net sales increased 37.9% to $16.6 billion in 1997 from $12.0
billion in 1996. The increase in worldwide net sales was attributable to growth
in the computer-based technology products and services industry in general, the
addition of new customers, increased sales to the existing customer base,
expansion of the Company's product offerings, and the acquisition of several
companies in 1997.
Net sales from U.S. operations increased 43.2% to $11.5 billion in 1997
from $8.1 billion in 1996. U.S. net sales were positively impacted by the
acquisition of RND, which was completed on July 18, 1997. Net sales from
European operations increased 29.4% to $3.4 billion in 1997 from $2.6 billion in
1996. Other international net sales increased 22.9% to $1.7 billion in 1997 from
$1.4 billion in 1996, primarily due to the growth in net sales from the
Company's Mexican and Canadian operations.
Gross profit as a percentage of net sales decreased to 6.5% in 1997 from
6.8% in 1996. This decrease was largely attributable to the increase as a
percentage of net sales of the master reseller business, which has lower
margins, as well as competitive pricing pressures.
Total SG&A expenses increased 29.6% to $702.0 million in 1997 from $541.5
million in 1996, but decreased as a percentage of net sales to 4.2% in 1997 from
4.5% in 1996. The increased level of spending was attributable to expenses
required to support expansion of the Company's business, consisting primarily of
incremental personnel and support costs, lease expenses relating to new
operating facilities, and expenses associated with the development and
maintenance of information systems. The decrease in SG&A expenses as a
percentage of sales is attributable to the growth of the Company's master
reseller business, which utilizes a lower-cost business model, and economies of
scale from higher sales volumes.
During 1997, the Company recorded a noncash compensation charge of $7.2
million ($5.9 million, net of tax) in connection with the Rollover Stock
Options. In 1996, the Company recorded a noncash compensation charge of $23.4
million ($19.5 million, net of tax) in connection with the Rollover Stock
Options.
Excluding the noncash compensation charges, total income from operations
remained constant as a percentage of net sales at 2.3% in 1997 and 1996. Income
from operations in the United States excluding the noncash compensation charge
remained constant as a percentage of net sales at 2.7% in 1997 and 1996. Income
from operations in Europe, excluding the noncash compensation charge, increased
as a percentage of net sales to 1.2% in 1997 from 0.8% in 1996. This increase
was partially offset by a decrease in income from operations, excluding the
noncash compensation charge, as a percentage of net sales for geographic regions
outside the United States and Europe to 1.9% in 1997 from 2.2% in 1996.
Income from operations, including the noncash compensation charges,
increased 52.1% to $376.6 million in 1997 from $247.5 million in 1996, and, as a
percentage of net sales, increased to 2.3% in 1997 from 2.1% in 1996.
Other expense, net, which consists primarily of net interest expense
(including interest expense charged by Ingram Industries in 1996), foreign
currency exchange losses, and miscellaneous nonoperating expenses, decreased
1.3% to $50.1 million in 1997 from $50.8 million in 1996, and decreased as a
percentage of net sales to 0.3% in 1997 from 0.5% in 1996. Although other
expense, net, remained relatively constant overall, the Company experienced
lower interest expense in 1997, primarily due to the reduction in average
outstanding borrowings (including amounts due to Ingram Industries) following
the IPO. The Company's interest expense increased toward the end of 1997 as a
result of increased borrowings to finance acquisitions and the expansion of the
Company's business.
The provision for income taxes increased 54.9% to $131.5 million in 1997
from $84.9 million in 1996, reflecting the 65.9% increase in the Company's
income before income taxes and minority interest. The Company's effective tax
rate was 40.3% in 1997 compared to 43.1% in 1996. The decrease in the effective
tax rate was primarily due to the reduction in the noncash compensation charge,
much of which is not deductible for tax purposes, as well as the effect of
certain international taxes in 1997.
22
7
Excluding the noncash compensation charges, net income increased 53.3% to
$199.6 million in 1997 from $130.2 million in 1996 and, as a percentage of net
sales, increased to 1.2% in 1997 from 1.1% in 1996. Pro forma diluted earnings
per share, excluding the noncash compensation charges, increased 30.8% to $1.36
in 1997 from $1.04 in 1996. Net income, including the noncash compensation
charges, increased 75.0% to $193.6 million in 1997 from $110.7 million in 1996.
Diluted earnings per share, including the noncash compensation charge, increased
50.0% to $1.32 in 1997 from $0.88 in 1996.
QUARTERLY DATA; SEASONALITY
The Company's quarterly sales and operating results have varied in the past
and will likely continue to do so in the future as a result of seasonal
variations in the demand for the products and services offered by the Company;
the introduction of new hardware and software technologies and products offering
improved features and functionality; the introduction of new products and
services by the Company and its competitors; the loss or consolidation of a
significant supplier or customer; changes in the level of operating expenses;
inventory adjustments; product supply constraints; competitive conditions
including pricing; interest rate fluctuations; the impact of acquisitions;
currency fluctuations; and general economic conditions. The Company's narrow
operating margins may magnify such fluctuations. Specific historical seasonal
variations in the Company's operating results have included a reduction of
demand in Europe during the summer months, increased Canadian government
purchasing in the first quarter, and worldwide pre-holiday stocking in the
retail channel during the September-to-November period. In addition, the product
cycle of major products may materially impact the Company's business, financial
condition, or results of operations.
The following table sets forth certain unaudited quarterly historical
financial data for each of the 8 quarters in the period ended January 2, 1999.
This unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the selected quarterly information. This
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report to
Shareowners. The operating results for any quarter shown are not necessarily
indicative of results for any future period.
CONSOLIDATED QUARTERLY INFORMATION
INCOME INCOME BEFORE BASIC DILUTED
NET GROSS FROM INCOME TAXES AND NET EARNINGS EARNINGS
SALES PROFIT OPERATIONS MINORITY INTEREST INCOME PER SHARE PER SHARE
----- ------ ---------- ----------------- ------ --------- ---------
(In millions, except per share data)
FISCAL YEAR ENDED JANUARY 3, 1998
THIRTEEN WEEKS ENDED(1):
MARCH 29, 1997 $3,650.0 $234.7 $ 78.8 $ 69.0 $40.4 $0.30 $0.28
JUNE 28, 1997 3,716.8 242.1 79.2 68.0 40.0 0.30 0.27
SEPTEMBER 27, 1997 4,087.3 264.0 85.6 75.7 44.3 0.32 0.30
JANUARY 3, 1998(2) 5,127.4 344.9 133.0 113.8 68.9 0.51 0.47
FISCAL YEAR ENDED JANUARY 2, 1999
THIRTEEN WEEKS ENDED(3):
APRIL 4, 1998 $5,150.1 $329.9 $116.2 $ 94.0 $56.5 $0.41 $0.38
JULY 4, 1998 4,956.1 315.5 110.8 92.8 55.6 0.40 0.37
OCTOBER 3, 1998 5,708.0 357.8 118.4 99.3 59.8 0.43 0.40
JANUARY 2, 1999 6,219.8 388.0 141.2 120.8 73.3 0.52 0.49
(1) Reflects a noncash compensation charge of $1.8 million, $1.7 million, $1.8
million, and $1.9 million for the first, second, third and fourth quarters
of 1997, respectively, in connection with the granting of the Rollover
Stock Options.
(2) Fourteen weeks ended January 3, 1998.
(3) Reflects a noncash compensation charge of $1.1 million for each of the
first, second, third and fourth quarters of 1998 in connection with the
granting of the Rollover Stock Options.
As indicated in the table above, the increases in the Company's net sales
in the fourth-quarter of each fiscal year have generally been higher than those
in the other three quarters in the same fiscal year. The trend of higher fourth
quarter net sales is attributable to calendar year-end business purchases and
holiday period purchases made by customers. Additionally, gross profit in the
fourth quarter of each year has historically been favorably impacted by
attractive year-end product buying opportunities, which have often resulted in
higher purchase discounts to the Company.
23
8
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company has financed its growth and cash needs largely through income
from operations and borrowings, trade and supplier credit, the public sale of
23,200,000 shares of its Class A Common Stock at $18.00 per share in the IPO
completed in November 1996, and the sale of Zero Coupon Convertible Senior
Debentures in June 1998.
Cash used by operating activities was $278.5 million in 1998 as compared to
$647.7 million in 1997 and cash provided by operating activities of $78.0
million in 1996. The significant decrease in cash used by operating activities
in 1998 compared to 1997 was partially attributable to the increase in net
income and the increase in trade creditor financing of product inventory through
the increase in accounts payable. The significant decrease in cash provided by
operating activities in 1997 compared to 1996 was primarily attributable to
increases in accounts receivable and product inventory that was not financed by
trade creditors, resulting from the continued growth of the Company.
Net cash used by investing activities was $218.6 million, $193.3 million,
and $107.2 million in 1998, 1997, and 1996, respectively. These increases were
due in part to the Company's expansion of warehouses and other facilities as
well as the Company's commitment to growth through acquisitions and strategic
alliances. In 1998, the Company used approximately $97 million in cash for
acquisitions, net of cash acquired (see Note 4 of the Notes to Consolidated
Financial Statements), and approximately $50 million in a strategic alliance
with SOFTBANK. Mitigating the uses of cash, the Company entered into a
sale/leaseback agreement whereby the Company sold its Santa Ana, California,
facility and a portion of its Buffalo, New York, facility to a third party and
received approximately $75 million in cash. In 1997, the Company used
approximately $34.0 million in cash for acquisitions, net of cash acquired, and
approximately $71.2 million in cash for the purchase of common stock, warrants
and an option to acquire additional common stock of ERL (see Note 4 of the Notes
to Consolidated Financial Statements). In 1996, purchases of property and
equipment included $22.6 million related to the acquisition, in connection with
the Split-Off, of certain previously leased facilities utilized by the Company.
Net cash provided by financing activities was $497.1 million, $888.4
million, and $21.3 million in 1998, 1997 and 1996, respectively. Net cash
provided by financing activities in 1998 was primarily due to the proceeds from
the convertible debentures and Company stock option exercises. The reduction of
cash provided by financing activities in 1998 compared to 1997 is due in part to
the Company's ability to finance its operations through trade creditors as well
as the increase in proceeds from stock option exercises. Net cash provided by
financing activities in 1997 was due primarily to the increase in revolving
credit of $770.4 million. Net cash provided by financing activities in 1996
includes the receipt of $393.8 million in net proceeds from the IPO. Net cash
provided by financing activities in 1996 decreased as a result of the repayment
of borrowings from Ingram Industries totaling $513.8 million as a result of the
Split-Off as well as a $20.0 million distribution to Ingram Industries. The
decrease in borrowings from Ingram Industries was partially offset by proceeds
from debt totaling $49.7 million and net borrowings under the revolving credit
facilities of $80.6 million.
Acquisitions
In 1998, the Company completed acquisitions of Macrotron, Nordemaq
Commercial de Maquinas Nordeste Ltda ("Nordemaq"), a Brazilian computer products
distributor, Tulip Computer N.V.'s assembly facility and related business in
's-Hertogenbosch, The Netherlands, and the remaining 30% minority interest in
Ingram Dicom S.A. de C.V., a Mexican subsidiary. The combined cash consideration
was approximately $97 million, net of cash acquired (see Note 4 of the Notes to
Consolidated Financial Statements).
In December 1997, the Company completed its purchase of approximately 21%
of the outstanding common stock, and approximately 19% of an outstanding class
of warrants of ERL, a publicly traded electronic components distributor based in
Singapore, for approximately $71 million. In January 1999, the Company purchased
additional shares from specific shareholders, which brought the Company's total
ownership to approximately 39.6%. In January and February 1999, the Company made
open-market purchases of ERL shares and warrants, and on February 19, 1999,
completed a tender offer for the remaining outstanding shares and warrants of
ERL. These purchases resulted in a 95% ownership of the outstanding common stock
and a 95% ownership of the outstanding warrants of ERL. The combined cash
consideration paid in 1999 was approximately $233 million (see Notes 4 and 14 of
the Notes to Consolidated Financial Statements).
24
9
Capital Resources
The Company has three credit facilities with bank syndicates providing an
aggregate credit availability of $1.65 billion. Under the credit facilities, the
Company is required to comply with certain financial covenants, including
minimum tangible net worth, restrictions on funded debt and interest coverage.
The credit facilities also restrict the Company's ability to pay dividends.
Borrowings are subject to the satisfaction of customary conditions, including
the absence of any material adverse change in the Company's business or
financial condition. On January 2, 1999, the Company had $994.5 million in
outstanding borrowings under the credit facilities.
In November 1996, the Company sold 23,200,000 shares of Class A Common
Stock in the IPO at $18.00 per share. The Company received net proceeds of
$393.8 million, of which approximately $366.3 million was used to repay certain
existing indebtedness to Ingram Industries.
The Company has an arrangement with a trust pursuant to which certain U.S.
trade accounts receivable of the Company are transferred to the trust, which in
turn has sold certificates representing undivided interests in the total pool of
trade receivables without recourse. The trust has issued fixed-rate, medium-term
certificates and a variable-rate certificate to support a commercial paper
program. At January 2, 1999, the amount of medium-term certificates outstanding
totaled $100 million, and the amount of commercial paper outstanding totaled
$150 million. The Company believes that there are sufficient trade accounts
receivables to support the outstanding medium-term certificates as well as the
commercial paper program.
On June 9, 1998, the Company sold $1.33 billion aggregate principal amount
at maturity of its Zero Coupon Convertible Senior Debentures due 2018 in a
private placement. The Company has subsequently registered the resale of these
debentures with the SEC. Gross proceeds from this offering were $460.4 million
and were used primarily to pay outstanding indebtedness. The debentures were
sold at an issue price of $346.18 per $1,000 principal amount at maturity
(representing a yield to maturity of 5.375% per annum), and are convertible into
shares of the Company's Class A Common Stock at a rate of 5.495 shares per
$1,000 principal amount at maturity, subject to adjustment under certain
circumstances. The debentures are currently convertible into approximately 7.3
million shares of the Company's Class A Common Stock. The debentures are
redeemable for cash at the option of the Company on or after June 9, 2003, at
the issue price plus accrued original issue discount to the date of the
redemption. Each debenture is subject to repurchase at the option of the holder
as of June 9, 2001, June 9, 2003, June 9, 2008, or June 9, 2013, or if there is
a Fundamental Change (as defined), at the issue price plus accrued original
issue discount to the date of the redemption. In the event of repurchase at the
option of a holder (other than upon a Fundamental Change), the Company may, at
its option, pay in cash or Class A Common Stock, or any combination thereof. In
the case of any such repurchase as of June 9, 2001, the Company may elect, in
lieu of the payment of cash or Class A Common Stock, to satisfy the redemption
in new Zero Coupon Convertible Senior Debentures due 2018. At January 2, 1999,
the issue price plus accrued original issue discount was $473.5 million.
The Company and its foreign subsidiaries have uncommitted lines of credit,
commercial paper, and short-term overdraft facilities in various currencies
which aggregated $260 million and $119 million at the end of 1998 and 1997,
respectively. These facilities are used principally for working capital and bear
interest at market rates.
The proceeds from stock option exercises provide an additional source of
cash to the Company. In 1998, 1997 and 1996, respectively, cash proceeds from
the exercise of stock options, including applicable tax benefits, totaled $93.9
million, $28.4 million and $11.3 million, respectively.
The Company believes that cash provided by operating activities,
supplemented as necessary with funds available under credit arrangements
(including the $1.65 billion in credit facilities and the sale of the Company's
convertible debentures), will provide sufficient resources to meet its present
and future working capital and cash requirements for at least the next 12
months, or earlier if the Company were to engage in significant, material
corporate transactions not currently anticipated, in which event the Company
anticipates that additional financing may be required.
Capital Expenditures
The Company presently expects to spend approximately $175 million in 1999
for capital expenditures due to continued expansion of its business.
25
10
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations and
interest rate changes due to its international sales and global funding. In the
normal course of business, the Company employs established policies and
procedures to manage its exposure to fluctuations in the value of foreign
currencies and interest rates using a variety of financial instruments. It is
the Company's policy to utilize financial instruments to reduce risks where
internal netting cannot be effectively employed. It is the Company's policy not
to enter into foreign currency or interest rate transactions for speculative
purposes.
In addition to product sales and costs, the Company has foreign currency
risk related to debt that is denominated in currencies other than the dollar and
cross-currency swaps hedging intercompany debt. The Company's foreign currency
risk management objective is to protect its earnings and cash flows resulting
from sales, purchases and other transactions from the adverse impact of exchange
rate movements. Foreign exchange risk is managed by using forward and option
contracts to hedge receivables and payables. By policy, the Company maintains
hedge coverage between minimum and maximum percentages. Cross-currency swaps are
used to hedge foreign currency denominated payments related to intercompany and
third-party loans. Hedged transactions are denominated primarily in British
pounds, Canadian dollars, French francs, German marks, Italian lira, Spanish
pesetas, and Swedish krona.
The Company is exposed to changes in interest rates primarily as a result
of its long-term debt used to maintain liquidity and finance inventory, capital
expenditures and business expansion. Interest rate risk is also present in the
cross-currency swaps hedging intercompany and third-party loans. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives the Company uses a combination of fixed- and
variable-rate debt. As of January 2, 1999, approximately 28% of the outstanding
debt had fixed interest rates. The Company finances working capital needs
through various bank loans and commercial paper programs.
MARKET RISK MANAGEMENT
Foreign exchange and interest rate risk and related derivatives use is
monitored using a variety of techniques including a review of market value,
sensitivity analysis and Value-at-Risk ("VaR"). The VaR model determines the
maximum potential loss in the fair value of foreign exchange rate-sensitive
financial instruments assuming a one-day holding period. The VaR model estimates
were made assuming normal market conditions and a 95% confidence level. There
are various modeling techniques that can be used in the VaR computation. The
Company's computations are based on interrelationships between currencies and
interest rates (a "variance/co-variance" technique). These interrelationships
were determined by observing foreign currency market changes and interest rate
changes over the preceding 90 days. The value of foreign currency options does
not change on a one-to-one basis with changes in the underlying currency rate.
The potential loss in option value was adjusted for the estimated sensitivity
(the "delta" and "gamma") to changes in the underlying currency rate. The model
includes all of the Company's forwards, options, cross-currency swaps and
nonfunctional currency denominated debt (i.e., the Company's market-sensitive
derivative and other financial instruments as defined by the SEC). The accounts
receivable and accounts payable denominated in foreign currencies, which certain
of these instruments are intended to hedge, were excluded from the model.
The VaR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by the Company, nor does it
consider the potential effect of favorable changes in market rates. It also does
not represent the maximum possible loss that may occur. Actual future gains and
losses will differ from those estimated because of changes or differences in
market rates and interrelationships, hedging instruments and hedge percentages,
timing and other factors.
The estimated maximum loss in fair value on the Company's foreign
currency-sensitive financial instruments and interest rate-sensitive financial
instruments, derived using the VaR model and a one-day holding period, was $1.3
million and $1.6 million, respectively, at January 2, 1999. The Company believes
that this hypothetical loss in fair value of its derivatives would be offset by
increases in the value of the underlying transactions being hedged.
26
11
EURO CONVERSION
On January 1, 1999, a single currency called the euro was introduced in
Europe. Eleven of the 15 member countries of the European Union adopted the euro
as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002 (but not later than July 1, 2002). During this transition period, parties
may settle transactions using either the euro or a participating country's
legacy currency. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legacy currencies will be withdrawn from circulation. The
Company has implemented plans to address the issues raised by the euro currency
conversion. These plans include, among others, the need to adapt computer
information systems and business processes and equipment to accommodate
euro-denominated transactions; the need to analyze the legal and contractual
implications on contracts; and the ability of the Company's customers and
vendors to accommodate euro-denominated transactions on a timely basis. Since
the implementation of the euro on January 1, 1999, the Company has experienced
improved efficiencies in its cash management program in Europe as all
intracompany transactions within participating countries are conducted in euros.
In addition, the Company has reduced hedging activities in Europe for
transactions conducted between euro-participating countries. Since the Company's
information systems and processes generally accommodate multiple currencies, the
Company anticipates that modifications to its information systems, equipment and
processes will be made on a timely basis and does not expect any failures that
would have a material adverse effect on the Company's financial position or
results of operations, or that the costs of such modifications will have a
material effect on the Company's financial position or results of operations.
The Company has not experienced any material adverse effects on its financial
position or results of operations in connection with the January 1, 1999
first-stage conversion.
YEAR 2000 MATTERS
Introduction
The Company's Year 2000 ("Y2K") readiness issues are broad and complex. As
is the case with many computer software systems, some of the Company's systems
use two-digit data fields that recognize dates using the assumption that the
first two digits are "19" (i.e., the number "99" is recognized as the year
"1999"). Therefore, the Company's date-critical functions relating to the year
2000 and beyond, such as sales, distribution, purchasing, inventory control,
merchandise planning and replenishment, facilities, and financial systems, may
be severely affected unless changes are made to these systems.
State of Readiness
With the assistance of an outside consultant, the Company commenced a
review of its internal information technology ("IT") systems to identify
applications that are not Y2K ready and to assess the impact of the Y2K problem.
The Company has developed an overall plan to modify its internal systems to be
Y2K ready. In addition, the Company formed a Y2K Global Project Team to provide
global oversight to the Company's Y2K readiness activities in the IT and non-IT
areas, the assessment of Y2K risks in connection with third-party relationships
and the development of contingency plans.
The Company's Y2K plan is divided into three major sections: IT systems,
non-IT systems ("Non-IT Systems"), and Y2K interfaces with material third
parties. The broad phases of the plan are generally common to all three
sections. The phases consist of: (1) inventorying potential Y2K sensitive items,
(2) assigning priorities to identified items, (3) assessing the Y2K readiness of
items determined to be material to the Company, (4) repairing or replacing
material items that are determined not to be Y2K ready ("remediation"), (5)
testing material items and/or certification of Y2K readiness, i.e., validation
and written confirmation that the process, activity or component can properly
process a date beyond December 31, 1999, as it does earlier dates and (6)
designing and implementing contingency and business-continuation plans for the
Company.
Please refer to "--Contingency Planning and Risks" regarding the Company's
progress for its Y2K plan with respect to ERL, which became a subsidiary of the
Company in February 1999.
27
12
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Information Technology Systems
The Company has completed an inventory and technical assessment (with the
exception of personal computers, which are assessed and remediated in a single
step) of all of its global hardware, operating systems, software (including
business applications, but excluding desktop software such as office tools) and
electronic interfaces that were in operation by the end of December 1998 ("IT
Systems") for Y2K remediation. With the exception of the Company's recently
acquired German subsidiary, Macrotron, the Company has completed remediation and
unit testing or upgrading/replacement of the mainframe part of its IT Systems,
and anticipates that it will complete the remediation, unit testing and/or
upgrading/replacement process on the balance of its IT Systems, which includes
client servers and personal computers, in the second quarter of 1999. As a
result of the Company's continued integration and consolidation of the Macrotron
facilities, the Company anticipates that the second-quarter 1999 target date for
remediation and unit testing or upgrading/replacement of Macrotron's IT Systems
will be extended by two months. The Company anticipates that it will complete
system and century testing and certification of Y2K readiness of all of its IT
Systems in the third quarter of 1999.
The Company uses different test methodologies for different phases: (1)
unit testing is used to verify that the individually changed components function
properly at the unit level, (2) system/integration testing is used to verify
that all changed components function as a complete system, (3) regression
testing is used to verify that changes made for Y2K readiness do not impact any
other functions within the IT system, and (4) century testing, i.e., simulating
the transition to January 1, 2000, is used to validate that the entire IT system
will function on or after such date.
With respect to desktop software on the Company's personal computers, the
Company provided to its associates before the end of 1998 a list of Y2K ready
versions of software. Associates were advised that if they have non-Y2K ready
versions of software on their personal computers, they must request upgrades to
Y2K ready versions of software. The Company will provide the necessary IT
support to upgrade associates' personal computers and will periodically remind
associates to assure that the necessary upgrades occur and to make appropriate
adjustments to date-sensitive databases or programs.
Non-Information Technology Systems
The Non-IT Systems consist of any device that is able to store and report
date-related information, such as access control systems, elevators, escalators,
conveyors and sensors; building systems; and other items containing a
microprocessor or an internal clock, such as handheld computers used to assist
with inventory control, electric power distribution systems and vaults. The
Company has completed a global inventory and assessment of its Non-IT Systems.
The Company's plan provides that by the end of the second quarter of 1999, all
Non-IT Systems that are deemed business-critical will either (a) have written
certifications that they are Y2K ready (e.g., confirmations from manufacturers
that the product is not impacted by the Y2K date transition or will continue to
operate on and after January 1, 2000, just as it did prior to such date) or (b)
have been replaced and/or modified to be Y2K ready.
Y2K Interfaces With Material Third Parties
The Company has commenced an inventory of third parties (including, among
others, domestic and international suppliers and vendors, financial service
providers and transportation and other logistics providers) whose Y2K
noncompliance could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, the Company has been
sending questionnaires to all such third parties in order to determine their
current Y2K status, tracking responses to these questionnaires and using such
responses towards contingency plan development. The Company anticipates that it
will have completed such assessment and inquiry by the end of the second quarter
of 1999. Follow-up inquiries, where appropriate, are planned throughout the
remainder of 1999.
Costs to Address Y2K Readiness
The Company has incurred approximately $3.8 million to date on Y2K
readiness efforts (excluding compensation and benefit costs for associates who
do not work full time on the Y2K project and costs of systems upgrades that
would normally have been made on a similar timetable) with respect to IT Systems
and anticipates that its total expenditures will not exceed $10 million.
However, such amount does not reflect costs for upgrades to servers, personal
computers, communications equipment and Non-IT Systems on a global basis as a
result of potential new acquisitions and/or business relationships throughout
the remainder of 1999 as the scope of this cost will not be known until the
Company has completed technical assessment of all of these areas. Although there
are opportunity costs and some diversion of human resources to the Company's Y2K
readiness efforts, management believes that no significant IT projects have been
deferred or accelerated due to this effort.
28
13
Contingency Planning and Risks
The Y2K Global Project Team is responsible for the development of a global
contingency plan to address the Company's at-risk business functions as a result
of Y2K issues. The Company anticipates that development of such a global
contingency plan will be completed in the second quarter of 1999. In the normal
course of business, the Company maintains and deploys contingency plans designed
to address various other potential business interruptions. For example, the
Company has the capability in the United States to automatically reroute
incoming telephone calls, such as from its Santa Ana (West Coast sales) facility
to its Buffalo (East Coast sales) facility, and the ability to reroute warehouse
shipping from one U.S. location to another location. Although these plans are
not Y2K specific, they may be applicable to address limited Y2K failures or
interruption of support provided by some third parties resulting from their
failure to be Y2K ready.
The Company's global IT and Non-IT operations are highly centralized in the
United States. The Company's strategy with respect to Y2K readiness is to
resolve its Y2K issues from a global perspective first through its U.S.
operations. For example, the Company's core enterprise system, IMpulse, is based
in the U.S. but operates globally. Remediation of this system is effective
across the Company's entire operations. However, the Company may continue to
experience risks with respect to new acquisitions where new management may not
be as familiar with the Company's computer systems (although the Company strives
to convert newly acquired operations to IMpulse as soon as possible), or the
existing associates may not be familiar with the Company's Y2K plan. For
example, the Company completed an unconditional tender offer for ERL's shares
and warrants on February 19, 1999. The Company currently believes that it will
complete the various stages with respect to IT Systems, Non-IT Systems and Y2K
interfaces with material third parties in the ERL organization approximately two
months later than the target dates set forth above. A similar extension of
approximately two months of the target date for the remediation and unit testing
or upgrading/replacement of IT Systems for the Company's recently acquired
Macrotron organization in Germany is anticipated.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially and adversely affect the Company's
results of operations, liquidity and financial condition. In addition, the
Company's operating results could be materially adversely affected if it were to
be held responsible for the failure of any products sold by the Company to be
Y2K ready despite the Company's disclaimer of product warranties and the
limitation of liability contained in its sales terms and conditions.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The matters in this Annual Report that are forward-looking statements are
based on current management expectations that involve certain risks, including
without limitation: the potential decline as well as seasonal variations in
demand for the Company's products; the potential termination of a supply
agreement with a major supplier; continued pricing and margin pressures; product
supply shortages; rapid product improvement and technological changes, and
resulting obsolescence risks; unavailability of adequate capital; the impact on
management of growth and acquisitions; foreign currency fluctuations; the
failure to achieve substantial Year 2000 readiness; and reliability of
information systems. For a further discussion of these and other significant
factors to consider in connection with forward-looking statements concerning the
Company, reference is made to Exhibit 99.01 of the Company's Annual Report on
Form 10-K for fiscal year ended January 2, 1999; other risks or uncertainties
may be detailed from time to time in the Company's future SEC filings.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which will become effective for the Company
in fiscal 2000. FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. However, the Company does not expect the adoption of FAS 133 to have
a material impact on its reported consolidated financial condition or results of
operations.
29
14
CONSOLIDATED BALANCE SHEET
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
FISCAL YEAR END
-----------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
CASH $ 96,682 $ 92,212
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCES OF $55,904
IN 1998 AND $48,541 IN 1997) 2,562,050 1,635,728
INVENTORIES 3,094,227 2,492,646
OTHER CURRENT ASSETS 278,591 225,408
----------- -----------
TOTAL CURRENT ASSETS 6,031,550 4,445,994
PROPERTY AND EQUIPMENT, NET 254,718 215,148
GOODWILL, NET 232,112 142,478
OTHER 215,024 128,531
----------- -----------
TOTAL ASSETS $ 6,733,404 $ 4,932,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 3,306,045 $ 2,415,001
ACCRUED EXPENSES 254,627 292,515
CURRENT MATURITIES OF LONG-TERM DEBT 38,978 21,869
----------- -----------
TOTAL CURRENT LIABILITIES 3,599,650 2,729,385
CONVERTIBLE DEBENTURES 473,475 --
OTHER LONG-TERM DEBT 1,208,003 1,119,262
OTHER 45,205 23,843
----------- -----------
TOTAL LIABILITIES 5,326,333 3,872,490
----------- -----------
MINORITY INTEREST -- 4,862
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
REDEEMABLE CLASS B COMMON STOCK 7,814 16,593
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE, 1,000,000 SHARES
AUTHORIZED; NO SHARES ISSUED AND OUTSTANDING -- --
CLASS A COMMON STOCK, $0.01 PAR VALUE, 265,000,000 SHARES
AUTHORIZED; 66,520,715 AND 37,366,389 SHARES
ISSUED AND OUTSTANDING IN 1998 AND 1997, RESPECTIVELY 665 374
CLASS B COMMON STOCK, $0.01 PAR VALUE, 135,000,000 SHARES
AUTHORIZED; 75,459,710 AND 99,714,672 SHARES
ISSUED AND OUTSTANDING IN 1998 AND 1997 (INCLUDING
1,116,250 AND 2,370,400 REDEEMABLE SHARES
IN 1998 AND 1997), RESPECTIVELY 743 973
ADDITIONAL PAID IN CAPITAL 591,235 484,912
RETAINED EARNINGS 811,616 566,441
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (4,914) (14,236)
UNEARNED COMPENSATION (88) (258)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,399,257 1,038,206
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,733,404 $ 4,932,151
=========== ===========
See accompanying notes to these consolidated financial statements.
30
15
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
FISCAL YEAR
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
NET SALES $ 22,034,038 $ 16,581,539 $ 12,023,451
COST OF SALES 20,642,870 15,495,850 11,211,067
------------ ------------ ------------
GROSS PROFIT 1,391,168 1,085,689 812,384
EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE 900,001 701,958 541,526
NONCASH COMPENSATION CHARGE 4,562 7,152 23,350
------------ ------------ ------------
904,563 709,110 564,876
------------ ------------ ------------
INCOME FROM OPERATIONS 486,605 376,579 247,508
OTHER (INCOME) EXPENSE:
INTEREST INCOME (5,652) (3,924) (2,060)
INTEREST EXPENSE 72,181 37,940 14,812
INTEREST EXPENSE CHARGED BY INGRAM INDUSTRIES -- -- 35,123
NET FOREIGN CURRENCY EXCHANGE LOSS 6,247 2,430 701
OTHER 6,969 13,644 2,175
------------ ------------ ------------
79,745 50,090 50,751
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 406,860 326,489 196,757
PROVISION FOR INCOME TAXES 161,685 131,463 84,889
------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 245,175 195,026 111,868
MINORITY INTEREST -- 1,386 1,189
------------ ------------ ------------
NET INCOME $ 245,175 $ 193,640 $ 110,679
============ ============ ============
BASIC EARNINGS PER SHARE $ 1.76 $ 1.43 $ 0.99
============ ============ ============
DILUTED EARNINGS PER SHARE $ 1.64 $ 1.32 $ 0.88
============ ============ ============
See accompanying notes to these consolidated financial statements.
31
16
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN 000S)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID IN RETAINED COMPREHENSIVE UNEARNED
CLASS A CLASS B CAPITAL EARNINGS INCOME (LOSS) COMPENSATION TOTAL
------- ------- ------- -------- ------------- ------------ -----
DECEMBER 30, 1995 $ -- $ 1,073 $ 22,427 $ 282,122 $ 5,173 $ -- $ 310,795
DISTRIBUTION TO
INGRAM INDUSTRIES (20,000) (20,000)
GRANT OF RESTRICTED CLASS B
COMMON STOCK 1 713 (714) --
NET PROCEEDS FROM
SALE OF CLASS A
COMMON STOCK 232 393,612 393,844
NONCASH COMPENSATION
CHARGE RELATED TO
STOCK OPTIONS 23,170 23,170
STOCK OPTIONS EXERCISED 10 1,612 1,622
INCOME TAX BENEFIT FROM
EXERCISE OF STOCK OPTIONS 8,123 8,123
CONVERSION OF CLASS B
COMMON STOCK TO
CLASS A COMMON STOCK 8 (8) --
AMORTIZATION OF UNEARNED
COMPENSATION 180 180
COMPREHENSIVE
INCOME (LOSS) 110,679 (3,263) 107,416
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 28, 1996 250 1,066 449,657 372,801 1,910 (534) 825,150
NONCASH COMPENSATION
CHARGE RELATED TO
STOCK OPTIONS 6,876 6,876
STOCK OPTIONS EXERCISED 31 6,546 6,577
INCOME TAX BENEFIT FROM
EXERCISE OF STOCK OPTIONS 21,833 21,833
CONVERSION OF CLASS B
COMMON STOCK TO
CLASS A COMMON STOCK 93 (93) --
AMORTIZATION OF UNEARNED
COMPENSATION 276 276
COMPREHENSIVE
INCOME (LOSS) 193,640 (16,146) 177,494
---------- ---------- ---------- ---------- ---------- ---------- ----------
JANUARY 3, 1998 374 973 484,912 566,441 (14,236) (258) 1,038,206
VESTING OF REDEEMABLE
CLASS B COMMON STOCK 11 8,118 8,129
NONCASH COMPENSATION
CHARGE RELATED TO
STOCK OPTIONS 4,392 4,392
STOCK OPTIONS EXERCISED 50 36,337 36,387
INCOME TAX BENEFIT FROM
EXERCISE OF STOCK OPTIONS 57,476 57,476
CONVERSION OF CLASS B
COMMON STOCK TO
CLASS A COMMON STOCK 241 (241) --
AMORTIZATION OF UNEARNED
COMPENSATION 170 170
COMPREHENSIVE
INCOME (LOSS) 245,175 9,322 254,497
---------- ---------- ---------- ---------- ---------- ---------- ----------
JANUARY 2, 1999 $ 665 $ 743 $ 591,235 $ 811,616 $ (4,914) $ (88) $1,399,257
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to these consolidated financial statements.
32
17
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN 000S)
Fiscal Year
-----------------------------------------
1998 1997 1996
--------- --------- ---------
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
NET INCOME $ 245,175 $ 193,640 $ 110,679
ADJUSTMENTS TO RECONCILE NET INCOME TO
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 67,942 47,835 36,170
DEFERRED INCOME TAXES 3,532 8,226 (1,635)
MINORITY INTEREST -- 1,387 1,189
NONCASH COMPENSATION CHARGE 4,562 7,152 23,350
NONCASH INTEREST EXPENSE ON DEBENTURES 14,248 -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES,
NET OF EFFECTS OF ACQUISITIONS:
TRADE ACCOUNTS RECEIVABLE (786,727) (485,711) (237,747)
INVENTORIES (445,324) (542,886) (239,054)
OTHER CURRENT ASSETS (17,473) (61,642) (46,291)
ACCOUNTS PAYABLE 694,880 92,396 399,995
ACCRUED EXPENSES (59,348) 91,912 31,372
--------- --------- ---------
CASH (USED) PROVIDED BY OPERATING ACTIVITIES (278,533) (647,691) 78,028
--------- --------- ---------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (143,236) (101,458) (105,584)
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT 75,321 12,963 --
ACQUISITIONS, NET OF CASH ACQUIRED (96,550) (33,960) --
EQUITY INVESTMENT IN ERL -- (71,212) --
PURCHASE OF AVAILABLE-FOR-SALE SECURITIES (50,262) -- --
OTHER (3,867) 320 (1,596)
--------- --------- ---------
CASH (USED) BY INVESTING ACTIVITIES (218,594) (193,347) (107,180)
--------- --------- ---------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
PROCEEDS FROM SALE OF CLASS A COMMON STOCK -- -- 393,844
PROCEEDS FROM (REPURCHASE OF) REDEEMABLE
CLASS B COMMON STOCK (650) (630) 17,223
EXERCISE OF STOCK OPTIONS INCLUDING TAX BENEFITS 93,863 28,410 11,331
(REPAYMENT) OF BORROWINGS FROM INGRAM INDUSTRIES -- -- (513,792)
(REPAYMENT) PROCEEDS OF DEBT (80,689) 90,219 49,717
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURES,
NET OF ISSUANCE COSTS 449,604 -- --
NET BORROWINGS UNDER REVOLVING CREDIT FACILITIES 34,978 770,367 80,618
DISTRIBUTION TO INGRAM INDUSTRIES -- -- (20,000)
MINORITY INTEREST INVESTMENT -- -- 2,400
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES 497,106 888,366 21,341
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 4,491 (3,395) (826)
--------- --------- ---------
INCREASE (DECREASE) IN CASH 4,470 43,933 (8,637)
CASH, BEGINNING OF YEAR 92,212 48,279 56,916
--------- --------- ---------
CASH, END OF YEAR $ 96,682 $ 92,212 $ 48,279
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAYMENTS DURING THE YEAR:
INTEREST $ 61,706 $ 36,185 $ 50,071
INCOME TAXES 109,108 107,129 101,091
See accompanying notes to these consolidated financial statements.
33
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Ingram Micro Inc. (the "Company" or "Ingram Micro"), formerly Ingram Micro
Holdings Inc., is primarily engaged in wholesale distribution of computer-based
technology products and services worldwide. The Company conducts the majority of
its operations in North America, Europe and Latin America. In November 1996, the
Company's former parent, Ingram Industries Inc. ("Ingram Industries"),
consummated a split-off of the Company in a tax-free reorganization (the
"Split-Off"). In connection with the Split-Off, certain stockholders of Ingram
Industries exchanged all or some of their shares of Ingram Industries Common
Stock for 107,251,362 shares of Class B Common Stock of the Company in specified
ratios (see Note 3).
The accompanying historical consolidated financial statements have been
prepared as if the Company had operated as an independent stand-alone entity for
all periods presented except that prior to the Split-Off, the Company generally
had no significant borrowings in North America other than amounts due to Ingram
Industries (see Notes 7 and 11).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The equity method of accounting is used for the Company's 50% or less owned
affiliates, over which the Company has the ability to exercise significant
influence.
Fiscal Year
The fiscal year of the Company is a 52- or 53-week period ending on the
Saturday nearest to December 31. All references herein to "1998" represent the
52-week fiscal year ended January 2, 1999. All references herein to "1997"
represent the 53-week fiscal year ended January 3, 1998, and all references
herein to "1996" represent the 52-week fiscal year ended December 28, 1996.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the financial statement date, and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
Revenue Recognition
Revenue is recognized at the time of product shipment. The Company, under
specific conditions, permits its customers to return or exchange products. The
provision for estimated sales returns is recorded concurrently with the
recognition of revenue.
Vendor Programs
Funds received from vendors for price protection, product rebates,
marketing or training programs are recorded net of direct costs as adjustments
to product costs, selling, general and administrative expenses or revenue
according to the nature of the program.
The Company's suppliers generally warrant the products distributed by the
Company and allow the Company to return defective products, including those that
have been returned to the Company by its customers. The Company does not
independently warrant the products it distributes; however, the Company does
warrant the following: (1) services with regard to products configured for its
customers, and (2) products it builds to order from components purchased from
other sources. Provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience. Warranty expense
was not material to the Company's Consolidated Statement of Income.
The Company generated approximately 40% of its net sales in fiscal 1998,
38% in 1997, and 35% in 1996 from products purchased from three vendors.
34
19
Foreign Currency Translation and Remeasurement
Financial statements of foreign subsidiaries, for which the functional
currency is the local currency, are translated into U.S. dollars using the
exchange rate at each balance sheet date for assets and liabilities and a
weighted average exchange rate for each period for statement of income items.
Translation adjustments are recorded in other comprehensive income. The
functional currency of the Company's subsidiaries in Latin America is the U.S.
dollar; accordingly, the monetary assets and liabilities of these subsidiaries
are translated into U.S. dollars at the exchange rate in effect at the balance
sheet date. Revenues, expenses, gains or losses are translated at the average
exchange rate for the period, and nonmonetary assets and liabilities are
translated at historical rates. The resultant remeasurement gains and losses of
these subsidiaries are recognized in the Consolidated Statement of Income. Gains
and losses from foreign currency transactions are included in the Consolidated
Statement of Income.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
other accrued expenses approximate fair value because of the short maturity of
these items. The carrying amounts of debt issued pursuant to bank credit
agreements approximate fair value because interest rates on these instruments
approximate current market interest rates. The carrying amount of the Zero
Coupon Convertible Debentures including accrued original issue discount
approximates fair value based upon available market information.
Cash
Book overdrafts of $228,556 and $108,399 as of January 2, 1999, and January
3, 1998, respectively, are included in accounts payable. The Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.
Inventories
Inventories are stated at the lower of average cost or market.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected, undiscounted future net cash flows is less than the
carrying amount of the asset.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life:
BUILDINGS 40 YEARS
LEASEHOLD IMPROVEMENTS 3 - 17 YEARS
DISTRIBUTION EQUIPMENT 5 - 7 YEARS
COMPUTER EQUIPMENT 2 - 5 YEARS
Maintenance, repairs and minor renewals are charged to expense as incurred.
Additions, major renewals and betterments to property and equipment are
capitalized.
Goodwill
Goodwill is amortized on a straight-line basis over periods ranging from
five to 30 years. Accumulated amortization was $31,621 at January 2, 1999, and
$21,638 at January 3, 1998. Amortization expense totaled $10,269, $4,955, and
$2,990 for 1998, 1997, and 1996, respectively. The Company assesses the
realizability of goodwill consistent with its policy for long-lived assets.
Investments in Available-for-Sale Securities
The Company classifies its marketable equity securities as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These securities are carried at fair market value, with
unrealized gains and losses reported in stockholders' equity as a component of
other comprehensive income (loss). Gains or losses on securities sold are based
on the specific identification method.
35
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
During 1998, the Company purchased approximately $50,000 in equity
securities. These securities had a gross unrealized holding gain of $6,666 as of
January 2, 1999. Income taxes have not been provided on the unrealized gain due
to tax planning strategies that the Company believes will reduce its tax
consequences to an immaterial amount.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable
and derivative financial instruments. Credit risk with respect to trade accounts
receivable is limited due to the large number of customers and their dispersion
across geographic areas. The Company sells its products primarily in the United
States, Europe, Canada and Latin America. The Company performs ongoing credit
evaluations of its customers' financial conditions, obtains credit insurance in
certain locations and requires collateral in certain circumstances. The Company
maintains an allowance for potential credit losses. Historically, such losses
have been within management's expectations.
Derivative Financial Instruments
The Company operates internationally with distribution facilities in
various locations around the world. The Company reduces its exposure to
fluctuations in interest rates and foreign exchange rates by creating offsetting
positions through the use of derivative financial instruments. The market risk
related to the foreign exchange agreements is offset by changes in the valuation
of the underlying items being hedged. The majority of the Company's derivative
financial instruments have terms of 90 days or less. The Company currently does
not use derivative financial instruments for trading or speculative purposes,
nor is the Company a party to leveraged derivatives.
Foreign exchange risk is managed by using forward and option contracts to
hedge receivables and payables. Written foreign currency options are used to
mitigate currency risk in conjunction with purchased options. Currency interest
rate swaps and forward rate agreements are used to hedge foreign currency
denominated principal and interest payments related to intercompany and
third-party loans.
Derivative financial instruments are accounted for on an accrual basis.
Income and expense are recorded in the same category as that arising from the
related asset or liability being hedged. Gains and losses resulting from
effective hedges of existing assets, liabilities or firm commitments are
deferred and recognized when the offsetting gains and losses are recognized on
the related hedged items. Gains or losses on written foreign currency options
are adjusted to market value at the end of each accounting period and have not
been material to date.
The notional amount of forward exchange contracts and options is the amount
of foreign currency bought or sold at maturity. The notional amount of currency
interest rate swaps and forward rate agreements are the underlying principal and
currency amounts used in determining the interest payments exchanged over the
life of the swap. Notional amounts are indicative of the extent of the Company's
involvement in the various types and uses of derivative financial instruments
and are not a measure of the Company's exposure to credit or market risks
through its use of derivatives. The estimated fair value of derivative financial
instruments represents the amount required to enter into like offsetting
contracts with similar remaining maturities based on quoted market prices.
Credit exposure for derivative financial instruments is limited to the
amounts, if any, by which the counterparties' obligations under the contracts
exceed the obligations of the Company to the counterparties. Potential credit
losses are minimized through careful evaluation of counter-party credit
standing, selection of counterparties from a limited group of high-quality
institutions and other contract provisions.
Derivative financial instruments comprise the following:
1998 1997
------------------------ -------------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
------- ---------- ------- ----------
FOREIGN EXCHANGE FORWARD CONTRACTS $702,343 $ (1,648) $279,911 $ 2,197
PURCHASED FOREIGN CURRENCY OPTIONS 32,604 78 37,966 320
WRITTEN FOREIGN CURRENCY OPTIONS 18,652 (111) 49,214 (185)
CURRENCY INTEREST RATE SWAPS 200,732 628 15,832 1,492
FORWARD RATE AGREEMENTS 149,400 10 -- ---
36
21
Comprehensive Income
Effective in the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and displaying comprehensive
income and its components in the Company's consolidated financial statements.
Comprehensive income is defined in FAS 130 as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources.
The components of accumulated other comprehensive income (loss) are as
follows:
FOREIGN CHANGE IN ACCUMULATED
CURRENCY UNREALIZED GAIN ON OTHER
TRANSLATION AVAILABLE-FOR-SALE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
---------- ---------- -------------
BALANCE AT DECEMBER 30, 1995 $ 5,173 $ -- $ 5,173
CURRENT YEAR CHANGE (3,263) -- (3,263)
-------- -------- --------
BALANCE AT DECEMBER 28, 1996 1,910 -- 1,910
CURRENT YEAR CHANGE (16,146) -- (16,146)
-------- -------- --------
BALANCE AT JANUARY 3, 1998 (14,236) -- (14,236)
CURRENT YEAR CHANGE 2,656 6,666 9,322
-------- -------- --------
BALANCE AT JANUARY 2, 1999 $(11,580) $ 6,666 $ (4,914)
======== ======== ========
Accounting for Stock-Based Compensation
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("FAS 123"). As permitted by FAS 123, the Company continues to
measure compensation cost in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), but provides pro
forma disclosures of net income and earnings per share as if the fair-value
method had been applied.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("FAS 128"), and related interpretations. FAS 128
requires dual presentation of Basic Earnings per Share ("Basic EPS") and Diluted
Earnings per Share ("Diluted EPS"). Basic EPS excludes dilution and is computed
by dividing net income by the weighted average number of common shares
outstanding during the reported period, after giving retroactive effect to the
Split-Off (see Notes 1 and 3). Diluted EPS reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised using the treasury stock method or the if-converted method, where
applicable.
The composition of Basic EPS and Diluted EPS is as follows:
1998 1997 1996
--------------- --------------- ------------
NET INCOME $ 245,175 $ 193,640 $ 110,679
=============== =============== ============
WEIGHTED AVERAGE SHARES 139,263,810 135,764,053 112,285,058
=============== =============== ============
BASIC EARNINGS PER SHARE $ 1.76 $ 1.43 $ 0.99
=============== =============== ============
WEIGHTED AVERAGE SHARES INCLUDING
THE DILUTIVE EFFECT OF STOCK OPTIONS
(10,274,060, 10,543,479, AND 13,151,318 FOR
FISCAL 1998, 1997, AND 1996, RESPECTIVELY) 149,537,870 146,307,532 125,436,376
=============== =============== ============
DILUTED EARNINGS PER SHARE $ 1.64 $ 1.32 $ 0.88
=============== =============== ============
At January 2, 1999, there was $473,475 in Zero Coupon Convertible
Debentures that are convertible into 7,308,350 shares of Class A Common Stock
(see Note 7). In 1998, these potential shares were excluded from the computation
of Diluted EPS because their effect would be antidilutive. Additionally, there
were approximately 388,000, 262,000, and -0- options in 1998, 1997, and 1996,
respectively, that were not included in the computation of Diluted EPS because
the exercise price was greater than the average market price of the Class A
Common Stock, thereby resulting in an antidilutive effect.
37
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which will become effective for the Company
in fiscal 2000. FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The Company does not expect the adoption of FAS 133 to have a
material impact on its reported consolidated financial condition or results of
operations.
In 1998, the Company elected to adopt the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement requires capitalization of computer
software costs that meet both the definition of internal-use software and
defined criteria for capitalization. The Company amortizes the costs of computer
software developed or obtained for internal use on a straight-line basis over
the estimated life of the software. The impact of adoption was not material to
the Company's consolidated financial statements.
NOTE 3 - SPLIT-OFF, REORGANIZATION AND EXCHANGE
In November 1996, the Split-Off was effected pursuant to a Reorganization
Agreement among the Company, Ingram Industries, and its subsidiary, Ingram
Entertainment Inc. ("Ingram Entertainment"), and an Exchange Agreement among
such companies and the stockholders of Ingram Industries. Pursuant to the
Reorganization Agreement, the Company retained all of the assets and liabilities
associated with the Company's business and indemnified Ingram Industries for all
liabilities related to the Company's business and operations or otherwise
assigned to the Company. In addition, the Reorganization Agreement provided for
the sharing by the Company of approximately 73% of certain contingent assets and
liabilities not allocated to one of the parties. The Company assumed a portion
of Ingram Industries' debt in return for the extinguishment of intercompany
indebtedness (see Note 7).
In connection with the Reorganization Agreement, the Company entered into
an Employee Benefits Transfer and Assumption Agreement with Ingram Industries,
which provided for the allocation of employee benefit assets and liabilities to
each of the parties' respective employees. The Company also entered into a Tax
Sharing and Tax Services Agreement pursuant to which the Company will be
responsible for its allocable share of Ingram Industries' consolidated federal
and state income tax liabilities for fiscal 1996 through the date of the
Split-Off and approximately 73% of any adjustment in excess of reserves already
established by Ingram Industries for past federal and state liabilities of the
Company and Ingram Industries. Similarly, the Company will share in any refunds
received with respect to such periods. The Company also entered into
Transitional Service Agreements related to certain administrative services and
data processing (see Note 11).
Pursuant to the Exchange Agreement, certain stockholders of Ingram
Industries exchanged all or some of their shares of Ingram Industries Common
Stock for 107,251,362 shares of Class B Common Stock of the Company in specified
ratios.
NOTE 4 - ACQUISITIONS
In July 1998, the Company completed the acquisition of Tech Data
Corporation's 99% and 91% interest in the outstanding common and preferred
stock, respectively, of Macrotron AG ("Macrotron") for approximately $100,000 in
cash. Macrotron is based in Munich, Germany, and operates primarily in Germany,
Austria, and Switzerland. The acquisition was accounted for using the purchase
method, and the results of Macrotron's operations have been combined with those
of the Company since July 1, 1998, the effective date of acquisition. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The excess of
the purchase price over the net assets acquired is approximately $80,000 and is
being amortized on a straight-line basis over 30 years.
In June 1998, the Company completed its acquisition of Tulip Computer
N.V.'s assembly facility and related business in 's-Hertogenbosch, The
Netherlands. In October 1998, the Company completed its purchase of the
remaining 30% minority interest in Ingram Dicom S.A. de C.V. ("Dicom"), a
Mexican subsidiary. In December 1998, the Company completed the acquisition of
Nordemaq Commercial de Maquinas Nordeste Ltda, a Brazilian computer products
distributor. The combined consideration paid was approximately $19,000. The
acquisitions were accounted
38
23
for using the purchase method of accounting and the results of operations have
been combined with those of the Company since the respective dates of
acquisition. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of the purchase price over net assets acquired for these
acquisitions totaled approximately $9,000 and is being amortized on a
straight-line basis over 20 years.
Pro forma financial information has not been presented because the effect
of the 1998 acquisitions was not significant.
In December 1997, the Company completed its purchase of 49,606,000 shares
or approximately 21% of the outstanding common stock of Electronic Resources
Ltd. ("ERL"), a publicly traded electronic components distributor based in
Singapore and operating in Australia, New Zealand, and seven Asian countries. In
addition, the Company purchased approximately 19% of an outstanding class of
warrants to acquire 8,443,195 shares of ERL. The aggregate purchase price for
this transaction was approximately $71,000. The Company accounted for the
investment in fiscal 1998 and 1997 under the equity method. The Company's
investment in ERL has been recorded in other assets at January 2, 1999, and
January 3, 1998, and includes the unamortized excess of the Company's investment
over its equity in the net assets of ERL. This excess of approximately $38,000
and $40,000 at January 2, 1999, and January 3, 1998, respectively, is being
amortized on a straight-line basis over its estimated useful life of 20 years.
At January 2, 1999, the aggregate market value of the Company's share of ERL
common stock and warrants, as quoted on the Stock Exchange of Singapore, was
approximately $49,239. The Company commenced a tender offer for ERL shares
subsequent to January 2, 1999 (see Note 14).
On July 18, 1997, the Company completed the acquisition of the Intelligent
Electronics Inc. indirect distribution business, its Reseller Network Division
("RND"). The purchase price was $73,000, payable by the assumption of
liabilities in excess of current assets (including $30,000 in cash acquired),
based on the balance sheet of RND at closing. This acquisition was accounted for
using the purchase method, and the results of RND's operations have been
combined with those of the Company since the date of acquisition. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The excess of purchase
price over net assets acquired of approximately $88,000 is being amortized on a
straight-line basis over 20 years.
The following table reflects unaudited pro forma combined results of
operations of the Company and RND as if the acquisition had occurred at the
beginning of fiscal 1996. These unaudited pro forma results have been prepared
for comparative purposes only and include certain pro forma adjustments. Such
pro forma amounts are not necessarily indicative of what actual consolidated
results of operations might have been or will be in the future. Pro forma
combined results of operations for the year ended December 28, 1996, exclude a
nonrecurring charge of approximately $61,600 taken by RND in fiscal 1996
primarily relating to the write-off of previously recorded goodwill. If this
nonrecurring charge was included, pro forma combined results of operations for
the year ended December 28, 1996, would reflect net income of $44,623 and
diluted earnings per share of $0.36.
FISCAL YEAR
----------------------------------
1997 1996
----------- -----------
NET SALES $17,630,842 $15,109,451
NET INCOME $ 177,119 $ 106,223
DILUTED EARNINGS PER SHARE $ 1.21 $ 0.85
In April 1997, the Company acquired Tallgrass Technologies AS., a
distributor of computer products based in Norway. In August 1997, the Company
acquired J&W Computer GmbH, a distributor of computer products with operations
in Germany, France, Switzerland, and Austria. In November 1997, the Company
acquired Computacion Tecnica, S.A, a distributor of computer products with
operations in Chile, Brazil, Peru, and Florida. In December 1997, the Company
acquired Latino Americana de Software, a distributor of primarily software
products with operations in Brazil, and TT Microtrading Oy, a software
distribution company based in Finland. The combined consideration paid was
approximately $75,053. The acquisitions were accounted for using the purchase
method of accounting and the results of operations of the acquired companies
have been combined with those of the Company since the respective dates of
acquisition. The purchase price was allocated to the assets acquired and the
liabilities assumed based upon their estimated fair values at the respective
dates of acquisition. The excess of purchase price over net assets acquired for
all five acquisitions totaled approximately $50,000 and is being amortized on a
straight-line basis over 20 years. Pro forma results of operations have not been
presented because the effect of these five acquisitions was not significant.
39
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 5 - ACCOUNTS RECEIVABLE
From February 1993 through the Split-Off, the Company had an arrangement
with Ingram Industries whereby the Company sold all of its domestic trade
accounts receivable to Ingram Industries on an ongoing basis. Ingram Industries
transferred certain trade accounts receivable from the Company and other Ingram
Industries affiliates to a trust that sold certificates representing undivided
interests in the total pool of trade receivables without recourse.
In connection with the Split-Off, in partial satisfaction of amounts due to
Ingram Industries, the Ingram Industries' accounts receivable securitization
agreement related to the Company was assumed by the Company. As of the
Split-Off, the trust had sold $160,000 of medium-term certificates with various
amortization commencement dates between June 1, 1998, and February 1, 2004. In
addition, approximately $13,000 of trust certificate-backed commercial paper was
outstanding on the Split-Off date. Assumption of the securitization program
resulted in a $100,000 and $160,000 reduction of trade accounts receivable and
long-term debt on the Company's Consolidated Balance Sheet at January 2, 1999,
and January 3, 1998, respectively, to reflect the sale of such receivables.
Amounts outstanding under the commercial paper program of $150,000 are included
in accounts receivable and other long-term debt in the Consolidated Balance
Sheet at January 2, 1999, and January 3, 1998. The commercial paper program
arrangement with the trust extends to December 31, 1999, renews biannually,
subject to certain conditions, and has a final termination date of February 10,
2013.
Fees in the amount of $8,667, $11,102, and $1,537 in 1998, 1997 and 1996,
respectively, related to the sale of trade accounts receivable under the
medium-term certificates are included in other expenses in the Consolidated
Statement of Income. Prior to the Company assuming the accounts receivable
securitization program, such fees were included in interest expense charged by
Ingram Industries.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FISCAL YEAR END
-------------------------------
1998 1997
--------- ---------
LAND $ 9,443 $ 19,414
BUILDINGS AND LEASEHOLD IMPROVEMENTS 59,370 93,529
DISTRIBUTION EQUIPMENT 188,045 120,879
COMPUTER EQUIPMENT 171,364 109,570
--------- ---------
428,222 343,392
ACCUMULATED DEPRECIATION (173,504) (128,244)
--------- ---------
$ 254,718 $ 215,148
========= =========
Depreciation expense was $57,673 in 1998, $42,880 in 1997 and $33,180 in
1996.
NOTE 7 - LONG-TERM DEBT
Effective upon completion of the Company's initial public offering (the
"IPO") in November 1996, the Company entered into a $1,000,000 revolving credit
agreement (the "U.S. Credit Facility") with a syndicate of banks. The U.S.
Credit Facility is unsecured and matures on October 30, 2001. In October 1997,
the Company entered into two additional multicurrency revolving credit
agreements of $500,000 (the "European Credit Facility") and $150,000 (the
"Canadian Credit Facility") with two bank syndicates. The European Credit
Facility and the Canadian Credit Facility are unsecured and mature on October
28, 2002, and October 28, 2001, respectively. The Company intends to exercise
its option to extend its U.S. and Canadian credit facilities to match the
European Credit Facility term. Collectively, the U.S. Credit Facility, the
European Credit Facility and the Canadian Credit Facility are referred to as the
"Credit Facilities."
Revolving loan rate and competitive bid interest rate options are available
under the Credit Facilities. The spread over LIBOR for revolving rate loans and
associated facility fees are determined by reference to certain financial ratios
or credit ratings by recognized rating agencies on the Company's senior
unsecured debt. The weighted average interest rate on outstanding borrowings
under the Credit Facilities at January 2, 1999, and January 3, 1998, was 4.95%
and 5.76%, respectively.
40
25
The Company is required to comply with certain financial covenants,
including minimum tangible net worth, restrictions on funded debt and interest
coverage. The credit facilities also restrict the Company's ability to pay
dividends. At January 2, 1999, the Company was in compliance with these
covenants.
At January 2, 1999, and January 3, 1998, commercial paper outstanding was
$199,673 and $150,000, respectively, and is included in other long-term debt.
These amounts include $150,000 of commercial paper in 1998 and 1997 issued under
the Company's accounts receivable securitization program (see Note 5) with the
remainder issued in Europe. The weighted average interest rate on the commercial
paper was 5.27% and 5.76% at January 2, 1999, and January 3, 1998, respectively.
On June 9, 1998, the Company sold $1,330,000 aggregate principal amount at
maturity of its Zero Coupon Convertible Senior Debentures due 2018 in a private
placement. The Company has subsequently registered the resale of these
debentures with the SEC. Gross proceeds from this offering were $460,400. The
debentures were sold at an issue price of $346.18 per $1,000 principal amount at
maturity (representing a yield to maturity of 5.375% per annum), and are
convertible into shares of the Company's Class A Common Stock at a rate of 5.495
shares per $1,000 principal amount at maturity, subject to adjustment under
certain circumstances. The debentures are currently convertible into
approximately 7.3 million shares of the Company's Class A Common Stock. The
debentures are redeemable for cash at the option of the Company on or after June
9, 2003, at the issue price plus accrued original issue discount to the date of
the redemption. Each debenture is subject to repurchase at the option of the
holder as of June 9, 2001, June 9, 2003, June 9, 2008, or June 9, 2013, or if
there is a Fundamental Change (as defined), at the issue price plus accrued
original issue discount to the date of the redemption. In the event of
repurchase at the option of a holder (other than upon a Fundamental Change), the
Company may, at its option, pay in cash or Class A Common Stock, or any
combination thereof. In the case of any such repurchase as of June 9, 2001, the
Company may elect, in lieu of the payment of cash or Class A Common Stock, to
satisfy the redemption in new Zero Coupon Convertible Senior Debentures due
2018. At January 2, 1999, the issue price plus accrued original issue discount
was $473,475.
The Company has additional lines of credit and short-term overdraft
facilities with various banks worldwide, which provide for borrowings
aggregating $209,924 and $119,043 in 1998 and 1997, respectively. Most of these
arrangements are on an uncommitted basis and are reviewed periodically for
renewal. At January 2, 1999, and January 3, 1998, the Company had $52,759 and
$52,493, respectively, outstanding under these facilities.
Other long-term debt, excluding the convertible debentures, consists of the
following:
FISCAL YEAR END
-----------------------------------
1998 1997
----------- -----------
CREDIT FACILITIES $ 994,549 $ 938,638
OVERDRAFT FACILITIES 38,978 21,869
COMMERCIAL PAPER 199,673 150,000
OTHER 13,781 30,624
----------- -----------
1,246,981 1,141,131
LESS CURRENT MATURITIES OF LONG-TERM DEBT (38,978) (21,869)
----------- -----------
$ 1,208,003 $ 1,119,262
=========== ===========
Annual maturities of long-term debt as of January 2, 1999, including the
convertible debentures, are as follows:
1999 $ 38,978
2000 --
2001 5,123
2002 1,202,880
2003 --
Thereafter 473,475
----------
$1,720,456
==========
41
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 8 - INCOME TAXES
The components of income before taxes and minority interest consist of the
following:
FISCAL YEAR
------------------------------------------------
1998 1997 1996
-------- -------- --------
UNITED STATES $350,631 $279,762 $165,576
FOREIGN 56,229 46,727 31,181
-------- -------- --------
TOTAL $406,860 $326,489 $196,757
======== ======== ========
The provision for income taxes consists of the following:
FISCAL YEAR
---------------------------------------
1998 1997 1996
--------- --------- ---------
CURRENT:
FEDERAL $ 111,862 $ 87,156 $ 64,252
STATE 15,146 16,697 9,952
FOREIGN 31,145 19,384 13,076
--------- --------- ---------
158,153 123,237 87,280
DEFERRED:
FEDERAL 4,057 7,355 (5,241)
STATE 6,926 1,582 462
FOREIGN (7,451) (711) 2,388
--------- --------- ---------
3,532 8,226 (2,391)
--------- --------- ---------
TOTAL INCOME TAX PROVISION $ 161,685 $ 131,463 $ 84,889
========= ========= =========
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets and liabilities are as follows:
FISCAL YEAR
---------------------
1998 1997
-------- --------
NET DEFERRED TAX ASSETS AND LIABILITIES:
TAX IN EXCESS OF BOOK BASIS OF FOREIGN OPERATIONS $ 31,391 $ 23,838
ITEMS NOT CURRENTLY DEDUCTIBLE (8,049) 216
DEPRECIATION (3,659) (1,618)
OTHER 12,426 7,590
-------- --------
TOTAL $ 32,109 $ 30,026
======== ========
Net current deferred tax assets of $15,562 and $12,856 are included in
other current assets at January 2, 1999, and January 3, 1998, respectively. Net
non-current deferred tax assets of $16,547 and $17,170 are included in other
assets at January 2, 1999, and January 3, 1998, respectively.
42
27
Reconciliation of the statutory U.S. federal income tax rate to the
Company's effective tax rate is as follows:
FISCAL YEAR
----------------------------------
1998 1997 1996
---- ---- ----
U.S. STATUTORY RATE 35% 35% 35%
STATE INCOME TAXES, NET OF FEDERAL INCOME TAX BENEFIT 4% 4% 4%
NONCASH COMPENSATION 0% 0% 2%
FOREIGN RATES IN EXCESS OF U.S. STATUTORY RATE 1% 1% 2%
---- ---- ----
EFFECTIVE TAX RATE 40% 40% 43%
==== ==== ====
At January 2, 1999, the Company had foreign net operating tax loss
carryforwards of $71,406 of which approximately 80% have no expiration date. The
remaining foreign net operating tax loss carryforwards expire through the year
2008.
The Company does not provide for income taxes on undistributed earnings of
foreign subsidiaries as such earnings are intended to be permanently reinvested
in those operations.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
There are various claims, lawsuits and pending actions against the Company
incident to the Company's operations. It is the opinion of management that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
The Company has arrangements with certain finance companies that provide
accounts receivable and inventory financing facilities for its customers. In
conjunction with certain of these arrangements, the Company has agreements with
the finance companies that would require it to repurchase certain inventory
which might be repossessed from the customers by the finance companies. Such
repurchases have been insignificant to date.
The Company leases the majority of its facilities and certain equipment
under noncancelable operating leases. Renewal and purchase options at fair
values exist for a substantial portion of the leases. Rental expense for the
years ended January 2, 1999, January 3, 1998, and December 28, 1996, was
$55,906, $42,321, and $34,784, respectively.
Future minimum rental commitments on operating leases that have remaining
noncancelable lease terms in excess of one year as of January 2, 1999, are as
follows:
1999 $ 40,667
2000 36,660
2001 34,017
2002 29,625
2003 25,939
Thereafter 153,297
--------
$320,205
========
43
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 10 - SEGMENT INFORMATION
Effective for 1998, the Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"). The Company's reportable
operating segments are based on geographic location, and the measure of segment
profit is income from operations. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
The Company operates predominantly in a single industry segment as a
wholesale distributor of computer-based technology products and services.
Geographic areas in which the Company operates include the United States, Europe
(Austria, Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland, and the United Kingdom) and Other (Brazil,
Canada, Chile, Malaysia, Mexico, Peru, and Singapore). Intergeographic sales
primarily represent intercompany sales which are accounted for based on
established sales prices between the related companies and are eliminated in
consolidation.
Financial information by geographic segments is as follows:
FISCAL YEAR
--------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
NET SALES:
UNITED STATES
SALES TO UNAFFILIATED CUSTOMERS $ 14,393,295 $ 11,539,623 $ 8,058,578
INTERGEOGRAPHIC SALES 163,199 190,765 140,721
EUROPE 5,624,074 3,352,451 2,590,120
OTHER 2,016,669 1,689,465 1,374,753
ELIMINATIONS OF INTERGEOGRAPHIC SALES (163,199) (190,765) (140,721)
------------ ------------ ------------
TOTAL $ 22,034,038 $ 16,581,539 $ 12,023,451
============ ============ ============
INCOME FROM OPERATIONS:
UNITED STATES $ 397,194 $ 304,003 $ 195,298
EUROPE 62,172 41,045 21,593
OTHER 27,239 31,531 30,617
------------ ------------ ------------
TOTAL $ 486,605 $ 376,579 $ 247,508
============ ============ ============
IDENTIFIABLE ASSETS:
UNITED STATES $ 3,939,573 $ 3,139,114 $ 2,227,997
EUROPE 2,051,827 1,180,792 800,755
OTHER 742,004 612,245 338,195
------------ ------------ ------------
TOTAL $ 6,733,404 $ 4,932,151 $ 3,366,947
============ ============ ============
CAPITAL EXPENDITURES:
UNITED STATES $ 119,838 $ 82,281 $ 90,626
EUROPE 19,109 13,749 8,596
OTHER 4,289 5,428 6,362
------------ ------------ ------------
TOTAL $ 143,236 $ 101,458 $ 105,584
============ ============ ============
DEPRECIATION AND AMORTIZATION:
UNITED STATES $ 44,067 $ 32,333 $ 22,438
EUROPE 15,904 9,538 8,091
OTHER 7,971 5,964 5,641
------------ ------------ ------------
TOTAL $ 67,942 $ 47,835 $ 36,170
============ ============ ============
U.S. includes all noncash compensation charges. No single customer accounts
for 10% or more of the Company's net sales.
44
29
NOTE 11 - TRANSACTIONS WITH RELATED PARTIES
Historically, Ingram Industries provided certain administrative services to
the Company. Prior to the Split-Off, the Company was allocated a portion of the
costs of these administrative services. Charges for these services were based
upon utilization and at amounts which management believes are less than the
amounts which the Company would have incurred as a stand-alone entity. Such
amounts totaled $3,633 in 1996 and have been included in selling, general and
administrative expenses in the Consolidated Statement of Income. Subsequent to
the Split-Off, such allocations ceased and the Company entered into a
Transitional Services Agreement with Ingram Industries relating to the continued
provision of certain administrative services, including payroll processing,
through December 31, 1997. The Company believes that the terms of this agreement
were on a basis as favorable as those that would be obtained from third parties
on an arms-length basis.
In addition, the Company entered into the Data Center Services Agreements
with Ingram Entertainment and a division of Ingram Industries, pursuant to which
the Company agreed to provide computer services and maintenance. Charges for
these services were based on a pro rata allocation of costs incurred by the
Company in operating the data services center. These agreements were terminated
during 1998.
The Company has in the past leased warehouse or office space from certain
of its shareowners, but no such leases remained in effect at January 2, 1999.
Total rental payments to shareowners were $1,460 in 1998, and $1,645 in both
fiscal 1997 and 1996, respectively.
Other transactions with Ingram Industries affiliates include sales of $996,
$4,482, and $3,464 in 1998, 1997, and 1996, respectively.
NOTE 12 - STOCK OPTIONS AND INCENTIVE PLANS
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("FAS 123") in 1996. As permitted by FAS 123, the
Company continues to measure compensation cost in accordance with APB 25.
Therefore, the adoption of FAS 123 had no impact on the Company's financial
condition or results of operations. Had compensation cost for the Company's
stock option plans been determined based on the fair value of the options
consistent with the method of FAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
FISCAL YEAR
------------------------------------------------
1998 1997 1996
-------- -------- --------
NET INCOME AS REPORTED $245,175 $193,640 $110,679
PRO FORMA $225,772 $182,977 $106,825
DILUTED EARNINGS PER SHARE AS REPORTED $ 1.64 $ 1.32 $ 0.88
PRO FORMA $ 1.51 $ 1.25 $ 0.85
For pro forma disclosure, the fair value of compensatory stock options,
restricted stock grants and stock purchase rights was estimated using the
Black-Scholes option pricing model using the following weighted average
assumptions:
FISCAL YEAR
-------------------------------------------------
1998 1997 1996
--------- --------- ---------
RISK-FREE INTEREST RATE 5.01% 6.39% 5.68%
EXPECTED YEARS UNTIL EXERCISE 4.0 YEARS 4.0 YEARS 3.1 YEARS
EXPECTED STOCK VOLATILITY 57.4% 47.0% 39.4%
EXPECTED DIVIDENDS -- -- --
The above table represents the weighted average expected stock volatility
after the IPO in November 1996. The Company used an expected volatility of 0%
for options granted prior to the IPO.
45
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
Rollover Stock Option Plan
Certain of the Company's employees participated in Ingram Industries'
qualified and non-qualified stock option and stock appreciation right ("SAR")
plans. In conjunction with the Split-Off, Ingram Industries options and SARs
held by the Company's employees and certain other Ingram Industries options,
SARs and Incentive Stock Units ("ISUs") were converted to or exchanged for
Ingram Micro options ("Rollover Stock Options") to purchase Class A Common
Stock. Approximately 10,989,000 Rollover Stock Options were outstanding
immediately following the conversion. The majority of the Rollover Stock Options
will be fully vested by the year 2000 and no such options expire later than 10
years from the date of grant. The Company recorded a noncash compensation charge
of approximately $4,392 ($3,659, net of tax) in 1998, $6,876 ($5,915, net of
tax) in 1997 and $23,170 ($19,483, net of tax) in 1996 related to the vested
portion of certain Rollover Stock Options based on the difference between the
estimated fair value of the underlying common stock at the applicable
measurement dates and the exercise price of such options. The weighted average
fair value of Rollover Stock Options for pro forma disclosure was $7.60 per
share.
1996 Equity Incentive Plan
As of April 30, 1996, the Company adopted the Ingram Micro Inc. 1996 Equity
Incentive Plan, as amended (the "Plan"), and Ingram Industries approved the
grant of options under this plan. The Plan authorized the granting of
stock-based awards to purchase up to 12,000,000 shares of Common Stock. In June
1996, the Company issued options under the Plan at $7.00 per share to purchase
an aggregate of approximately 4,618,000 shares of Class B Common Stock to all
eligible employees of the Company. These options vest and generally become
exercisable over five years from the issue date and expire eight years from the
issue date.
In November 1996, the Company issued options under the Plan at $18.00 per
share (the initial public offering price) to purchase an aggregate of
approximately 5,137,000 shares of Class A Common Stock to certain executive
officers, employees, and directors of the Company. Options to purchase 2,680,000
shares vest at the end of nine years; however, such options will vest earlier if
the Company achieves certain performance criteria. All such options expire ten
years from the issue date. During 1998, the Company achieved the performance
criteria established under the Plan and the outstanding options automatically
vested. The remaining options to purchase 2,457,000 shares vest and generally
become exercisable over five years and expire eight years from the issue date.
In 1997, the Company issued options under the Plan at exercise prices
ranging from $20.12 to $30.19 to purchase approximately 1.9 million shares of
Class A Common Stock to certain executive officers and employees of the Company.
The exercise price was equal to the market value of the underlying common stock
at the date of grant. The options generally vest over five years and expire
eight years from issue date.
1998 Equity Incentive Plan
Effective February 1998, the Company's Board of Director's and stockholders
adopted the Ingram Micro Inc. 1998 Equity Incentive Plan ("1998 Plan"). The 1998
Plan authorized the granting of stock-based awards to purchase up to 15,000,000
shares of the Company's Class A Common Stock. In 1998, the Company issued
options under the 1998 Plan at exercise prices ranging from $27.88 to $53.56 to
purchase approximately 2.7 million shares of Class A Common Stock to certain
executive officers and employees of the Company. The exercise price of the
options was equal to the market value of the underlying common stock on the date
of grant. The options generally vest over five years and expire eight years from
issue date.
The weighted average fair value of options granted in 1998, 1997 and 1996
for pro forma disclosure was $16.54, $11.34, and $3.87, respectively.
46
31
A summary of the status of the Company's stock option plans is presented
below:
WEIGHTED-
SHARES AVERAGE
(000s) EXERCISE PRICE
------ --------------
OUTSTANDING AT DECEMBER 30, 1995 -- $ --
ROLLOVER STOCK OPTIONS 10,989 1.83
STOCK OPTIONS GRANTED DURING THE YEAR 9,756 12.79
STOCK OPTIONS EXERCISED (1,078) 1.32
FORFEITURES (20) 1.87
------- ------
OUTSTANDING AT DECEMBER 28, 1996 19,647 7.30
STOCK OPTIONS GRANTED DURING THE YEAR 1,888 23.22
STOCK OPTIONS EXERCISED (3,085) 2.13
FORFEITURES (417) 5.67
------- ------
OUTSTANDING AT JANUARY 3, 1998 18,033 9.89
STOCK OPTIONS GRANTED DURING THE YEAR 2,709 32.52
STOCK OPTIONS EXERCISED (4,992) 7.29
FORFEITURES (569) 8.12
------- ------
OUTSTANDING AT JANUARY 2, 1999 15,181 $14.85
======= ======
The following table summarizes information about stock options
outstanding and exercisable at January 2, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES AT 1/2/99 (000s) LIFE EXERCISE PRICE 1/2/99 (000s) EXERCISE PRICE
----------------- --------------- --------- -------------- --------------- --------------
$0.66 - $ 3.32 4,075 3.6 $ 2.16 2,182 $ 1.75
$ 7.00 2,857 5.5 7.00 200 7.00
$18.00 3,780 5.8 18.00 2,069 18.00
$20.12 - $30.19 3,643 6.8 26.14 266 22.85
$30.50 - $45.63 656 7.7 38.35 -- --
$46.50 - $53.56 170 7.7 49.05 -- --
----------------- ---------- ------ ------ ---------
15,181 $14.85 4,717 $ 10.29
================= ========== ====== ====== =========
Stock options exercisable totaled approximately 4,717,000, 3,004,000 and
1,948,000 at January 2, 1999, January 3, 1998, and December 28, 1996,
respectively, at weighted average exercise prices of $10.29, $3.49 and $3.18,
respectively.
1996 Employee Stock Purchase Plan
In October 1996, the Board of Directors and stockholders adopted the 1996
Employee Stock Purchase Plan (the "1996 ESPP"). The 1996 ESPP permits eligible
employees of the Company to purchase Class A Common Stock through payroll
deductions, provided that no employee may accrue the right to purchase more than
$25 worth of stock under all employee stock purchase plans of the Company in any
calendar year. Up to 1,000,000 shares of Class A Common Stock were initially
available for sale under the 1996 ESPP. The initial offering period commenced on
November 1, 1996, and ended on the last market trading day on or before December
31, 1998. The purchase price under the initial offer was the lower of $18.00 per
share or the last reported transaction price of the Class A Common Stock
reported on the New York Stock Exchange on December 31, 1998. Employees may end
their participation in the 1996 ESPP at any time during an offering period, and
they will be paid their payroll deductions accumulated to date. A second
offering ("ESPP2") pursuant to the 1996 ESPP commenced on June 29, 1997, and
ended on the last market trading day on or before December 31, 1998. The ESPP2
has the same rights and restrictions as the 1996 ESPP except the purchase price
under ESPP2 was the lower of $24.06 per share or the last reported transaction
price of the Class A Common Stock reported on the New York Stock Exchange on
December 31, 1998. A third offering ("ESPP3") commenced on December 31, 1997,
and ended on the last trading day on
47
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
or before December 31, 1998. The ESPP3 has the same rights and restrictions as
the 1996 ESPP except the purchase price under the ESPP3 was the lower of $29.12
per share or the last reported transaction price of the Class A Common Stock
reported on the New York Stock Exchange on December 31, 1998. A fourth offering
("ESPP4") commenced on July 1, 1998, and ended on the last trading day on or
before December 31, 1998. The ESPP4 has the same rights and restrictions as the
1996 ESPP except the purchase price under the ESPP4 was the lower of $44.25 per
share or the last reported transaction price of the Class A Common Stock
reported on the New York Stock Exchange on December 31, 1998.
On December 31, 1998, the offering period was completed for all 1996 ESPP
offerings. In January 1999, the Company issued approximately 585,900 of the
1,000,000 shares. The 1996 ESPP terminated on December 31, 1998.
1998 Employee Stock Purchase Plan
Effective as of March 18, 1998, the Company's Board of Directors and
stockholders adopted the 1998 Employee Stock Purchase Plan (the "1998 ESPP").
The 1998 ESPP permits eligible employees of the Company to purchase Class A
Common Stock through payroll deductions, provided that no employee may accrue
the right to purchase more than $25 worth of stock under the 1998 Plan in any
calendar year. Up to 3,000,000 shares of Class A Common Stock will be initially
available for sale under the 1998 ESPP.
Under the 1998 ESPP, each participant electing to participate in the Plan
will have the right to purchase from the Company on December 31, 1999, up to but
not exceeding the aggregate number of whole shares of Common Stock that may be
purchased with funds accumulated in the participant's stock purchase plan
account, minus amounts required to be withheld under applicable local law.
No offerings under the 1998 ESPP were made during 1998. During 1999, two
offerings will be made under the 1998 ESPP. The "First Offering" will commence
on the first business day of the first payroll period beginning in January 1999
or, in the case of an individual first becoming eligible to participate
thereafter (but prior to December 31, 1999), on the last business day of the
month in which such individual becomes eligible (the "First Grant Date") and end
on December 31, 1999. The "Second Offering" will commence on the first business
day of the first payroll period beginning after June 30, 1999, or in the case of
individuals first becoming eligible to participate thereafter (but prior to
December 31, 1999), on the last business day of the month in which such
individual becomes eligible (the "Second Grant Date"), and end on December 31,
1999.
The purchase price per share in the First and Second Offerings will be the
lower of the last reported transaction prices of the Company's Common Stock on
the principal exchange on which it trades on the First Grant Date or the Second
Grant Date or in the case of an individual first becoming eligible to
participate on the last business day of the month in which such individual
becomes eligible, and December 31, 1999.
Employee Benefit Plans
Prior to the Split-Off, the Company participated in Ingram Industries'
defined contribution plan covering substantially all U.S. employees. As a result
of the Split-Off, the Company established its own employee benefit plans. The
plans permit eligible employees to make contributions up to certain limits which
are matched by the Company at stipulated percentages. The Company's
contributions charged to expense were $3,314 in 1998, $2,678 in 1997, and $1,642
in 1996.
NOTE 13 - COMMON STOCK
The Company has two classes of Common Stock, consisting of 265,000,000
authorized shares of $0.01 par value Class A Common Stock and 135,000,000
authorized shares of $0.01 par value Class B Common Stock, and 1,000,000
authorized shares of $0.01 par value Preferred Stock. Class A stockholders are
entitled to one vote on each matter to be voted on by the stockholders whereas
Class B stockholders are entitled to ten votes on each matter to be voted on by
the stockholders. The two classes of stock have the same rights in all other
respects. Each share of Class B Common Stock may at any time be converted to a
share of Class A Common Stock; however, conversion will occur automatically on
the earliest to occur of (1) the fifth anniversary of the consummation of the
Split-Off; (2) the sale or transfer of such share of Class B Common Stock to any
person not specifically authorized to hold such shares by the Company's
Certificate of Incorporation; or (3) the date on which the number of shares of
Class B Common Stock then outstanding represents less than 25% of the aggregate
number of shares of Class A Common Stock and Class B Common Stock then
outstanding.
48
33
Initial Public Offering
On November 1, 1996, the Company sold 23,200,000 shares of Class A Common
Stock at $18.00 per share in the IPO. Proceeds of $393,844, net of underwriters'
commissions and expenses of the offering aggregating $23,756, were received and
used to repay indebtedness to Ingram Industries in the amount of $366,340. The
remaining amount of $27,504 was used for working capital purposes.
Key Employee Stock Purchase Plan
As of April 30, 1996, the Company adopted the Key Employee Stock Purchase
Plan (the "Stock Purchase Plan") which provides for the issuance of up to
4,000,000 shares of Class B Common Stock to certain employees. In June 1996, the
Company offered 2,775,000 shares of its Class B Common Stock for sale to certain
employees pursuant to the Stock Purchase Plan, and subsequently sold 2,510,400
shares at $7.00 per share with aggregate proceeds of approximately $17,573. The
shares sold thereby are subject to certain restrictions on transfer and to
repurchase by the Company upon termination of employment prior to certain
specified vesting dates at the original offering price. The Company has
repurchased 232,900 of such shares.
In addition, the Company granted, pursuant to the Stock Purchase Plan,
107,000 restricted shares of Class B Common Stock to certain officers and
employees of the Company. These shares generally vest over four years. Prior to
vesting, these restricted shares are subject to forfeiture to the Company
without consideration upon termination of employment. At January 2, 1999, 10,000
of such shares have been forfeited to the Company. Unearned compensation in the
amount of $714 related to the restricted shares was recorded as a separate
component of stockholders' equity and is amortized to noncash compensation over
the vesting period. The amount amortized to noncash compensation in 1998, 1997,
and 1996 was $170, $276, and $180, respectively.
The detail of changes in the number of issued and outstanding shares of
Class A Common Stock, Class B Common Stock, and Redeemable Class B Common Stock
for the three year period ended January 2, 1999, is as follows:
COMMON STOCK
----------------------------------------------------
REDEEMABLE
CLASS A CLASS B CLASS B
------------ ------------ ------------
DECEMBER 30, 1995 -- 107,251,362 --
GRANT OF RESTRICTED CLASS B COMMON STOCK 107,000
SALE OF REDEEMABLE CLASS B COMMON STOCK 2,510,400
SALE OF CLASS A COMMON STOCK 23,200,000
STOCK OPTIONS EXERCISED 1,077,696
FORFEITURE OF RESTRICTED CLASS B COMMON STOCK (5,000)
REPURCHASE OF REDEEMABLE CLASS B COMMON STOCK (50,000)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 770,000 (770,000)
------------ ------------ ------------
DECEMBER 28, 1996 25,047,696 106,583,362 2,460,400
STOCK OPTIONS EXERCISED 3,084,603
FORFEITURE OF RESTRICTED CLASS B COMMON STOCK (5,000)
REPURCHASE OF REDEEMABLE CLASS B COMMON STOCK (90,000)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 9,234,090 (9,234,090)
------------ ------------ ------------
JANUARY 3, 1998 37,366,389 97,344,272 2,370,400
VESTING OF REDEEMABLE CLASS B COMMON STOCK 1,161,250 (1,161,250)
STOCK OPTIONS EXERCISED 4,992,264
REPURCHASE OF REDEEMABLE CLASS B COMMON STOCK (92,900)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 24,162,062 (24,162,062)
------------ ------------ ------------
JANUARY 2, 1999 66,520,715 74,343,460 1,116,250
============ ============ ============
49
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 14 - SUBSEQUENT EVENT
In January 1999, the Company purchased 44,114,340 shares of ERL common
stock from certain shareholders, which increased the Company's ownership to
39.6%. In accordance with Singapore law, the Company was required to extend a
tender offer for the remaining shares and warrants of ERL as a result of its
increased ownership. The Company offered to purchase the remaining outstanding
shares and warrants for approximately $1.20 and $0.65 per share and warrant,
respectively, during the tender offer period from January 4, 1999, to February
19, 1999. In addition, during January and February 1999, the Company made
open-market purchases of ERL shares and warrants. As a result of the open-market
purchases and the tender offer, the Company's ownership in ERL increased to
approximately 95%. The aggregate purchase price paid in 1999 for purchases of
ERL common stock and warrants was approximately $233 million. The Company
intends to amortize the excess of the purchase price over the net assets
acquired for all of the ERL acquisition on a straight-line basis over 30 years.
50
35
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY
Management is responsible for the integrity of the financial information
contained in this annual report, including the Company's consolidated financial
statements, which have been prepared in conformity with generally accepted
accounting principles and include amounts based upon management's informed
estimates and judgments.
Management maintains an effective system of internal accounting controls,
including an internal audit program, that is designed to provide reasonable, but
not absolute, assurance that assets are safeguarded and that accounting records
provide a reliable basis for the preparation of financial statements. This
system is continuously reviewed, improved and modified in response to changing
business conditions and operations and recommendations made by the independent
accountants and internal auditors. Management believes that the accounting and
control systems provide reasonable assurance that assets are safeguarded and
financial information is reliable.
The Company's Bylaws provide that a majority of members of the Audit
Committee of the Board of Directors shall be Independent Directors who are not
employees of the Company. The Audit Committee is currently comprised entirely of
Independent Directors. The Audit Committee represents the shareowners and the
Board of Directors on matters relating to corporate accounting, financial
reporting, internal accounting control and auditing including the ongoing
assessment of the activities of the independent accountants and internal
auditors. The independent accountants and internal auditors advise the Audit
Committee of significant findings and recommendations arising from their
activities and have free access to the Audit Committee, with or without the
presence of management.
/s/ JERRE L. STEAD /s/ MICHAEL J. GRAINGER
- ------------------------------- ----------------------------------
Jerre L. Stead Michael J. Grainger
Chairman of the Board and Executive Vice President and
Chief Executive Officer Worldwide Chief Financial
Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Ingram Micro Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Ingram Micro
Inc. and its subsidiaries at January 2, 1999 and January 3, 1998, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------------------
PricewaterhouseCoopers LLP
Costa Mesa, California
February 10, 1999, except as to Note 14,
which is as of February 19, 1999
51
36
BOARD OF DIRECTORS
JERRE L. STEAD
Chairman of the Board and Chief Executive Officer,
Ingram Micro Inc.
DON H. DAVIS, JR.
Chairman and Chief Executive Officer,
Rockwell International Corporation
JOHN R. INGRAM
Chairman, Ingram Book Group
and Co-President, Ingram Industries Inc.
MARTHA R. INGRAM
Chairman of the Board, Ingram Industries Inc.
PHILIP M. PFEFFER
Chief Executive Officer, Borders Group, Inc.
J. PHILLIP SAMPER
Founder and General Partner,
Gabriel Venture Partners, Chairman, Placeware Inc.
JOE B. WYATT
Chancellor, Vanderbilt University
CORPORATE MANAGEMENT
JERRE L. STEAD
Chairman of the Board and Chief Executive Officer
JEFFREY R. RODEK
President and Worldwide Chief Operating Officer
MICHAEL J. GRAINGER
Executive Vice President and Worldwide Chief Financial Officer
DOUGLAS R. ANTONE
Executive Vice President and Worldwide President,
Frameworks,(TM) Worldwide
GUY P. ABRAMO
Senior Vice President, Marketing, Worldwide
JAMES E. ANDERSON, JR.
Senior Vice President, Secretary and General Counsel
DAVID M. CARLSON
Senior Vice President and Chief Technology Officer
DAVID M. FINLEY
Senior Vice President, Human Resources, Worldwide
JAMES F. RICKETTS
Vice President and Worldwide Treasurer
REGIONAL MANAGEMENT
PHILIP D. ELLETT
Executive Vice President and President,
Ingram Micro North America
ROBERT D. GRAMBO
Executive Vice President and President,
Ingram Micro Europe
HANS T. KOPPEN
Senior Vice President and President,
Ingram Micro Latin America
GREGORY M. SPIERKEL
Senior Vice President and President,
Ingram Micro Asia-Pacific
52
37
Corporate Offices
Ingram Micro Inc.
1600 E. St. Andrew Place
Santa Ana, CA 92705
Phone: (714) 566-1000
Annual Meeting
The 1999 Annual Meeting of Shareowners will be held at 10 a.m. (Central time)
Wednesday, May 19, 1999, at the Ingram Micro Distribution Center, 3820 Micro
Drive (off Route 51) in Millington, Tennessee. Shareowners are cordially invited
to attend.
Shareowner Inquiries
Requests for information may be sent to the Investor Relations Department
at our corporate offices.
Investor Relations telephone information line: (714) 382-8282.
Investor Relations e-mail address: investor.relations@ingrammicro.com
Additional information also is available on our Web site, www.ingrammicro.com.
Transfer Agent and Registrar
First Chicago Trust Company of New York
ADivision of EquiServe
Post Office Box 2500
Jersey City, NJ 07303-2500
(201) 324-1644
38
Common Stock
The Class ACommon Stock of Ingram Micro is traded on the New York Stock Exchange
under the symbol "IM."
Price Range of Class A Common Stock
High Low
Fiscal 1997 First Quarter $25.88 $19.00
Second Quarter 25.25 20.75
Third Quarter 30.13 23.63
Fourth Quarter 34.75 23.50
Fiscal 1998 First Quarter $40.75 $26.63
Second Quarter 49.25 36.75
Third Quarter 54.63 43.31
Fourth Quarter 50.38 32.88