AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1996
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XLCONNECT SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
Pennsylvania 7373 23-2832796
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
411 Eagleview Boulevard
Exton, Pennsylvania 19341
(610) 458-5500
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------
Richard G. Ellenberger
President & Chief Executive Officer
XLConnect Solutions, Inc.
411 Eagleview Boulevard
Exton, Pennsylvania 19341
(610) 458-5500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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COPIES TO:
Barry M. Abelson, Esq. Richard C. Tilghman, Jr., Esq.
John E. Royer, Jr., Esq. Piper & Marbury L.L.P.
Pepper, Hamilton & Scheetz Charles Center South
3000 Two Logan Square 36 South Charles Street
Eighteenth and Arch Streets Baltimore, Maryland 21201
Philadelphia, PA 19103-2799 (410) 539-2530
(215) 981-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
Common Stock, par value $.01.......... 3,330,000 Shares $11.00 $36,630,000 $12,631
</TABLE>
(1) Includes 430,000 shares of Common Stock subject to the over-allotment option
granted by the Company to the Underwriters.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
XLCONNECT SOLUTIONS, INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
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REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
---------------------------------------------------- ----------------------------------------------------
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus........................................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Risk Factors
4. Use of Proceeds..................................... Summary; Risk Factors; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
5. Determination of Offering Price..................... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered.......... Summary; Capitalization; Description of Capital
Stock
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information with Respect to the Registrant.......... Outside Front Cover Page of Prospectus; Summary;
Risk Factors; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected Combined
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Relationship
Between the Company and IE; Principal Shareholder;
Description of Capital Stock; Available
Information; Combined Financial Statements
12. Disclosure of Commission Policies on
Indemnification for Securities Act
Liabilities....................................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not to be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
JULY 24, 1996
2,900,000 SHARES
XLCONNECT SOLUTIONS, INC. [LOGO]
COMMON STOCK
------------------
All of the 2,900,000 shares of Common Stock offered hereby are being sold
by XLConnect Solutions, Inc. ('XLConnect' or the 'Company'). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$ and $ per share. See 'Underwriting' for the factors to be considered in
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market upon completion of
this offering under the trading symbol 'XLCT.'
The Company is currently an indirect wholly-owned subsidiary of Intelligent
Electronics, Inc. (together with all of its affiliates other than the Company,
'IE'), and, upon completion of this offering, IE will beneficially own 82.1% of
the Company's outstanding Common Stock (80.0% if the Underwriters'
over-allotment option is exercised in full). See 'Relationship between the
Company and IE.'
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY (1)
Per Share.......................................... $ $ $
Total (2).......................................... $ $ $
</TABLE>
(1) Before deducting expenses estimated at $ , payable by the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
430,000 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby, solely to cover over-allotments, if any.
To the extent the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See 'Underwriting.'
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about ,
1996.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
JANNEY MONTGOMERY SCOTT INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[GRAPHIC DISPLAY OF THE COMPANY'S SERVICES]
XLConnect, XLConnect Solutions, XLConnect Systems, XLConnect Services and
the Company's logo are trademarks of the Company. This Prospectus also includes
trademarks of companies other than the Company.
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. This
Prospectus contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this Prospectus, including the matters set forth under the caption
'Risk Factors,' which could cause actual results to differ materially from those
indicated by such forward-looking statements.
THE COMPANY
XLConnect is a professional services organization providing enterprise-wide
total connectivity solutions to clients with complex computing and
communications requirements. As a single source provider, the Company offers
comprehensive internetworking services, applications development services,
managed services and telecommunications services. The Company's solutions are
custom designed to integrate computing and communications devices and equipment
with software applications and systems to develop local area networks ('LANs')
and to link LANs through public and private communications networks and the
Internet to form wide area networks ('WANs'). The Company describes the
provision of these services on an integrated basis as total connectivity
solutions.
Internetworking services include consulting, design and implementation of
LANs and WANs. Applications development services include customization and
adaptation of proven software as well as training to support the Company's
applications and internetworking solutions. Managed services enable clients to
outsource multiple aspects of their information technology functions, including
technology selection, deployment and support, network management and help desk
support. Telecommunications services include data, video and voice transmission.
XLConnect believes that its total connectivity solutions enable its clients to
increase productivity and enhance competitiveness by improving the flow of
information among clients' employees, customers and suppliers.
Demand for internetworking, applications development and outsourcing
services is expected to increase as organizations continue to: (i) migrate from
legacy mainframe environments to distributed, client/server environments
characterized by LANs relying on multi-vendor, multi-protocol technologies; (ii)
share information among diverse client, employee and supplier locations across
telecommunications networks, creating WANs; and (iii) experience difficulty in
maintaining in-house technical expertise sufficient to support these complex LAN
and WAN environments.
The Company believes that as a single source provider of total connectivity
solutions with broad geographic reach and expertise in multi-vendor
technologies, it is capable of addressing organizations' demands for total
connectivity solutions. The Company's strategy focuses on maintaining and
enhancing its technical expertise, expanding its national presence, emphasizing
high quality service and customer support, further penetrating its existing
client base, leveraging alliances with industry leaders and maintaining and
enhancing its multiple sales channels.
The Company focuses its sales, services and support efforts on a variety of
enterprises participating in a wide range of industries throughout the United
States. XLConnect delivers total connectivity solutions through its engineering
and technical staff of approximately 950 professionals located in 24 offices
nationwide and through its Network Management Center and two Help Desk Centers.
The Company utilizes a direct sales force currently comprised of 44 persons in
addition to indirect sales channels, including IE's approximately 205 person
sales staff. The Company's approximately 500 authorized agents, principally
value added resellers ('VARs'), sell data and voice transmission services on
behalf of the Company.
The Company has alliances and relationships with many industry-leading
vendors of information technology and telecommunications products and services,
including Ameritech, Inc. ('Ameritech'), Bay Networks, Inc. ('Bay Networks'),
3Com Corporation ('3Com'), Hewlett-Packard Company ('HP'), International
Business Machines Corporation, including its Lotus Division ('IBM/Lotus'), MCI
Telecommunications Corporation ('MCI'), Microsoft Corporation ('Microsoft') and
Novell, Inc. ('Novell').
The executive offices of the Company are located at 411 Eagleview
Boulevard, Exton, Pennsylvania 19341, and its telephone number is (610)
458-5500.
3
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See 'Risk Factors.'
THE OFFERING
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Common Stock offered by the Company............... 2,900,000 shares
Common Stock outstanding after the offering....... 16,225,000 shares (1)
Use of proceeds................................... To repay indebtedness to IE. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol............ XLCT
</TABLE>
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(1) Does not include 3,000,000 shares reserved for issuance under the Company's
1996 Long-Term Incentive Plan. As of __, 1996, options to acquire
1,062,500 shares of Common Stock at an exercise price of $______ per share
were outstanding. See 'Management -- Employment Arrangements' and '-- 1996
Long-Term Incentive Plan.'
SUMMARY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
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STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 8,526 $ 21,909 $ 49,653 $ 50,965 $ 79,862 $ 36,609 $ 52,001
Gross profit............................ 2,193 4,647 15,837 13,806 23,535 10,699 15,627
Income (loss) from operations........... 126 (519) 5,912 2,448 7,259 3,580 4,415
Net income (loss)....................... 39 (460) 2,879 250 2,422 1,476 1,014
Pro forma net income per share (1)...... $ 0.18 $ 0.08
Shares used in computing pro forma net
income per common share (1)........... 13,325 13,325
</TABLE>
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JUNE 30, 1996
-------------------------
AS ADJUSTED
ACTUAL (2)
--------- --------------
BALANCE SHEET DATA:
Working capital....................................................................... $ 16,458 $
Total assets.......................................................................... 59,112
Long-term debt, less current portion.................................................. 42,576
Shareholder's equity.................................................................. 6,144
</TABLE>
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(1) Computed on the basis described in Note 2 of Notes to Combined Financial
Statements.
(2) Adjusted to give effect to the sale by the Company of 2,900,000 shares of
Common Stock offered hereby at an assumed public offering price of $ per
share and the application of the estimated net proceeds therefrom. See 'Use
of Proceeds.'
4
<PAGE>
RELATIONSHIP WITH IE
Company History and Formation Transactions. The Company is currently an
indirect wholly-owned subsidiary of IE, and, upon completion of this offering,
IE will beneficially own approximately 82.1% of the outstanding shares of Common
Stock (approximately 80.0% if the Underwriters' over-allotment option is
exercised in full). The Company is composed of the businesses of the
professional services organization ('PSO') of The Future Now, Inc. ('TFN') and
IntelliCom Solutions, Inc. ('IntelliCom'). TFN established the PSO in 1990, and
TFN was acquired by IE in August 1995. IntelliCom was founded by IE in 1994 as a
wholly-owned subsidiary. IE incorporated the Company as a Pennsylvania
corporation under the name 'PSO Acquisition Corporation' in January 1996, and
the Company changed its name to XLConnect Solutions, Inc. in May 1996. In
anticipation of this offering, (i) IE contributed to the Company the stock of
IntelliCom and the assets and liabilities, including intercompany debt, relating
to the PSO business, and (ii) the Company and IE entered into the contractual
arrangements described below. The foregoing transactions, which were completed
as of May 31, 1996, are collectively referred to herein as the 'Formation
Transactions.' See 'Risk Factors -- Control by and Relationship with IE;
Potential Conflicts of Interest' and 'Relationship between the Company and IE --
Ownership of Common Stock.'
Contractual Arrangements with IE. In anticipation of this offering, the
Company and IE have entered into a number of agreements, which will become
effective upon completion of this offering. These agreements provide for: (i) IE
to continue to provide various corporate services and employee benefit plans to
the Company until at least December 31, 1996; (ii) the sharing by the Company
and IE of certain office facilities; (iii) the allocation of payments of taxes
for periods during which the Company and IE are included in the same
consolidated group for Federal or state income tax purposes, the allocation of
responsibility for the filing of tax returns and certain other related tax
matters; (iv) indemnities between the Company and IE and their respective
directors, officers, employees, agents and representatives for certain
liabilities, financial obligations and other matters; (v) under certain
circumstances, the registration under the Securities Act of 1933, as amended
(the 'Securities Act'), of the Common Stock owned by IE; and (vi) the grant of
an option to IE to purchase from the Company at then-current market prices such
number of shares of Common Stock as are necessary for IE to continue to include
the Company in IE's consolidated Federal income tax return or to increase the
likelihood that a pro rata distribution by IE to its shareholders of its Common
Stock (the 'Distribution') would be tax free to IE and its shareholders, which
is expected to be the number of shares necessary for IE to continue to own at
least 80% of the outstanding Common Stock. See 'Relationship between the Company
and IE -- Contractual Arrangements.'
Possible Distribution. Following completion of this offering, IE intends
to consider its options regarding its ownership interest in the Company,
including whether to retain its investment in the Company, to sell all or a
portion of its remaining shares of Common Stock to the public in another public
offering or to a strategic investor or to make the Distribution to its
shareholders in a tax-free or taxable transaction. The occurrence of the
Distribution is only one possibility and is by no means a certainty. For the
Distribution to occur, the Board of Directors of IE must conclude, at the time
that the Distribution may be considered, that the Distribution is in the best
interests of the shareholders of IE. IE has advised the Company that such
determination may be conditioned upon the receipt of a favorable ruling from the
Internal Revenue Service (the 'IRS') as to the tax-free nature of the
Distribution, for which IE has not applied as of the date of this offering. See
'Risk Factors -- Possibility of Substantial Sales of Common Stock Following
Distribution.'
Conduct of Business of XLConnect. Prior to the Formation Transactions,
XLConnect established a number of systems and procedures to enable it to operate
as a stand-alone company. The Company invoices separately from IE substantially
all of its clients and performs its own collection functions. The Company will
perform its own cash management functions after this offering. All of the
Company's employees are tracked by payroll codes distinct from those of IE. See
'Relationship between the Company and IE -- Contractual Arrangements.'
------------------------
Unless the context otherwise requires, (i) the information contained in
this Prospectus gives effect to the Formation Transactions, reflects a
1-to-13,325 stock split of the Company's issued and outstanding shares of Common
Stock effected immediately prior to this offering and assumes that the
over-allotment option granted to the Underwriters is not exercised, and (ii)
references to the 'Company' or 'XLConnect' include the historical operating
results and activities of, and assets and liabilities assigned to, the business
and operations which comprise the Company.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
Control by and Relationship with IE; Potential Conflicts of Interest. Upon
completion of this offering, IE will beneficially own approximately 82.1% of the
outstanding Common Stock (approximately 80.0% if the Underwriters' overallotment
option is exercised in full). So long as IE beneficially owns a majority of the
outstanding Common Stock, it will have the ability to elect all of the members
of the Board of Directors of the Company and otherwise control the management
and affairs of the Company, including any determinations with respect to
acquisitions, dispositions, borrowings, issuances of Common Stock or other
securities or the declaration and payment of any dividends on the Common Stock.
In addition, IE could determine to sell its remaining shares to a strategic
buyer in a transaction that may not be favored by the Company or its minority
shareholders. Conflicts of interest may arise between the Company and IE in a
number of areas relating to their past and ongoing relationships, including
potential competitive business activities, sales and marketing functions, tax
and employee benefit matters, indemnity arrangements, registration rights, sales
or distributions by IE of its remaining shares of Common Stock and the exercise
by IE of its ability to control the management and affairs of the Company.
Although IE has advised the Company that it does not currently intend to engage
in the business of delivering total connectivity solutions to clients except
through its ownership of Common Stock and contractual relationships with the
Company, there are no contractual or other restrictions on IE's ability to
engage in such activities. Accordingly, circumstances could arise in which IE
would engage in activities in competition with the Company. See ' -- Shares
Eligible for Future Sale' and 'Relationship Between the Company and IE --
Conflicts of Interest.'
The Company and IE have entered into a number of agreements, which will
become effective upon completion of this offering, for the purpose of defining
certain relationships between them. As a result of IE's ownership interest in
the Company, the terms of such agreements were not, and the terms of any future
amendments to those agreements will not be, the result of arm's-length
negotiations. The Company and IE may also enter into material transactions and
agreements in the future. In evaluating the terms of any material transactions
between the Company and IE or its affiliates, the Company's Board of Directors
will utilize such procedures as it may deem appropriate in light of its
fiduciary duties under state law. Four of the six directors of the Company are
also directors of IE. Directors of the Company who are also directors of IE will
have conflicts of interest with respect to matters potentially or actually
involving or affecting the Company and IE, such as acquisitions, financing and
other corporate opportunities that may be suitable for both the Company and IE.
Notwithstanding the foregoing, there can be no assurance that conflicts will be
resolved in favor of the Company. The ability of IE to control the Company could
have an adverse effect on the market price for shares of Common Stock. In
addition, there can be no assurance that potential clients and vendors will not
be deterred by the existence of these relationships or by the historical ties
between the Company and IE. See 'Relationship Between the Company and IE --
Contractual Arrangements' and '-- Conflicts of Interest.'
Possibility of Substantial Sales of Common Stock Following
Distribution. If the Distribution occurs, up to 13,325,000 shares of Common
Stock will be distributed to the shareholders of IE. All of those shares that
are then held by persons other than 'affiliates' of the Company will be freely
tradeable without restriction or registration under the Securities Act. The
Company is unable to predict whether substantial amounts of Common Stock would
be sold in the open market in anticipation of, or following, the Distribution,
if it occurs. Any sales of substantial amounts of Common Stock in the public
markets or the perception that such sales might occur, whether as a result of
the Distribution or otherwise, could materially adversely affect the market
price of the Common Stock. See 'Shares Eligible for Future Sale.'
Absence of History as a Stand-Alone Company; Limited Relevance of
Historical Financial Information. The Company has never operated as a
stand-alone company and has limited name recognition. In addition, the PSO
business and IntelliCom began to operate as a single, integrated business within
IE only after the Formation Transactions were consummated as of May 31, 1996.
After this offering and prior to the Distribution or other sale of shares of the
Company held by IE, if any, the Company will continue to be a subsidiary of IE
but will operate as a stand-alone company. The financial information included
herein may not necessarily reflect what the results of operations and financial
condition would have been had the Company been a separate, stand-alone entity
during the periods presented or be indicative of future results of operations
and financial condition of the Company. See
6
<PAGE>
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview.'
Absence of IE Financial Support. Prior to this offering and the Formation
Transactions, the assets and liabilities associated with the business of the
Company did not reside in a single independent legal entity but were distributed
in various locations within IE's corporate structure, and the business of the
Company was operated within separate divisions of a larger public company.
Accordingly, the Company has not been responsible for obtaining external sources
of financing. Any capital requirements of the Company in excess of internally
generated funds were financed by IE internally or through IE's credit
facilities, currently a $225 million credit facility (the 'Credit Facility')
with IBM Credit Corporation ('IBMCC'). Pursuant to the terms of a proposed
amendment to the Credit Facility, the Company will have borrowing availability
of, and joint and several liability with IE for, up to $20 million of the entire
outstanding balance under the Credit Facility. IE will be permitted to borrow
the entire amount available under the Credit Facility, including the Company's
portion. IE and the Company will each have the option to make advances to each
other as requested at market rates. Funds advanced by the Company to IE will not
be segregated from other funds of IE, and IE may use such funds for its own
benefit. Consequently, the Company will be subject to risk of loss in respect of
such funds. Other than its $20 million portion of the IBMCC Credit Facility, the
Company will be responsible for obtaining its own external sources of financing,
and IE will have no obligation to provide assistance to the Company or any of
its subsidiaries, except as described in 'Relationship Between the Company and
IE.' As a result, the Company may not be able to obtain financing with interest
rates and other terms as favorable as those enjoyed by IE, with the result that
the Company's cost of future capital may be higher than that reflected in its
historical financial statements. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.'
Proceeds to Benefit Related Party. The Company intends to use all of the
net proceeds from this offering to repay intercompany indebtedness to IE. None
of the net proceeds, therefore, will be available to fund the Company's growth.
See 'Use of Proceeds.'
Dependence on Key Personnel; New Management Personnel. The continued
success of the Company will depend largely on the continued services of its key
managerial employees, particularly its executive officers, several of whom,
including its Chief Executive Officer, were only recently hired by the Company.
Each executive officer has entered into an employment arrangement with the
Company that is terminable at will by either party, and the Company does not
maintain key person life insurance on any of its executive officers. There can
be no assurance that the Company will retain its key employees or that the
departure of one or more of them would not have a materially adverse effect on
the Company. Furthermore, there can be no assurance that the Company will be
successful in attracting and retaining the new or additional managerial
personnel it requires to conduct its operations or to meet its future needs to
accommodate growth successfully. See 'Management -- Employment Arrangements.'
Competitive Market for Technical Personnel. The Company's future success
also depends largely on its ability to attract, hire, train and retain highly
qualified technical personnel to provide the Company's services. Competition for
such personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining the technical personnel it requires to
conduct and expand its operations successfully and to differentiate itself from
its competition. The Company's results of operations and growth prospects could
be materially adversely affected if the Company were unable to attract, hire,
train and retain such qualified technical personnel. See 'Business -- Technical
Capabilities.'
Reliance on Referrals from IE's Sales Force. Historically, IE's
approximately 205 person sales staff generated substantially all of the
Company's sales. The Company currently continues to rely on IE's sales staff for
most of its sales leads and expects that IE's sales force will continue to be an
important source of sales referrals for the foreseeable future. However, there
is no contractual requirement that IE's sales persons use or recommend the
Company's professional services in connection with computer product sales by IE.
See 'Business -- Sales and Marketing.'
Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results. The Company's future quarterly operating results may vary and reduced
levels of earnings or losses could be experienced in one or more quarters.
Fluctuations in the Company's quarterly operating results could result from a
variety of factors, including changes in the levels of revenues derived from
internetworking, applications development, managed services and
telecommunications services, the size and timing of significant project orders,
changes in the mix of employee and subcontractor technicians on large projects,
the timing of new service offerings by the Company or its competitors, new
branch office openings by the Company, changes in pricing policies by the
Company or its competitors, market
7
<PAGE>
acceptance of new and enhanced services offered by the Company or its
competitors, changes in operating expenses, availability of qualified technical
personnel, disruptions in sources of supply of computer, telecommunications and
related products and services, the effect of potential acquisitions and industry
and general economic factors. The Company has limited or no control over many of
these factors. The Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. In addition, the Company
believes that its business is subject to some seasonality, the effects of which
currently are partially obscured by the Company's revenue growth during the past
eight quarters. Nonetheless, the Company believes that weaker sales generally
may be expected during the fourth and first quarters due to fewer working days
and some clients' decisions at year end to postpone large internetworking and
applications development projects until the following year when capital budgets
are renewed. Accordingly, comparisons of results of operations between
particular periods are not necessarily meaningful and historical results of
operations are not necessarily indicative of future performance. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
Management of Growth. The Company's business has experienced substantial
growth during the past five years, in terms of revenues, employees and clients.
This growth is expected to continue to place significant and increasing demands
on the Company's management, operational and technical resources. The Company's
future performance will depend in part on its ability to manage expanding
operations and to adapt its information systems to changes in its business. The
failure of the Company to manage its growth effectively could have a materially
adverse effect on the Company's business, financial condition and results of
operations. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
Competition. The markets in which the Company operates are characterized
by intense competition from several types of solution and technical service
providers. These include VARs, systems integrators and consultants, computer or
other hardware and software vendors, and long distance carriers and the Regional
Bell Operating Companies ('RBOCs'). In addition, there can be no assurance that
the Company's potential clients will not seek to develop further their in-house
capabilities and perform internally more of the services that the Company
offers. The Company expects to face further competition from new market entrants
and possible alliances among competitors in the future as the convergence of
information processing and telecommunications continues. Many of the Company's
current and potential competitors have greater financial, technical, marketing
and other resources than the Company. As a result, they may be better able to
respond or adapt to new or emerging technologies and changes in client
requirements or to devote greater resources to the development, marketing and
sales of their services than the Company. There can be no assurance that the
Company will be able to continue to compete successfully. See 'Business --
Industry Background' and ' -- Competition.'
Acquisition Risk. As part of its growth strategy, XLConnect intends to
evaluate the acquisition of complementary professional services organizations in
attractive geographic or service markets or with desirable client relationships.
The success of this strategy will depend not only upon the Company's ability to
locate and acquire such businesses on a cost-effective basis but also upon its
ability to integrate acquired operations into its organization effectively, to
retain and motivate key personnel and to retain clients of acquired firms.
Although the Company periodically considers possible acquisitions, no specific
acquisitions are currently being negotiated or planned. In addition, although
the Company conducts due diligence reviews of potential acquisition candidates,
there can be no assurance that the Company can identify all material liabilities
or risks related to potential acquisition candidates. There can be no assurance
that the Company will be able to acquire any businesses, retain the technical
and other key personnel of an acquired business or integrate any acquired
business successfully, that financing for any acquisition, if necessary, will be
available on acceptable terms, if at all, or that the Company will be able to
accomplish its strategic objectives in connection with any acquisition. See
'Business -- Strategy.'
Substantial Reliance on Key Clients. The Company's client base is highly
concentrated, with its top 25 clients in 1993, 1994, 1995 and the first six
months of 1996 accounting for approximately 24.2%, 53.6%, 52.4% and 51.5% of
revenues, respectively. Sales to one client, principally of managed services,
accounted for approximately 10.3%, 14.8% and 16.7% of revenues in 1994, 1995 and
the first six months of 1996, respectively. Based upon historical and recent
results and existing relationships with clients, the Company believes that a
substantial portion of its revenues will continue to be derived from services
provided to a relatively few large clients. A significant reduction in services
provided to any of the Company's largest clients could have a materially adverse
effect on the Company's results of operations. The Company's contracts to
provide professional services to its clients generally do not obligate the
client
8
<PAGE>
to purchase any minimum level of services and are terminable upon relatively
short notice, often 30 days. There can be no assurance that the Company's
largest clients will continue to enter into new contracts with the Company at
current levels of business, if at all, or that existing contracts will not be
terminated. See 'Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Results of Operations' and 'Business -- Clients.'
Risks Associated with Rapid Technological Change. The market for the
Company's services is characterized by rapidly changing technology and frequent
new product and service introductions. The development and commercialization of
new technologies and the introduction of new products can render existing
products and services obsolete or unmarketable. The Company's continued success
will depend on its ability to attract and retain highly capable technical
personnel, to enhance existing services and to package newly developed and
introduced service offerings of its own with products and services from vendors,
on a timely and cost-effective basis, that keep pace with technological
developments and address increasingly sophisticated client requirements. There
can be no assurance that the Company will be successful in identifying and
marketing service enhancements or supporting new products and services
introduced by vendors that respond to technological change. In addition, the
Company may experience contractual or technical difficulties that could delay or
prevent its successfully deploying newly developed and introduced products.
Dependence on Industry Alliances and Relationships. The Company's success
depends in part upon its alliances and relationships with leading hardware and
software vendors, telecommunications carriers and Internet access service
providers, particularly Microsoft, IBM/Lotus, Novell and MCI. Any adverse change
in these relationships could have a materially adverse effect on the Company's
results of operations and financial condition while it seeks to establish
alternative relationships. Also, the Company will likely need to establish
additional alliances and relationships in order to keep pace with evolutions in
technology and enhance its service offerings, and there can be no assurance such
additional alliances will be established. See 'Business -- Industry Alliances
and Relationships.'
Dependence on Network Management Center and Help Desk Centers. The
Company's network management and help desk services are dependent upon the
Company's ability to protect its computer and telecommunications equipment and
the information stored in its Network Management Center and Help Desk Centers
against damage from fire, power loss, telecommunications failures, unauthorized
intrusion, computer viruses and disabling devices and other similar events.
Notwithstanding the precautions the Company has taken to avoid these risks,
there can be no assurance that an unforeseen event will not result in a
prolonged disruption of the Company's network management and help desk services
or that the Company can recover the full amount of its lost revenues from its
insurance policies. See 'Business -- Facilities' and '-- Risk Management.'
Limited Protection of Intellectual Property Rights; Risks of
Infringement. The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its intellectual property rights, which afford only
limited protection. The Company routinely enters into non-disclosure and
confidentiality agreements with employees, contractors, consultants and clients.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to obtain and use information that the Company regards as
proprietary, and there can be no assurance that the Company's means of
protecting its proprietary rights will be adequate. The Company does not believe
that any of its intellectual property infringes on the proprietary rights of
third parties. However, there can be no assurance that third parties will not
claim infringement by the Company. Any such claim, with or without merit, could
be time-consuming, result in costly litigation, cause project delays or require
the Company to enter into royalty or licensing agreements which may not be
available on terms acceptable to the Company, all of which could have a
materially adverse effect on the business, results of operations and financial
condition of the Company. A third party has asserted that the Company's
XLConnect trademark is confusingly similar to the third party's trademark and
that the Company should cease using the trademark. Although the Company believes
that no such confusion exists and intends to continue to use the XLConnect
trademark, there can be no assurance as to the outcome if the Company's use of
the trademark is formally challenged.
Dependence on Third Party Suppliers and Vendors. The Company's business
depends upon the adequate and timely supply to its clients of computer and
telecommunications products and services from third parties at competitive
prices and on reasonable terms. To date, the Company has elected to procure
substantially all of the products it uses on client projects from IE, given its
historic relationship with IE. The Company has not entered into any long-term
supply contracts with IE or other distributors. As a result, there can be no
assurance that products will
9
<PAGE>
be available as required by the Company. At times, typically due to product
shortages of the specific manufacturer, the Company is unable to obtain products
for its clients on a timely basis. Any material disruption in the supply of
products and services from third party vendors could have a materially adverse
effect on the Company's results of operations. See 'Business -- IE and Other
Suppliers.'
Government Regulation of Telecommunications Services. A portion of the
telecommunications services offered by the Company is subject to regulation at
both the Federal and state levels. As a result of the passage of the
Telecommunications Act of 1996, it is possible that certain services not
currently subject to regulation could become subject to regulation, which could
subject the Company to delays, additional compliance costs and mandatory
contributions to Federal and state universal service funds. Such costs and
delays could affect the Company's margins for telecommunications services and
its ability to respond quickly to client requirements. If the provision of
regulated telecommunications services results in substantial regulatory costs,
the Company may elect to cease providing one or more of such services in some or
all states. See 'Business -- Government Regulation.'
Absence of Public Market and Possible Volatility of Stock Price. There has
been no public market for the Common Stock prior to this offering, and there can
be no assurance that an active trading market in the Common Stock will develop
or, if one develops, that it will be sustained. The initial public offering
price of the Common Stock will be determined through negotiations between the
Company and the representatives of the Underwriters, and may not reflect the
price at which the Common Stock will trade after this offering. In addition,
there can be no assurance as to the effect, if any, that the possibility of the
Distribution, the occurrence of the Distribution or the non-occurrence of the
Distribution will have on the market price of the Common Stock. The Company
believes factors such as actual or anticipated quarterly fluctuations in
financial results, changes in earnings estimates by securities analysts and
announcements of material events by the Company, its major clients or its
competitors, as well as general industry or economic conditions, may cause the
market price of the Common Stock to fluctuate, perhaps substantially. See
'Underwriting.'
Shares Eligible for Future Sale. The Distribution or future sales of
substantial amounts of Common Stock (including shares issuable upon the exercise
of stock options), or the perception that the Distribution or such sales may or
may not occur, could adversely affect the market price of the Common Stock. Upon
completion of this offering, the Company will have 16,225,000 shares of Common
Stock outstanding. Of these shares, the 2,900,000 shares sold in this offering
will be freely tradeable by persons other than 'affiliates' of the Company
without restriction or further registration under the Securities Act. The
remaining 13,325,000 shares of Common Stock will be held by IE. Although such
shares may not be sold by IE absent registration under the Securities Act or an
exemption from such registration, IE has advised the Company that it
contemplates that the Distribution, if it occurs, could be effected without
registration under the Securities Act and that the shares distributed pursuant
thereto would thereafter be freely tradeable by persons other than 'affiliates'
of the Company. In addition, following this offering, IE will have the
contractual right to require the Company to register under the Securities Act
all shares of Common Stock owned by IE. The Company and IE have agreed not to
offer, sell or otherwise dispose publicly of any shares of Common Stock (other
than any shares sold to IE pursuant to the Stock Registration and Option
Agreement or any shares issued pursuant to acquisitions of businesses) for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated. See 'Relationship Between the
Company and IE,' 'Principal Shareholder,' 'Shares Eligible for Future Sale' and
'Underwriting.'
Anti-takeover Effect of Certain Provisions of the Company's Articles of
Incorporation and Pennsylvania Law. The Company's Articles of Incorporation
authorize the issuance of up to 100,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock. The Board of Directors will have the power
to determine the price and terms under which any such Preferred Stock may be
issued and to fix the terms thereof. The ability of the Board of Directors to
issue one or more series of Preferred Stock without shareholder approval, as
well as certain applicable statutory provisions under the Pennsylvania Business
Corporation Law, could deter or delay unsolicited changes in control of the
Company by discouraging open market purchases of the Common Stock or a
non-negotiated tender or exchange offer for such stock, which may be
disadvantageous to the Company's shareholders who may otherwise desire to
participate in such transaction and receive a premium for their shares. See
'Description of Capital Stock.'
Dilution. Purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution of $ in the net
tangible book value per share of Common Stock (assuming an initial public
offering price of $ ). See 'Dilution.'
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,900,000 shares of
Common Stock offered hereby are estimated to be $ ($ if the
Underwriters' over-allotment option is exercised in full) assuming an initial
public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses. All of the net
proceeds will be used to repay indebtedness to IE, which bore interest on a
weighted average basis of 10.1% per annum as of June 30, 1996 and had no stated
maturity or repayment terms. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.'
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock, and it is
the Company's current intention to retain any earnings for use in the operation
and expansion of its business. Accordingly, the Company does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future.
CAPITALIZATION
The following table sets forth, as of June 30, 1996, (i) the actual
capitalization of the Company and (ii) such capitalization as adjusted to give
effect to the sale of 2,900,000 shares of Common Stock offered by the Company
hereby at an assumed public offering price of $__ per share and application of
the estimated net proceeds therefrom as described in 'Use of Proceeds.' The
information set forth below should be read in conjunction with the Combined
Financial Statements and notes thereto and 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' contained elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion..................................................... $ 42,576 $
---------- -----------
Shareholder's equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued and
outstanding........................................................................ -- --
Common Stock, $.01 par value, 100,000,000 shares authorized, 13,325,000 shares
outstanding, actual and 16,225,000 shares outstanding, as adjusted (1)............. 133 162
Additional paid-in capital............................................................. 4,997
Retained earnings...................................................................... 1,014 1,014
---------- -----------
Total shareholder's equity........................................................ 6,144
---------- -----------
Total capitalization........................................................... $ 48,720 $
---------- -----------
---------- -----------
</TABLE>
- ------------------
(1) Does not include 3,000,000 shares reserved for issuance under the Company's
1996 Long-Term Incentive Plan. See 'Management -- Employment Arrangements'
and '-- 1996 Long-Term Incentive Plan' and Note 12 of Notes to Combined
Financial Statements.
11
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company as of June
30, 1996 was $21.6 million, or $1.62 per share of Common Stock. The deficit in
pro forma net tangible book value per share of Common Stock represents the
excess of total liabilities over total tangible assets, divided by the total
number of shares of Common Stock outstanding. After giving effect to the sale of
the 2,900,000 shares of Common Stock offered hereby by the Company (after
deducting estimated underwriting discounts and commissions and offering
expenses) at an assumed initial public offering price of $ , per
share, the net tangible book value of the Company as of June 30, 1996 would have
been $ , or $ per share, representing an immediate
increase in pro forma net tangible book value of $ per share to
existing shareholders and an immediate dilution of $ per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................... $
Deficit in pro forma net tangible book value per share at June 30, 1996..... $(1.62)
Increase per share attributable to new investors............................
----------
Pro forma net tangible book value per share after this offering...............
----------
Dilution per share to new investors........................................... $
----------
----------
</TABLE>
The following table sets forth, as of June 30, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by IE and by the new investors in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- -------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholder.......................... 13,325,000 82.1% $ 5,130,000 % $ 0.39
New investors................................. 2,900,000 17.9
------------- ----------- ------------ -----------
Total....................................... 16,225,000 100% $ %
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</TABLE>
The foregoing tables also assume no exercise of options to purchase
1,062,500 shares of Common Stock at a per share exercise price of $ ,
which options are anticipated to be granted prior to this offering. To the
extent these options are exercised, there will be further dilution to the
purchasers of shares in this offering. If all such options were included above,
the pro forma net tangible book value per share at June 30, 1996, after giving
effect to this offering, would have been $ , and the dilution per
share to the purchasers of shares in this offering would have been
$ . See 'Management -- 1996 Long-Term Incentive Plan' and Note 12 of
Notes to the Combined Financial Statements. In addition, the above calculations
assume no exercise of the Underwriters' over-allotment option. See
'Underwriting.'
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<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data presented below as of December 31,
1993, 1994 and 1995 and for the years then ended have been derived from the
Combined Financial Statements of the Company which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected
combined financial data as of December 31, 1991 and 1992 and for the years then
ended, and as of June 30, 1995 and 1996 and for the six months then ended, are
derived from the unaudited Combined Financial Statements of the Company, which,
in management's opinion, include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information set
forth therein. The results of operations for the six months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the full
year. In addition, all of the historical financial information set forth below
may not be indicative of the Company's future performance and does not
necessarily reflect what the financial position and results of operations of the
Company would have been had the Company operated as a separate stand-alone
entity during the periods covered. The information set forth below should be
read in conjunction with the Combined Financial Statements and the Notes
thereto, and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations,' included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 8,526 $ 21,909 $ 49,653 $ 50,965 $ 79,862 $ 36,609 $ 52,001
Cost of revenues......................... 6,333 17,262 33,816 37,159 56,327 25,910 36,374
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 2,193 4,647 15,837 13,806 23,535 10,699 15,627
Operating expenses:
Selling and marketing.................. 999 2,511 3,815 3,755 3,975 2,027 3,508
General and administrative............. 945 2,259 5,294 6,543 9,178 3,981 5,213
Depreciation and amortization.......... 123 396 816 1,060 3,123 1,111 2,491
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 2,067 5,166 9,925 11,358 16,276 7,119 11,212
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations............ 126 (519) 5,912 2,448 7,259 3,580 4,415
Other expense, net....................... 61 247 941 1,763 2,578 802 2,212
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes........ 65 (766) 4,971 685 4,681 2,778 2,203
Provision for income taxes (benefit)..... 26 (306) 2,092 435 2,259 1,302 1,189
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ 39 $ (460) $ 2,879 $ 250 $ 2,422 $ 1,476 $ 1,014
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income per common
share(1)............................... $ 0.18 $ 0.08
--------- ---------
--------- ---------
Shares used in computing pro forma net
income per common share(1)............. 13,325 13,325
--------- ---------
--------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.......................... $ (2,182) $ 1,744 $ 8,424 $ 3,346 $ 11,102 $ 6,393 $ 16,458
Total assets............................. 4,329 12,444 40,034 31,918 54,473 29,765 59,112
Long-term debt, less current portion..... 89 7,369 27,887 13,282 39,556 13,882 42,576
Shareholder's equity (deficit)........... 39 (421) 2,458 2,708 5,130 4,184 6,144
</TABLE>
- ------------------
(1) Computed on the basis described in Note 2 of Notes to Combined Financial
Statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is currently an indirect, wholly-owned subsidiary of IE. Prior
to June 1996, IE conducted the Company's businesses through various divisions
and subsidiaries. As of May 31, 1996, IE effected the Formation Transactions by
contributing to the Company the assets and liabilities related to the Company's
businesses and entering into certain agreements with the Company governing
various interim and ongoing relationships between the two companies. After the
completion of this offering, IE will own 82.1% of the outstanding shares of
Common Stock of the Company (80.0% if the Underwriters' over-allotment option is
exercised in full). See 'Relationship Between the Company and IE.'
The Company's Combined Financial Statements consist of the results of
operations and financial condition of the professional services organization of
TFN both prior to and after its acquisition by IE in August 1995, as well as the
incremental goodwill and indebtedness associated with that acquisition. The
Company's Combined Financial Statements also include IntelliCom's business
beginning on January 1, 1996.
The Company's revenues grew at a compound annual growth rate of 75% from
1991 through 1995 and grew by 42% from June 30, 1995 to June 30, 1996,
principally due to increased penetration in the Company's existing geographic
markets, growth in the sale of new services, increased demand for the Company's
services and acquisitions made by TFN through 1993. XLConnect's revenues are
generated from the provision of professional services, which include
internetworking, applications development, managed services and
telecommunications. The Company began offering telecommunications services as of
January 1, 1996.
The Company's internetworking and applications development services
generally are provided under contracts ranging from one week to one year.
Revenues from internetworking and applications development services are billed
to clients principally on a time and materials basis and are recognized as costs
are incurred and services are provided. The Company, to a lesser extent, also
provides these services at a fixed price and recognizes revenues from such
services on a percentage-of-completion basis. Training provided to clients in
conjunction with the Company's services is billed on a per person or per project
basis, with revenue recognized when training is provided.
The Company's managed services are typically provided under contracts
ranging from one to three years. Revenues derived from the Company's managed
services are recognized ratably over the term of the particular contract.
Pricing for managed services is generally based on unit or usage-based formulas.
In addition, the Company offers clients an alternative payment program, marketed
as 'Power by the Hour' ('PBTH'), which was introduced in late 1993. Under the
PBTH program, for a fixed monthly fee, the Company bundles its value-added
services with PCs, workstations, and other equipment and technologies. The
Company facilitates the PBTH program by entering into a master lease agreement
with a third party, which is supported by the client's contractual obligations
to the Company. As a result, the PBTH program allows clients to account for the
assets and services supplied under PBTH as operating expenses rather than as
capital expenditures.
The Company's telecommunications services are provided under contracts
ranging from one to three years. Under these contracts, the Company sells
value-enhanced data, video and voice transmission services, including Internet
access. These services are billed monthly and revenues are recognized on the
basis of client usage or pursuant to a fixed rate.
All of the Company's services are billed on a monthly basis, with managed
services often being billed in advance. The Company's contracts generally do not
obligate the client to purchase a minimum level of services and are terminable
by the client on relatively short notice, typically 30 days. In providing its
services, the Company does not purchase, take title to or resell the hardware or
software products used in implementing its solutions, but rather facilitates the
purchase of such products for the client.
Cost of revenues consists primarily of salaries and compensation-related
expenses for billable technical professionals (including training, which is
partially subsidized by vendors, and subcontracted labor) and operating lease
costs payable to a third party relating to equipment necessary for the Company's
PBTH program. Additionally, cost of revenues for the Company's
telecommunications services includes transmission services purchased by the
Company from third parties. Costs associated with providing the Company's
services are recorded when incurred.
14
<PAGE>
Selling and marketing expenses consist primarily of salaries, commissions
and bonuses paid to the Company's sales force, as well as fees paid to IE for
sales generated through leads provided by IE's sales force. Sales commissions
are recorded as revenues are recognized. Selling and marketing expenses also
include associated costs for the sales and marketing departments as well as
direct advertising costs. General and administrative expenses consist primarily
of compensation and related costs for nonbillable management and administrative
support personnel including practice development, finance, MIS and legal, as
well as fixed operating costs, principally rent and utilities.
The Company depreciates computer and office equipment used in the operation
of its business over three to seven years. The Company amortizes its intangible
assets, primarily goodwill, on a straight-line basis over 20 years. Other
expense, net consists primarily of interest expense associated with the
aggregate intercompany borrowings outstanding from IE for each period presented.
Conduct of Business of XLConnect. Prior to the Formation Transactions,
XLConnect established a number of systems and procedures to enable it to operate
as a stand-alone company. The Company invoices separately from IE substantially
all of its clients and performs its own collection functions. The Company will
perform its own cash management functions after this offering. All of the
Company's employees are tracked by payroll codes distinct from those of IE. See
'Relationship Between the Company and IE -- Contractual Arrangements.'
Formation Transactions Allocations. The historical Combined Financial
Statements of the Company reflect the results of operations, financial position
and cash flows of the businesses transferred to the Company from IE in the
Formation Transactions. Telecommunications services, which were first offered by
the Company on January 1, 1996, are only included in the combined financial
statements for the six month period ended June 30, 1996. The Combined Financial
Statements are presented as if the Company had existed as a corporation separate
from IE during the periods presented and include the historical assets,
liabilities, sales and expenses directly related to the Company's operations
that were either specifically identifiable or allocable using methodologies
which took into consideration personnel, business volume or other appropriate
factors. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
For the periods presented, primarily those prior to January 1, 1996,
certain general and administrative expenses reflected in the Combined Financial
Statements consist of allocations of various corporate expenses from IE using
the methodologies referenced above. These allocations generally include
administrative expenses related to management personnel, MIS and other
miscellaneous services such as accounting, tax, human resources, insurance and
legal. In addition, selling and marketing expenses for such periods reflect
allocations of IE's total selling and marketing expenses and the assumed fees
paid to IE for sales referrals during the corresponding periods. Although the
Company believes the allocations and the charges for such services to be
reasonable, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had been an independent entity and had otherwise contracted for or managed these
functions. Subsequent to the Formation Transactions, except as set forth in
'Relationship Between the Company and IE,' the Company will manage the various
required administrative functions using its own resources or contract with third
parties to perform these services and, in addition, will be responsible for the
costs and expenses associated with the management of a public corporation. The
Company's goodwill represents an allocation from IE of the Company's share of
intangible assets resulting from historical acquisitions by TFN and IE's
acquisition of TFN. The goodwill allocation took into consideration various
factors, which included operating cash flows, revenue streams and employee and
client bases.
The provision for income taxes was calculated as if the Company were a
stand-alone corporation filing separate Federal and state income tax returns for
all periods presented. The Company's intercompany borrowings from IE represent
the net cash required by the Company to fund its operations and an allocation of
the debt incurred in acquisitions by TFN and IE since the Company's inception in
1990.
As a result of the foregoing, the financial information included herein may
not necessarily reflect what the results of operations, financial position and
cash flows would have been had the Company been a separate, stand-alone entity
during the periods presented or be indicative of the results of operations,
financial position and cash flows of the Company in the future. The financial
information included herein does not reflect the changes that may occur in the
funding and operations of the Company as a result of and subsequent to the
Formation Transactions and this
15
<PAGE>
offering. However, management believes the assumptions underlying the Company's
financial statements and all allocations related thereto are reasonable.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by expense items in the Company's Combined Statements of
Operations:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................................... 68.1 72.9 70.5 70.8 69.9
--------- --------- --------- --------- ---------
Gross profit......................................................... 31.9 27.1 29.5 29.2 30.1
Operating expenses:
Selling and marketing.............................................. 7.7 7.4 5.0 5.5 6.7
General and administrative......................................... 10.7 12.8 11.5 10.9 10.0
Depreciation and amortization...................................... 1.6 2.1 3.9 3.0 4.8
--------- --------- --------- --------- ---------
Total operating expenses......................................... 20.0 22.3 20.4 19.4 21.5
--------- --------- --------- --------- ---------
Income from operations............................................... 11.9 4.8 9.1 9.8 8.6
Other expense, net................................................... 1.9 3.4 3.3 2.2 4.3
--------- --------- --------- --------- ---------
Income before income taxes........................................... 10.0 1.4 5.8 7.6 4.3
Provision for income taxes........................................... 4.2 0.9 2.8 3.6 2.4
--------- --------- --------- --------- ---------
Net income........................................................... 5.8% 0.5% 3.0% 4.0% 1.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The following table sets forth the components of revenues of the Company
for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- ---------
% OF % OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Internetworking...... $ 17,301 34.8% $ 22,619 44.4% $ 25,106 31.4% $ 12,671 34.6% $ 13,675
Applications
development........ 2,935 5.9 8,434 16.5 12,518 15.7 5,757 15.7 8,093
Managed services..... 29,417 59.3 19,912 39.1 42,238 52.9 18,181 49.7 27,396
Telecommunications... -- -- -- -- -- -- -- -- 2,837
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total revenues..... $ 49,653 100.0% $ 50,965 100.0% $ 79,862 100.0% $ 36,609 100.0% $ 52,001
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
% OF
REVENUE
---------
Revenues:
Internetworking...... 26.3%
Applications
development........ 15.6
Managed services..... 52.6
Telecommunications... 5.5
---------
Total revenues..... 100.0%
---------
---------
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. The Company's revenues increased 42.0% for the six months ended
June 30, 1996 to $52.0 million from $36.6 million for the comparable period in
1995. The increase in revenues resulted principally from growth in managed
services, particularly LAN and desktop administration and support and the PBTH
program. The Company also introduced its telecommunications services on January
1, 1996, which accounted for $2.8 million, or 5.5% of revenues.
Cost of Revenues. Cost of revenues increased 40.4% for the six months
ended June 30, 1996 to $36.4 million from $25.9 million for the comparable
period in 1995, primarily as a result of an increased number of technical
personnel, in part from the expansions of the Company's San Mateo branch office
and the Company's help desk operations. The increase also reflects $2.5 million
of costs associated with revenue from telecommunications services. Cost of
revenues as a percentage of revenues decreased to 69.9% for the six months ended
June 30, 1996 from 70.8% for the comparable period in 1995 as a result of the
increased utilization of the Company's engineers and technicians, particularly
technical professionals providing the Company's managed services and
applications development services. The benefit from improved utilization of
technical personnel was partially offset by the introduction of lower margin
16
<PAGE>
telecommunications services and growth in certain managed service areas, which
provide recurring or repeat revenues at lower margins, primarily the PBTH
program and hardware repair.
Selling and Marketing. Selling and marketing expenses increased 73.1% for
the six months ended June 30, 1996 to $3.5 million from $2.0 million for the
comparable period in 1995 and increased as a percentage of revenues to 6.7% for
the first six months of 1996 from 5.5% for the comparable period in 1995. The
increase was a result of the Company's adding sales personnel as it continued to
emphasize its direct sales channel.
General and Administrative. General and administrative expenses increased
30.9% for the six months ended June 30, 1996 to $5.2 million from $4.0 million
for the comparable period in 1995. As a percentage of revenues, general and
administrative expenses decreased to 10.0% for the first six months of 1996 from
10.9% for the first six months of 1995. The dollar increase was due to the
incremental costs associated with the introduction of telecommunications
services, increased overhead costs required to support the Company's growth and
to enable it to operate as a separate company, including an expanded management
team, and expanded facility costs to support overall personnel growth. The
decrease as a percentage of revenues was attributable to the Company's improved
return on fixed costs combined with effective management of variable costs.
Depreciation and Amortization. Depreciation and amortization increased
124.2% for the six months ended 1996 to $2.5 million from $1.1 million for the
comparable period in 1995. As a percentage of revenues, depreciation and
amortization increased to 4.8% for the first six months of 1996 from 3.0% for
the first six months of 1995. The increase was primarily due to amortization of
the incremental goodwill associated with IE's acquisition of TFN in August 1995,
combined with depreciation of new computer equipment acquired to support the
increased number of technical services personnel and new training rooms to
support the Company's applications development service programs.
Income from Operations. Income from operations increased 23.3% for the six
months ended June 30, 1996 to $4.4 million from $3.6 million for the comparable
period in 1995 and decreased as a percentage of revenues to 8.6% in 1996 from
9.8% in 1995, for the reasons stated above.
Other Expense, Net. Other expense, net increased 175.8% for the six months
ended June 30, 1996 to $2.2 million from $802,000 for the comparable period in
1995, primarily as a result of an increase in interest expense. Interest expense
for the six months ended June 30, 1996 was $2.0 million, compared to $804,000
for the six months ended June 30, 1995, as a result of increased intercompany
borrowings attributable to IE's acquisition of TFN in August 1995 and
incremental debt required to support the Company's higher working capital needs.
Provision for Income Taxes. Provision for income taxes decreased 8.7% for
the six months ended June 30, 1996 to $1.2 million from $1.3 million for the
comparable period in 1995, primarily as a result of lower income before income
taxes. The effective income tax rate increased to 54.0% for the first six months
of 1996 from 46.9% for the comparable period in 1995, primarily due to the
increase in nondeductible goodwill amortization associated with the acquisition
of TFN by IE in August 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased 56.7% for 1995 to $79.9 million from $51.0
million for 1994. The increase resulted principally from increased sales of
existing service offerings, particularly managed services such as the PBTH
program, and the LAN and desktop support and administration component of the
Company's managed services. The increase also was attributable to the
reinstitution on a selective basis of the Company's hardware repair services
business, effective January 1, 1995, which had been sold in December 1993.
During 1995, hardware repair services conducted by managed services' technicians
accounted for $6.9 million, or 8.7% of revenues.
Cost of Revenues. Cost of revenues increased 51.6% for 1995 to $56.3
million from $37.2 million for 1994 as a result of the Company's growth in
revenues. Cost of revenues as a percentage of revenues decreased to 70.5% in
1995 from 72.9% in 1994. The decrease as a percentage of revenues was primarily
attributable to the increased utilization of the Company's engineers and
technical professionals and a more favorable mix within the Company's LAN and
desktop support and administration services and internetworking services,
partially offset by an increase in lower margin services such as the PBTH
program and hardware repair services.
Selling and Marketing. Selling and marketing expenses increased 5.9% for
1995 to $4.0 million from $3.8
17
<PAGE>
million for 1994, but decreased as a percentage of revenues to 5.0% for 1995
from 7.4% for 1994. The dollar increase was primarily due to increases in sales
commissions resulting from higher revenues. The decrease as a percentage of
revenues was due to a reduced sales staff following the acquisition of TFN by IE
in August 1995 and higher recurring revenues from services such as the PBTH
program and network management, which have a lower associated selling expense.
General and Administrative. General and administrative expenses increased
40.3% for 1995 to $9.2 million from $6.5 million for 1994, but decreased as a
percentage of revenues to 11.5% for 1995 from 12.8% for 1994. The dollar
increase was primarily the result of increased staffing and related personnel
costs necessary to manage the Company's revenue growth and incremental costs
associated with IE's acquisition of TFN, while the decrease as a percentage of
revenues was attributable to the relatively fixed nature of certain general and
administrative expenses and effective cost controls.
Depreciation and Amortization. Depreciation and amortization increased
194.6% for 1995 to $3.1 million for 1995 from $1.1 million for 1994, and
increased as a percentage of revenues to 3.9% for 1995 from 2.1% for 1994. These
increases were primarily due to the incremental depreciation attributable to
upgraded operating and information systems and expanded facilities necessary to
support the growing number of technical services and administrative
professionals. The increase also resulted from amortization of the goodwill
resulting from IE's August 1995 acquisition of TFN.
Income from Operations. Income from operations increased 196.5% for 1995
to $7.3 million from $2.4 million for 1994 and increased as a percentage of
revenues from 4.8% in 1994 to 9.1% in 1995 for the reasons stated above.
Other Expense, Net. Other expense, net increased 46.2% for 1995 to $2.6
million from $1.8 million for 1994 because of higher interest expense resulting
from IE's acquisition of TFN in August 1995 and increased working capital
requirements in 1995.
Provision for Income Taxes. Provision for income taxes increased 419.3%
for 1995 to $2.3 million from $435,000 for 1994 as a result of substantially
higher income before income taxes in 1995. The effective tax rate decreased to
48.3% for 1995 from 63.5% for 1994, primarily due to the higher income before
income taxes, which offset the increase in nondeductible goodwill amortization
associated with IE's acquisition of TFN in August 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased 2.6% for 1994 to $51.0 million from $49.7
million for 1993. Revenues in 1993 included $22.6 million from the Company's
hardware repair services business, which was sold in December 1993. Excluding
the Company's hardware repair services, the Company's revenues would have
increased 82.9% to $49.6 million in 1994 from $27.1 million in 1993. The
increase in 1994 was a result of strong growth in the Company's managed services
and applications development services and more modest growth in the Company's
internetworking services. Growth in managed services (excluding the hardware
repair services) resulted primarily from increased services provided under the
Company's Power by the Hour program.
Cost of Revenues. Cost of revenues increased 9.9% for 1994 to $37.2
million from $33.8 million for 1993 as a result of an increase in staffing to
support the Company's anticipated growth in revenues. Cost of revenues as a
percentage of revenues increased to 72.9% for 1994 from 68.1% for 1993. The
increase as a percentage of revenues was primarily attributable to the decreased
utilization of certain technical professionals following the sale of the
Company's hardware repair business pending the redeployment of these technicians
into the Company's other service areas.
Selling and Marketing. Selling and marketing expenses remained virtually
unchanged at $3.8 million for 1994 and 1993, consistent with the Company's
modest revenue growth. As a percentage of revenues, selling and marketing
expenses decreased to 7.4% for 1994 from 7.7% for 1993 reflecting improvement in
the productivity of the Company's sales force.
General and Administrative. General and administrative expenses increased
23.6% for 1994 to $6.5 million for 1994 from $5.3 million for 1993. As a
percentage of revenues, general and administrative expenses increased to 12.8%
for 1994 from 10.7% for 1993. The increase was primarily due to incremental
costs associated with various acquisitions consummated in 1993 and an increase
in overhead costs, primarily salaries, compensation-related costs
18
<PAGE>
and facility costs, to support anticipated growth in the Company's core
businesses.
Depreciation and Amortization. Depreciation and amortization increased
29.9% for 1994 to $1.1 million from $816,000 for 1993 and, as a percentage of
revenues, increased to 2.1% for 1994 from 1.6% for 1993. This increase was
directly attributable to capital expenditures and increased goodwill from
acquisitions completed by TFN in 1993.
Income from Operations. Income from operations decreased 58.6% for 1994 to
$2.4 million from $5.9 million for 1993 and decreased as a percentage of
revenues to 4.8% for 1994 from 11.9% for 1993 for the reasons stated above.
Other Expense, Net. Other expense, net increased 87.4% for 1994 to $1.8
million from $941,000 for 1993. Interest expense increased to $1.8 million for
1994 from $1.2 million for 1993 as a result of higher average intercompany debt
during 1994 to finance acquisitions made in 1993 and greater working capital
requirements in 1994.
Provision for Income Taxes. Provision for income taxes decreased 79.2% for
1994 to $435,000 from $2.1 million for 1993, while the effective tax rate
increased to 63.5% in 1994 from 42.1% in 1993, primarily due to lower income
before income taxes, combined with an increase in nondeductible goodwill
amortization associated with acquisitions by TFN during 1993.
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly operating results may vary depending upon such
factors as changes in the levels of revenues derived from internetworking,
applications development, managed services and telecommunications services, the
size and timing of significant projects, changes in the mix of employee and
subcontractor technicians on large projects, the timing of new service offerings
by the Company or its competitors, new branch office openings by the Company,
changes in pricing policies by the Company or its competitors, market acceptance
of new and enhanced services offered by the Company or its competitors, changes
in operating expenses, the availability of qualified technical personnel,
disruptions in sources of supply of computer, telecommunications and related
products and services, the effect of acquisitions and industry and general
economic factors. In addition, the Company believes that its business is subject
to some seasonality, the effects of which currently are partially obscured by
the Company's revenue growth during the past eight quarters. Nonetheless, the
Company believes that weaker sales may be experienced during the fourth and
first quarters due to fewer business days and by some clients' decisions at year
end to postpone large internetworking and applications development projects
until the following year when capital budgets are renewed.
19
<PAGE>
The following table presents unaudited quarterly operating results for the
Company for the last eight quarters, as well as the percentage of the Company's
revenues represented by each expense item. This information has been prepared by
the Company on a basis consistent with the Company's audited Combined Financial
Statements and includes all adjustments (consisting solely of normal recurring
adjustments) that the Company considers necessary for a fair presentation in
accordance with generally accepted accounting principles. Such quarterly results
are not necessarily indicative of future results of operations:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
----------- --------- --------- --------- ----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 13,032 $ 15,804 $ 17,665 $ 18,944 $ 21,019 $ 22,234 $ 23,718 $ 28,283
Cost of revenues................ 9,332 11,969 12,666 13,244 15,093 15,324 17,004 19,370
----------- --------- --------- --------- ----------- --------- --------- ---------
Gross profit.................... 3,700 3,835 4,999 5,700 5,926 6,910 6,714 8,913
Operating expenses:
Selling and marketing......... 1,013 990 976 1,051 888 1,060 1,539 1,969
General and administrative.... 1,735 1,837 1,845 2,136 2,657 2,540 2,444 2,769
Depreciation and
amortization................ 291 353 486 625 895 1,117 1,302 1,189
----------- --------- --------- --------- ----------- --------- --------- ---------
Total operating expenses.... 3,039 3,180 3,307 3,812 4,440 4,717 5,285 5,927
----------- --------- --------- --------- ----------- --------- --------- ---------
Income from operations.......... 661 655 1,692 1,888 1,486 2,193 1,429 2,986
Other expense, net.............. 337 351 397 405 725 1,051 1,079 1,133
----------- --------- --------- --------- ----------- --------- --------- ---------
Income before income taxes...... 324 304 1,295 1,483 761 1,142 350 1,853
Provision for income taxes...... 204 193 561 741 384 573 291 898
----------- --------- --------- --------- ----------- --------- --------- ---------
Net income...................... $ 120 $ 111 $ 734 $ 742 $ 377 $ 569 $ 59 $ 955
----------- --------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- --------- ----------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1995 1995 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 71.6 75.7 71.7 69.9 71.8 68.9 71.7
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 28.4 24.3 28.3 30.1 28.2 31.1 28.3
Operating expenses:
Selling and marketing.......... 7.8 6.3 5.5 5.5 4.2 4.8 6.5
General and administrative..... 13.3 11.7 10.4 11.3 12.6 11.4 10.3
Depreciation and
amortization................. 2.2 2.2 2.8 3.3 4.3 5.0 5.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..... 23.3 20.2 18.7 20.1 21.1 21.2 22.3
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations........... 5.1 4.1 9.6 10.0 7.1 9.9 6.0
Other expense, net............... 2.6 2.2 2.2 2.2 3.5 4.7 4.6
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes....... 2.5 1.9 7.4 7.8 3.6 5.2 1.4
Provision for income taxes....... 1.6 1.2 3.2 3.9 1.8 2.6 1.2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income....................... 0.9% 0.7% 4.2% 3.9% 1.8% 2.6% 0.2%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
JUNE 30,
1996
-----------
Revenues......................... 100.0%
Cost of revenues................. 68.5
-----------
Gross profit..................... 31.5
Operating expenses:
Selling and marketing.......... 7.0
General and administrative..... 9.8
Depreciation and
amortization................. 4.2
-----------
Total operating expenses..... 21.0
-----------
Income from operations........... 10.5
Other expense, net............... 3.9
-----------
Income before income taxes....... 6.6
Provision for income taxes....... 3.2
-----------
Net income....................... 3.4%
-----------
-----------
</TABLE>
EFFECTS OF INFLATION
The Company believes it has not been adversely affected by inflation during
the past three years.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion of this offering, the Company participated in IE's
central cash management system, pursuant to which all cash generated from the
Company's operations was transferred to IE on a daily basis, and all cash
required to operate the Company's business was transferred back to the Company
from IE. Following the completion of this offering, IE will no longer provide
cash management services to the Company. However, pursuant to the Services
Agreement, IE and XLConnect may make advances to each other bearing interest at
market rates. See 'Relationship between the Company and IE -- Contractual
Arrangements.'
20
<PAGE>
The Company is currently a party to, but has not yet borrowed directly
under, the IBMCC Credit Facility. The Credit Facility allows for total
borrowings of up to $225 million, subject to meeting a collateral-based formula,
of which $111.8 million was outstanding as of June 30, 1996. The Credit Facility
is secured by all of the assets of IE and its subsidiaries, including the
Company. Of the Credit Facility, $75 million is classified as a term loan with a
maturity date of October 5, 1998 and bears interest at prime plus 2.5% (10.75%
on June 30, 1996), and the remaining portion of the Credit Facility can be used
by IE for inventory financing and working capital purposes and bears interest at
prime plus 1.5% (9.75% on June 30, 1996).
The Company has obtained a Commitment Letter dated June 21, 1996, from
IBMCC setting forth the terms of a proposed amendment to the Credit Facility to
be effective on the date of this Prospectus, whereby the Company would be able
to borrow directly from IBMCC up to $20 million of the total of $225 million
(the '$20 million Sub-facility'), subject to a collateral-based formula. In
addition, the Company's joint and several liability to IBMCC would be limited to
$20 million, irrespective of whether any borrowings were outstanding under the
$20 million Sub-facility. To the extent that the net proceeds from this offering
are insufficient to repay all of the intercompany borrowings from IE, the
Company anticipates that, subject to availability under the $20 million
Sub-facility, it will borrow funds under such facility in an amount sufficient
to satisfy the remaining outstanding intercompany borrowings. All cash generated
by the Company will be deposited in accounts segregated from the accounts used
by IE. IE will retain the ability to borrow up to the total amount of the credit
facility, including amounts not then outstanding to the Company under the $20
million Sub-facility, provided IE satisfies its collateral-based formula
exclusive of XLConnect's assets.
The Company intends to seek its own credit facility prior to the
termination of the Services Agreement, although there can be no assurance that
the Company will be able to do so on terms acceptable to the Company, or that
the Company will be permitted to be removed as a party to the IBMCC Credit
Facility. After termination of the Services Agreement, the Company's principal
sources of liquidity will consist of cash on hand, cash from operations and
borrowings under such credit facilities as may be available to the Company from
time to time.
The Company's operating activities used cash of $10.8 million in 1993,
provided cash of $15.1 million in 1994 and $1.1 million in 1995 and used cash of
$1.9 million for the six months ended June 30, 1996. The use of cash resulting
from the Company's operating activities in 1993 was due to increased working
capital requirements and the Company's recording a note receivable for a portion
of the sale price for the hardware repair services business (the 'Note
Receivable'). The Company generated cash from operating activities in 1994 as a
result of improved working capital management and the collection of a
substantial portion of the amount due under the Note Receivable. Cash provided
by the Company's operating activities in 1995 was due to a higher level of net
income in the period as compared to 1994 and collection of the balance due under
the Note Receivable, partially offset by increased working capital requirements.
The Company used cash from operating activities in the six months ended June 30,
1996, as a result of increased working capital requirements.
The Company's investing activities used cash of $8.5 million in 1993, $3.0
million in 1994, $2.1 million in 1995 and $700,000 for the six months ended June
30, 1996. Cash used in the Company's investing activities for 1993 related to
the Company's share of excess purchase price paid by TFN for certain
acquisitions and capital expenditures. The use of cash in the Company's
investing activities for 1994, 1995 and the six months ended June 30, 1996
related to capital expenditures necessary to upgrade the Company's operating and
information systems and to expand existing facilities to support the growing
number of technical service and administrative personnel.
The Company's financing activities provided cash of $19.3 million in 1993,
used cash of $12.1 million in 1994 and provided cash of $1.0 million in 1995 and
$2.6 million for the six months ended June 30, 1996. Cash provided by the
Company's financing activities in 1993 was principally the result of
intercompany borrowings from IE. The use of cash was due to the repayment of
intercompany borrowings from IE and other long term debt. Cash provided by the
Company's financing activities in 1995 and the six months ended June 30, 1996
was due to intercompany borrowings from IE in both periods which were partially
offset by the repayment of other long-term debt.
The foregoing cash flows are not necessarily indicative of the cash flows
that would have resulted if the Company were a stand-alone entity.
The Company currently has no long-term debt or material long-term
obligations other than the intercompany debt and its capital leases of office
equipment. See Note 6 to 'Notes to Combined Financial Statements.' The debt
21
<PAGE>
owed to IE, which aggregated $39.5 million and $42.5 million as of December 31,
1995, and June 30, 1996, respectively, is unsecured and has been classified as
noncurrent, as there are no repayment terms between IE and the Company. The
weighted average interest rates associated with the debt were 6.8%, 8.4%, 10.1%
and 9.75% per annum for 1993, 1994 and 1995 and for the six months ended June
30, 1996, respectively. The interest rate was based on the weighted average
rates associated with IE's various borrowing arrangements.
The estimated net proceeds to the Company from its sale of shares of Common
Stock pursuant to this offering will be approximately $____________. During the
remainder of 1996 and 1997, the Company anticipates making approximately $7
million in capital expenditures, expected to be funded from cash flows from
operations and available external financing sources. These expenditures will
include the acquisition and implementation of a new remote time, billing and
contract management system, additional purchases of computers to support the
technical staff and completion of an executive briefing center to be used to
demonstrate the Company's network management and help desk capabilities to
clients. The Company has no current plans for any additional material capital
expenditures through December 31, 1997. The Company believes that its cash flows
from operations and funds available from the $20 million Sub-facility, or any
alternative line of credit that may become available to the Company, will be
sufficient to satisfy its working capital needs and planned growth through at
least the next twelve months, except to the extent that additional financing may
be required in connection with any acquisitions.
22
<PAGE>
BUSINESS
OVERVIEW
XLConnect is a professional services organization providing enterprise-wide
total connectivity solutions to clients with complex computing and
communications requirements. As a single source provider, the Company offers
comprehensive internetworking services, applications development services,
managed services and telecommunications services. The Company's solutions are
custom designed to integrate computing and communications devices and equipment
with software applications and systems to develop LANs and to link LANs through
public and private communications networks and the Internet to form WANs. The
Company describes the provision of these services on an integrated basis as
total connectivity solutions.
Internetworking services include consulting, design and implementation of
LANs and WANs. Applications development services include customization and
adaptation of proven software as well as training to support the Company's
applications and internetworking solutions. Managed services enable clients to
outsource multiple aspects of their information technology functions, including
technology selection, deployment and support, network management and help desk
support. Telecommunications services include data, video and voice transmission.
XLConnect believes that its total connectivity solutions enable its clients to
increase productivity and enhance competitiveness by improving the flow of
information among clients' employees, customers and suppliers.
INDUSTRY BACKGROUND
According to available industry sources, the market for systems
integration, consulting, applications development and outsourcing services in
1994 was estimated to be $91 billion worldwide and is estimated to grow by
approximately 16.5% annually through 1999. Demand for these services is expected
to increase as organizations become increasingly dependent on information
technology and as computing and communications technologies continue to evolve
at a rapid rate.
Computer networks are becoming increasingly complex due to the migration
from legacy, mainframe environments to distributed, client/server environments
characterized by LANs which rely on multi-vendor, multi-protocol technologies.
While client/server networks provide many competitive benefits, particularly
increased ease of use, computing power and flexibility, this migration has
resulted in increased MIS investment, system design and compatibility issues and
substantial inefficiencies in supporting and managing these networks.
Distributed client/server environments have placed significant pressures on
users' in-house support staffs, as well as on software and hardware vendors. As
a result, demand has increased for independent service providers capable of
integrating and supporting the variety of protocols, applications and equipment
inherent in LANs.
As LANs have proliferated, computing and communications technologies have
continued to converge. Evolving business practices have created an increased
need for the instantaneous flow of information within and beyond traditional
corporate walls to branch sales offices, telecommuters, mobile offices and
customer and supplier networks. Businesses now share data, video and voice
information among diverse locations across telecommunications networks, thereby
creating WANs. In addition, access to the Internet is providing new
communications and marketing opportunities for virtually all businesses. In
response to the proliferation of WANs, telecommunications carriers now offer a
wider array of communications services, including private and public networks
utilizing frame relay, Integrated Services Digital Networks ('ISDN') and
asynchronous transfer mode ('ATM'). These services involve the use of a variety
of access lines, distinct signaling protocols and evolving and specialized
networking equipment.
Due to the difficulties of designing, implementing and managing complex
LANs and WANs, in-house support staffs have been unable to maintain either the
expertise or personnel necessary to keep pace with technological advances. As a
result, enterprises must increasingly rely on independent service providers with
the technical expertise to design and configure these complex systems and the
ability to manage and upgrade the networks on an ongoing basis. Historically,
enterprises were forced to turn to multiple service providers, such as VARs,
systems integrators, hardware and software vendors and telecommunications
carriers, for the various components and services necessary to meet their
connectivity needs. However, VARs and smaller systems integrators typically have
limited geographic reach and lack broad technical expertise and sufficient scale
to address these needs. Large systems integrators and consultants have focused
principally on providing solutions to the largest enterprises and generally do
not have sufficient telecommunications and networking expertise. Hardware and
software vendors are increasingly focused on
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their core activities of developing, manufacturing and marketing their products
and are not perceived as being objective in recommending multi-product
solutions. Many of these vendors are outsourcing their own post-sale service and
support requirements. Telecommunications carriers generally do not have
sufficient expertise in computer networking. Large systems integrators,
consultants and VARs, as well as hardware and software vendors, lack the ability
to provide and manage transmission of data over networks.
THE XLCONNECT SOLUTION
The Company provides a broad array of services to address the total
connectivity needs of its clients. Key elements of the XLConnect solution are:
Single Source Provider. XLConnect is a single source provider of
'end-to-end' connectivity solutions. The Company's technical staff of
approximately 950 engineers and technicians coordinate and manage all
elements of clients' connectivity needs, from the desktop through the LAN
to the WAN, including data, video and voice transmission services. The
Company also offers client training and managed services, such as
technology selection and deployment, network management and help desk
support.
National Coverage. The Company operates through a network of 24
offices located in major metropolitan areas throughout the United States.
Each office is staffed with technical professionals providing a national
base from which to offer services to clients with multiple locations and
dispersed employees, customers and suppliers. National coverage enables the
Company to provide local and timely delivery of cost-effective solutions
for clients, allows for more flexible, efficient staffing and enhances the
Company's ability to respond to local clients' specific needs.
Multi-Vendor Expertise. By maintaining a highly-trained,
cross-certified technical staff and remaining independent of any specific
vendor, the Company is able to select the most appropriate products and
services for each aspect of the client's total connectivity solution. The
Company has significant expertise in integrating and supporting
technologies from multiple hardware and software manufacturers and
developers, telecommunications carriers and Internet service providers.
STRATEGY
The Company's business objective is to be the preferred provider of total
connectivity solutions to enterprises throughout the United States. The Company
is pursuing the following strategies to achieve this objective:
Maintain and Enhance Technical Expertise. The Company seeks to
maintain and enhance its technical expertise by hiring and training the
most proficient engineering personnel available. The Company has 11 full-
time recruiters to identify and recruit technical personnel. The Company's
extensive training programs assist in maintaining its technical
proficiency. The Company focuses on its corporate culture, employment
environment and incentive systems in order to motivate, reward and retain
its employees. The Company believes that the expertise of its technical
staff differentiates it from its competitors, allows it to offer total
connectivity solutions and affords it the flexibility to expand its service
offerings rapidly as required to meet technological advances and evolving
client needs. Additionally, XLConnect intends to evaluate opportunities for
strategic acquisitions of complementary professional services organizations
which have a proven record of delivering high quality technical services.
Expand National Presence. XLConnect seeks to enhance its national
reputation and aggressively market its services by expanding its branch
office network. The Company intends to evaluate opportunities to expand its
branch network through opening new branch offices and through strategic
acquisitions of professional services organizations located in new
geographic markets.
Emphasize High Quality Service and Customer Support. The Company's
engineers and technicians follow documented and standardized methodologies
to ensure a consistent approach to similar types of projects, thereby
fostering uniform quality and more cost-efficient solutions for clients.
The Company assumes responsibility for all aspects of its custom-designed
total connectivity solutions, providing its clients with a single point of
contact to address any concerns with respect to project implementation,
thus allowing clients to avoid managing multiple service providers and
product vendors.
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Further Penetrate Existing Client Base. The Company's comprehensive
range of services often permits interaction with diverse points of contact
and decisionmakers in a client's organization, including the chief
executive officer, chief financial officer, chief information officer,
divisional or department executives and purchasing managers. The Company
seeks to utilize these multiple points of contact in order to expand its
relationships with existing clients to obtain additional internetworking
and applications projects, as well as generate recurring revenues by
providing continuing services such as network management, help desk support
and telecommunications services.
Leverage Alliances with Industry Leaders. The Company has alliances
and relationships with industry-leading product vendors, telecommunications
carriers and Internet service providers, such as Ameritech, Bay Networks,
3Com, IBM/Lotus, HP, Microsoft, Novell, MCI and PSINet Inc. ('PSINet').
These relationships enhance XLConnect's credibility and provide leads to
new business opportunities. On certain occasions, the Company also teams
with large systems integrators and consultants on complex projects for
major enterprises. The Company will continue to pursue alliances and
relationships to further expand its service offerings and remain current
with advances in computing and communications technology.
Maintain and Enhance Multiple Sales Channels. The Company is actively
expanding its direct sales force that is now focused exclusively on the
sale of XLConnect's total connectivity solutions. Historically, a number of
these persons principally provided technical support to IE's direct sales
staff. In addition to developing this direct sales force, the Company
intends to continue to utilize IE's sales staff for the generation of sales
leads, as well as XLConnect's authorized agent companies. The Company also
continues to receive sales leads from product and service vendors as well
as large systems integrators and consultants.
SERVICES OFFERED
The Company provides internetworking services, applications development
services, managed services and telecommunications services, as described below.
Internetworking Services
The Company designs and implements internetworking solutions to connect all
segments of clients' networks using the proven products of leading hardware and
software vendors. Through its internetworking services, the Company integrates
computing and communications devices and equipment, such as PCs, workstations,
databases, routers and hubs, with software applications and systems to develop
LANs and to link LANs through public and private communications networks and the
Internet to form WANs.
LAN/WAN Consulting and Design. LAN/WAN consulting and design services
involve assessing clients' information-sharing needs, evaluating existing
infrastructure, analyzing current network performance and designing optimal
system and network solutions.
Implementation and Project Management. XLConnect implements network design
solutions and assumes responsibility for managing entire projects. Elements of
project management include configuring and installing desktop devices and
networking equipment, configuring network operating systems and applications
software, installing Internet web servers and implementing the infrastructure
required for telecommunications services. XLConnect also ensures clients'
information security over the Internet by customizing and implementing
firewalls.
The following examples are representative of the internetworking solutions
the Company provides to its clients.
An international brewing company migrating from a legacy system to
client/server computing engaged the Company to design the architecture that
would support client/server applications for approximately 500 end-users at
one of its brewing facilities. The Company assessed the client's needs,
designed the network, managed the implementation of the design and
installed and configured the networking components. The technologies
implemented by the Company included Cabletron hubs and switches, Cisco
routers, Microsoft NT and IBM Risc 6000 servers. With its updated WAN, the
client has improved its ability to share information among its breweries in
a more timely and comprehensive manner. Based on the success of the
project, the client awarded XLConnect additional contracts to design,
implement and maintain the networks in four of its other breweries.
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A designer-label clothing manufacturer engaged the Company to
implement a network to connect the client's 13 worldwide design,
manufacturing and distribution centers and corporate headquarters.
XLConnect designed and implemented a WAN based on frame relay services
connected by Bay Networks' switches, routers and hubs. XLConnect also
provided the client Internet access, including web site equipment
installation and support. The WAN implemented by the Company provides the
client's employees with real-time access to operating data generated at any
of the client's locations.
Applications Services
XLConnect's applications development services include customization and
adaptation of proven software to meet clients' specific needs and training to
support the Company's applications and internetworking solutions. Applications
services provide clients with software solutions to improve productivity through
more timely, accurate information-sharing and decision-making processes. The
Company's applications solutions minimize development times while delivering
quality solutions by using proven project management methodologies, risk
assessment practices and software development techniques. Projects start with
detailed needs assessments, requirements definitions and designs. The projects
then involve prototype development, testing, implementation, training and
support.
Applications Development and Integration. XLConnect custom designs
groupware, client/server and intranet software applications. In particular, the
Company customizes IBM/Lotus Notes applications into comprehensive intranet
group communications solutions, such as electronic messaging, bulletin boards
and video and voice communications capabilities. The Company also customizes
Microsoft Exchange to help clients exchange information seamlessly. XLConnect
adapts Netscape and Microsoft software to enable clients to implement electronic
mail, electronic commerce and other Internet applications over the World Wide
Web. The Company also provides Internet applications to develop web pages using
programming languages such as Java and HTML.
End-user Training. The Company offers comprehensive training through
cooperative relationships with vendors such as Microsoft, Novell, IBM/Lotus and
Bay Networks to support its applications and internetworking solutions. Training
is provided to end-users through programs designed to address the client's
custom applications. In order to deliver training in an efficient and effective
manner, XLConnect uses proven methodologies, assesses end-user training
requirements and develops customized curricula. Technical certification training
centers are located in 13 of the Company's 24 offices and provide
vendor-certified instructors.
The following examples are representative of the applications solutions the
Company provides to its clients:
XLConnect was engaged to help reengineer and automate the sales and
quoting process for a division of a diversified manufacturing company.
XLConnect's solution consisted of a series of interrelated IBM/Lotus Notes
databases located on a central server providing access to approximately 50
marketing and sales representatives at 15 international locations. The
client's prior quote generation system consisted of a five day paper
intensive effort. XLConnect's solution reduced the quote generation time to
one day. Other benefits included the creation of a central repository of
all quotes, the development of centralized information management, timely
sales forecasting and increased time available for customer interaction and
selling.
A regional home builder engaged the Company to implement Internet
marketing tools to reduce marketing expenses and reach more potential
customers. The Company developed a web site utilizing Microsoft's latest
web and database server technologies to convey the client's corporate
message, deliver information on its products and allow for communication
and interaction with potential customers. The client's web site provides
potential home buyers with convenient access to more in-depth and current
information and enables the client to access potential customers in a more
cost-effective manner.
Managed Services
XLConnect's managed services help clients to organize their technology
resources, enable them to outsource multiple aspects of their information
technology functions and minimize their support costs from the desktop through
the LAN and WAN. The Company's managed services reduce clients' costs of
technology ownership, allowing them to focus on their core competencies and
reduce their in-house support staffs.
Technology Selection, Deployment and Management Services. XLConnect
provides technology selection, procurement and deployment, software distribution
and other support services. The Company places personnel on-
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site and dispatches personnel as needed to provide desktop and LAN support
services. The Company bundles its managed services and the financing of
equipment purchases for a monthly service fee under its PBTH program. Under this
program, end-users have the flexibility to upgrade their PCs, workstations and
other equipment periodically throughout the contract term, which is usually
three years. The PBTH program allows subscribers to remain current with
technology without having to purchase the hardware and incur the capital
investment or capital lease drawbacks of ownership. The fee depends on the
number of services used, systems deployed and time frame commitments. Under this
program, the Company facilitates the provision of these products by entering
into a master lease agreement with a third party which is supported by the
client's contractual obligations to the Company.
As part of its technology selection, deployment and support services,
XLConnect also provides hardware repair services when requested by clients.
Typically, the Company subcontracts a significant amount of these services to
nationally recognized hardware repair providers.
Network Management. The Company provides remote network monitoring and
diagnostics through its Network Management Center, minimizing the client's need
for costly on-site service. The Network Management Center is able to detect
failures throughout clients' LANs and WANs, to troubleshoot routers, hubs, file
servers and desktop devices remotely and to dispatch technicians if necessary.
In addition, the Company will provide remote network management over the
Internet for Microsoft NT and Novell based file server environments. XLConnect
also provides network management services at clients' sites.
Help Desk. XLConnect's help desk services provide software and network
administration support, 24 hours a day, seven days a week, both on-site at the
client and remotely from the Company's Help Desk Centers. The Help Desk Centers
currently handle approximately 300,000 calls per year, most of which involve
software support for the clients' end-users.
The following examples are representative of the managed services the
Company provides to its clients.
A leading aircraft engine manufacturer engaged XLConnect to provide
its PBTH program to the users of 11,000 PCs and accompanying hardware.
XLConnect and the client's management team reengineered the client's
desktop implementation process, developed and deployed new technology
standards for user groups and upgraded most of the existing technology over
a three-year cycle. Managed services provided to the client include
technology standardization, procurement, deployment, asset management,
configuration and relocation. The client benefitted from more rapid
technology upgrades for end-users, reduced operating costs and higher
levels of end-user support.
XLConnect was engaged by a major airline to manage the enterprise
network supporting the client's reservation and ticketing system, corporate
headquarters and 11 domestic airport locations remotely through the Network
Management Center. The Company provides NetWare and NT user administration,
GroupWise e-mail administration, network operating system and server
management and network infrastructure management services, including remote
performance and fault management of routers, hubs, servers and network
operating systems. Network up-time has increased to an average availability
exceeding 99%.
XLConnect was engaged by a major farm equipment manufacturer to
provide technical help desk support for the client's computing and
networking systems. The help desk is staffed by the Company's technical
personnel and supported by more than 60 Company professionals at several of
the client's sites. The help desk personnel answer questions and, when
necessary, obtain additional support from specialists by clicking on an
icon in their help desk software that sends electronic message pages to
dispatch appropriate on-site technicians. The help desk can dispatch
specialists to support any technology solution that XLConnect implemented
for the client.
Telecommunications Services
The Company's telecommunications services include the provision of data,
video and voice transmission services. To provide these services, the Company
has alliances with several leading telecommunications carriers and Internet
service providers.
XLConnect is a non-facilities-based reseller of value-enhanced services
including voice, Internet access, ISDN and frame relay services, utilizing
public switched and dedicated private networks. XLConnect provides these
services
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to clients on an ongoing basis and bills them each month for their voice and
data transmission usage. The Company has established relationships with several
telecommunications carriers and Internet access providers, principally MCI, the
seven RBOCs and PSINet.
The following example is representative of the telecommunications services
the Company provides to its clients.
A national consumer finance company engaged the Company to implement a
network to connect its 160 branch offices and corporate headquarters and
provide ongoing telecommunications services. The Company provided a frame
relay solution consisting of routing hardware, network design and frame
relay transmission services that reduced the client's turnaround on its
loan approval process and improved its record-keeping processes.
OPERATIONS
Branch Office and Facilities Network. XLConnect operates from its
headquarters, 23 branch offices throughout the United States, its Network
Management Center and two Help Desk Centers. The branch network is divided into
three geographic regions, Central, Great Lakes/West and East, with a vice
president responsible for all aspects of operations within each region. The
number of technical personnel in each office ranges from approximately five to
90 persons, and the level of expertise ranges from offices which provide a few
specialized services to offices which provide all of the Company's services.
Each branch office has a practice director who oversees the services provided by
that office. Depending on its size, a branch office may have one or more
discipline managers who oversee specific services provided by that office, such
as internetworking, applications, telecommunications and managed services.
Reporting to each discipline manager in the larger branches are project
managers, senior engineers and technicians and developers, staff engineers and
technicians and developers and administrative personnel. Each office also has
one or more sales persons, and 11 branches have full-time recruiters whose
responsibility is to recruit technical personnel.
Project Planning and Review. When the Company is presented with a service
opportunity, the Company first performs a risk assessment of the opportunity to
ensure that the requested service is within the Company's scope of expertise and
to analyze the risks that may affect the Company's ability to deliver a quality
solution to the client. The Company emphasizes the development of standardized
methodologies for each type of service with respect to scope, technologies
involved and other aspects of the service. Proposals submitted to clients
contain specific scopes of work, timetables and change order processes which
detail the Company's and client's responsibilities. Once XLConnect is engaged, a
project manager or senior engineer, who typically has been involved in the
proposal process, is assigned to the project, based on technical skills and
experience. Additional staff and engineers are allocated to the project as
needed, based on each individual's technical experience and availability. All
applications development projects for the Company's clients provide that the
applications development documentation and solutions become the property of the
Company's clients.
Project Terms and Pricing. The Company typically contracts to provide its
services on a time and materials basis. The Company's contracts are generally
terminable by the client upon relatively short notice, often 30 days. The
Company typically enters into letters of understanding which provide for an
agreed upon scope of work for projects under $25,000. The Company charges a
fixed monthly fee to maintain technical personnel on site. Fixed-price contracts
are utilized when the Company can clearly define the scope of services to be
provided and the Company's cost of providing those services, so as to limit the
risk of cost overruns. For example, if a client experiences problems with its
network, XLConnect will evaluate the issues and determine whether the solution
is discrete and appropriate for a fixed price quote. If the scope of services
cannot be determined in the discovery phase, the contract is written on a time
and materials basis. Time and materials contracts are also used when the Company
is engaged to provide services such as network management where additional staff
may be needed over the term of the contract.
TECHNICAL CAPABILITIES
Professional Technical Staff. The Company's professional staff of
approximately 950 engineers and technicians is authorized by many
industry-leading manufacturers, service providers and telecommunications
carriers, including Microsoft, IBM/Lotus, Novell, 3Com, Bay Networks and PSINet.
These authorizations enable XLConnect to provide advanced network services and
support for each vendor's products and services. XLConnect's technical staff
currently has an aggregate of more than 300 Microsoft and 200 Novell
certifications and approximately 70 IBM/Lotus Notes certifications.
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The Company hires technical personnel from two pools of applicants:
experienced personnel and recent college and technical school graduates. The
Company established a college cooperative education program in 1995 in five
branch offices, through which computer science students are hired on a part-time
basis and receive both work experience and college credit. The Company may then
offer full-time employment to the best prospects in the program. The Company
utilizes 11 full-time recruiters as well as branch management to locate
technical personnel. At any given time, the Company typically has 200 or more
persons subcontracted from several of the largest technical temporary employment
agencies to meet changes in staffing requirements quickly. Several of these
agencies allow XLConnect to hire the subcontractors after 90 days without
placement fees, providing a cost-effective source of full-time engineers and
technicians whom the Company can evaluate on a trial basis.
The Company's technical staff is divided generally among the categories of
services the Company provides, although a number of personnel have expertise in
more than one area. The Company's approximately 300 internetworking engineers
and technicians have knowledge and experience in such LAN/WAN protocols such as
TCP/IP, IPX, SNA and SNMP and network operating system platforms such as
Microsoft Windows and NT, Novell NetWare, OS/2 WARP and UNIX.
The Company's applications development staff of approximately 150 persons
is composed primarily of more experienced technical personnel who have been
trained in several development languages and often cross-trained in network
operating systems. Developers are typically experienced with applications and
languages such as Lotus Notes, Microsoft Exchange and SQL Server, Netscape,
Oracle, Visual Basic, HTML, Java and Powerbuilder and operating systems such as
Novell 3.x and 4.x, OS/2, Microsoft Windows and NT and UNIX.
The Company has a staff of approximately 500 managed services engineers and
field technicians, many of whom are on-site at various client locations on a
fully dedicated basis. In addition, as of June 30, 1996, 67 of the managed
services personnel operated from the Company's Network Management and Help Desk
Centers. The Company also provides dispatched on-site services in response to
client requests for service 24 hours a day, seven days a week.
Advanced Education and Customized Training. As a part of the Company's
effort to maintain and enhance its technical expertise, it provides continuing
education to all sales and technical services personnel. Technical employees and
agents are required to complete intensive training and certification programs
through 'XLConnect University.' XLConnect University's programs feature two
methods of technical instruction: regularly scheduled certification classes
offered in 13 of the Company's offices and large-group, vendor-sponsored
training events offered in centralized locations throughout the United States.
Key certified vendor technologies include 3Com, Bay Networks, IBM/Lotus, MCI,
Microsoft and Novell. Most employee and agent training conducted at XLConnect
University is partially vendor financed. The Company also offers online, remote
training, as well as self-study agent authorization and employee certification
programs.
INDUSTRY ALLIANCES AND RELATIONSHIPS
In order to strengthen its service offerings, the Company has relationships
with a number of leading technology and telecommunications companies. Key
relationships include the following:
Microsoft. The Company has been a Microsoft Solutions Provider since
August 1993. Working with Microsoft, the Company has developed consulting
methodologies that support client needs in the areas of NT Server, Windows
95 and Exchange Server migrations. Eleven of the Company's offices are
authorized Microsoft technical education centers and provide end-user and
technician training on Microsoft technologies. In addition, the Company
participates in Microsoft's Early Adopter Program, testing and providing
feedback on Microsoft's new products before their general release. As part
of its relationship with Microsoft, the Company has developed services to
provide remote network management over the Internet to support Microsoft NT
and Microsoft's back office products. Microsoft's participation in
XLConnect's employee training programs enables XLConnect engineers and
technicians to maintain and enhance their skills. XLConnect's technical
staff currently has more than 300 Microsoft certifications.
MCI. The Company entered into an agreement with MCI in December 1994,
whereby the Company is authorized to sell certain of MCI's data and voice
communications services under the Company's name. This relationship
generates recurring revenues for the Company from clients' monthly usages.
The Company is required to meet certain minimum billing levels or pay MCI
the shortfall.
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IBM/Lotus. The Company has a long-standing relationship with
IBM/Lotus. Nine of the Company's offices operate as Lotus authorized
education centers and 11 are IBM's 'BEST' team certified. The Company's
staff currently has approximately 70 Lotus Notes certifications. XLConnect
serves as a beta site for testing IBM's intranet, Lotus Notes and
communications server software. In addition to working closely with
IBM/Lotus in developing and integrating Lotus Notes and other IBM software
applications, the Company signed an IBM subcontractor agreement in May 1996
that enables IBM to resell XLConnect's professional services.
XLConnect has relationships with other leading technology and
telecommunications companies such as 3Com, Novell, Bay Networks,
Hewlett-Packard, PSINet and Ameritech. These relationships typically provide the
Company with additional sales leads, better access to new technologies, advanced
training and the opportunity to conduct joint marketing.
SALES AND MARKETING
The Company focuses its sales and marketing efforts on companies with
complex computing and communications requirements located throughout the United
States. To reach its clients, the Company uses a mix of direct and indirect
sales channels. As of June 30, 1996, the Company's direct sales force was
comprised of 44 persons with an average of approximately 12 years experience in
the sale of information technology services and products and a high level of
technical proficiency. The sales persons develop client relationships and
support the Company's other sales channels. The Company believes that its direct
sales strategy leads to better account penetration and management, long-term
relationships and more opportunities for follow-on sales to its existing client
base. Senior engineers often participate with sales consultants as part of a
team approach to selling the Company's services. The Company expects to continue
to expand its direct sales force.
IE's approximately 205 person sales staff, the Company's largest indirect
sales channel, historically generated substantially all of the Company's sales.
The Company currently relies on IE's sales staff for most of its sales leads.
During 1995, XLConnect paid IE aggregate fees of $3.0 million for referrals by
IE's sales personnel. The Company believes that the importance of its direct
sales force will increase as the sales force expands and its members continue to
develop client relationships. Nonetheless, XLConnect expects that IE's sales
force will continue to provide an important source of referrals for the
foreseeable future, although there is no contractual obligation for IE's
personnel to do so.
The Company also receives sales leads directly from VARs and product and
service vendors and, on occasion, teams with large systems integrators on major
projects. In addition, the Company has a program to recruit and train VARs and
other telecommunications service providers to sell data and voice
telecommunications services, including Internet access. The Company currently
has authorized approximately 500 agents.
The Company has a marketing department of six persons. The Company's
external marketing efforts currently include the development of brochures,
direct mail campaigns, formulation of marketing strategies designed to create
new business opportunities and the development of sales presentation materials.
The Company's marketing department is also responsible for continued development
of the Company's presence on the Internet.
CLIENTS
During the first six months of 1996, approximately 600 clients, including
many Fortune 1000 corporations, purchased at least $5,000 of the Company's
services. The Company's clients operate in a variety of industries and service
businesses, and the Company is not dependent on any single industry or service
business as a source of clients. Services provided to one client, principally
managed services, accounted for 10.3%, 14.8% and 16.7% of the Company's revenues
during 1994, 1995 and the first six months of 1996, respectively. One other
client accounted for 7.4% of the Company's revenues during 1993; another
accounted for 5.3% of revenues in 1994. No other client accounted for more than
5% of the Company's revenues during 1993, 1994, 1995 or the first six months of
1996. Sales to the Company's top 25 clients totaled 24.2%, 53.6%, 52.4% and
51.5% for each of 1993, 1994, 1995 and the first six months of 1996,
respectively.
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COMPETITION
The Company competes in rapidly changing markets that are intensely
competitive. These markets are highly fragmented with many direct and indirect
competitors in each of them. The Company believes that the principal competitive
factors for its services include technical expertise, breadth of service
offerings, geographic reach, quality performance, client service and support,
reputation, price of services and financial stability. Few competitors, in the
Company's view, offer as comprehensive an array of information technology
professional services or focus on total connectivity solutions to the extent
that the Company does.
The Company's competitors include the services organizations of established
computer product manufacturers, VARs, systems integrators and consultants,
aggregators, distributors, specific service providers and long distance carriers
and RBOCs. Many of the Company's current and potential competitors have
substantially longer operating histories and financial, sales, marketing,
technical and other competitive resources which are substantially greater than
those of the Company. As a result, the Company's competitors may be better able
to respond or adapt to new or emerging technologies and changes in client
requirements or to devote greater resources than the Company to the development
and sale of their services. Such competitors could also attempt to increase
their presence in the Company's markets by forming strategic alliances with
hardware or software vendors, telecommunications providers or other competitors
of the Company, offer new or improved services to the Company's clients or
increase their efforts to gain and retain market share through competitive
pricing.
GOVERNMENT REGULATION
The Company acts as a reseller of several telecommunications services,
including enhanced services, which are unregulated by the Federal Communications
Commission ('FCC') and generally unregulated by the states, and, to a
substantially lesser extent, basic services, which are regulated by the FCC and
by virtually all of the states. The Telecommunications Act of 1996 generally
preserves the distinction between regulated basic services and unregulated
enhanced services. As a result of the Telecommunications Act of 1996 or of
current FCC proceedings, however, it is possible that some services currently
treated as unregulated may become subject to regulation in the future. FCC
regulation of the Company's services currently does not entail substantial
burdens, and the FCC has proposed to reduce many of the burdens that currently
exist. At the state level, the regulatory requirements vary.
Providers of basic telecommunications services are required to make
contributions to Federal and state universal service funds, and these
contribution obligations will likely increase in the future as a result of
regulatory changes arising from the Telecommunications Act of 1996. The FCC and
the states are in the process of determining the level of and method for
calculating required contributions. Depending on the scope of universal service
contribution requirements, the Company may decide to refrain from offering some
or all basic telecommunications services.
Changes in regulation may affect the competitive environment within which
the Company operates. Most importantly, regulatory changes likely will affect
the scope of competition in local and long distance telecommunications markets,
the circumstances under which local exchange carriers, upon whom the Company and
most other telecommunications services providers currently must rely to connect
long distance and information services to end-users, may compete in
telecommunications markets, and the prices charged for local connections to
end-users. These changes may affect the prices paid by the Company for and the
quality of the Company's telecommunications offerings, as well as the Company's
competitive position vis-a-vis other service providers.
IE AND OTHER SUPPLIERS
The Company utilizes the products and services of leading manufacturers,
vendors and distributors of computer hardware, software and peripherals and
suppliers of Internet access and other telecommunications services. The Company
recommends and outsources the procurement of products for its clients as needed
through distributors, primarily IE. The Company believes that IE's product
pricing is comparable to other major computer product distributors. During 1994
and 1995, the Company's clients purchased from IE substantially all of the
hardware products required for the Company's integration projects, although the
Company is not contractually obligated to use IE to fulfill its clients' product
requirements. The Company does not purchase, take title to and resell products.
Instead, the supplier, whether IE or another distributor, VAR or vendor, in
effect serves as a subcontractor on a project-specific basis and typically
invoices the end-user directly. The Company expects to continue this practice
after this offering.
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RISK MANAGEMENT
The Company has a disaster recovery plan that provides an alternative
off-site computer system for use in certain disastrous events, and the Company
has taken precautions to protect itself and its clients from such events that
could interrupt delivery of the Company's network management services. These
precautions include, among others, backup power generation equipment, fire
protection and physical security systems and an early warning detection and fire
extinguishing system. The Company also is currently covered under IE's insurance
programs, which include business interruption insurance and comprehensive
liability coverage.
EMPLOYEES
As of June 21, 1996, the Company employed 1,033 persons, of whom 50 were
engaged in sales and marketing, 944 were engaged in providing the Company's
technical services and training and 39 were engaged in finance, administration
and management functions.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed an
invention assignment and confidentiality agreement. In addition, the Company
requires that all new employees execute such agreements as a condition of
employment by the Company. There is increasing competition for experienced
technical professionals and sales and marketing personnel. The Company's future
success will depend in part on its ability to continue to attract, retain and
motivate highly qualified personnel. The Company considers relations with its
employees to be good.
FACILITIES
The Company does not own any real property and currently subleases all of
its office space from IE pursuant to the terms of the Space Sharing Agreement,
other than its Boston branch office, which it leases from a third party. The
Company subleases approximately 5,000 square feet as its headquarters space in
Exton, Pennsylvania from IE. The Company's headquarters includes sufficient
space for certain of its sales and technical staffs and its marketing,
administrative, finance and management personnel. The Company subleases from IE
a total of approximately 97,000 square feet of office space pursuant to the
Space Sharing Agreement at 22 of its branch office locations, including
Cincinnati and Bettendorf, Iowa (which include the Help Desk Centers) and
Houston (which includes the Network Management Center). The Company believes
that its existing facilities are adequate to meet its current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed. See 'Relationship between the Company
and IE' and Note 6 of Notes to Combined Financial Statements.
LEGAL PROCEEDINGS
There are currently no material legal proceedings pending to which the
Company is a party or to which any of its property is subject.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their positions with
the Company and their ages as of the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Richard D. Sanford (1).......................... 52 Chairman of the Board
Richard G. Ellenberger.......................... 44 President and Chief Executive Officer; Director
Timothy W. Wallace.............................. 38 Executive Vice President, Field Operations
John J. Chidester, III.......................... 37 Executive Vice President, Sales and Marketing
Stephanie D. Cohen.............................. 34 Executive Vice President, Finance; Chief Financial Officer
Barry M. Abelson (1)............................ 50 Director
J. B. Doherty (1)(2)............................ 52 Director
William E. Johnson (1)(2)....................... 54 Director
John A. Porter (1)(2)........................... 52 Director
</TABLE>
- ------------------
(1) Member of Audit Committee
(2) Member of Compensation and Benefits Committee
Mr. Sanford has been the Company's Chairman of the Board since its
formation. He has been the Chairman and Chief Executive Officer of IE since he
founded IE in 1982 and was also named IE's President in April 1996.
Mr. Ellenberger has been the Company's Chief Executive Officer and
President and a member of the Board of Directors since March 1996. From 1980
through 1990 and 1992 through 1996, Mr. Ellenberger served in various management
positions with MCI Telecommunications, Inc., a long-distance telecommunications
company, most recently as President of MCI's Business Sales and Service
division. From 1990 to 1992, Mr. Ellenberger served initially as the Senior Vice
President of Sales and Marketing and subsequently as the Chief Operating Officer
of Entrade Corp., a natural gas company.
Mr. Wallace joined the Company upon its formation as Executive Vice
President, Field Operations. Between 1991 and March 1996, Mr. Wallace served in
various management positions with TFN, rising from Assistant Vice President, to
Vice President, Strategic Planning and Development, to Vice President,
Professional Services in 1995. Prior to joining TFN, Mr. Wallace was employed by
Arthur Andersen & Co. as a managing director of business systems consulting.
Mr. Chidester joined the Company in April 1996 as its Executive Vice
President, Sales and Marketing. Between 1981 and that time, Mr. Chidester served
in various management positions with MCI, most recently as Vice President of
Sales and Service for the northeast metro region.
Ms. Cohen joined the Company upon its formation as its Chief Financial
Officer and Executive Vice President, Finance. Prior to that time, she had
served in various management positions with IE since 1987, most recently as Vice
President, Investor Relations from March 1991 to May 1993, Vice President,
Secretary and Treasurer from May 1993 to May 1996 and Chief Financial Officer of
TFN from August 1995 to May 1996.
Mr. Abelson has been a director of the Company since its formation and of
IE since January 1989. Since May 1992, Mr. Abelson has been a partner of the law
firm of Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania, which provides
legal services to the Company and to IE. From 1978 to April 1992, Mr. Abelson
was a partner of the law firm of Braemer Abelson & Hitchner, Philadelphia,
Pennsylvania (and its predecessor firms). Mr. Abelson is also a member of the
Board of Directors of Covenant Bank for Savings.
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<PAGE>
Mr. Doherty has been a director of the Company since June 1996. Since 1992,
Mr. Doherty has been the Chairman and President of Private Equity Management
Company, a venture capital fund manager, and Managing General Partner of TDH III
Partners, L.P., a venture capital fund. Between 1983 and 1992, Mr. Doherty was
the Managing Partner of TDH II Limited, a venture capital fund, and a general
partner of K.S. Sweet Associates, a venture capital management and real estate
company.
Mr. Johnson has been a director of the Company since March 1996 and of IE
since November 1994. He has been President of William E. Johnson Associates, a
private investment company, since 1993. From 1986 to 1992, Mr. Johnson served as
Chairman and CEO of Scientific-Atlanta, Inc., a manufacturer of
telecommunications instruments and equipment.
Mr. Porter has been a director of the Company since March 1996 and of IE
since May 1994. Mr. Porter has been Vice Chairman of WorldCom, Inc. (formerly
LDDS/Metro Media Communications), a long distance telecommunications carrier,
since the fall of 1993. From 1988 until its merger with Metro Media
Communications in 1993, he served as Chairman of LDDS. Mr. Porter is the
president and sole shareholder of PM Restaurant Group, Inc., which filed a
petition under Chapter 11 of the U.S. Bankruptcy Code in March 1995. Mr. Porter
also serves on the Board of Directors of Uniroyal Technology Corporation.
The Board of Directors currently consists of six persons. The Company
intends to elect an additional director to the Board who is not affiliated with
IE or the Company as soon as possible after this offering. Directors are elected
by the shareholders of the Company for a one-year term and hold office until the
next annual meeting of shareholders or until their successors are duly elected
and qualified. Except for awards that may be granted to directors under the
Company's 1996 Long-Term Incentive Plan, directors are not expected to receive
any additional compensation for serving on the Board or attending meetings. See
'-- 1996 Long-Term Incentive Plan.'
The Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
COMMITTEES
The Board of Directors has an Audit Committee and a Compensation and
Benefits Committee.
The Audit Committee is composed of Messrs. Sanford, Abelson, Doherty,
Johnson and Porter. It was formed in June 1996, and its principal functions
include making recommendations to the Board regarding the annual selection of
independent public accountants and review of the recommendations of the
independent public accountants as a result of their audit of the Company.
The Compensation and Benefits Committee is composed of Messrs. Doherty,
Johnson and Porter. It was formed in June 1996, and its principal functions are
to establish the compensation of the officers of the Company and to administer
the Company's 1996 Long-Term Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1996, the Company had no separate Compensation and Benefits
Committee or other Board committee performing equivalent functions, and these
functions were performed by the Company's Board of Directors or senior
management of IE. In June 1996, the Company established the Compensation and
Benefits Committee, which is composed of Messrs. Doherty, Johnson and Porter,
all of whom are non-employee directors.
EXECUTIVE COMPENSATION
The Company was formed in January 1996. The following table sets forth the
compensation paid by IE and TFN for 1995 to the Company's Chief Executive
Officer and each of the two other most highly compensated executive officers of
the Company who performed services on behalf of the Company's business during
1995.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPEN-
ANNUAL COMPENSATION SATION
----------------------------------------- -----------
OTHER ANNUAL ALL OTHER
SALARY COMPENSATION(1) OPTIONS/ COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) $ SARS(#) ($)
- --------------------------- --------- --------- --------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Ellenberger(3)................. 1995 -- -- -- -- --
Chief Executive Officer; President
Timothy W. Wallace........................ 1995 231,475 15,125 -- -- 2,287
Executive Vice President, Field Operations
Stephanie D. Cohen........................ 1995 130,000 -- -- -- 3,900
Chief Financial Officer; Executive Vice
President, Finance
</TABLE>
- ------------------
(1) Includes perquisites and other personal benefits paid for by the Company,
such as automobile payments, long-term disability and life insurance
premiums and relocation expenses, which amounts did not exceed the lesser of
$50,000 or 10% of annual salary and bonus for any of the named executive
officers.
(2) Represents matching contributions to accounts of executive officers under
IE's 401(k) Plan.
(3) Mr. Ellenberger became Chief Executive Officer of the Company on April 8,
1996. The Company did not have a Chief Executive Officer prior to Mr.
Ellenberger's appointment. For a description of Mr. Ellenberger's 1996
compensation arrangements, see '--Employment Arrangements.' In addition, Mr.
Chidester became Executive Vice President, Sales and Marketing of the
Company on April 8, 1996, and would otherwise appear in this table if he had
been employed by the Company's business during 1995. For a description of
Mr. Chidester's 1996 compensation arrangements, see '-- Employment
Arrangements.'
1996 LONG-TERM INCENTIVE PLAN
Overview. The Board of Directors and shareholder of the Company adopted
the 1996 Long-Term Incentive Plan (the 'LTIP') in June 1996. The Board of
Directors believes that the grant of stock, stock-related and performance-based
awards is an effective method of attracting and retaining valuable employees and
directors. The following description of the LTIP is qualified by reference to
the full text thereof, a copy of which is filed as a exhibit to the Registration
Statement. See 'Additional Information.'
The LTIP permits the granting of any or all of the following types of
awards ('Awards'): (i) stock options, including non-qualified and incentive
stock options ('NQSOs' and 'ISOs'); (ii) stock appreciation rights; (iii)
restricted stock; (iv) long-term performance awards; (v) performance shares; and
(vi) performance units.
Directors, officers and other employees of the Company, IE and their
subsidiaries are eligible to receive Awards under the LTIP. Directors who are
not employees of the Company or a subsidiary of the Company will automatically
receive grants of stock options to purchase 25,000 shares of Common Stock upon
the later of the date of this Prospectus and the date of their initial
appointment or election to the Board and subsequent annual grants of stock
options to purchase 5,000 shares of Common Stock upon each re-election to the
Board by the Company's shareholders, provided such re-election occurs at least
six months after their initial election or appointment.
The LTIP will be administered by the Compensation and Benefits Committee of
the Board of Directors (the 'Committee'). The Committee will select those
persons eligible to receive Awards from time to time and will determine the
type, terms and conditions of Awards. The Committee will have the authority to
interpret the provisions of the LTIP. The Board may generally amend, alter or
discontinue the LTIP at any time, but no amendment, alteration or
discontinuation will be made which would impair the rights of a participant with
respect to an Award which has been made under the LTIP.
The maximum number of shares of Common Stock of the Company that may be
made the subject of Awards granted under the LTIP is 3,000,000. In the event of
any merger, reorganization, consolidation, recapitalization, stock dividend or
other change in corporate structure affecting the Common Stock, the Committee
will adjust accordingly the number, type and issuer of shares reserved for
issuance under the LTIP, the number and option price
35
<PAGE>
of shares subject to outstanding options granted under the LTIP and the number
and price of shares subject to other Awards made under the LTIP. In addition,
the shares related to the unexercised or undistributed portion of any
terminated, expired or forfeited Award will also be made available for
distribution in connection with future Awards. No individual may receive, during
the term of the LTIP, more than an aggregate of 30% of the shares of Common
Stock authorized for grant under the LTIP or cash awards in excess of
$1,000,000.
Stock Options. The LTIP permits the Committee to grant to any participant
NQSOs and, to participants who are also employees, ISOs. The per share exercise
price of a stock option will be determined by the Committee; provided, however,
that the exercise price per share of Common Stock purchasable under an ISO will
not be less than 100% of the fair market value of the Common Stock at the time
of grant (and not less than 110% in the case of an ISO granted to a participant
who, at the time the option is granted, owns more than 10% of the voting power
of all classes of stock of the Company (a '10% Owner')). The provisions of stock
option Awards need not be the same with respect to each recipient.
Subject to the limitations of the LTIP, each stock option will vest at such
time or times and in the installments determined by the Committee; provided,
however, that no stock option will be exercisable for a period of two years from
the date of this Prospectus, which period may be extended for one additional
year by the Committee at the direction of IE if IE determines that such
extension is required in connection with the ruling request to the IRS as to the
tax-free nature of the Distribution. No stock option will be exercisable more
than ten years after the date it is granted. An ISO granted to a 10% Owner will
not have a term of more than five years. ISOs are subject to additional
restrictions imposed by the Internal Revenue Code of 1986, as amended (the
'Code'). Stock options are not transferable by the participant other than by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order, and all stock options will be exercisable, during the
participant's lifetime, only by the participant. In the discretion of the
Committee, the purchase price for shares acquired pursuant to the exercise of a
stock option may be paid in cash or by shares of Common Stock. In the event of a
Change of Control (defined below), the Committee may, in its discretion, cause
all outstanding stock options to immediately become vested.
Stock Appreciation Rights. The LTIP permits the grant of stock
appreciation rights ('SARs') in connection with the grant of stock options. An
SAR or the applicable portion thereof granted with respect to a given stock
option will generally terminate and no longer be exercisable upon the
termination or exercise of the related stock option. An SAR permits the
participant to receive, upon exercise of the SAR, an amount in cash and/or
shares of Common Stock equal in value to the excess of the fair market value of
one share of Common Stock over the exercise price per share specified in the
related stock option, multiplied by the number of shares in respect of which the
SAR will have been exercised. The Committee will have the right to determine the
form of payment. SARs will be exercisable only at such time or times and to the
extent that the stock options to which they relate will be exercisable;
provided, however, that any SAR granted subsequent to the grant of the related
stock option will, in general, not be exercisable during the first six months of
its term.
Restricted Stock. Shares of restricted stock may be issued either alone or
in addition to other Awards granted under the LTIP. The Committee will determine
the recipients of shares of restricted stock, the number of shares to be
awarded, the price (if any) to be paid by such recipient, the time or times
within which such Awards may be subject to forfeiture, and all other conditions
of the Award. The provisions of restricted stock Awards need not be the same
with respect to each recipient. The Company will issue a certificate to each
recipient representing the shares of restricted stock, which will bear a legend
marking such stock as restricted stock. Although such certificate(s) will be
held in custody by the Company until the restrictions thereon have elapsed, such
recipient will have, with respect to the shares of restricted stock, all rights
of a shareholder of the Company, including the right to vote the shares, and the
right to receive any cash dividends. The Committee, at the time of Award, may
permit or require the payment of cash dividends to be deferred and reinvested in
additional shares of restricted stock. During the restriction period set by the
Committee, the participant will not be permitted to transfer or encumber shares
of restricted stock; provided that the Committee may provide for the lapse of
such restrictions in installments and may accelerate or waive such restrictions
in whole or in part. Upon the expiration of the restriction period without a
prior forfeiture of the restricted stock, the certificates for such shares of
restricted stock will be delivered to the participant receiving the Award. In
the event of a Change of Control, the Committee may, in its discretion, cause
all forfeiture limitations on restricted stock to lapse and a stock certificate
or certificates representing such unrestricted shares to be issued to the
participant.
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<PAGE>
Long-Term Performance Awards. The LTIP permits the Committee to grant to
any participant long-term performance Awards. The Committee will determine in
advance the nature, length and starting date of the performance period for each
long-term performance Award, which will be at least two years, and will
determine the performance objectives to be used in valuing long-term performance
Awards and determining the extent to which such long-term performance Awards
have been earned. Performance objectives may vary from participant to
participant and between groups of participants. In the event of special or
unusual events or circumstances affecting the application of one or more
performance objectives to a long-term performance Award, the Committee may
revise the performance objectives and/or underlying factors and criteria
applicable to the long-term performance Awards affected. Performance Awards may
be denominated in dollars or in shares of Common Stock, and to the extent that
the relevant measure of performance is met, payments may be made in the form of
cash or Common Stock, including shares of restricted stock, either in a lump sum
payment or in annual installments commencing as soon as practicable after the
end of the relevant performance period. Unless otherwise provided in the
applicable Award agreement, if a participant terminates service with the Company
during a performance period because of death, disability or retirement, the
participant will be entitled to a payment with respect to each outstanding
long-term performance Award at the end of the applicable performance period
based upon the participant's performance for the portion of such performance
period ending on the date of termination and pro-rated for the portion of the
performance period during which the participant was employed by or served on the
Board of Directors of the Company, as determined by the Committee. In the event
of a Change of Control, the Committee may, in its discretion, cause all
conditions applicable to a long-term performance Award to immediately terminate
and a stock certificate or cash, as the case may be, to be issued or paid to the
participant.
Performance Shares. The Committee will determine the persons to whom
performance shares will be granted and the times and the number of such
Performance Shares that will be granted. Performance shares are awards of the
right to receive Common Stock at the end of a specified period upon the
attainment of performance goals specified by the Committee at the time of grant.
The provisions of the performance shares need not be the same with respect to
each participant. Performance shares generally will be forfeited if the
participant ceases to be an employee of the Company during the performance
period for any reason other than death, disability or retirement. In the event
of death, disability or retirement, the participant or the participant's estate,
as the case may be, will be entitled to receive, at the expiration of the
performance period, a percentage of performance shares that is equal to the
percentage of the performance period that had elapsed as of the date of death or
date on which such disability or retirement commenced, provided that the
Committee determines that the applicable performance goals have been met. In the
event of a Change of Control, the Committee may, in its discretion, cause all
conditions applicable to the performance shares to immediately terminate and the
full number of shares of Common Stock subject to the performance shares award to
be issued to the participant.
Performance Units. The Committee will determine the persons to whom
performance units will be granted and the times and the number of such
performance units that will be granted. Performance units are awards of the
right to receive a fixed dollar amount, payable in cash, at the end of a
specified period upon the attainment of performance goals specified by the
Committee at the time of the grant. The provisions of performance unit Awards
need not be the same with respect to each participant. Performance units will be
forfeited if the participant ceases to be an employee of the Company during the
performance period for any reason other than death, disability or retirement. In
the event of death, disability or retirement, the participant or his or her
estate will be entitled to receive, at the expiration of the performance period,
cash for a percentage of his or her performance units equal to the percentage of
the performance period that elapsed at the time of death or commencement of
disability or retirement, provided that the Committee determines that the
applicable performance goals have been met. In the event of a Change of Control,
the Committee may, in its discretion, cause all conditions applicable to
performance units to terminate and a cash payment for the full amount of the
performance unit to be made to the participant.
Change of Control. For purposes of the LTIP, the term 'Change of Control'
means (i) the acquisition in one or more transactions by any person (including
any group acting in concert) of beneficial ownership of 25% or more of the
combined voting power of the Company's then outstanding voting securities (the
'Voting Securities'), excluding Voting Securities acquired directly from the
Company (but such Voting Securities shall be included in the calculation of the
total number of Voting Securities then outstanding); or (ii) approval by
shareholders of the Company of (A) a merger, reorganization or consolidation
involving the Company if the shareholders of the Company immediately before such
merger, reorganization or consolidation do not or will not own directly or
37
<PAGE>
indirectly immediately following such merger, reorganization or consolidation,
more than fifty percent (50%) (or such other percentage ranging from fifty
percent (50%) to and including seventy-five percent (75%), that the Committee
may, in its discretion, specify from time to time in general or with respect to
any particular merger, reorganization or consolidation) of the combined voting
power of the outstanding voting securities of the corporation resulting from or
surviving such merger, reorganization or consolidation in substantially the same
proportion as their ownership of the Voting Securities outstanding immediately
before such merger, reorganization or consolidation or (B) (1) a complete
liquidation or dissolution of the Company or (2) an agreement for the sale or
other disposition of all or substantially all of the assets of the Company; or
(3) acceptance by shareholders of the Company of shares in a share exchange if
the shareholders of the Company immediately before such share exchange do not or
will not own directly or indirectly immediately following such share exchange
more than fifty percent (50%) (or such other percentage ranging from fifty
percent (50%) to and including seventy-five percent (75%), that the Committee
may, in its discretion, specify from time to time in general or with respect to
any particular share exchange) of the combined voting power of the outstanding
voting securities of the corporation resulting from or surviving such share
exchange in substantially the same proportion as their ownership of the Voting
Securities outstanding immediately before such share exchange. However, a Change
of Control shall not be deemed to occur solely because 25% or more of the then
outstanding Voting Securities is acquired by a corporation which immediately
prior to such acquisition is owned directly or indirectly by the Company's
shareholders in the same proportion as their ownership of stock in the Company
immediately prior to such acquisition.
The Board of Directors believes that granting the Committee the authority
to cause the acceleration of the exercisability of outstanding stock options,
the lapse of restrictions applicable to restricted stock and the elimination of
conditions applicable to long-term performance Awards, performance shares and
performance units upon the occurrence of an event constituting a Change in
Control will help to preserve the benefits of the options granted under the LTIP
in the event of a Change in Control. Such provisions may increase the cost to a
third party of acquiring control of the Company (whether pursuant to a friendly
or hostile transaction) by reason of the immediate expense it would be obligated
to incur upon a Change of Control.
EMPLOYMENT ARRANGEMENTS; STOCK OPTION GRANT UNDER THE PLAN
The Company has entered into offer letters with each of Messrs.
Ellenberger, Wallace and Chidester and Ms. Cohen setting forth certain terms
with respect to each executive officer's terms of employment. Mr. Ellenberger's
letter, dated February 16, 1996, provides for a starting salary of $350,000 per
year and a bonus of up to an additional $250,000 per year. Messrs. Wallace and
Chidester's letters, dated March 16 and February 1, respectively, each provide
for starting salaries of $200,000 per year and bonuses of up to an additional
$125,000 per year. Ms. Cohen's letter, dated April 16, 1996, provides for a
starting salary of $175,000 per year and a bonus of up to an additional $75,000
per year. The bonuses will be based upon the achievement of specific criteria to
be established by the Compensation and Benefits Committee. The employment of
each of the named executive officers is terminable at will by either party. If
any of Messrs. Ellenberger's, Wallace's or Chidester's employment is terminated
other than for cause within periods ranging from the first 12 to 24 months of
such employment's commencement, each such executive will receive severance
payments ranging from 12 to 18 months of salary. In addition, the foregoing
officers are prohibited from soliciting any of the Company's employees or
clients for a period of two years from the termination of their employment.
In 1996, the Compensation and Benefits Committee granted
options under the Plan to the following executive officers of the Company: Mr.
Ellenberger -- 500,000 shares; Mr. Wallace -- 150,000 shares; Mr. Chidester --
125,000 shares; and Ms. Cohen -- 125,000 shares. In addition, options to
purchase an aggregate of 162,500 shares of Common Stock were granted to other
officers of the Company. All of such options have an exercise price of $____ per
share and vest ratably over a four year period, but will not become exercisable
until the second anniversary of the date of this Prospectus, which date may be
extended for one additional year by the Committee at the direction of IE. The
Plan provides that each current non-employee director of the Company, Messrs.
Sanford, Abelson, Doherty, Johnson and Porter, will automatically receive an
option to purchase 25,000 shares of Common Stock on the date of this Prospectus.
In addition, Mr. Sanford, as Chairman of the Board, will receive an option to
purchase an additional 100,000 shares of Common Stock. It is also anticipated
that on the date of this Prospectus: (i) an option to purchase 25,000 shares of
Common Stock will be granted to Mr. Gregory A. Pratt, Executive Vice President
and a member of the Board of Directors of IE; (ii) options to purchase 12,500
shares will be granted to each
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<PAGE>
of the remaining members of the IE Board of Directors: Messrs. William L.
Rulon-Miller, Arnold S. Hoffman, Roger J. Fritz, Christopher T. G. Fish and Alex
A. C. Wilson; (iii) an option to purchase 5,000 shares will be granted to IE's
Chief Financial Officer, Mr. Thomas Coffey; and (iv) options to purchase an
aggregate of 295,000 shares will be granted to other employees of the Company.
All options to be granted on the date of this Prospectus will have a per share
exercise price equal to the initial public offering price for the shares offered
hereby and vesting and exercisability provisions identical to the provisions of
the options granted to officers of the Company.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The Company's Bylaws provide that a director shall not be liable to the
Company for monetary damages as such for any action taken or omitted unless the
director breaches or fails to perform a duty of his office and that breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
This limitation does not apply to criminal liability or liability for the
payment of taxes. The Company believes that this provision will assist it in
securing and maintaining the services of directors who are not employees of the
Company. The Company's Bylaws also provide for indemnification of the Company's
directors and officers to the fullest extent permitted by law for expenses
(including attorneys' fees) incurred as a result of the officer's or director's
status as an officer or director of the Company.
The Company currently relies on IE's insurance policy to afford officers
and directors coverage for losses arising from claims based on breaches of duty,
negligence, error and other wrongful acts.
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<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND IE
OWNERSHIP OF COMMON STOCK
Upon completion of this offering, IE will beneficially own 82.1% of the
outstanding Common Stock (80.0% if the Underwriters' over-allotment option is
exercised in full). The Company and IE have entered into the Stock Registration
and Option Agreement described below, pursuant to which, subject to certain
limitations, IE will have an option to purchase from the Company in one or more
transactions at then-current market prices such number of shares of Common Stock
as IE may determine to be necessary to allow IE to continue to include the
Company in IE's consolidated federal income tax return or to increase the
likelihood that the Distribution would be tax free to IE and its shareholders.
In addition, IE may engage in open-market purchases of Common Stock, although
there is no current intention to do so.
So long as IE beneficially owns a majority of the outstanding shares of
Common Stock, it will have the ability to elect all of the members of the Board
and otherwise control the management and affairs of the Company. In addition,
four of the six current directors of the Company are also directors of IE. The
Company intends to elect an additional director to the Board who is not
affiliated with IE or the Company as soon as possible after this offering.
However, transactions between IE and the Company will not require the separate
approval of those directors who are not also directors of IE. Certain provisions
of the Company's Articles of Incorporation, Bylaws and applicable law will also
facilitate IE's ability to exercise control of the Company. The ability of IE to
control the Company could have an adverse effect on the market price of shares
of Common Stock. See 'Management,' 'Principal Shareholder' and 'Description of
Capital Stock.'
CONTRACTUAL ARRANGEMENTS
In anticipation of this offering, the Company and IE have entered into a
number of agreements, which will become effective upon completion of this
offering, for the purpose of defining certain relationships between them. As a
result of IE's ownership interest in the Company, the terms of such agreements
were not, and the terms of any future amendments to those agreements will not
be, the result of arm's-length negotiation.
The following discussion of agreements between the Company and IE is
qualified in its entirety by reference to such agreements, which have been filed
as exhibits to the Registration Statement of which this Prospectus forms a part.
See 'Additional Information.'
Services Agreement. The Company and IE have entered into a services
agreement (the 'Services Agreement') pursuant to which IE will continue on an
interim basis to provide to the Company, upon the Company's request, various
services, including insurance and risk management, employee benefit
administration, and similar administrative and management services, that IE has
historically provided to the Company and its subsidiaries, and the Company will
continue on an interim basis to provide service call support to IE. The Company
will pay the direct costs of services provided by IE, and IE will pay the
Company for service call support at the Company's standard billing rates. To the
extent that the direct costs of services provided by IE cannot be separately
measured, the Company will pay its allocable portion of the total cost to IE for
any such services, determined in accordance with described methodologies, using
such objective factors as are available to IE and the Company. The Services
Agreement also provides that IE will furnish additional services as may be
reasonably requested by the Company on similar terms. The Services Agreement
will automatically terminate on the occurrence of the Distribution, if it
occurs, or at such time that IE no longer owns a majority of the outstanding
shares, and is otherwise terminable by either party on 90 days' prior written
notice, except that no such written notice will result in termination prior to
January 1, 1997.
Under the Services Agreement, IE and XLConnect will each have the option to
make advances from time to time to the other upon request. In the case of
XLConnect, such advances would be made as directed or within specific parameters
prescribed by its Board of Directors. Interest will be payable monthly in
arrears at market rates on all net advances by the Company or IE, as the case
may be, and, prior to termination of the Services Agreement, will be accounted
for as additional advances. Advances will be repayable on the date specified in
the request for such advance. Funds advanced by the Company to IE will not be
segregated from other funds of IE, and IE may use such funds for its own
benefit, subject to certain limitations under the IBMCC Credit Facility.
Consequently, the Company will be subject to risk of loss in respect of such
funds. The Services Agreement will be deemed effective from and after the
40
<PAGE>
date on which this offering is completed and will apply to all advances
occurring on or after such date. Upon the termination of the Services Agreement,
all outstanding advances and accrued but unpaid interest will become due and
payable.
The Services Agreement also provides that IE will permit employees of the
Company and its subsidiaries to continue to participate in the benefit plans and
programs sponsored by IE until the termination of the Services Agreement. It is
contemplated that, prior to the termination of the Services Agreement or the
occurrence of the Distribution, the Company will establish benefit plans and
programs providing employees of the Company and its subsidiaries with benefits
substantially comparable to those presently available under the plans and
programs sponsored by IE and that there will be no interruption in or loss of
benefits for the employees of the Company and its subsidiaries. So long as
employees of the Company and its subsidiaries continue to participate in IE's
benefit plans and programs, the contributions of such employees to such plans
and programs, and the costs of participation by such persons in such plans and
programs, will be accounted for separately from contributions of, and costs of
participation by, employees of IE and its other subsidiaries. Upon the
termination of the Services Agreement, each of IE and the Company will be
responsible for all aspects of its respective benefit plans and programs.
The Services Agreement also recognizes that IE's direct sales force may
continue to provide to XLConnect sales leads and referrals. The Services
Agreement provides that XLConnect shall continue to compensate IE at least
through December 31, 1997 for such leads and referrals that result in revenues
to XLConnect in a manner consistent with and substantially similar to current
practices between the companies.
The Services Agreement further provides that the Company will continue to
receive from IE for an interim period, consistent with past practices, a portion
of the funds received by IE from vendors for training, capital expenditures and
marketing programs.
Space Sharing Agreement. The Company, IE and TFN have entered into a space
sharing agreement (the 'Space Sharing Agreement') providing for the sharing by
the Company and IE or TFN of certain office facilities, including the office
facilities located in Exton, Pennsylvania at which the Company's and IE's
principal executive offices are located (the 'Headquarters Facility'). Under the
Space Sharing Agreement, the costs associated with leasing and maintaining
facilities are, in general, allocated between the Company and IE or TFN on a pro
rata basis determined by the square footage utilized by each company or the
number of employees of each company at the specific location, in accordance with
historical practices. The Company's rights to use portions of the shared
facilities (including the Headquarters Facility) leased from third parties, and
the corresponding obligations to pay for such use, may be terminated as to any
such facility by either the Company or IE on 90 days' prior written notice.
Tax Allocation Agreement. The Company and IE have entered into a tax
allocation agreement (the 'Tax Allocation Agreement') to provide for (i) the
allocation of payments of taxes for periods during which the Company or any of
its subsidiaries and IE (or any of its affiliates other than the Company and its
subsidiaries) are included in the same consolidated group for federal income tax
purposes or the same consolidated, combined or unitary returns for state, local
or foreign tax purposes, (ii) the allocation of responsibility for the filing of
tax returns, (iii) the conduct of tax audits and the handling of tax
controversies, and (iv) various related matters. For periods during which the
Company is included in IE's consolidated federal income tax returns or state
consolidated, combined or unitary tax returns (which periods are expected to
include the period between this offering and the Distribution), the Company will
be required to pay to IE its allocable portion of the consolidated federal
income and state tax liability, and will be entitled to receive from IE its
allocable share of any tax benefit attributable to the use of the Company's
losses, if any. The Company will be responsible for the filing of federal,
state, local and foreign tax returns and related liabilities for itself and its
other subsidiaries for all periods, to the extent not included in IE's combined
or consolidated tax returns. Notwithstanding the Tax Allocation Agreement, under
federal income tax law, each member of a consolidated group for federal income
tax purposes is also jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Similar rules apply
under some state income tax laws. In the event that IE or members of its
consolidated tax group (other than the Company and its subsidiaries) do not
comply with the provisions of the Tax Allocation Agreement and the Company is
required to make payments in respect of the tax liabilities allocated to IE
thereunder, such payments could adversely affect the business, results of
operations and financial condition of the Company.
Indemnification Agreement. The Company and IE have also entered into an
indemnification agreement (the 'Indemnification Agreement'). Under the
Indemnification Agreement, subject to limited exceptions, the Company is
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<PAGE>
required to indemnify IE and its directors, officers, employees, agents and
representatives for liabilities under federal or state securities laws as a
result of this offering, including liabilities arising out of or based upon
alleged misrepresentations in or omissions from the Registration Statement of
which this Prospectus forms a part or this Prospectus. The Indemnification
Agreement also provides that each party thereto (the 'Indemnifying Party') will
indemnify the other party thereto and its directors, officers, employees, agents
and representatives (the 'Indemnified Party') for liabilities that may be
incurred by the Indemnified Party relating to, resulting from or arising out of
(i) the businesses and operations conducted or formerly conducted, or assets
owned or formerly owned, by the Indemnifying Party and its subsidiaries (except,
in the case where IE is the Indemnifying Party, the businesses, operations and
assets of the Company and its subsidiaries) or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with this offering.
The Indemnification Agreement also provides that each party thereto (the
'Obligor Party') (i) will use reasonable efforts to obtain the release of the
other party thereto (the 'Guarantor Party') from its obligations under or in
respect of all material guarantees, surety and performance bonds, letters of
credit and other arrangements guaranteeing or securing any liability or
obligation of the Obligor Party, (ii) will indemnify the Guarantor Party for any
liabilities incurred under such guarantees, bonds, letters of credit and other
arrangements, and (iii) will reimburse the Guarantor Party for its direct costs
(or, in certain circumstances, the Obligor Party's pro rata share of such direct
costs) of maintaining such guarantees, bonds, letters of credit and other
arrangements pending the release of the Guarantor Party thereunder.
Stock Registration and Option Agreement. Pursuant to the terms of a stock
registration and option agreement (the 'Stock Registration and Option
Agreement') with IE, the Company has provided IE with certain registration
rights, including demand registration rights and certain 'piggy-back'
registration rights, with respect to Common Stock owned by IE after this
offering. The Company's obligation is subject to certain limitations relating to
a minimum amount of Common Stock required for registration, the timing of
registration and other similar matters. The Company is obligated to pay all
expenses incidental to such registration, excluding underwriters' discounts and
commissions and certain legal fees and expenses. Pursuant to the Stock
Registration and Option Agreement, the Company also has granted to IE, during
the period between the completion of this offering and the earlier to occur of
(i) the completion of the Distribution and (ii) the sale by IE of such number of
shares of Common Stock that IE is no longer eligible to make the Distribution
tax free or to include the Company in IE's consolidated federal income tax
return, a continuous, cumulative option to purchase from the Company at
then-current market prices such number of shares of Common Stock as IE may
determine to be necessary (a) to allow IE to continue to include the Company in
IE's consolidated federal income tax return or (b) to increase the likelihood
that the Distribution would be tax-free to IE and its shareholders. This number
of shares is expected to be the number necessary for IE to continue to own at
least 80% of the outstanding shares of Common Stock. The option may only be
exercised upon the original issuance of shares by the Company. In the event that
any shares of Common Stock are issued prior to the Distribution upon the
exercise of any option granted under the Company's 1996 Long-Term Incentive Plan
and such issuance would otherwise prevent IE from continuing to include the
Company in IE's consolidated federal income tax return or effecting the
Distribution on a tax-free basis, the option described in the immediately
preceding sentence will automatically be deemed to have been exercised in
respect of a number of shares of Common Stock equal to four times the number of
shares of Common Stock issued upon the exercise of the option granted under the
1996 Long-Term Incentive Plan unless IE shall have earlier terminated such
automatic exercise feature. See 'Risk Factors -- Shares Eligible for Future
Sale' and 'Description of Capital Stock -- Registration Rights.'
Existing Telecommunications Services Agreement. Pursuant to the terms of a
services agreement between IE and XLConnect dated as of January 1, 1996, IE has
agreed to purchase from XLConnect all of the telecommunications services
required by IE. The services provided by XLConnect under the services agreement
include the transmission of voice, data, video and other information as well as
enhanced telecommunications services such as frame relay and asynchronous
transfer mode transmission services. The services provided by XLConnect also
include capacity planning, call accounting, network design and similar services.
The services agreement requires IE to purchase sufficient telecommunications
services to permit XLConnect to meet the minimum volume requirements imposed by
XLConnect's agreement with MCI. The services agreement has a term of five years
and will renew automatically for six successive two year periods, unless
terminated earlier in accordance with its terms. IE may terminate the services
agreement at the conclusion of any such term if it provides XLConnect with at
least 90 days' notice prior to the expiration of such term that it has received
a bona fide offer to provide telecommunications services that in quantity,
quality and duration are equal to or better than the services then being
provided to IE by XLConnect at a price of 5% or more below the price XLConnect
charges for such services and XLConnect does not match the offer.
42
<PAGE>
CONFLICTS OF INTEREST
Conflicts of interest may arise between the Company and IE in a number of
areas relating to their past and ongoing relationships, including potential
competitive business activities, marketing functions, tax and employee benefit
matters, indemnity arrangements, registration rights, sales or distributions by
IE of its remaining shares of Common Stock and the exercise by IE of its ability
to control the management and affairs of the Company. The Company does not
currently intend to engage in the distribution and direct sales of hardware and
software products in which IE is engaged. IE has advised the Company that IE
does not currently intend to engage in the business of providing total
connectivity solutions and services except through its ownership of Common Stock
and contractual relationships with the Company. However, there are no
contractual or other restrictions on the ability of either the Company or IE to
engage in such activities. Accordingly, circumstances could arise in which the
Company and IE would engage in activities in competition with one another.
The Company and IE may enter into material transactions and agreements in
the future in addition to those described above. The Company has been advised by
IE that it intends that, for so long as IE beneficially owns a majority of the
outstanding Common Stock, the terms of any future transactions and agreements
between the Company and IE or its affiliates will be at least as favorable to
the Company as could be obtained from third parties. The Board will utilize such
procedures in evaluating the terms and provisions of any material transactions
between the Company and IE or its affiliates as the Board may deem appropriate
in light of its fiduciary duties under state law. Depending on the nature and
size of the particular transaction, in any such evaluation, the Board may rely
on management's statements and opinions and may or may not utilize outside
experts or consultants or obtain independent appraisals or opinions.
Four of the six current directors of the Company are also directors of IE,
including IE's Chairman and Chief Executive Officer, Richard D. Sanford.
Directors of the Company who are also directors of IE will have conflicts of
interest with respect to matters potentially or actually involving or affecting
the Company and IE, such as acquisitions, financing and other corporate
opportunities that may be suitable for the Company and IE. To the extent that
such opportunities arise, such directors may consult with their legal advisors
and make a determination after consideration of a number of factors, including
whether such opportunity is presented to any such director in his capacity as a
director of the Company, whether such opportunity is within the Company's line
of business or consistent with its strategic objectives and whether the Company
will be able to undertake or benefit from such opportunity. In addition,
determinations may be made by the Board, when appropriate, by the vote of the
disinterested directors only. Notwithstanding the foregoing, there can be no
assurance that conflicts will be resolved in favor of the Company.
So long as the Company remains a subsidiary of IE, the directors and
officers of the Company will, subject to certain limitations, be indemnified by
IE and insured under insurance policies maintained by IE against liability for
actions taken or omitted to be taken in their capacities as directors and
officers of the Company, including actions or omissions that may be alleged to
constitute breaches of the fiduciary duties owed by such persons to the Company
and its shareholders. It is contemplated that, prior to the Distribution, if one
occurs, the Company will obtain insurance coverage for its directors and
officers in respect of such matters comparable to that currently provided under
IE's policy.
POSSIBLE DISTRIBUTION
Following the completion of this offering, IE intends to consider its
options regarding its interest in the Company, including whether to retain its
investment in the Company, to sell all or a portion of its remaining shares of
Common Stock to the public in another public offering or to a strategic investor
or to distribute pro rata to its shareholders its remaining shares in the
Distribution. The occurrence of the Distribution is only one possibility and is
by no means a certainty. For the Distribution to occur, the Board of Directors
of IE must conclude, at the time that such Distribution may be considered, that
such Distribution is in the best interests of the shareholders of IE. IE has
advised the Company that such determination may be conditioned upon the receipt
of a favorable ruling from the IRS as to the tax-free nature of the
Distribution, for which IE has not applied as of the date of this offering. IE
has also advised the Company that it presently anticipates that the Distribution
will likely occur, if at all, within two years of this offering. IE has not
determined what action, if any, it would take if it were not to receive a
favorable tax ruling. No assurance can be given that the favorable tax ruling
will be obtained nor that, in any event, the Distribution will occur. If the
Distribution is not effected, IE may or may not continue to own a majority of
the outstanding shares of Common Stock.
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<PAGE>
PRINCIPAL SHAREHOLDER
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock by IE, after giving effect to the
Formation Transactions, (i) immediately prior to this offering and (ii) as
adjusted to reflect the sale of the Common Stock by the Company in this
offering. IE has or will have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by IE.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
----------------------- ------------------------
NAMES AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ----------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
Intelligent Electronics, Inc............. 13,325,000 100.0% 13,325,000 82.1%(1)
411 Eagleview Boulevard
Exton, Pennsylvania 19341
</TABLE>
- ------------------
(1) Assumes no exercise of the Underwriters' over-allotment option. If the
option is exercised in full, IE will beneficially own 80.0% of the Common
Stock after this offering. Also does not take into account any options to
purchase Common Stock that have been granted, or are available for grant, to
employees and directors of the Company or IE or any exercise of IE's
continuous option to remain above the 80% ownership level.
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,0000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of the date of this Prospectus, there were 13,325,000 shares of Common
Stock outstanding, all of which are beneficially owned by IE.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Subject to applicable provisions of the Pennsylvania Business
Corporation Law of 1988, as amended (the 'BCL'), shareholders holding a majority
of the shares of Common Stock constitute a quorum for the purposes of convening
a shareholders' meeting. Accordingly, a majority of the quorum may elect all the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared on the Common Stock by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to receive ratably the net assets of the Company available for
distribution after the payment of all debts and other liabilities of the
Company, subject to prior and superior rights of holders of Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered hereby, when issued and paid for, will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, the Company will have the authority to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix and determine the relative rights, preferences and limitations of each class
or series so authorized without any further vote or action by the shareholders.
The Board of Directors may issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock and have the effect of delaying or preventing a change in the control of
the Company. As of the date of this Prospectus, no shares of Preferred Stock are
outstanding. The Company has no current intention to issue any shares of
Preferred Stock.
PENNSYLVANIA ANTI-TAKEOVER LAWS
The BCL contains a number of statutory 'anti-takeover' provisions
applicable to the Company. One of these BCL provisions prohibits, subject to
certain exceptions, a 'business combination' with a shareholder or group of
shareholders beneficially owning more than 20% of the voting power of a public
corporation (an 'interested shareholder') for a five-year period following the
date on which the holder became an interested shareholder. This provision may
discourage open market purchases of a corporation's stock or a non-negotiated
tender or exchange offer for such stock and, accordingly, may be considered
disadvantageous by a shareholder who would desire to participate
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<PAGE>
in any such transaction. In addition, other BCL provisions applicable to the
Company include the 'control transactions' provision, which permits shareholders
in certain change of control transactions to demand payment from a new 20%
shareholder of the fair market value of the demanding shareholders' shares, the
'control shares' provision, which limits the voting power of shareholders
acquiring more than 20%, 33.3% and/or 50% of a corporation's voting stock, and
the 'disgorgement' provision, which permits a corporation to recover profits
resulting from the sale of shares by a shareholder, under certain circumstances,
after the shareholder has acquired or expressed an intent to acquire at least
20% of the corporation's voting shares.
The BCL also provides that directors may, in discharging their duties,
consider the interests of a number of different constituencies, including
shareholders, employees, suppliers, customers, creditors and the community in
which it is located. Directors are not required to consider the interests of
shareholders to a greater degree than other constituencies' interests. The BCL
expressly provides that directors do not violate their fiduciary duties solely
by relying on poison pills or the anti-takeover provisions of the BCL.
REGISTRATION RIGHTS
After this offering, IE will be entitled to specific rights with respect to
the registration under the Securities Act, for resale to the public, of a total
of 13,325,000 shares of Common Stock that it will own immediately after this
offering, as well as any shares of Common Stock that are issued to it upon the
exercise of the continuous option granted to IE, pursuant to the terms of the
Registration and Option Agreement. The Registration and Option Agreement
provides that, with certain limitations and exceptions, IE may require, not more
frequently than once within any six month period, that the Company register for
sale under the Securities Act some or all of the shares of Common Stock held by
IE. In addition, such agreement provides that, with certain limitations and
exceptions, in the event the Company proposes to register any of its securities
under the Securities Act for its own account or otherwise, the holders of
registrable securities are entitled to include their Common Stock in such
registration, subject to certain conditions and limitations, which include the
right of the underwriters of any such offering to exclude for marketing reasons
all or a portion of such Common Stock from such registration.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is StockTrans, Inc.,
Ardmore, Pennsylvania.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
16,225,000 shares of Common Stock. Of these shares, the 2,900,000 shares sold in
this offering (plus up to 430,000 additional shares if the Underwriters exercise
their over-allotment option) will be freely tradeable without restriction or
further registration (except by affiliates of the Company or persons acting as
underwriters) under the Securities Act. All of the remaining 13,325,000 shares
of Common Stock (the 'Restricted Shares') will be beneficially owned by IE and
may not be sold unless they are registered under the Securities Act or are sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144 promulgated under the Securities Act.
In general, commencing 90 days after the completion of this offering, Rule
144, as currently in effect, allows a person who has beneficially owned
Restricted Shares for at least two years, including persons who may be deemed
affiliates of the Company, to sell, within any three-month period, up to the
number of Restricted Shares that does not exceed the greater of (i) one percent
of the then outstanding shares of Common Stock, and (ii) the average weekly
trading volume during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. A person who
is not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale and who has beneficially owned his or her Restricted
Shares for at least three years would be entitled to sell such Restricted Shares
without regard to the volume limitations described above and the other
conditions of Rule 144. Upon the completion of this offering, none of the
Restricted Shares will be eligible for sale by IE in the public market without
restriction pursuant to Rule 144 of the Securities Act. IE will have
beneficially owned such shares for two years in January 1998, at which time IE
may sell shares under Rule 144, subject to the volume and other limitations
contained in that Rule. Although such shares may not be sold publicly by IE
absent registration under the Securities Act or under Rule 144, IE has advised
the Company that it believes that the Distribution, if it occurs, could be
effected without registration under the Securities Act and that the shares
distributed pursuant thereto would thereafter be freely tradeable by persons
other than 'affiliates' of the Company without restriction or registration under
the Securities Act.
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<PAGE>
Notwithstanding the foregoing, the Company and IE have each agreed with the
Underwriters not to sell, contract to sell or otherwise dispose of any shares of
Common Stock publicly for a period of 180 days after the date of this Prospectus
without the written consent of Alex. Brown & Sons Incorporated, except for
issuances by the Company in connection with acquisitions or shares sold to IE
pursuant to the Stock Registration and Option Agreement. See 'Underwriting.' In
addition, the Company intends to file a registration statement on Form S-8 to
register 3,000,000 shares subject to the Company's 1996 Long-Term Incentive Plan
upon completion of this offering. Market sales of a substantial number of shares
of Common Stock, or the availability of such shares for sale in the public
market, could adversely affect prevailing market prices of the Common Stock.
In addition, after this offering, IE will be entitled to certain rights
with respect to registration under the Securities Act of the Restricted Shares.
Registration of such Restricted Shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act immediately upon the effectiveness of such registration. See 'Relationship
Between the Company and IE -- Contractual Agreements' and 'Description of
Capital Stock -- Registration Rights.'
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the 'Underwriters'), through their Representatives,
Alex. Brown & Sons Incorporated, Montgomery Securities and Janney Montgomery
Scott Inc., have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<S> <C>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
Alex. Brown & Sons Incorporated................................................
Montgomery Securities..........................................................
Janney Montgomery Scott Inc....................................................
----------
Total................................................................... 2,900,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of shares of the Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ to certain other
dealers. After commencement of the initial public offering, the public offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 430,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table bears to 2,900,000, and the
Company will be obligated pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection under the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 2,900,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters, the Company and IE against certain civil liabilities,
including liabilities under the Securities Act.
46
<PAGE>
The Company and IE have agreed not to offer, sell or otherwise dispose of
publicly any shares of Common Stock (other than any shares sold to IE pursuant
to the Stock Registration and Option Agreement or any shares issued in
connection with acquisitions) for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons Incorporated.
See 'Principal Shareholder' and 'Shares Eligible for Future Sale.'
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Mr. William L. Rulon-Miller, Senior Vice President and Co-Director of
Investment Banking for Janney Montgomery Scott Inc., one of the Representatives,
is a member of the Board of Directors of IE. It is anticipated that Mr.
Rulon-Miller, together with the other non-employee directors of IE who are not
also non-employee directors of the Company, will be granted an option to
purchase 12,500 shares of Common Stock on the date of this Prospectus.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price will be
determined through negotiation among the Company and the Representatives. Among
the factors to be considered in such negotiations will be prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalizations and stages of development of other companies which the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present stage of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania.
Barry M. Abelson, a partner of Pepper, Hamilton & Scheetz, is a member of the
Boards of Directors of the Company and IE. Pepper, Hamilton & Scheetz regularly
provides legal services to IE and the Company. It is expected that Mr. Abelson,
together with the other non-employee directors of the Company, will be granted
an option to purchase 25,000 shares of Common Stock on the date of this
Prospectus. Certain legal matters related to this offering will be passed upon
for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The Combined Financial Statements of the Company as of December 31, 1994
and 1995, and for each of the years in the three-year period ended December 31,
1995, have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Securities and Exchange Act (the 'Exchange Act'). As a result of this offering,
the Company will be required to file reports and other information with the
Commission pursuant to the informational requirements of the Exchange Act.
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the Common Stock, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents or provisions of any documents
referred to herein are not necessarily complete, and in each instance, reference
is made to the copy of the document filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at such
address, and at the Commission's regional offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048, and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, the Company intends to furnish its shareholders with annual
reports containing audited financial statements examined by an independent
public accounting firm.
47
<PAGE>
XLCONNECT SOLUTIONS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
(Information for the six months ended June 30, 1996 and 1995
and subsequent to December 31, 1995 is unaudited)
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
--------------------
<S> <C>
Report of Independent Auditors................................................................. F-2
Combined Balance Sheets as of December 31, 1995 and 1994 and June 30, 1996..................... F-3
Combined Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993 and the Six Months Ended June 30, 1996 and 1995................................ F-4
Combined Statements of Shareholder's Equity for the Years Ended December 31, 1995,
1994 and 1993 and the Six Months Ended June 30, 1996......................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995,
1994, and 1993 and the Six Months Ended June 30, 1996 and 1995............................... F-6
Notes to Combined Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
XLConnect Solutions, Inc.:
We have audited the accompanying combined balance sheets of XLConnect
Solutions, Inc. as of December 31, 1995 and 1994, and the related combined
statements of operations, shareholder's equity, and cash flows for each of the
years in the three-year period ended December 31, 1995. These combined 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of XLConnect Solutions,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Cincinnati, Ohio
May 31, 1996
F-2
<PAGE>
XLCONNECT SOLUTIONS, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Trade accounts receivable, less allowance of $858 at June 30, 1996 and
$710 and $158 at December 31, 1995 and 1994,
respectively....................................................... $ 14,219 $ 18,460 $ 23,081
Note receivable....................................................... 2,783 -- --
Deferred tax asset.................................................... 1,352 2,210 1,840
Prepayments and other current assets.................................. 920 219 1,929
--------- ---------- ---------
Total current assets............................................... 19,274 20,889 26,850
Property and equipment, net of accumulated depreciation................. 4,621 4,389 3,307
Intangible assets, net of accumulated amortization...................... 6,400 28,456 27,731
Other long-term assets.................................................. 1,623 739 1,224
--------- ---------- ---------
Total assets............................................................ $ 31,918 $ 54,473 $ 59,112
========= ========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..................................... $ 2,531 $ 113 $ 73
Accounts payable...................................................... 8,514 2,705 2,943
Accrued expenses...................................................... 2,911 5,525 5,897
Deferred income and other............................................. 1,972 1,444 1,479
--------- ---------- ---------
Total current liabilities.......................................... 15,928 9,787 10,392
--------- ---------- ---------
Long-term liabilities
Long-term debt........................................................ 178 101 40
Due to parent......................................................... 13,104 39,455 42,536
--------- ---------- ---------
Total liabilities.................................................. 29,210 49,343 52,968
--------- ---------- ---------
Commitments and contigencies (Notes 6, 11 and 12)
Shareholder's equity
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding as of June 30, 1996
and December 31, 1995 and 1994................................... -- -- --
Common Stock, $.01 par value; 100,000,000 shares authorized; 1,000
shares issued and outstanding as of June 30, 1996; no shares issued
and outstanding as of December 31, 1995
and 1994........................................................... -- -- --
Additional paid-in capital............................................ -- -- 5,130
Retained earnings..................................................... -- -- 1,014
Shareholder's net investment.......................................... 2,708 5,130 --
--------- ---------- ---------
Total shareholder's equity......................................... 2,708 5,130 6,144
--------- ---------- ---------
Total liabilities and shareholder's equity.............................. $ 31,918 $ 54,473 $ 59,112
========= ========== =========
</TABLE>
See accompanying notes to Combined Financial Statements.
F-3
<PAGE>
XLCONNECT SOLUTIONS, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 49,653 $ 50,965 $ 79,862 $ 36,609 $ 52,001
Cost of revenues........................................... 33,816 37,159 56,327 25,910 36,374
--------- --------- --------- --------- ---------
Gross profit............................................... 15,837 13,806 23,535 10,699 15,627
Operating expenses
Selling and marketing.................................... 3,815 3,755 3,975 2,027 3,508
General and administrative............................... 5,294 6,543 9,178 3,981 5,213
Depreciation and amortization............................ 816 1,060 3,123 1,111 2,491
--------- --------- --------- --------- ---------
9,925 11,358 16,276 7,119 11,212
--------- --------- --------- --------- ---------
Income from operations..................................... 5,912 2,448 7,259 3,580 4,415
Other expense, net
Interest................................................. 1,246 1,799 2,591 804 1,974
Other.................................................... (305) (36) (13) (2) 238
--------- --------- --------- --------- ---------
941 1,763 2,578 802 2,212
--------- --------- --------- --------- ---------
Income before income taxes................................. 4,971 685 4,681 2,778 2,203
Provision for income taxes................................. 2,092 435 2,259 1,302 1,189
--------- --------- --------- --------- ---------
Net income................................................. $ 2,879 $ 250 $ 2,422 $ 1,476 $ 1,014
========= ========= ========= ========= =========
Unaudited Pro Forma Data (Note 2)
Net income per common share.............................. $ 0.18 $ 0.08
Shares used in computing net income per common share..... 13,325 13,325
</TABLE>
See accompanying notes to Combined Financial Statements.
F-4
<PAGE>
XLCONNECT SOLUTIONS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL SHAREHOLDER'S
STOCK STOCK PAID-IN RETAINED NET
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INVESTMENT TOTAL
----------- ----------- ----------- --------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31,
1992..................... -- $ -- -- $ -- $ -- $ -- $ (421) $ (421)
Net Income............... -- -- -- -- -- -- 2,879 2,879
---------- ---------- ---------- --------- ---------- ---------- ----------- ---------
Balance -- December 31,
1993..................... -- -- -- -- -- -- 2,458 2,458
Net Income............... -- -- -- -- -- -- 250 250
---------- ---------- ---------- --------- ---------- ---------- ----------- ---------
Balance -- December 31,
1994..................... -- -- -- -- -- -- 2,708 2,708
Net Income............... -- -- -- -- -- -- 2,422 2,422
---------- ---------- ---------- --------- ---------- ---------- ----------- ---------
Balance -- December 31,
1995..................... -- -- -- -- -- -- 5,130 5,130
Issuance of Common Stock
(Unaudited)............ -- -- 1,000 -- 5,130 -- (5,130) --
Net Income (Unaudited)... -- -- -- -- -- 1,014 -- 1,014
---------- ---------- ---------- --------- ---------- ---------- ----------- ---------
Balance -- June 30, 1996
(Unaudited).............. -- $ -- 1,000 $ -- $ 5,130 $ 1,014 $ -- $ 6,144
========== ========== ========== ========= ========== ========== =========== =========
</TABLE>
See accompanying notes to Combined Financial Statements.
F-5
<PAGE>
XLCONNECT SOLUTIONS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,879 $ 250 $ 2,422 $ 1,476 $ 1,014
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 816 1,060 3,123 1,111 2,491
Goodwill impairment............................... -- 583 -- -- --
Loss on disposal of property and equipment........ 5 1 20 19 16
Provision for allowance on trade accounts
receivable..................................... 58 141 335 65 148
Deferred income taxes............................. (341) (860) (278) 301 (17)
Changes in assets and liabilities, net of effects of
acquisition:
Trade accounts receivable...................... (6,723) (493) (4,576) (2,166) (4,163)
Note receivable................................ (11,022) 8,239 2,783 2,783 --
Prepayments and other current assets........... (152) (730) 701 626 (1,710)
Other long-term assets......................... (484) 3,138 304 191 (98)
Accounts payable............................... 1,994 3,373 (5,809) (3,113) (1)
Accrued expenses............................... 3,029 (893) 2,614 1,443 343
Deferred income and other...................... (875) 1,311 (528) (148) 35
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities...... (10,816) 15,120 1,111 2,588 (1,942)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment................. (1,855) (2,963) (2,148) (777) (700)
Excess purchase price............................... (6,640) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities.................... (8,495) (2,963) (2,148) (777) (700)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings (repayments) of long-term debt........... 2,052 (2,692) (2,495) (2,468) (101)
Borrowings (repayments) of due to parent............ 17,259 (9,465) 3,532 657 2,743
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities...... 19,311 (12,157) 1,037 (1,811) 2,642
--------- --------- --------- --------- ---------
Net change in cash....................................... -- -- -- -- --
Cash -- beginning of year........................... -- -- -- -- --
--------- --------- --------- --------- ---------
Cash -- end of year $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to Combined Financial Statements.
F-6
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
NOTE 1. FORMATION AND OPERATIONS
The accompanying combined financial statements of XLConnect Solutions, Inc.
(the Company) includes the operations of the Professional Services Organizations
(PSO) of The Future Now, Inc. (TFN) and IntelliCom Solutions, Inc. (IntelliCom),
a wholly-owned subsidiary of Intelligent Electronics, Inc. (IE). TFN established
the PSO in 1990 and was acquired by IE in August 1995. Prior to January 1, 1996,
the Company had no separate legal status or existence. IE incorporated the
Company as a Pennsylvania corporation under the name 'PSO Acquisition
Corporation' in January 1996, and the Company changed its name to XLConnect
Solutions, Inc. in May 1996. In anticipation of an initial public offering, (i)
IE contributed to the Company the stock of IntelliCom and the assets and
liabilities, including intercompany debt, relating to the PSO business, and (ii)
the Company and IE entered into certain contractual arrangements (see Note 12).
The foregoing transactions were completed as of May 31, 1996. The Company and IE
will both operate as separate companies.
The Company provides enterprise-wide total connectivity to its clients
offering comprehensive services in four primary service areas: (i)
internetworking services under which the Company designs and implements
solutions to address all aspects of its clients' enterprise-wide networks or any
component thereof; (ii) applications development services through which the
Company customizes and adapts proven software to meet clients' needs and offers
training to support these solutions; (iii) managed services under which the
Company helps clients organize their technology resources, outsource multiple
aspects of their information technology functions and minimize support costs
from the desktop through the LAN and WAN; and (iv) telecommunications services,
introduced on January 1, 1996, which include the provision of data, video and
voice transmission services.
The Company's operations are subject to certain risks and uncertainties
including, among others, actual or prospective competition by entities with
greater financial resources, experience and market presence than the Company,
risks associated with growth, and risks associated with technology and
regulatory matters.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements consist of the financial
statements of the Company as described in Note 1. These statements are presented
as if the Company had existed as a corporation separate from IE, and include the
historical assets, liabilities, sales and expenses directly related to the
Company's operations that were either specifically identifiable or allocable
using methods which took into consideration personnel, business volume or other
appropriate factors. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
All material transactions between entities included in these combined financial
statements have been eliminated.
Effective January 1, 1996, IE contributed its net investment in the
Company, at which time, the Company began accumulating its retained earnings.
For the periods presented, certain general and administrative expenses
reflected in the combined financial statements include allocations of certain
corporate expenses from IE. These allocations took into consideration personnel,
business volume or other appropriate bases and generally include administrative
expenses related to general management, insurance, information management and
other miscellaneous services. Allocations of corporate expenses are estimates
based on management's best estimate of actual expenses. It is management's
opinion that the expenses charged to the Company are reasonable.
Interest expense shown in the combined financial statements reflects
interest expense associated with the Company's share of the aggregate borrowings
of IE for each of the periods presented (see Note 6). Additionally, income taxes
are calculated on a separate tax return basis. Management believes that such
allocations are reasonable.
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Company in the
future or what the balance sheets, results of operations or cash flows of the
F-7
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Company would have been if it had been a separate, stand-alone publicly-held
corporation during the periods presented.
REVENUE AND COST RECOGNITION
Revenues from internetworking and applications development service
contracts are primarily recognized as services are provided to the client and
billed on a time and materials basis, and to a lesser extent, are recognized on
the percentage-of-completion basis for fixed price contracts. Costs are
recognized as incurred. Revenues associated with managed service contracts are
recorded ratably over the service period of the contract while costs are also
recognized as incurred. Revenues and costs from telecommunications services are
recognized on the basis of client usage or pursuant to a fixed rate. Funds
received from vendors for training, capital expenditures and marketing programs
are accounted for as a reduction of cost of revenues or capitalized costs,
according to the nature of the program when earned.
NOTE RECEIVABLE
At December 31, 1994, a note receivable of $2,783 was due from a third
party, which arose from the sale by IE in late 1993 of IE's service contract
base and repair parts inventory. Effective January 1, 1995, IE negotiated the
return of a selected portion of the service contract base and repair services
from the third party.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Charges for repairs and maintenance are expensed as incurred and additions and
improvements that significantly extend the lives of assets are capitalized. Upon
sale or retirement of depreciable property, the cost and accumulated
depreciation are removed from the related accounts and any gain or loss is
reflected in operations. Depreciation is provided on a straight-line basis, over
the estimated useful lives of the depreciable assets, principally three to seven
years.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
Intangible assets, composed of costs in excess of net assets acquired,
represent allocations from IE relating to the Company's share of IE's historical
acquisitions. The allocations took into consideration various factors, which
include, among other things, operating cash flows, revenue streams and client
and employee bases. Costs in excess of net assets acquired are being amortized
on a straight-line basis over the expected period to be benefited, generally
twenty years. The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation.
INCOME TAXES
The provision for income taxes of the Company for Federal and state income
taxes has been calculated as if the Company were a stand-alone corporation
filing separate tax returns.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS), No. 109, Accounting for Income Taxes.
Pursuant to SFAS No. 109, deferred tax assets and liabilities are recorded for
temporary differences which enter into the determination of taxable income in
different periods for financial reporting and income tax purposes.
F-8
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments were made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies.
Trade Accounts Receivable and Accounts Payable -- The carrying amount of
these items are a reasonable estimate of their fair value.
Long-Term Debt and Due to Parent -- Rates currently available to the
Company for debt with similar terms are used to estimate its fair value.
Accordingly, the carrying amount of debt is a reasonable estimate of its fair
value.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The combined financial statements as of June 30, 1996 and for the six
months ended June 30, 1996 and 1995 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the combined financial statements for the
interim periods have been included. The results for the interim period ended
June 30, 1996 are not necessarily indicative of the results to be achieved for
the full fiscal year.
UNAUDITED PRO FORMA NET INCOME PER COMMON SHARE
As of June 30, 1996, the Company has 1,000 shares of Common Stock
outstanding, all of which are owned by IE. Immediately prior to the offering,
the Company will effect a 1 to 13,325 stock split of the outstanding shares of
common stock. Unaudited pro forma net income per common share is computed using
the number of common shares and common share equivalents outstanding after the
organization of the Company and before the proposed initial public offering,
assuming the consummation of the stock split. Common share equivalents consists
of the Company's common shares issuable upon exercise of stock options (see Note
12). Pursuant to the requirements of the Securities and Exchange Commission
(SEC), stock options issued by the Company during the twelve months immediately
preceding the proposed initial public offering have been included in the number
of common shares and common shares equivalents used in computing pro forma net
income per share as if they were outstanding for the latest year using the
treasury stock method.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets and certain identifiable
intangibles and goodwill related both to assets to be held and used, and assets
to be disposed. The new standard is effective for fiscal years beginning after
December 15, 1995. The Company adopted SFAS No. 121 during the first quarter of
1996. Upon adoption, there was no material effect on its financial condition or
results of operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires that companies with stock-based compensation
plans either recognize compensation expense based on new fair value accounting
methods or continue to apply the existing accounting rules and disclose pro
forma net income and income per share assuming the fair value method had been
applied. The new standard is effective for fiscal years beginning after December
15, 1995. As provided for by this statement, the Company will continue to apply
the accounting provisions of Accounting Principles Board Opinion No. 25,
Accounting For Stock Issued to Employees, relating to its stock based
compensation plan.
F-9
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 3. ALLOWANCE FOR TRADE ACCOUNTS RECEIVABLE
The activity in the allowance for doubtful accounts for trade accounts
receivable for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at Beginning of Period............................................ $ 64 $ 101 $ 158
Charged to Expense........................................................ 58 141 335
Charged to Other Accounts................................................. -- -- 257
Deductions/Write-offs..................................................... (21) (84) (40)
--------- --------- ---------
Balance at Ending of Period............................................... $ 101 $ 158 $ 710
========= ========= =========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Net property and equipment is comprised of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Office Equipment................................................................ $ 5,067 $ 6,638
Computer Software............................................................... 110 231
Leasehold Improvements.......................................................... 193 552
Equipment Under Capital Leases.................................................. 392 363
--------- ---------
5,762 7,784
Less: Accumulated Depreciation.................................................. (1,141) (3,395)
--------- ---------
$ 4,621 $ 4,389
========= =========
</TABLE>
NOTE 5. INTANGIBLE ASSETS
Net intangible assets is comprised of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Goodwill..................................................................... $ 7,017 $ 29,000
Less: Accumulated Amortization............................................... 617 544
--------- ---------
$ 6,400 $ 28,456
========= =========
</TABLE>
Approximately $22,000 of goodwill was allocated by IE resulting from a
stock acquisition made in August 1995.
NOTE 6. DEBT AND LEASE OBLIGATIONS
For purposes of the Combined Financial Statements presented herein, amounts
Due to Parent represent intercompany borrowings from IE necessary to fund the
Company's operations and acquisitions since its inception in 1990. These amounts
have been classified as noncurrent since there were no repayment terms between
IE and the Company (see Note 12).
The interest expense charged to the Company was based on the weighted
average interest rates on the aforementioned borrowings (6.8%, 8.4% and 10.1% in
1993, 1994 and 1995, respectively). The Company's portion of IE's consolidated
debt at December 31, 1995 was $39,455.
F-10
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 6. DEBT AND LEASE OBLIGATIONS -- CONTINUED
The Company leases certain equipment under operating leases with IE. At
December 31, 1995, the Company's portion of future minimum payments under
noncancellable leases with initial or remaining terms in excess of one year are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1996........................................................................... $ 875
1997........................................................................... 582
1998........................................................................... 375
1999........................................................................... 267
2000........................................................................... 90
Thereafter..................................................................... 159
---------
$ 2,348
=========
</TABLE>
Rent expense for the three years ended December 31, 1995 was $491, $561 and
$692 respectively.
During 1994 and 1995, the Company entered into noncancellable lease
agreements of computer desktop equipment. With respect to purchase options, the
Company can (i) purchase the equipment under lease with an early buyout option
such that the purchase price shall include the lessor's projected yield from the
lease, or (ii) purchase the equipment at lease expiration at the then fair
market value. The lease is classified as an operating lease in accordance with
SFAS No. 13, Accounting for Leases. At December 31, 1995, the Company's future
minimum lease payments under these agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996.......................................................................... $ 9,884
1997.......................................................................... 8,348
1998.......................................................................... 3,614
1999.......................................................................... 172
2000.......................................................................... --
Thereafter.................................................................... --
---------
$ 22,018
=========
</TABLE>
Rent expense under these agreements for the two years ended December 31,
1995 was $1,785 and $6,465, respectively.
F-11
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 consist of the
following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal........................................................... $ 1,949 $ 1,037 $ 2,032
State............................................................. 484 258 505
--------- --------- ---------
2,433 1,295 2,537
Deferred
Federal........................................................... (273) (689) (223)
State............................................................. (68) (171) (55)
--------- --------- ---------
(341) (860) (278)
--------- --------- ---------
$ 2,092 $ 435 $ 2,259
========= ========= =========
</TABLE>
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Statutory U.S. Federal Tax Rate..................................... $ 1,740 $ 240 $ 1,638
Amortization of Intangibles......................................... 75 128 313
State and Local Income Tax, Net of Federal Benefit.................. 270 57 292
Other, Net.......................................................... 7 10 16
--------- --------- ---------
$ 2,092 $ 435 $ 2,259
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1994 and 1995 are presented
below:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred Tax Asset:
Trade Accounts Receivable Allowance............................... $ 64 $ 285
Depreciation...................................................... 1,101 521
Accrued Expenses.................................................. 123 1,027
Deferred Income................................................... 794 580
Other............................................................. 371 318
--------- ---------
$ 2,453 $ 2,731
========= =========
</TABLE>
Based upon the level of historical taxable income and assumptions regarding
future taxable income over the periods which the deferred tax assets are
deductible, management believes that it is more likely than not that the Company
will realize the benefits of these deductible differences; therefore, no
valuation allowance has been established.
NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash activities were as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Details of Acquisition
Fair Value of Assets Acquired................................. $ -- $ -- $ -- $ -- $ 606
Liabilities Assumed........................................... -- -- -- -- 268
Details of Investing Activities
Allocation of Goodwill........................................ $ -- $ -- $ 22,819 $ -- $ --
</TABLE>
F-12
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION -- CONTINUED
As a result of the Company participating in IE's central cash management
system, the Company made no cash payments for interest and income taxes.
NOTE 9. SIGNIFICANT CLIENT
Sales to one customer accounted for approximately 10% and 15% of the
Company's revenue for the years ended December 31, 1994 and 1995, respectively.
No customer exceeded 10% of Company's revenues in 1993.
NOTE 10. EMPLOYEE BENEFIT PLAN
The Company participates in IE's 401(k) tax deferred savings plan (the
Plan) permitting eligible employees to defer a portion of their total
compensation through contributions to the Plan. The Company matches $0.50 for
each dollar contributed by participants subject to certain limitations. The
Company's contributions under the Plan for 1993, 1994 and 1995 were $120, $107
and $172, respectively.
NOTE 11. CONTINGENCIES
The Company continuously evaluates contingencies based upon the best
available evidence. Management believes that allowances for loss have been
provided to the extent necessary and that its assessment of contingencies is
reasonable.
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED)
In June 1996, the Company's Board of Directors authorized management to
file a registration statement with the SEC with respect to an initial public
offering of less than 20% of the Company's Common Stock (the 'Offering'). If the
Offering is consummated under the terms presently anticipated, 3,330,000 shares
of Common Stock (inclusive of an over-allotment option to the Company's
underwriters) will be issued. In anticipation of the Offering, the Company and
IE have entered into a number of agreements, which will become effective upon
completion of the Offering, for the purpose of defining certain relationships
between them. As a result of IE's ownership interest in the Company, the terms
of such agreements were not, and the terms of any future amendments to those
agreements may not be, the result of arm's-length negotiation. The following
summaries of these agreements are qualified in all material respects by the
terms and conditions of the agreements.
SERVICES AGREEMENT
The Company and IE have entered into a Services Agreement pursuant to which
IE will continue, on an interim basis, to provide the Company, upon the
Company's request, various services, including insurance and risk management,
employee benefit administration and similar administrative and management
services, that IE has historically provided to the Company, and the Company will
continue on an interim basis to provide service call support to IE. The Company
will pay the direct costs of services provided by IE, and IE will pay the
Company for service call support at the Company's standard billing rates. To the
extent that the direct costs of services provided by IE cannot be separately
measured, the Company will pay its allocable portion of the total cost to IE for
any such services, determined in accordance with described methodologies, using
such objective factors as are available to IE and the Company. The Services
Agreement also provides that IE will furnish additional services as may be
reasonably requested by the Company on similar terms. The Services Agreement
will automatically terminate on (i) the occurrence of a pro rata distribution to
IE's shareholders of its remaining shares by means of a tax-free or taxable
transaction (the 'Distribution') or (ii) such time that IE no longer owns a
majority of the outstanding shares of Common Stock. In addition, the Services
Agreement may also be terminable by either party on 90 days' prior written
notice, except that no such written notice will result in termination prior to
January 1, 1997.
Under the Services Agreement, IE and the Company each have the option to
make advances from time to time to the other upon request. In the case of the
Company, such advances would be made as directed or within specific parameters
prescribed by its Board of Directors. Interest is payable monthly in arrears at
market rates on all net advances by the Company or IE, as the case may be, and,
prior to termination of the Services Agreement, will be
F-13
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) -- CONTINUED
accounted for as additional advances. Advances will be repayable on the date
specified in the request for such advance. Funds advanced by the Company to IE
will not be segregated from other funds of IE, and IE may use such funds for its
own benefit, subject to certain limitations under the IBM Credit Corporation
(IBMCC) credit facility. Consequently, the Company will be subject to risk of
loss in respect of such funds. The Services Agreement will be deemed effective
from and after the date on which this Offering is completed and will apply to
all advances occurring on or after such date. Upon the termination of the
Services Agreement, all outstanding advances and accrued but unpaid interest
will become due and payable.
In addition, the Services Agreement also provides that IE will permit
employees of the Company to continue to participate in the benefit plans and
programs sponsored by IE until the termination of the Services Agreement.
The Services Agreement also recognizes that IE's direct sales force may
continue to provide to the Company sales leads and referrals. The Services
Agreement provides that the Company shall continue to compensate IE at least
through December 31, 1997 for such leads and referrals that result in revenues
to the Company in a manner consistent with and substantially similar to current
practices between the companies.
The Services Agreement further provides that the Company will continue to
receive from IE for an interim period, consistent with past practices, a portion
of the funds received by IE from vendors for training, capital expenditures and
marketing programs.
SPACE SHARING AGREEMENT
The Company and IE have entered into a Space Sharing Agreement providing
for the sharing by the Company and IE of certain office facilities, including
the offices located in Exton, Pennsylvania at which the Company's and IE's
principal executive offices are located. Under the Space Sharing Agreement, the
costs associated with leasing and maintaining facilities will, in general, be
allocated between the Company and IE on a pro rata basis determined by the
square footage utilized by each company or the number of employees of each
company at the specified location, in accordance with historical practice. The
Company's rights to use portions of the shared facilities leased from third
parties and the corresponding obligations to pay for such use, may be terminated
as to any such facility by either the Company or IE on 90 days' prior written
notice.
TAX ALLOCATION AGREEMENT
The Company and IE have entered into a Tax Allocation Agreement to provide
for (i) the allocation of payments of taxes for periods during which the Company
and IE are included in the same consolidated group for federal income tax
purposes or the same consolidated, combined or unitary tax returns for state,
local or foreign tax purposes, (ii) the allocation of responsibility for the
filing of tax returns, (iii) the conduct of tax audits and the handling of tax
controversies, and (iv) various related matters. For periods during which the
Company is included in the aforementioned returns, the Company will be required
to pay to IE its allocable portion of the consolidated Federal income and state
tax liability and will be entitled to receive from IE its allocable share of any
tax benefit attributable to the use of the Company's losses, if any. The Company
will be responsible for the filing of Federal, state, local and foreign tax
returns and related liabilities for itself for all periods, to the extent not
included in IE's combined or consolidated tax returns. Notwithstanding the Tax
Allocation Agreement, under Federal income tax law, each member of a
consolidated group for Federal income tax purposes is also jointly and severally
liable for the Federal income tax liability of each other member of the
consolidated group. Similar rules may apply under state income tax laws.
INDEMNIFICATION AGREEMENT
The Company and IE have also entered into an Indemnification Agreement
under which, among other things and subject to limited exceptions, the Company
is required to indemnify IE and its directors, officers, employees, agents and
representatives for all liabilities relating to the Company's business and
operations and for all contingent liabilities relating to the Company's business
and operations or otherwise assigned to the Company. In addition,
F-14
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) -- CONTINUED
indemnification will be granted to IE for liabilities arising out of or based
upon alleged misrepresentations in or omissions from the Registration Statement.
The Indemnification Agreement also provides that each party thereto (the
Obligor Party) (i) will use reasonable efforts to obtain the release of the
other party thereto (the Guarantor Party) from its obligations under or in
respect of all material guarantees, surety and performance bonds, letters of
credit and other arrangements guaranteeing or securing any liability or
obligation of the Obligor Party, (ii) will indemnify the Guarantor Party for any
liabilities incurred under such guarantees, bonds, letters of credit and other
arrangements, and (iii) will reimburse the Guarantor Party for its direct costs
(or, in certain circumstances, the Obligor Party's pro rata share of such direct
costs) of maintaining such guarantees, bonds, letters of credit and other
arrangements pending the release of the Guarantor Party thereunder.
STOCK REGISTRATION AND OPTION AGREEMENT
Pursuant to the terms of the Stock Registration and Option Agreement with
IE, the Company has provided IE with certain registration rights, including
demand registration rights and certain 'piggy-back' registration rights, with
respect to Common Stock owned by IE after the Offering. The Company's obligation
is subject to certain limitations relating to a minimum amount of Common Stock
required for registration, the timing of registration and other similar matters.
The Company is obligated to pay all expenses incidental to such registration,
excluding underwriters' discounts and commissions and certain legal fees and
expenses. The Company also has granted to IE, pursuant to the Stock Registration
and Option Agreement, during the period between the completion of this Offering
and the earlier to occur of (i) the completion of the Distribution and (ii) the
sale by IE of such number of shares of Common Stock that IE is no longer
eligible to make the Distribution tax free or to include the Company in IE's
consolidated Federal income tax return, a continuous, cumulative option to
purchase from the Company at then-current market prices such number of shares of
Common Stock as IE may determine to be necessary (a) to allow IE to continue to
include the Company in IE's consolidated Federal income tax return or (b) to
increase the likelihood that the Distribution would be tax-free to IE and its
shareholders. This number of shares is expected to be the number necessary for
IE to continue to own at least 80% of the outstanding shares of Common Stock.
The option may only be exercised upon the original issuance of shares by the
Company. In the event that any shares of Common Stock are issued prior to the
Distribution upon the exercise of any option granted under the Company's 1996
Long-Term Incentive Plan and such issuance would otherwise prevent IE from
continuing to include the Company in IE's consolidated Federal income tax return
or effecting the Distribution on a tax-free basis, the option described in the
immediately preceding sentence will automatically be deemed to have been
exercised in respect of a number of shares of Common Stock equal to four times
the number of shares of Common Stock issued upon the exercise of the option
granted under the 1996 Long-Term Incentive Plan unless IE shall have earlier
terminated such automatic exercise feature.
EXISTING TELECOMMUNICATIONS SERVICES AGREEMENT.
Pursuant to the terms of a services agreement between IE and the Company
dated as of January 1, 1996, IE has agreed to purchase from the Company all of
the telecommunications services required by IE. The services provided by the
Company under the services agreement include the transmission of voice, data,
video and other information as well as enhanced telecommunications services such
as frame relay and asynchronous transfer mode transmission services. The
services provided by the Company also include capacity planning, call
accounting, network design and similar services. The services agreement requires
IE to purchase sufficient telecommunications services to permit the Company to
meet the minimum volume requirements imposed by the Company's agreement with
MCI. The services agreement has a term of five years and will renew
automatically for six successive two year periods, unless terminated earlier in
accordance with its terms. IE may terminate the services agreement at the
conclusion of any such term if it provides XLConnect with at least 90 days'
notice prior to the expiration of such term that it has received a bona fide
offer to provide telecommunications services that in quantity, quality and
duration are equal to or better than the services then being provided to IE by
XLConnect at a price of 5% or more below the price XLConnect charges for such
services and XLConnect does not match the offer.
F-15
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) -- CONTINUED
IBM CREDIT CORPORATION CREDIT FACILITY
The Company is a party to IE's credit facility with IBMCC, jointly and
severally liable for any defaults by IE or any of its affiliates. The credit
facility allows for total borrowings of up to $225,000, subject to a
collateral-based formula, and is secured by all of the assets of IE and its
subsidiaries, including the Company. $75,000 of the credit facility is
classified as a term loan with a due date of October 5, 1998 and bears interest
at prime plus 2.5% (10.75% on June 30, 1996), and the remaining portion of the
credit facility can be used by IE for inventory financing, equipment financing
and working capital purposes and bears interest at prime plus 1.5% (9.75% on
June 30, 1996).
The Company has obtained a Commitment Letter dated June 21, 1996 from IBMCC
setting forth the terms of a proposed amendment to the credit facility to be
effective prior to the date of the Offering, whereby the Company would be able
to borrow directly from IBMCC up to $20,000 of the total $225,000, subject to a
collateral-based formula, and the Company's joint and several liability to IBMCC
would be limited to the $20,000 sublimit. In addition, all cash generated by the
Company will be deposited in accounts segregated from the accounts used by IE.
IE will retain the ability to borrow up to the total amount of the credit
facility, including amounts not then outstanding to the Company under the
$20,000 sublimit provided IE satisfies its collateral-based formula, exclusive
of the Company's assets.
PREFERRED STOCK
Upon completion of the Offering, the Company will have the authority to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix and determine the relative rights, preferences and limitations of each class
or series so authorized without any further vote or action by the shareholders.
The Board of Directors may issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of the
Company's Common Stock and have the effect of delaying or preventing a change in
the control of the Company. As of June 30, 1996, no shares of Preferred Stock
are outstanding and the Company has no current intention to issue any shares of
Preferred Stock.
1996 LONG-TERM INCENTIVE PLAN
In June 1996, the Company adopted the 1996 Long-Term Incentive Plan (the
Plan) permitting the grant of any or all of the following types of awards
(Awards): (i) stock options, including non-qualified and incentive stock options
(NQSOs and ISOs); (ii) stock appreciation rights; (iii) restricted stock; (iv)
long-term performance awards; (v) performance shares; and (vi) performance units
to employees and directors of the Company and IE. A total of 3,000,000 shares of
the Company's Common Stock have been reserved for grant under the Plan. The Plan
is intended to provide an incentive for employees and directors to maximize
their efforts and enhance the success of the Company. Options will generally be
granted by the Company's Compensation and Benefits Committee of the Board of
Directors at option prices equivalent to or greater than the fair market value
of the underlying Common Stock at the date of grant and vest in equal
installments over the succeeding four years from the grant date; provided that
no options will become exercisable for a period of two years from the effective
date of the Offering, which period may be extended for one additional year by
the Compensation and Benefits Committee at the direction of IE. The options
expire ten years after the date of grant, subject to earlier termination and
other provisions relating to the cessation of employment.
F-16
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
PAGE
---------
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 11
Dividend Policy................................. 11
Capitalization.................................. 11
Dilution........................................ 12
Selected Combined Financial Data................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Business........................................ 23
Management...................................... 33
Relationship Between the Company and IE......... 40
Principal Shareholder........................... 44
Description of Capital Stock.................... 44
Shares Eligible for Future Sale................. 45
Underwriting.................................... 46
Legal Matters................................... 47
Experts......................................... 47
Additional Information.......................... 47
Index to Financial Statements................... F-1
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,900,000 SHARES
[LOGO]
XLCONNECT SOLUTIONS, INC.
COMMON STOCK
------------------
PROSPECTUS
------------------
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
JANNEY MONTGOMERY SCOTT INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated
expenses, all of which will be paid by the Company, in connection with the
issuance and distribution of the securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSES AMOUNT
- ------------------------------------------------------------------------------------------ ----------
<S> <C>
SEC Registration Fee...................................................................... $ 12,631
Nasdaq National Market Listing Fee........................................................ 50,000
Printing and engraving fees............................................................... *
Registrant's counsel fees and expenses.................................................... *
Accounting fees and expenses.............................................................. *
Blue Sky expenses and counsel fees........................................................ *
Transfer agent and registrar fees......................................................... *
Miscellaneous............................................................................. *
----------
TOTAL................................................................................... $ *
==========
</TABLE>
- ------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Sections 1741-1747 of the BCL, Article II, Section 10 of the
Company's Bylaws provides that the Company shall, in the case of directors and
officers, and may, in the case of employees and agents, indemnify any such
person who is or was a party (other than a party acting on his or her own
behalf) or who is threatened to be made such a party, to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (including actions brought by or in the right of the Company
where certain standards of conduct have been met), by reason of the fact that
such person is or was a director or officer of the Company, or is or was serving
at the request of the Company on behalf of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action if
he or she met certain requisite standards of conduct. In all such cases, the
Company shall indemnify any such person against all such expenses actually and
reasonably incurred by him or her in connection with any such action to the
extent that such person has been successful on the merits or in defense of any
such action. The indemnification provisions of the Bylaws are non-exclusive.
Pursuant to Section 1713 of the BCL, Article II, Section 9 of the Company's
Bylaws provides that a director shall not be liable to the Company for monetary
damages as such for any action taken or omitted unless the director breaches or
fails to perform a duty of his office and that breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. This limitation
does not apply to criminal liability or liability for the payment of taxes. The
Company believes that the provisions will assist it in securing and maintaining
the services of directors who are not employees of the Company.
The Company intends to procure insurance, which would afford officers and
directors insurance coverage for losses arising from claims based on breaches of
duty, negligence, error and other wrongful acts, including liabilities under the
Securities Act. The Company and its officers and directors currently rely on
IE's directors' and officers' liability coverage.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 5, 1996, 1,000 shares of Common Stock were issued to IE in
connection with the initial capitalization of the Company. Such shares were
contributed by IE to its indirect, wholly-owned subsidiary, The Future Now, Inc.
of Arkansas, as part of the Formation Transactions. In addition, the Company
granted on ____ __, 1996 stock options to purchase an aggregate of 1,062,500
shares of Common Stock to certain of its officers under the 1996 Long-Term
Incentive Plan, and intends to file a registration statement on Form S-8 on or
about the date of this Prospectus to register the shares underlying options
granted or available for grant under the 1996 Long-Term Incentive Plan.
The Company believes that the foregoing described issuances of securities,
if they constitute sales, are exempt from registration under the Securities Act
by virtue of the exemption provided by Section 4(2) thereof for transactions not
involving a public offering.
II-1
<PAGE>
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement by and between the Company and the Underwriters*
3.1 -- Restated Articles of Incorporation of the Company*
3.2 -- By-Laws of the Company
4.1 -- Specimen Stock Certificate*
5.1 -- Opinion of Pepper, Hamilton & Scheetz*
10.1 -- Contribution Agreement between IE, TFN, The Future Now, Inc. of Arkansas and the Company dated as of
May 31, 1996*
10.2 -- 1996 Long-Term Incentive Plan (including forms of option agreements)*
10.3 -- Services Agreement between the Company and IE dated as of May 31, 1996*
10.4 -- Space Sharing Agreement between the Company, IE and TFN, with respect to the Company's principal
executive offices and branch offices dated as of May 31, 1996*
10.5 -- Tax Allocation Agreement between the Company, IE and IE's other subsidiaries dated as of May 31, 1996*
10.6 -- Registration Rights and Option Agreement between the Company, IE and The Future Now, Inc. of Arkansas
dated as of May 31, 1996*
10.7 -- Indemnification Agreement between the Company and IE dated as of May 31, 1996*
21 -- Subsidiaries
24.1 -- Consent of KPMG Peat Marwick LLP (included on page II-3 of the Registration Statement)
24.2 -- Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1)*
25 -- Powers of Attorney (included on Signature Pages)
</TABLE>
- ------------------
* To be filed by Amendment.
(B) COMBINED FINANCIAL STATEMENT SCHEDULES:
Schedule No. Description
All other schedules have been omitted because they are not applicable, not
required, or the required information is included in the Combined Financial
Statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certifies in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-2
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
XLConnect Solutions, Inc.
We consent to the use of our report included herein and to all references
to our firm under the heading 'Experts' in the Registration Statement.
KPMG PEAT MARWICK LLP
Cincinnati, OH
July 24, 1996
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 24 day of July, 1996.
XLCONNECT SOLUTIONS, INC.
By: /s/ RICHARD G. ELLENBERGER
-----------------------------------------
Richard G. Ellenberger
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Richard D. Sanford, Richard G.
Ellenberger and Barry M. Abelson and each or any of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their,
his or her substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD D. SANFORD Chairman of the Board July 24, 1996
- --------------------------------
Richard D. Sanford
/s/ RICHARD G. ELLENBERGER Chief Executive Officer and President; July 24, 1996
- -------------------------------- Director (principal executive officer)
Richard G. Ellenberger
/s/ STEPHANIE D. COHEN Chief Financial Officer, Vice President, July 24, 1996
- -------------------------------- Finance (principal financial officer and
Stephanie D. Cohen principal accounting officer)
/s/ BARRY M. ABELSON Director July 24, 1996
- --------------------------------
Barry M. Abelson
/s/ J.B. DOHERTY Director July 24, 1996
- --------------------------------
J.B. Doherty
/s/ WILLIAM E. JOHNSON Director July 24, 1996
- --------------------------------
William E. Johnson
/s/ JOHN A. PORTER Director July 24, 1996
- --------------------------------
John A. Porter
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement by and between the Company and the Underwriters*
3.1 -- Restated Articles of Incorporation of the Company*
3.2 -- By-Laws of the Company
4.1 -- Specimen Stock Certificate*
5.1 -- Opinion of Pepper, Hamilton & Scheetz*
10.1 -- Contribution Agreement between IE, TFN, The Future Now, Inc. of Arkansas and the Company dated as of
May 31, 1996 *
10.2 -- 1996 Long-Term Incentive Plan (including forms of option agreements)*
10.3 -- Services Agreement between the Company and IE dated as of May 31, 1996*
10.4 -- Space Sharing Agreement between the Company, IE and TFN, with respect to the Company's principal
executive offices and branch offices dated as of May 31, 1996*
10.5 -- Tax Allocation Agreement between the Company, IE and IE's other subsidiaries dated as of May 31, 1996*
10.6 -- Registration Rights and Option Agreement between the Company, IE and The Future Now, Inc. of Arkansas
dated as of May 31, 1996*
10.7 -- Indemnification Agreement between the Company and IE dated as of May 31, 1996*
21 -- Subsidiaries
24.1 -- Consent of KPMG Peat Marwick LLP (included on page II-3 of the Registration Statement)
24.2 -- Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1)*
25 -- Powers of Attorney (included on Signature Pages)
</TABLE>
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* To be filed by Amendment.
EXHIBIT 3.2
XLCONNECT SOLUTIONS, INC.
BYLAWS
ARTICLE I
OFFICES
Section 1.1. Registered Office. The registered office of XLCONNECT
SOLUTIONS, INC. (the "Corporation") in the Commonwealth of Pennsylvania shall be
as specified in the Articles of Incorporation of the Corporation, as they may be
amended from time to time (the "Articles"), or at such other place as the Board
of Directors of the Corporation (the "Board") may specify in a statement of
change of registered office filed with the Department of State of the
Commonwealth of Pennsylvania.
Section 1.2. Other Offices. The Corporation may also have an office or
offices at such other place or places either within or without the Commonwealth
of Pennsylvania as the Board may from time to time determine or the business of
the Corporation requires.
ARTICLE II
MEETINGS OF THE SHAREHOLDERS
Section 2.1. Place. All meetings of the shareholders shall be held at such
places, within or without the Commonwealth of Pennsylvania, as the Board may
from time to time determine.
Section 2.2. Annual Meeting. A meeting of the shareholders for the election
of directors and the transaction of such other business as may properly be
brought before the meeting shall be held once each calendar year on the first
Wednesday of
<PAGE>
April or, if that be a legal holiday, on the first day thereafter that is not a
legal holiday, or on such other date as the Board shall determine. If the annual
meeting is not called and held within six months after the designated time for
such meeting, any shareholder may call the meeting at any time after the
expiration of such six-month period.
Section 2.3. Written Ballot. Unless required by vote of the shareholders
before the voting begins, elections of directors need not be by written ballot.
Section 2.4. Special Meetings. Special meetings of the shareholders, for
any purpose or purposes, may be called at any time by the President or by the
Board, upon written request delivered to the Secretary of the Corporation. In
addition, an "interested shareholder" (as defined in section 2553 of the
Pennsylvania Business Corporation Law of 1988, as it may from time to time be
amended (the "1988 BCL")) may, upon written request delivered to the Secretary
of the Corporation, call a special meeting for the purpose of approving a
business combination under either subsection (3) or (4) of section 2553 of the
1988 BCL. Any request for a special meeting of shareholders shall state the
purpose or purposes of the proposed meeting. Upon receipt of any such request,
it shall be the duty of the Secretary to give notice, in a manner consistent
with Section 2.6 of these Bylaws, of a special meeting of the shareholders to be
held at such time as the Secretary may fix, which time may not be, if the
meeting is called pursuant to a statutory right, more
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than sixty (60) days after receipt of the request. If the Secretary shall
neglect or refuse to fix the date of the meeting and give notice thereof, the
person or persons calling the meeting may do so.
Section 2.5. Scope of Special Meetings. Business transacted at any special
meeting shall be confined to the business stated in the notice.
Section 2.6. Notice. Written notice of every meeting of the shareholders,
stating the place, the date and hour thereof and, in the case of a special
meeting of the shareholders, the general nature of the business to be transacted
thereat, shall be given in a manner consistent with the provisions of Section
12.5 of these Bylaws at the direction of the Secretary of the Corporation or, in
the absence of the Secretary of the Corporation, any Assistant Secretary of the
Corporation, at least ten (10) days prior to the day named for a meeting called
to consider a fundamental change under Chapter 19 of the Pennsylvania Business
Corporation Law of 1988, as it may from time to time be amended (the "1988
BCL"), or five (5) days prior to the day named for the meeting in any other
case, to each shareholder entitled to vote thereat on the date fixed as a record
date in accordance with Section 8.1 of these Bylaws or, if no record date be
fixed, then of record at the close of business on the tenth (10th) day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the day immediately preceding the day of the meeting, at such
address (or telex, TWX, facsimile
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or telephone number), as appears on the transfer books of the Corporation. Any
notice of any meeting of shareholders may state that, for purposes of any
meeting that has been previously adjourned for one or more periods aggregating
at least fifteen (15) days because of an absence of a quorum, the shareholders
entitled to vote who attend such a meeting, although less than a quorum pursuant
to Section 2.7 of these Bylaws, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in the original notice of the
meeting that was so adjourned.
Section 2.7. Quorum. The shareholders present in person or by proxy,
entitled to cast at least a majority of the votes that all shareholders are
entitled to cast on any particular matter to be acted upon at the meeting, shall
constitute a quorum for the purposes of consideration of, and action on, such
matter. The shareholders present in person or by proxy at a duly organized
meeting can continue to do business until the adjournment thereof
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. If a meeting cannot be organized because a quorum has not attended, the
shareholders present in person or by proxy may, except as otherwise provided by
the 1988 BCL and subject to the provisions of Section 2.8 of these Bylaws,
adjourn the meeting to such time and place as they may determine.
Section 2.8. Adjournment. Any meeting of the shareholders, including one
at which directors are to be elected, may
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be adjourned for such period as the shareholders present in person or by proxy
and entitled to vote shall direct. Other than as provided in the last sentence
of Section 2.6 of these Bylaws, notice of the adjourned meeting or the business
to be transacted thereat need not be given, other than announcement at the
meeting at which adjournment is taken, unless the Board fixes a new record date
for the adjourned meeting or the 1988 BCL requires notice of the business to be
transacted and such notice has not previously been given. At any adjourned
meeting at which a quorum is present, any business may be transacted that might
have been transacted at the meeting as originally noticed.
Those shareholders entitled to vote present in person or by proxy, although
less than a quorum pursuant to Section 2.7 of these Bylaws, shall nevertheless
constitute a quorum for the purpose of (a) electing directors at a meeting
called for the election of directors that has been previously adjourned for lack
of a quorum, and (b) acting, at a meeting that has been adjourned for one or
more periods aggregating fifteen (15) days because of an absence of a quorum,
upon any matter set forth in the original notice of such adjourned meeting,
provided that such original notice shall have complied with the last sentence of
Section 2.6 of these Bylaws.
Section 2.9. Majority Voting. Any matter brought before a duly organized
meeting for a vote of the shareholders[, including, without limitation, the
amendment of any bylaw,] shall be decided by a majority of the votes cast at
such meeting by the
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<PAGE>
shareholders present in person or by proxy and entitled to vote thereon, unless
the matter is one for which a different vote is required by express provision of
the 1988 BCL, the Articles or a bylaw adopted by the shareholders, in any of
which case(s) such express provision shall govern and control the decision on
such matter.
Section 2.10. Voting Rights. Except as otherwise provided in the Articles,
at every meeting of the shareholders, every shareholder entitled to vote shall
have the right to one vote for each share having voting power standing in his or
her name on the books of the Corporation. Shares of the Corporation owned by it,
directly or indirectly, and controlled by the Board, directly or indirectly,
shall not be voted.
Section 2.11. Proxies. Every shareholder entitled to vote at a meeting of
the shareholders or to express consent or dissent to corporate action in writing
may authorize another person to act for him or her by proxy. The presence of, or
vote or other action at a meeting of shareholders, or the expression of consent
or dissent to corporate action in writing, by a proxy of a shareholder, shall
constitute the presence of, or vote or action by, or written consent or dissent
of the shareholder. Every proxy shall be executed in writing by the shareholder
or by the shareholder's duly authorized attorney-in-fact and filed with the
Secretary of the Corporation. A proxy, unless coupled with an interest, shall be
revocable at will, notwithstanding any other agreement or any provision in the
proxy to the contrary,
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<PAGE>
but the revocation of a proxy shall not be effective until written notice of
revocation has been given to the Secretary of the Corporation. No unrevoked
proxy shall be valid after three (3) years from the date of its execution,
unless a longer time is expressly provided therein. A proxy shall not be revoked
by the death or incapacity of the maker unless, before the vote is counted, or
the authority is exercised, written notice of such death or incapacity is given
to the Secretary of the Corporation.
Section 2.12. Voting Lists. The officer or agent having charge of the
transfer books for securities of the Corporation shall make a complete list of
the shareholders entitled to vote at a meeting of the shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each
shareholder, which list shall be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any shareholder during the
whole time of the meeting. If the Corporation has five thousand (5000) or more
shareholders, it may make such information available at the meeting by any other
means.
Section 2.13. Judges of Election. In advance of any meeting of the
shareholders, the Board may appoint judges of election, who need not be
shareholders, to act at such meeting or any adjournment thereof. If judges of
election are not so appointed, the presiding officer of any such meeting may,
and on the request of any shareholder shall, appoint judges of election at the
meeting. The number of judges shall be one (1) or three
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(3), as determined by the Board to be appropriate under the circumstances. No
person who is a candidate for office to be filled at the meeting shall act as a
judge at the meeting. The judges of election shall do all such acts as may be
proper to conduct the election or vote with fairness to all shareholders, and
shall make a written report of any matter determined by them and execute a
certificate of any fact found by them, if requested by the presiding officer of
the meeting or any shareholder or the proxy of any shareholder. If there are
three (3) judges of election, the decision, act or certificate of a majority
shall be effective in all respects as the decision, act or certificate of all.
Section 2.14. Participation by Conference Call. The right of any
shareholder to participate in any shareholders' meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting may hear each other, in which event all
shareholders so participating shall be deemed present at such meeting, shall be
granted solely in the discretion of the Board.
ARTICLE III
SHAREHOLDER ACTION BY PARTIAL WRITTEN CONSENT
Section 3.1. Partial Written Consent. Any action required or permitted to
be taken at a meeting of the shareholders or of a class of shareholders may be
taken without a meeting upon the written consent of shareholders who would have
been entitled to cast the minimum number of votes that would be
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<PAGE>
necessary to authorize the action at a meeting at which all shareholders
entitled to vote thereon were present and voting. An action taken pursuant to
this Section may become effective immediately upon its authorization, but prompt
notice of the action shall be given to those shareholders entitled to vote
thereon who have not consented. The consents shall be filed with the Secretary
of the Corporation.
Section 3.2. Record Date - Consents. Except as otherwise provided in
Section 8.1 of these Bylaws, the record date for determining shareholders
entitled to (a) express consent or dissent to corporate action in writing
without a meeting, when prior action by the Board is not necessary, (b) call a
special meeting of the shareholders, or (c) propose an amendment of the
Articles, shall be at the close of business on the day on which the first
written consent or dissent, request for a special meeting or petition proposing
an amendment of the Articles is filed with the Secretary of the Corporation. If
prior action by the Board is necessary, the record date for determining such
shareholders shall be at the close of business on the day on which the Board
adopts the resolution relating to such action.
ARTICLE IV
DIRECTORS
Section 4.1. Number and Qualifications. The Board shall consist of one or
more directors as determined from time to time by the Board. Except as provided
in Section 4.4 of these Bylaws in the case of vacancies, directors, other than
those
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constituting the first board of directors, shall be elected by the shareholders.
Directors shall be natural persons of full age and need not be residents of the
Commonwealth of Pennsylvania or shareholders of the Corporation.
Section 4.2. Term. Each director shall be elected to serve a term of one
(1) year and until a successor is elected and qualified or until the director's
earlier death, resignation or removal.
Section 4.3. Nominations of Directors. Nominees for election to the Board
shall be selected by the Board or a committee of the Board to which the Board
has delegated the authority to make such selections pursuant to Section 4.11 of
these Bylaws. The Board or such committee, as the case may be, may consider
written recommendations from shareholders for nominees for election to the Board
provided any such recommendation, together with (a) such information regarding
each nominee as would be required to be included in a proxy statement filed
pursuant to the Exchange Act, (b) a description of any arrangements or
understandings among the recommending shareholder and each nominee and any other
person with respect to such nomination, and (c) the consent of each nominee to
serve as a director of the Corporation if so elected, is received by the
Secretary of the Corporation, in the case of an annual meeting of shareholders,
not later than the date specified in the most recent proxy statement of the
Corporation as of the date by which shareholder proposals for consideration at
the next annual
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<PAGE>
meeting of shareholders must be received and, in the case of a special meeting
of shareholders, not later than the tenth (10th) day after the giving of notice
of such meeting. Only persons duly nominated for election to the Board in
accordance with this Section 4.3 and persons with respect to whose nominations
proxies have been solicited pursuant to a proxy statement filed pursuant to the
Exchange Act shall be eligible for election to the Board.
Section 4.4. Vacancies. Vacancies in the Board, including vacancies
resulting from an increase in the number of directors, shall be filled by a
majority vote of the remaining members of the Board, even though less than a
quorum, or by a sole remaining director, and each person so elected shall serve
as a director for the balance of the unexpired term. If one or more directors
resign from the Board effective at a future date, the directors then in office,
including those who have resigned, shall have the power to fill the vacancies by
a majority vote, the vote thereon to take effect when the resignations become
effective.
Section 4.5. Removal. The entire Board or any one or more directors may be
removed from office without assigning any cause by the vote of the shareholders.
Section 4.6. Powers. The business and affairs of the Corporation shall be
managed under the direction of its Board, which may exercise all powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Articles
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<PAGE>
or these Bylaws directed or required to be exercised and done by
the shareholders.
Section 4.7. Place of Board Meetings. Meetings of the Board may be held at
such place within or without the Commonwealth of Pennsylvania as the Board may
from time to time appoint or as may be designated in the notice of the meeting.
Section 4.8. First Meeting of Newly Elected Board. The first meeting of
each newly elected Board may be held at the same place and immediately after the
meeting at which such directors were elected and no notice shall be required
other than announcement at such meeting. If such first meeting of the newly
elected Board is not so held, notice of such meeting shall be given in the same
manner as set forth in Section 4.8 of these Bylaws with respect to notice of
regular meetings of the Board.
Section 4.9. Regular Board Meetings; Notice. Regular meetings of the Board
may be held at such times and places as shall be determined from time to time by
resolution of at least a majority of the whole Board at a duly convened meeting,
or by unanimous written consent. Notice of each regular meeting of the Board
shall specify the purpose, date, place and hour of the meeting and shall be
given to each director at least two (2) days before the meeting. Notice shall be
given in a manner consistent with Section 12.4 of these Bylaws.
Section 4.10. Special Board Meetings; Notice. Special meetings of the Board
may be called by the President on notice to each director, specifying the
purpose, date, place and hour of
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the meeting and given within the same time and in the same manner provided for
notice of regular meetings in Section 4.8 of these Bylaws. Special meetings
shall be called by the Secretary in like manner and on like notice on the
written request of two directors.
Section 4.11. Quorum of the Board. At all meetings of the Board, the
presence of a majority of the directors in office shall constitute a quorum for
the transaction of business, and the acts of a majority of the directors present
and voting at a meeting at which a quorum is present shall be the acts of the
Board. If a quorum shall not be present at any meeting of directors, the
directors present thereat may adjourn the meeting. It shall not be necessary to
give any notice of the adjourned meeting or of the business to be transacted
thereat other than by announcement at the meeting at which such adjournment is
taken.
Section 4.12. Committees of Directors. The Board may, by resolution adopted
by a majority of the directors in office, establish one or more committees, each
committee to consist of one or more of the directors, and may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee or for the purposes of
any written action by the committee. Any such committee, to the extent provided
in such resolution of the Board or in these Bylaws, shall have and may exercise
all of the powers and authority of the Board; provided, however, that no such
committee shall have any power or authority to (a) submit to
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<PAGE>
the shareholders any action requiring approval of the shareholders under the
1988 BCL, (b) create or fill vacancies on the Board, (c) amend or repeal these
Bylaws or adopt new bylaws, (d) amend or repeal any resolution of the Board that
by its terms is amendable or repealable only by the Board, (e) act on any matter
committed by these Bylaws or by resolution of the Board to another committee of
the Board, (f) amend the Articles or adopt a resolution proposing an amendment
to the Articles, or (g) adopt a plan or an agreement of merger or consolidation,
share exchange, asset sale or division. In the absence or disqualification of a
member or alternate member or members of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
a quorum is present, may unanimously appoint another director to act at the
meeting in the place of any absent or disqualified member. Minutes of all
meetings of any committee of the Board shall be kept by the person designated by
such committee to keep such minutes. Copies of such minutes and any writing
setting forth an action taken by written consent without a meeting shall be
distributed to each member of the Board promptly after such meeting is held or
such action is taken. Each committee of the Board shall serve at the pleasure of
the Board.
Section 4.13. Participation in Board Meetings by Telephone. One or more
directors may participate in a meeting of the Board or of a committee of the
Board by means of conference telephone or similar communications equipment by
means of which
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all persons participating in the meeting can hear each other, and all directors
so participating shall be deemed present at the meeting.
Section 4.14. Action by Consent of Directors. Any action required or
permitted to be taken at a meeting of the Board or of a committee of the Board
may be taken without a meeting if, prior or subsequent to the action, a consent
or consents in writing setting forth the action so taken shall be signed by all
of the directors in office or the members of the committee, as the case may be,
and filed with the Secretary of the Corporation.
Section 4.15. Compensation of Directors. The Board may, by resolution, fix
the compensation of directors for their services as directors. A director may
also serve the Corporation in any other capacity and receive compensation
therefor.
Section 4.16. Directors' Liability. No person who is or was a director of
the Corporation shall be personally liable for monetary damages for any action
taken, or any failure to take any action, unless (a) such director has breached
or failed to perform the duties of his or her office under the 1988 BCL and (b)
the breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness, or unless such liability is imposed pursuant to a criminal statute
or for the payment of taxes pursuant to local, state or federal law.
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<PAGE>
ARTICLE V
OFFICERS
Section 5.1. Principal Officers. The officers of the Corporation shall be
chosen by the Board, and shall include a President, one or more Vice Presidents,
a Secretary and a Treasurer (collectively, the "Principal Officers"). The Board
shall designate one officer (who need not be a Principal Officer but shall not
be an assistant officer) to be the chief financial officer of the Corporation,
and another officer (who need not be a Principal Officer but shall not be an
assistant officer) to be the chief accounting officer of the Corporation. The
President, all Vice Presidents and the Secretary shall be natural persons of
full age. The Treasurer may be a corporation, but if a natural person, shall be
of full age. Any number of offices may be held by the same person.
Section 5.2. Electing Principal Officers. The Board, immediately after each
annual meeting of the shareholders, shall elect the Principal Officers of the
Corporation, none of whom need be members of the Board.
Section 5.3. Other Officers. The Corporation may have such other officers,
assistant officers, agents and employees as the Board may deem necessary, each
of whom shall hold office for such period, have such authority and perform such
duties as the Board may from time to time determine. The Board may delegate to
any Principal Officer the power to appoint or remove, and set the
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compensation of, any such other officers and any such agents or employees.
Section 5.4. Compensation. Except as provided in Section 5.3 of these
Bylaws, the salaries of all officers of the Corporation shall be fixed by the
Board.
Section 5.5. Term of Office; Removal. Each officer of the Corporation shall
hold office until his or her successor has been chosen and qualified or until
his or her earlier death, resignation or removal. Vacancies of any office shall
be filled by the Board. Any officer or agent may be removed by the Board with or
without cause, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. The election or appointment of an
officer or agent shall not of itself create any contract rights.
Section 5.6. The President. The President shall be the chief executive
officer of the Corporation; he or she shall preside at all meetings of the
shareholders and directors, shall have general and active management of the
business of the Corporation and shall see that all orders and resolutions of the
Board are carried into effect.
Section 5.6A. The Chief Executive Officer. The Chief Executive Officer
shall supervise and direct all the business and affairs of the Corporation and
shall see that all orders and resolutions of the Board are carried into effect;
he or she shall generally perform all duties incident to the office of Chief
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Executive Officer and other duties as may be prescribed by the Board.
Section 5.7. The Vice Presidents. The Vice-President or Vice-Presidents, in
the order designated by the Board, shall, in the absence or disability of the
President, perform the duties and exercise the powers of the President, and
shall perform such other duties as the Board may prescribe or the President may
delegate to them.
Section 5.8. The Secretary. The Secretary shall attend all sessions of the
Board and all meetings of the shareholders and record all the votes of the
Corporation and the minutes of all the transactions in a book to be kept for
that purpose, and shall perform like duties for the committees of the Board when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board, and shall perform such other duties as may
be prescribed by the Board or the President, under whose supervision the
Secretary shall be. He or she shall keep in safe custody the corporate seal, if
any, of the Corporation.
Section 5.9. The Treasurer.
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation, and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as shall be designated by the Board.
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(b) The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board, taking proper vouchers for such disbursements, and
shall render to the President and directors, at the regular meetings of the
Board, or whenever they may require it, an account of all his or her
transactions as Treasurer.
Section 5.10. Bonds. If required by the Board, any officer shall give the
Corporation a bond in such sum, and with such surety or sureties as may be
satisfactory to the Board, for the faithful discharge of the duties of his or
her office and for the restoration to the Corporation, in the case of his or her
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his or her possession or
under his or her control belonging to the Corporation.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 6.1. Share Certificates. The certificates representing shares of
the Corporation shall be numbered and registered in a share register as they are
issued. The share register shall exhibit the names and addresses of all
registered holders and the number and class of shares and the series, if any,
held by each.
The Certificate shall state that the Corporation is incorporated under the
laws of the Commonwealth of Pennsylvania, the name of the registered holder and
the number and class of
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shares and the series, if any, represented thereby. If, under its Articles, the
Corporation is authorized to issue shares of more than one class or series, each
Certificate shall set forth, or shall contain a statement that the Corporation
will furnish to any shareholder upon request and without charge, a full or
summary statement of the designations, voting rights, preferences, limitations
and special rights of the shares of each class or series authorized to be issued
so far as they have been fixed and determined and the authority of the Board to
fix and determine such rights.
Section 6.2. Execution of Certificates. Every share certificate shall be
executed, by facsimile or otherwise, by or on behalf of the Corporation, by the
President, by any Vice-President, or by the Secretary. In case any officer who
has signed or whose facsimile signature has been placed upon any share
certificate shall have ceased to be such officer, because of death, resignation
or otherwise, before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer had not ceased to be such at
the time of issue.
ARTICLE VII
TRANSFER OF SHARES
Section 7.1. Transfer; Duty of Inquiry. Upon presentment to the Corporation
or its transfer agent of a share certificate indorsed by the appropriate person
or accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person
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entitled thereto and the old certificate cancelled and the transfer registered
upon the books of the Corporation, unless the Corporation or its transfer agent
has a duty to inquire as to adverse claims with respect to such transfer which
has not been discharged. The Corporation shall have no duty to inquire into
adverse claims with respect to transfers of its securities or the rightfulness
thereof unless (a) the Corporation has received written notification of an
adverse claim at a time and in a manner which affords the Corporation a
reasonable opportunity to act on it before the issuance of a new, reissued or
re-registered share certificate and the notification identifies the claimant,
the registered owner and the issue of which the share or shares are a part and
provides an address for communications directed to the claimant; or (b) the
Corporation has required and obtained, with respect to a fiduciary, a copy of a
will, trust, indenture, articles of co-partnership, bylaws or other controlling
instruments, for a purpose other than to obtain appropriate evidence of the
appointment or incumbency of the fiduciary, and such documents indicate, upon
reasonable inspection, the existence of an adverse claim.
Section 7.2. Discharging Duty of Inquiry. The Corporation may discharge any
duty of inquiry by any reasonable means, including notifying an adverse claimant
by registered or certified mail at the address furnished by the claimant or, if
there is no such address, at the claimant's residence or regular place of
business, that the security has been presented for
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registration of transfer by a named person, and that the transfer will be
registered unless, within thirty (30) days from the date of mailing the
notification, either (a) an appropriate restraining order, injunction or other
process issues from a court of competent jurisdiction or (b) an indemnity bond,
sufficient in the Corporation's judgment to protect the Corporation and any
transfer agent, registrar or other agent of the Corporation involved from any
loss which it or they may suffer by complying with the adverse claim, is filed
with the Corporation.
ARTICLE VIII
RECORD DATE; IDENTITY OF SHAREHOLDERS
Section 8.1. Record Date. The Board may fix a time, prior to the date of
any meeting of the shareholders, as a record date for the determination of the
shareholders entitled to notice of, or to vote at, the meeting, which time,
except in the case of an adjourned meeting, shall not be more than ninety (90)
days prior to the date of the meeting. Except as otherwise provided in Section
8.2 of these Bylaws, only the shareholders of record at the close of business on
the date so fixed shall be entitled to notice of, or to vote at, such meeting,
notwithstanding any transfer of securities on the books of the Corporation after
any record date so fixed. The Board may similarly fix a record date for the
determination of shareholders for any other purpose. When a determination of
shareholders of record has been made as herein provided for purposes of a
meeting, the determination
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shall apply to any adjournment thereof unless the Board fixes a new record date
for the adjourned meeting.
Section 8.2. Certification of Nominee. The Board may adopt a procedure
whereby a shareholder may certify in writing to the Secretary of the Corporation
that all or a portion of the shares registered in the name of the shareholder
are held for the account of a specified person or persons. The Board, in
adopting such procedure, may specify (a) the classification of shareholder who
may certify, (b) the purpose or purposes for which the certification may be
made, (c) the form of certification and the information to be contained therein,
(d) as to certifications with respect to a record date, the date after the
record date by which the certification must be received by the Secretary of the
Corporation, and (e) such other provisions with respect to the procedure as the
Board deems necessary or desirable. Upon receipt by the Secretary of the
Corporation of a certification complying with the procedure, the persons
specified in the certification shall be deemed, for the purpose or purposes set
forth in the certification, to be the holders of record of the number of shares
specified instead of the persons making the certification.
ARTICLE IX
REGISTERED SHAREHOLDERS
Section 9.1. Before due presentment for transfer of any shares, the
Corporation shall treat the registered owner thereof as the person exclusively
entitled to vote, to receive
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notifications and otherwise to exercise all the rights and powers of an owner,
and shall not be bound to recognize any equitable or other claim or interest in
such securities, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of the Commonwealth of Pennsylvania or
Section 8.2 of these Bylaws.
ARTICLE X
LOST CERTIFICATES
Section 10.1. If the owner of a share certificate claims that it has been
lost, destroyed, or wrongfully taken, the Corporation shall issue a new
certificate in place of the original certificate if the owner so requests before
the Corporation has notice that the certificate has been acquired by a bona fide
purchaser, and if the owner has filed with the Corporation an indemnity bond and
an affidavit of the facts satisfactory to the Board or its designated agent, and
has complied with such other reasonable requirements, if any, as the Board may
deem appropriate.
ARTICLE XI
DISTRIBUTIONS
Section 11.1. Distributions. Distributions upon the shares of the
Corporation, whether by dividend, purchase or redemption or other acquisition of
its shares subject to any provisions of the Articles related thereto, may be
authorized by the Board at any regular or special meeting of the Board and may
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be paid directly or indirectly in cash, in property or by the incurrence of
indebtedness by the Corporation.
Section 11.2. Reserves. Before the making of any distributions, there may
be set aside out of any funds of the Corporation available for distributions
such sum or sums as the Board from time to time, in its absolute discretion,
deems proper as a reserve fund to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Board shall deem conducive to the interests of the
Corporation, and the Board may abolish any such reserve in the manner in which
it was created.
Section 11.3. Stock Dividends/Splits. Stock dividends or splits upon the
shares of the Corporation, subject to any provisions of the Articles related
thereto, may be authorized by the Board at any regular or special meeting of the
Board.
ARTICLE XII
GENERAL PROVISIONS
Section 12.1. Checks and Notes. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers as the Board may
from time to time designate.
Section 12.2. Fiscal Year. The fiscal year of the Corporation shall end on
December 31 of each year.
Section 12.3. Seal. The corporate seal, if any, shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Pennsylvania." Such seal may be used by causing it or a
facsimile thereof to be
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impressed or affixed or in any manner reproduced. The affixation of the
corporate seal shall not be necessary to the valid execution, assignment or
endorsement of any instrument or other document by the Corporation.
Section 12.4. Notices. Whenever, under the provisions of the 1988 BCL or of
the Articles or of these Bylaws or otherwise, written notice is required to be
given to any person, it may be given to such person either personally or by
sending a copy thereof by first class or express mail, postage prepaid, telegram
(with messenger service specified), telex, TWX (with answerback received),
courier service (with charges prepaid) or facsimile transmission, to his or her
address, (or to his or her telex, TWX, or facsimile number), appearing on the
books of the Corporation or, in the case of directors, supplied by the director
to the Corporation for the purpose of notice. If the notice is sent by mail,
telegraph or courier service, it shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or with a
telegraph office or courier service for delivery to that person. A notice given
by telex or TWX shall be deemed to have been given when dispatched. If mailed at
least twenty (20) days prior to the meeting or corporate action to be taken,
notice may be sent by any class of post paid mail (including bulk mail).
Section 12.5. Waiver of Notice. Whenever any notice is required to be given
by the 1988 BCL or by the Articles or these Bylaws, a waiver thereof in writing,
signed by the person
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or persons entitled to the notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Neither the
business to be transacted nor the purpose of a meeting need be specified in the
waiver of notice of the meeting. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting, except where any person attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened, and the person so
objects at the beginning of the meeting.
ARTICLE XIII
AMENDMENTS
Section 13.1. Amendments. The Bylaws may be adopted, amended or repealed by
a majority vote of the shareholders entitled to vote thereon at any regular or
special meeting duly convened or, except for a bylaw on a subject expressly
committed to the shareholders by the 1988 BCL, by a majority vote of the members
of the Board at any regular or special meeting duly convened, subject always to
the power of the shareholders to change such action by the directors; however,
whenever the Bylaws require for the taking of any action by the shareholders or
a class of shareholders a specific number or percentage of votes, the provision
of the Bylaws setting forth that requirement shall not be amended or repealed by
any lesser number or percentage of votes of the shareholders or of the class of
shareholders. In the case of a meeting of shareholders, written notice shall be
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given to each shareholder that the purpose, or one of the purposes, of a meeting
is to consider the adoption, amendment or repeal of the Bylaws. There shall be
included in, or enclosed with the notice, a copy of the proposed amendment or a
summary of the changes to be effected thereby. Any change in the Bylaws shall
take effect when adopted unless otherwise provided in the resolution effecting
the change.
ARTICLE XIV
INDEMNIFICATION
Section 14.1. Officers and Directors - Direct Actions. The Corporation
shall indemnify any director or officer of the Corporation (as used herein, the
phrase "director or officer of the Corporation" shall mean any person who is or
was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise), any person who was or is a party (other than a party
plaintiff suing on his or her own behalf), or who is threatened to be made such
a party, to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he or she is
or was a director or officer of the Corporation, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in
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connection with such action, suit or proceeding if he or she met the standard of
conduct of (a) acting in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the Corporation and
(b) with respect to any criminal proceeding, having no reasonable cause to
believe his or her conduct was unlawful. The termination of any action or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person (a) did not act in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the Corporation and
(b) with respect to any criminal proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
Section 14.2. Officers and Directors - Derivative Actions. The Corporation
shall indemnify any director or officer of the Corporation who was or is a party
(other than a party suing in the right of the Corporation), or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding by or in the right of the Corporation to procure a judgment in the
Corporation's favor by reason of the fact that he or she is or was a director or
officer of the Corporation, against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of the action, suit or proceeding if he or she met the standard of
conduct of acting in good faith and in a manner he or she reasonably believed to
be in, or not opposed
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to, the best interests of the Corporation. Indemnification shall not be made
under this Section in respect of any claim, issue or matter as to which the
person has been adjudged to be liable to the Corporation unless and only to the
extent that the Court of Common Pleas of the judicial district embracing the
county in which the registered office of the Corporation is located or the court
in which the action, suit or proceeding was brought determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for the
expenses that the Court of Common Pleas or other court deems proper.
Section 14.3. Employees and Agents. The Corporation may, to the extent
permitted by the 1988 BCL, indemnify any employee or agent of the Corporation
(as used in this Article XIV, the phrase "employee or agent of the Corporation
shall mean any person who is or was an employee or agent of the Corporation,
other than an officer, or is or was serving at the request of the Corporation as
an employee or agent of another domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise) who was
or is a party, or who is threatened to be made such a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in
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connection with such action, suit or proceeding by reason of the fact that he or
she is or was an employee or agent of the Corporation, provided he or she has
met the standard of conduct set forth in Sections 14.1 and 14.2, subject to the
limitations set forth in Section 14.2 in the case of an action, suit or
proceeding by or in the right of the Corporation to procure a judgment in the
Corporation's favor.
Section 14.4. Mandatory Indemnification. To the extent that a director or
officer of the Corporation or any employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action or proceeding
referred to in Sections 14.1, 14.2 or 14.3 of this Article XIV, or in defense of
any claim, issue or matter therein, he or she shall be indemnified by the
Corporation against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
Section 14.5. Advancing Expenses. Expenses (including attorneys' fees)
incurred by a director or officer of the Corporation or an employee or agent of
the Corporation in defending any action or proceeding referred to in this
Article XIV may be paid by the Corporation in advance of the final disposition
of the action or proceeding upon receipt of an undertaking by or on behalf of
such person to repay such amount if it is ultimately determined that he or she
is not entitled to be indemnified by the Corporation as authorized in this
Article XIV.
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Section 14.6. Procedure.
(a) Unless ordered by a court, any indemnification under Section
14.1, 14.2 or 14.3 or advancement of expenses under Section 14.5 of this Article
XIV shall be made by the Corporation only as authorized in a specific case upon
a determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he or she has met the applicable standard
of conduct set forth in Section 14.1, 14.2 or 14.3.
(b) All determinations under this Section 14.6 shall be made:
(1) With respect to indemnification under Section 14.3 and
advancement of expenses to an employee or agent of the Corporation, other than
an officer, by the Board by a majority vote.
(2) With respect to indemnification under Section 14.1 or 14.2
and advancement of expenses to a director or officer of the Corporation,
(A) By the Board by a majority vote of a quorum consisting
of directors who were not parties to such action or proceeding, or
(B) If such a quorum is not obtainable, or, if obtainable
and if a majority vote of a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or
(C) By the shareholders.
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Section 14.7. Nonexclusivity of Indemnification.
(a) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article XIV shall not be deemed exclusive of any other
rights to which a person seeking indemnification or advancement of expenses may
be entitled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to actions in his or her official capacity and
as to actions in another capacity while holding that office. Section 1728
(relating to interested directors; quorum) of the 1988 BCL, or any successor
section, shall be applicable to any Bylaw, contract or transaction authorized by
the directors under this Section 14.7. The Corporation may create a fund of any
nature, which may, but need not be, under the control of a trustee, or otherwise
secure or insure in any manner its indemnification obligations, whether arising
under or pursuant to this Article XIV or otherwise.
(b) Indemnification pursuant to Section 14.7(a) hereof shall not be
made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness.
(c) Indemnification pursuant to Section 14.7(a) under any Bylaw,
agreement, vote of shareholders or directors or otherwise, may be granted for
any action taken or any failure to take any action and may be made whether or
not the Corporation would have the power to indemnify the person under any other
provision of law except as provided in this Section 14.7 and
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whether or not the indemnified liability arises or arose from any threatened or
pending or completed action by or in the right of the Corporation.
Section 14.8. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation or an employee or agent of the Corporation, against any
liability asserted against such person and incurred by him or her in any such
capacity, or arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her against that liability
under the provisions of this Article XIV or otherwise.
Section 14.9. Past Officers and Directors. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article XIV
shall continue as to a person who has ceased to be a director, officer, employee
or agent of the Corporation and shall inure to the benefit of the heirs and
personal representatives of that person.
Section 14.10. Surviving or New Corporations. References to "the
Corporation" in this Article XIV include all constituent corporations absorbed
in a consolidation, merger or division, as well as the surviving or new
corporation resulting therefrom, so that any director, officer, employee or
agent of the constituent, surviving or new corporation shall stand in the same
position under the provisions of this Article XIV with respect to the surviving
or new corporation as he or she would if
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he or she had served the surviving or new corporation in the same capacity.
Section 14.11. Employee Benefit Plans.
(a) References in this Article XIV to "other enterprises" shall
include employee benefit plans and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation that imposes duties on, or involves services by, the person
with respect to an employee benefit plan, its participants or beneficiaries.
(b) Excise taxes assessed on a person with respect to an employee
benefit plan pursuant to applicable law shall be deemed "fines."
(c) Action with respect to an employee benefit plan taken or omitted
in good faith by a director, officer, employee or agent of the Corporation in a
manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of the plan shall be deemed to be action in a manner that is
not opposed to the best interests of the Corporation.
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Exhibit 21
Subsidiaries
of Registrant
XLConnect Services, Inc.
XLConnect Systems, Inc.
