<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1996
REGISTRATION NO. 333-08735
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
XLCONNECT SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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)
------------------
COPIES TO:
<TABLE>
<S> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
===============================================================================================================================
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 (3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01........... 3,330,000 Shares $12.00 $39,960,000 $13,779
===============================================================================================================================
</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.
(3) A registration fee in the amount of $12,631 based upon a proposed maximum
offering price of $11.00 per share was previously paid at the time this
Registration Statement was initially filed on July 24, 1996.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
SEPTEMBER 16, 1996
2,900,000 SHARES
[XLCONNECT 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
$10.00 and $12.00 per share. See 'Underwriting' for the factors to be considered
in determining the initial public offering price. The Common Stock has been
approved for quotation 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
approximately 82.1% of the Company's outstanding Common Stock (approximately
80.0% if the Underwriters' over-allotment option is exercised in full). See
'Relationship between the Company and IE.'
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
------------------
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.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY (1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total (2).......................................... $ $ $
=============================================================================================================
</TABLE>
(1) Before deducting expenses estimated at $1,000,000, 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
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 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 BE 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.
<PAGE>
[XLCONNECT LOGO] Total Connectivity Solutions.
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,
XLConnect offers comprehensive
internetworking services, applications
development services, managed services
and telecommunications services. XLConnect'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).
Internetworking Applications
Services Services
/ / LAN/WAN Consulting & Design / / Application Development
& Integration
/ / Implementation & Project / / End-user Training
Management
ART WORK
Managed Telecommunications
Services Services
/ / Technology Selection, / / Internet Access
Deployment & Management
Services
/ / Network Management / / Frame Relay, ISDN & Voice
Transmissions
/ / Help Desk
------------------
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 1,000 professionals located in 24 offices
nationwide, which include the Network Management Center and two Help Desk
Centers. The Company utilizes a direct sales force currently comprised of
approximately 60 persons in addition to indirect sales channels, including IE's
approximately 210 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. 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.
3
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See 'Risk Factors.'
THE OFFERING
<TABLE>
<S> <C> <C>
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.'
Nasdaq National Market symbol..................... XLCT
</TABLE>
- ------------------
(1) Does not include 3,000,000 shares reserved for issuance under the Company's
1996 Long-Term Incentive Plan. As of September 12, 1996, options to acquire
1,495,000 shares of Common Stock at an exercise price of $9.35 per share
were outstanding. The Company also expects to grant options to acquire
approximately 895,000 shares of Common Stock at the initial public offering
price. 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
--------- --------- --------- --------- --------- --------- -----------
<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
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)........... 13,549 13,549
</TABLE>
<TABLE>
<S> <C> <C>
JUNE 30, 1996
-------------------------
AS ADJUSTED
ACTUAL (2)
--------- --------------
BALANCE SHEET DATA:
Working capital....................................................................... $ 16,458 $ 16,458
Total assets.......................................................................... 59,112 59,112
Long-term debt, less current portion.................................................. 42,576 13,909
Shareholder's equity.................................................................. 6,144 34,811
</TABLE>
- ------------------
(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 $11.00
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, as of May 31,
1996, 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 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'), if one were effected, 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.'
IE's Alternatives for its Shares of Common Stock. As of the date of this
Prospectus, IE has no current plan or intention other than to hold its shares of
the Common Stock of the Company for the foreseeable future. After the date of
this offering, other options which may be considered by IE regarding its
ownership interest in the Company are whether to sell all or a portion of its
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. IE has advised the Company that the Distribution, which
is only one possibility, 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 shortly 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
13,325-for-1 stock split of the Company's issued and outstanding shares of
Common Stock effected 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. There
are no contractual or other restrictions on IE's ability to compete with the
Company. 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.
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 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview.'
Absence of IE Financial Support; Limited Borrowing Capacity. 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. Prior to the completion of this
6
<PAGE>
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. Consequently,
the Company has not maintained any cash or 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 (subject to a collateral-based formula) of, and joint and several
liability with IE for, up to $20 million of the entire outstanding balance under
the Credit Facility (the '$20 million Sub-facility'). Under the amendment, IE
will be permitted to borrow the entire amount available under the Credit
Facility, including amounts otherwise available to the Company under the $20
million Sub-facility, subject to a collateral-based formula. As a result, the
Company's access to the $20 million Sub-facility may be significantly limited.
IE and the Company have agreed, however, that IE may borrow against XLConnect's
assets under the Credit Facility only up to an amount of borrowing equal to any
remaining intercompany indebtedness owed by XLConnect to IE from time to time.
Accordingly, the amount that would have been available to the Company under the
$20 million Sub-facility as of June 30, 1996 would have been approximately
$400,000. 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 amounts, if any, available to XLConnect under the $20
million Sub-facility (which expires in April 1997), 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, there can be no assurances that the Company will be able to obtain
adequate financing or financing with interest rates and other terms as favorable
as those enjoyed by IE. Additionally, 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, subject to severance
arrangements, and the Company does not currently 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 210 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
7
<PAGE>
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 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 finance and 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, GE Aircraft Engines, a division of
General Electric Company ('GEA'), 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
8
<PAGE>
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 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 be available as required by the Company. At times,
typically due to product shortages of the specific manufacturer,
9
<PAGE>
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 $10.56 in the net tangible book
value per share of Common Stock (assuming an initial public offering price of
$11.00). 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 $28.7 million ($33.1 million if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses. All of the net
proceeds will be used to reduce the Company's indebtedness to IE, which bore
interest on a weighted average basis of 9.75% per annum for the six months ended
June 30, 1996. After application of these proceeds, the Company's remaining
indebtedness to IE, based on the June 30, 1996 balance, will be approximately
$13.9 million. This indebtedness will remain outstanding after this offering
with a maturity date of January 1, 1998, subject to prepayment in whole or in
part without penalty at the option of XLConnect, and with an interest rate no
higher than the rate applicable to IE for long-term borrowings under the Credit
Facility or any successor facility. 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 $11.00 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 $ 13,909
---------- -----------
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 33,635
Retained earnings...................................................................... 1,014 1,014
---------- -----------
Total shareholder's equity........................................................ 6,144 34,811
---------- -----------
Total capitalization........................................................... $ 48,720 $ 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 $11.00 per share, the
net tangible book value of the Company as of June 30, 1996 would have been $7.1
million, or $0.44 per share, representing an immediate increase in pro forma net
tangible book value of $2.06 per share to existing shareholders and an immediate
dilution of $10.56 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...................................... $ 11.00
Deficit in pro forma net tangible book value per share at June 30, 1996............ $(1.62)
Increase per share attributable to new investors................................... 2.06
---------
Pro forma net tangible book value per share after this offering...................... 0.44
---------
Dilution per share to new investors.................................................. $ 10.56
---------
---------
</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>
<S> <C> <C> <C> <C> <C>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- --------- ------------- --------- -------------
Existing shareholder....................... 13,325,000 82.1% $ 5,130,000 13.9% $ 0.39
New investors.............................. 2,900,000 17.9 31,900,000 86.1 11.00
------------- --------- ------------- ---------
Total.................................... 16,225,000 100.0% $ 37,030,000 100.0%
------------- --------- ------------- ---------
------------- --------- ------------- ---------
</TABLE>
The foregoing tables also assume no exercise of outstanding options to
purchase 1,495,000 shares of Common Stock at a per share exercise price of
$9.35. To the extent these options are exercised, there will be further dilution
to the purchasers of shares in this offering. 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.'
12
<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)............. 13,549 13,549
--------- ---------
--------- ---------
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 approximately 82.1% of the outstanding
shares of Common Stock of the Company (approximately 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, except on limited
occasions under the PBTH program, 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 shortly 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, an allocation of
the debt incurred by IE in acquiring TFN and allocations of the debt incurred by
TFN in connection with other acquisitions by TFN since 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
15
<PAGE>
funding and operations of the Company as a result of and subsequent to the
Formation Transactions and this 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, due in part to 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
improved utilization of the Company's engineers and technicians, particularly
technical professionals providing the Company's managed services and
applications development services.
16
<PAGE>
The benefit from improved utilization of technical personnel was partially
offset by the introduction of lower margin 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.
17
<PAGE>
Selling and Marketing. Selling and marketing expenses increased 5.9% for
1995 to $4.0 million from $3.8 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 PBTH 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
18
<PAGE>
acquisitions consummated in 1993 and an increase in overhead costs, primarily
salaries, compensation-related costs 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
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
20
<PAGE>
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 primarily
as a result of an increase in accounts receivable, due to the significant growth
in revenues. The Company also used cash in such period as a result of an
increase in other current assets, principally reflecting a timing differential
between the date of deployment of equipment under the PBTH program and the date
of financing of such equipment.
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.
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. Consequently, the Company has not maintained any cash. Shortly after
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.'
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 by IE of up to $225 million, the availability under which is limited
by a collateral-based formula. As of August 3, 1996, under the collateral-based
formula, approximately $12 million remained available to be borrowed by IE. 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 April 5, 1998 and bears interest at the prime
rate 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 the prime rate plus 1.5% (9.75% on June 30,
1996).
The Company has obtained a Commitment Letter 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 under the $20 million Sub-facility of IE's total $225 million Credit
Facility, subject to a collateral-based formula. Borrowings under the $20
million Sub-facility will bear interest at the prime rate plus 1.5% and will
have a maturity date of April 5, 1997. In addition, the Company's joint and
several liability to IBMCC would be limited to $20 million, irrespective of
whether XLConnect made any direct borrowings under the $20 million Sub-facility.
Once the Company has its own cash management system shortly after this offering,
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 the
collateral-based formula, which includes XLConnect's assets. However, the
Company and IE have agreed that IE may borrow against XLConnect's assets only up
to an amount of borrowing equal to any remaining intercompany indebtedness owed
from time to time. IE has agreed to indemnify the Company for, and the Company
may reduce any remaining intercompany indebtedness by, any amounts that the
Company pays to IBMCC other than amounts representing the Company's direct
borrowings under the $20 million Sub-facility. Similarly,
21
<PAGE>
XLConnect has agreed to indemnify IE for any amounts IE pays to IBMCC on account
of direct borrowings by XLConnect under the $20 million Sub-facility.
The Company intends to seek its own credit facility prior to the
termination of the $20 million Sub-facility, 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 $20 million Sub-facility, the Company's
principal sources of liquidity will consist of cash from operations, borrowings
under such credit facilities as may be available to the Company from time to
time, the use of operating or capital leases and advances, if any, under the
Services Agreement.
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 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 were no repayment terms then in effect 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 the 2,900,000
shares of Common Stock pursuant to this offering will be approximately $28.7
million, assuming an initial public offering price of $11.00 per share. All of
the net proceeds will be used to reduce the Company's indebtedness to IE. After
application of these proceeds, the Company's remaining indebtedness to IE, based
on the June 30, 1996 balance, will be approximately $13.9 million. This
indebtedness will be due on January 1, 1998, subject to prepayment in whole or
in part without penalty at the option of XLConnect, with an interest rate no
higher than the rate applicable to IE for long-term borrowings under the Credit
Facility or any successor facility. IE has agreed, to the extent necessary, to
reduce its borrowings under the Credit Facility against XLConnect's assets to an
amount not greater than the amount of intercompany debt owed by the Company to
IE after application of the net proceeds of this offering. Therefore, assuming
an initial public offering price of $11.00 per share, IE will reduce such
borrowings against XLConnect's assets to approximately $13.9 million (based on
the June 30, 1996 balance of the intercompany indebtedness). This would have
allowed the Company to borrow approximately $400,000 and $3.7 million under the
$20 million Sub-facility as of June 30, 1996 and July 31, 1996, respectively.
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, funds
available from the $20 million Sub-facility, or a replacement line of credit
that may become available to the Company, the use of operating or capital leases
and advances, if any, under the Services Agreement will be sufficient to satisfy
its working capital needs and planned growth through the next twelve months,
except to the extent that additional financing may be required in connection
with any acquisitions.
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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 development 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 Dataquest Incorporated, an information technology market
research firm, 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 1,000 engineers and technicians coordinates and manages 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 Development 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 domestic and 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 and 23 branch offices throughout the United States, which include
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 development, telecommunications and managed
services. Reporting to each discipline manager in the larger branches are
project managers, senior engineers, technicians and developers, staff engineers,
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.
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 1,000 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 305 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 160 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 535 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 August 30, 1996, 66 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. IE's approximately 210 person sales staff, the Company's largest
indirect sales channel, historically 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. During 1995, XLConnect paid IE aggregate fees of $3.0
million for referrals by IE's sales personnel. The referral fee paid by the
Company to IE is based on a percentage of revenues generated from sales
referred, except that the fee is not paid on PBTH or certain other managed
services revenues. XLConnect is obligated to continue to pay IE referral fees
until at least December 31, 1997, although there is no contractual requirement
that IE's sales persons use or recommend the Company's professional services to
their customers in connection with computer product sales.
In preparation to become a stand-alone company, XLConnect has been
developing a direct sales force, which as of August 30, 1996 was comprised of 61
persons. These sales persons have significant experience in the sale of
information technology services and products and a high level of technical
proficiency. They are responsible for developing client relationships and
supporting the Company's other sales channels. The Company believes that its
emphasis on developing its direct sales force will lead 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 personnel as part of a team approach to selling the Company's
services. The Company expects to continue to expand its direct sales force and
believes that the importance of this force will increase as it 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, GEA,
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.
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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.
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 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,
except on
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limited occasions under the PBTH program. 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.
INTELLECTUAL PROPERTY RIGHTS
Applications development projects for the Company's clients typically
provide that the specific applications development documentation and customized
solutions become the property of the Company's clients. The Company does not
believe that intellectual property rights in general are of primary importance
to its business. To the extent applicable, 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.
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 August 30, 1996, the Company employed 1,101 persons, of whom 67 were
engaged in sales and marketing, 991 were engaged in providing the Company's
technical services and training and 43 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).......................... 53 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.
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 March 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.
34
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-
TERM
COMPEN-
ANNUAL COMPENSATION SATION
--------------------------------------- -------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION(1) OPTIONS/ COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) $ 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 as of March 1,
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 as of March 4, 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 will 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 a 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
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<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 GRANTS 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.
On September 6, 1996, the Compensation and Benefits Committee granted
options under the Plan to the following executive officers of the Company: Mr.
Ellenberger -- 525,000 shares; Mr. Wallace -- 260,000 shares; Mr. Chidester --
215,000 shares; and Ms. Cohen -- 215,000 shares. In addition, options to
purchase an aggregate of 280,000 shares of Common Stock were granted to other
officers of the Company. All of such options have an exercise price of $9.35 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 will be
extended for one additional year by the Committee if so directed by 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) options to purchase an aggregate of
88,700 shares of Common Stock will be granted to members of the Board of
Directors of IE who are not also directors or employees of XLConnect; (ii)
options to purchase an aggregate of 20,000
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shares will be granted to other officers and employees of IE; and (iii) options
to purchase an aggregate of approximately 561,000 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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RELATIONSHIP BETWEEN THE COMPANY AND IE
OWNERSHIP OF COMMON STOCK
Upon completion of this offering, IE will beneficially own approximately
82.1% of the outstanding Common Stock (approximately 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
December 31, 1996.
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 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.
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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, 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. See 'Business -- Sales and Marketing.'
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
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
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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 (except with respect to XLConnect's obligations
under the Credit Facility), (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.
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
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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, and through companies that may be acquired by IE
and which offer such services in addition to their principal business
activities. 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.
IE'S ALTERNATIVES FOR ITS SHARES OF COMMON STOCK
As of the date of this Prospectus, IE has no current plan or intention
other than to hold its shares of Common Stock of the Company for the foreseeable
future. After the date of this offering, other options which may be considered
by IE regarding its interest in the Company are whether to sell all or a portion
of its 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. IE has advised the Company that the Distribution,
which is only one possibility, 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 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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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. (1)........ 13,325,000 100.0% 13,325,000 82.1%(2)
411 Eagleview Boulevard
Exton, Pennsylvania 19341
</TABLE>
- ------------------
(1) The Board of Directors of IE exercises shared voting and dispositive control
over the shares of Common Stock of the Company held by IE. In addition, as
of June 1, 1996, Mr. Sanford, IE's Chief Executive Officer and Chairman of
the Board, beneficially owned 11.3% of the outstanding shares of common
stock of IE, and three institutional investors who are unaffiliated with
each other beneficially owned 10.2%, 5.6% and 5.5%, respectively, of the
outstanding shares of common stock of IE, according to Schedules 13-G filed
with the Securities and Exchange Commission.
(2) Assumes no exercise of the Underwriters' over-allotment option. If the
option is exercised in full, IE will beneficially own approximately 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.
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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 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.
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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.
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.'
46
<PAGE>
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>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
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.
47
<PAGE>
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.
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.
48
<PAGE>
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,
registration statements and certain other filings made with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ('EDGAR') system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.gov. The Registration Statement, including
all exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
In addition, the Company intends to furnish its shareholders with annual
reports containing audited financial statements examined by an independent
public accounting firm.
49
<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>
<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, $.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>
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
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..... 13,549 13,549
</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:
Net borrowings (repayments) of long-term debt....... 2,052 (2,692) (2,495) (2,468) (101)
Net 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.
F-7
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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
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 through IE from vendors for training, capital expenditures and
marketing programs are accounted for as a reduction of cost of revenues,
capitalized costs or selling and marketing expenses, 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. Prior to the offering, the Company
will effect a 13,325-for-1 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>
<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>
<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>
<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.
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, $1,000 in 1995 and $1,200 in 1996, or
pay MCI the shortfall. The Company has exceeded its minimum under this agreement
in the past and believes that it will exceed its minimum in 1996. In addition,
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. This agreement requires IE to
purchase sufficient telecommunications services to permit XLConnect to meet the
minimum volume requirements imposed by XLConnect's agreement with MCI.
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
F-13
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) -- CONTINUED
occurrence of a pro rata distribution to IE's shareholders of it 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 December 31, 1996.
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 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
F-14
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) -- CONTINUED
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,
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 (except with respect to the Company's
obligations under the IBMCC Credit Facility), (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
F-15
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLARS IN THOUSANDS)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) -- CONTINUED
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.
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 April 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 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. The $20,000 sublimit will bear
interest at the prime rate plus 1.5% and will have a maturity date of April 5,
1997. 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, inclusive of the Company's assets. However, the
Company and IE have agreed that IE may borrow against the Company's assets under
the credit facility only up to an amount of borrowing equal to any remaining
intercompany indebtedness owed from time to time.
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 will be extended for one additional year by
the Compensation and Benefits Committee, if so directed by 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>
[XLCONNECT LOGO] TOTAL CONNECTIVITY SOLUTIONS AT WORK.
INTERNETWORKING SERVICES
An international brewing company migrating from a
legacy information system engaged XLConnect to design
the architecture that would support client/server
[PHOTO] applications at one of its brewing facilities.
XLConnect assessed the company's needs, designed the
network, managed the implementation of the design and
installed and configured the networking components.
With its updated WAN, the client has improved its
ability to share information among its breweries in a
more timely an comprehensive manner.
APPLICATIONS DEVELOPMENT SERVICES
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
[PHOTO] databases located on a central server providing access to
approximately 15 domestic and international locations.
XLConnect's solution reduced quote generation time
to one day. Other benefits included centralized
management and increased time available for customer
interaction.
MANAGED SERVICES
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
[PHOTO] XLConnect's Network Management Center. XLConnect provided
the client NetWare and NT user administration, GroupWise
e-mail administration, network operating system and
server management. The Network Management Center also
provided remote performance and fault management of
routers, hubs, servers and network operating systems.
The client's network up-time has since increased to an
average availability exceeding 99%.
TELECOMMUNICATIONS SERVICES
A national consumer finance company engaged XLConnect
to implement a network to connect its 160 branch
offices and corporate headquarters and provide ongoing
[PHOTO] telecommunications services. XLConnect provided a frame
relay solution consisting of routing hardware, network
design and frame relay transmission services that
reduced the client's turnaround time on its loan
approval process and improved its record-keeping
processes.
<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................. 46
Underwriting.................................... 47
Legal Matters................................... 48
Experts......................................... 48
Additional Information.......................... 49
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
[XLCONNECT LOGO]
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:
NATURE OF EXPENSES AMOUNT
------------------ ------------
SEC Registration Fee............................................. $ 13,779
Nasdaq National Market Listing Fee............................... 50,000
Printing and engraving fees...................................... 125,000*
Registrant's counsel fees and expenses........................... 450,000*
Accounting fees and expenses..................................... 275,000*
Blue Sky expenses and counsel fees............................... 5,000*
Transfer agent and registrar fees................................ 5,000*
Miscellaneous.................................................... 76,221*
------------
TOTAL.......................................................... $ 1,000,000*
------------
------------
- ------------------
* Estimate
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 September 6, 1996 stock options to purchase an aggregate of 1,495,000
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 -- Articles of Incorporation of the Company, as amended
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 form of option agreement)
10.3 -- Form of Services Agreement between the Company and IE dated as of , 1996
10.4 -- Form of 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 -- Form of Tax Allocation Agreement between the Company, IE and IE's other subsidiaries effective as of
January 29, 1995.
10.6 -- Form of Registration Rights and Option Agreement between the Company, IE and The Future Now, Inc. of
Arkansas dated as of May 31, 1996
10.7 -- Form of Indemnification Agreement between the Company and IE dated as of , 1996
10.8 -- Offer Letters for Executive Officers of the Company
10.9 -- Amended Credit Facility between IBMCC, IE and the Company creating the $20 million Sub-facility**
21 -- Subsidiaries*
23.1 -- Consent of KPMG Peat Marwick LLP (included on page II-3 of the Registration Statement)
23.2 -- Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1)
25 -- Powers of Attorney (included on Signature Pages)*
27 -- Financial Data Schedule
</TABLE>
- ------------------
* Included in the Company's Registration Statement on Form S-1 (No. 333-08735)
filed on July 24, 1996.
** 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 certificates 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
September 12, 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 12th day of September, 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>
<S> <C> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD D. SANFORD Chairman of the Board September 12, 1996
----------------------------------
Richard D. Sanford
/s/ RICHARD G. ELLENBERGER Chief Executive Officer and President; September 12, 1996
- ----------------------------------- Director (principal executive officer)
Richard G. Ellenberger
/s/ STEPHANIE D. COHEN Chief Financial Officer, Vice President, September 12, 1996
- ----------------------------------- Finance (principal financial officer and
Stephanie D. Cohen principal accounting officer)
/s/ BARRY M. ABELSON Director September 12, 1996
- -----------------------------------
Barry M. Abelson
/s/ * Director September 12, 1996
- -----------------------------------
J.B. Doherty
/s/ * Director September 12, 1996
- -----------------------------------
William E. Johnson
/s/ * Director September 12, 1996
- -----------------------------------
John A. Porter
*By: /s/ BARRY M. ABELSON
-------------------------------
Barry M. Abelson
Attorney-in-Fact
</TABLE>
II-4
EXHIBIT 1.1
2,900,000 Shares
XLConnect Solutions, Inc.
Common Stock
UNDERWRITING AGREEMENT
, 1996
ALEX. BROWN & SONS INCORPORATED
MONTGOMERY SECURITIES
JANNEY MONTGOMERY SCOTT INC.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
XLConnect Solutions, Inc., a Pennsylvania corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,900,000 shares of the Company's Common
Stock, par value $.01 per share (the "Firm Shares"). The respective amounts of
the Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The Company also proposes to sell at
the Underwriters' option an aggregate of up to 430,000 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several
<PAGE>
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
The Company is currently an indirect wholly-owned subsidiary of
Intelligent Electronics, Inc. (collectively, with its subsidiaries, other than
the Company, "IE"), and immediately after issuance of the Firm Shares, IE will
own approximately 82.1% of the Company's Common Stock. In anticipation of the
public offering of the Firm Shares, the Formation Transactions (as defined in
the Registration Statement) occurred.
With respect to any statement made in this Agreement that is qualified by
or to the knowledge of the Company or IE, such knowledge shall refer to the
actual knowledge of any of the executive officers or directors of the Company or
IE, as the case may be, at the time such statement was made.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and IE.
The Company and IE jointly and severally represent and warrant as
follows:
(a) A registration statement on Form S-1 (File No. 333-08735) with
respect to the Shares has been carefully prepared by the Company conforming in
all material respects to the requirements of the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission under the Act. Copies of such registration
statement, including any amendments thereto, the preliminary prospectuses
contained therein and the exhibits, financial statements and schedules, as
finally amended and revised, have heretofore been delivered by the Company to
you. Such registration statement, together with any registration statement filed
by the Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance on Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of this
Agreement. As used herein, the term "Prospectus" means (i) the form of
prospectus first filed by the Company with the Commission pursuant to its Rule
424(b) or (ii) the last preliminary prospectus included in the Registration
Statement filed prior to the time it becomes effective or filed pursuant to Rule
424(a) under the Act that is delivered by the Company to the Underwriters for
delivery to purchasers of the Shares together with any term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
- 2 -
<PAGE>
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the Commonwealth of Pennsylvania,
with corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. As a result of the
Formation Transactions, the Company and its Subsidiaries (as hereinafter
defined) now own or lease all of the assets necessary for them to conduct their
business in the manner described in the Prospectus. Each of the Subsidiaries of
the Company listed in Exhibit 22.1 of Item 16(a) of the Registration Statement
(collectively, the "Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement.
The Subsidiaries are the only material subsidiaries, direct or indirect, of the
Company. The Company and the Subsidiaries are duly qualified to transact
business in all jurisdictions in which the conduct of their business requires
such qualification, except where the failure to be so qualified will not have a
materially adverse effect on the results of operations or the financial
condition of the Company and the Subsidiaries, taken as a whole. The outstanding
shares of capital stock of the Subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable and are owned by the Company
free and clear of all liens, encumbrances equities and claims; and no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests of the Subsidiaries are outstanding. Except for the
Subsidiaries and investments in securities as described in the Registration
Statement, the Company has no material equity or other interest in, or right to
acquire, a material equity or other interest in, any corporation, partnership,
trust or other entity.
(c) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the Shares
to be issued and sold by the Company have been duly authorized and when issued
and paid for as contemplated herein will be validly issued, fully-paid and
non-assessable; and no preemptive rights of stockholders exist with respect to
any of the Shares or the issue and sale thereof. Neither the filing of the
Registration Statement nor the offering or sale of Shares as contemplated by
this Agreement gives rise to any rights other than those which have been waived
or satisfied, relating to the registration of any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct in all material respects. All of the Shares
conform to the descriptions thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of
Pennsylvania.
(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains and
the Prospectus and any amendments or supplements thereto will contain all
statements which are required to be stated therein by, and in all material
respects conform or will conform, as the case may be, to the requirements of,
- 3 -
<PAGE>
the Act and the Rules and Regulations. Neither the Registration Statement nor
any amendment thereto, and neither the Prospectus nor any supplement thereto
contains or will contain, as the case may be, any untrue statement of a material
fact or omits or will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no representations or warranties as to information
contained in or omitted from the Registration Statement or the Prospectus, or
any such amendment or supplement in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any Underwriter
through the Representatives, specifically for use in the preparation thereof.
(f) The combined financial statements of the Company and the
Subsidiaries, together with related notes as set forth in the Registration
Statement, present fairly in all material respects the combined financial
position and the combined results of operations and cash flows of the Company
and the Subsidiaries at the indicated dates and for the indicated periods. Such
combined financial statements have been prepared in accordance with generally
accepted principles of accounting, consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of results for
such periods have been made. The summary and selected combined financial and
statistical data included in the Registration Statement present fairly in all
material respects the information shown therein and such data have been compiled
on a basis consistent with the financial statements presented therein.
(g) KPMG Peat Marwick LLP, who has certified certain of the combined
financial statements filed with the Commission as part of the Registration
Statement, are, to the knowledge of the Company, independent public accountants
as required by the Act and the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company, any of the
Subsidiaries or IE before any court, administrative agency, regulatory authority
or otherwise which, if determined adversely to the Company, any Subsidiary or IE
could reasonably be expected to result in any material adverse change in the
earnings, business, management, properties, assets, rights, operation, condition
or prospects of the Company and the Subsidiaries taken as a whole or prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title to
all of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, except for such
assets which have been disposed of in the ordinary course of the Company's
business since the dates of such financial statements, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except those reflected in
such financial statements (or as described in the Registration Statement) or
which are not material in amount. The Company and the Subsidiaries occupy their
leased properties under a Space Sharing Agreement with IE and The Future Now,
Inc. that is valid and binding on the parties thereto or, in the case of the
Company's Boston office, a valid and binding lease.
- 4 -
<PAGE>
(j) The Company and the Subsidiaries have filed (either directly or as
part of IE's consolidated group) all Federal, State, local and foreign income
tax returns which have been required to be filed and have paid all taxes
indicated as due by said returns and all assessments received by them or any of
them to the extent that such taxes have become due and are not being contested
in good faith. There is no material tax deficiency which has been or would
reasonably be expected to be asserted or threatened against the Company or any
Subsidiary that has not been adequately provided for in the financial statements
of the Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or, to the Company's knowledge, any development
involving a prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, condition,
financial or otherwise, or prospects of the Company and the Subsidiaries taken
as a whole, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business and
changes and transactions contemplated by the Registration Statement, as it may
be amended or supplemented. The Company and the Subsidiaries have no known
material contingent obligations which are not disclosed in the Registration
Statement or the Company's financial statements which are included in the
Registration Statement.
(l) Neither the Company nor any of the Subsidiaries is, nor with the
giving of notice, lapse of time or both, will be in violation or default under
its Articles of Incorporation or By-Laws or any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it or any of its properties is bound and which violation or default is of
material significance in respect of the condition (financial or otherwise) of
the Company and its Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiaries is a party, except to the extent that any such
conflict, breach or default would not result in a materially adverse effect on
the Company and the Subsidiaries taken as a whole, or of the Articles of
Incorporation or By-Laws of the Company or, to the knowledge of the Company, any
order, rule or regulation applicable to the Company or any of the Subsidiaries
of any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or may be necessary to
- 5 -
<PAGE>
qualify the Shares for public offering by the Underwriters under state
securities or Blue Sky laws) has been obtained or made and is in full force and
effect.
(n) The Company and each of the Subsidiaries hold all material licenses,
certificates and permits from governmental authorities which are necessary to
the conduct of their business; and, except as described in the Prospectus with
respect to the Company's "XLConnect" trademark, neither the Company nor any of
the Subsidiaries has infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of the
Company and the Subsidiaries taken as a whole. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks or
copyrights owned by or licensed to the Company.
(o) Neither the Company nor IE, nor to the Company's knowledge, any of
the Company's or IE's affiliates, has taken or may take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
could reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(p) Neither the Company nor any of the Subsidiaries has ever been, is
now, and immediately after the sale of the Shares under this Agreement will be,
an "investment company" within the meaning of the Investment Company Act of
1940, as amended and the rules and regulations of the Commission thereunder (the
"1940 Act").
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company and the Subsidiaries carry, or are covered by, insurance
in such amounts and covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective properties and as is
customary for companies engaged in similar industries.
(s) The Company and IE are in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA") with respect to the employees of the Company; no
"reportable event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company would have any
liability; the Company has not incurred and does not expect to incur liability
under (i) Title IV of
- 6 -
<PAGE>
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the "Code");
and each "pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
(t) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of doing Business with Cuba, and the Company further
agrees that if it commences engaging in business with the government of Cuba or
with any person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever date is
later, or if the information reported in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the Department.
(u) The Shares to be sold under this Agreement have been approved for
listing on the Nasdaq National Market upon official notice of issuance.
(v) To the best of the Company's knowledge, there are no affiliations
between any member of the National Association of Securities Dealers, Inc. and
any of the Company's directors, officers or 5% or greater security holders,
except as set forth in the Registration Statement or as disclosed to the
Representatives in writing.
2. Purchase, Sale and Delivery of the Firm Shares.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $________ per share, the number of Firm Shares set
forth opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made by
wire transfer of immediately available funds to the order of the Company against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at the
offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland 21202, at 10:00 A.M., Baltimore time, on the third business
day after the date of this Agreement or at such other time and date not later
than three business days thereafter as you and the Company shall agree upon,
such time and date being herein referred to as the "Closing Date." (As used
herein, "business day" means a day on which the New York Stock Exchange is open
for trading and on which banks in New York are open for
- 7 -
<PAGE>
business and are not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part but
only once and at any time upon written notice (i) at any time before the Closing
Date and (ii) only once thereafter within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which certificates for
Option Shares are to be delivered shall be determined by the Representatives but
shall be three full business days after the exercise of such option, in no event
prior to the Closing Date (such time and date being herein referred to as the
"Option Closing Date"). If the date of exercise of the option is three or more
days before the Closing Date, the notice of exercise shall set the Closing Date
as the Option Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option Shares
being purchased as the number of Firm Shares being purchased by such Underwriter
bears to the total number of Firm Shares, adjusted by you in such manner as to
avoid fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the Option
Closing by wire transfer of immediately available funds to the order of the
Company against delivery of certificates therefor at the offices of Alex. Brown
& Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price set forth in the
Prospectus. The Representatives may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
- 8 -
<PAGE>
4. Covenants of the Company.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, to prepare and timely file with the Commission under
Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the
Representatives containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations, (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations and (C) file on a timely basis all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, or (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions as
the Representatives may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications of the Shares in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
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reasonably request. The Company will deliver to the Representatives at or before
the Closing Date, one signed copy of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested) and of all amendments thereto, as the Representatives
may reasonably request.
(e) If during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer any event shall occur as a result of
which, in the judgment of the Company or in the reasonable opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances
existing at the time the Prospectus is delivered to a purchaser, not misleading,
or, if it is necessary at any time to amend or supplement the Prospectus to
comply with any law, the Company promptly will prepare and file with the
Commission an appropriate amendment to the Registration Statement or supplement
to the Prospectus so that the Prospectus as so amended or supplemented will not,
in the light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply in all material respects with law.
(f) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 15 months
after the effective date of the Registration Statement, an earnings statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all other
documents, reports and information furnished by the Company to its stockholders
or filed by the Company with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or the
Securities Exchange Act of 1934, as amended. The Company will deliver to the
Representatives similar reports with respect to significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements.
(h) No public offering, sale or other disposition of any Common Stock of
the Company will be made for a period of 180 days after the date of this
Agreement, directly or indirectly, by the Company or IE otherwise than hereunder
or with the prior written consent of Alex. Brown & Sons Incorporated, except
that the Company may, without such consent, grant options, or issue shares upon
the exercise of options granted, pursuant to the Company's 1996 Long-Term
Incentive Plan, as consideration for future acquisitions or strategic ventures
or relationships or pursuant to the Company's dividend reinvestment plan.
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(i) The Company will use its best efforts to list, subject to notice of
issuance, the Shares on the Nasdaq National Market.
(j) The Company has caused each officer and director of the Company to
furnish to you, on or prior to the date of this agreement, a letter or letters,
in form and substance satisfactory to the Underwriters, pursuant to which each
such person shall agree not to publicly offer, sell, sell short or otherwise
dispose of any shares of Common Stock of the Company or other capital stock of
the Company, or any other securities convertible, exchangeable or exercisable
for Common Shares or derivative of Common Shares owned by such person or request
the registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of 180 days
after the date of this Agreement, directly or indirectly, except with the prior
written consent of Alex. Brown & Sons Incorporated ("Lockup Agreements").
(k) The Company will apply the net proceeds of its sale of the Shares as
set forth in the Prospectus and will file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(l) The Company will not invest, or otherwise use the proceeds received
by the Company from its sale of the Shares in such a manner as would require the
Company or any of the Subsidiaries to register as an investment company under
the 1940 Act.
(m) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the Common
Stock.
(n) For a period of 180 days from the Closing Date, the Company will not
take, directly or indirectly, any action designed to cause or result in, or that
has constituted or might reasonably be expected to constitute, the stabilization
or manipulation of the price of any securities of the Company.
5. Costs and Expenses. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company under this
Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of counsel
for the Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters'
Selling Memorandum, the Underwriters' Questionnaire, the Underwriters'
Invitation Letter, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Shares; the fees and expenses incurred
with respect to the listing of the Shares on the Nasdaq National Market; and the
expenses, including the reasonable fees and disbursements of counsel for the
Underwriters, incurred in connection
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with the qualification of the Shares under State securities or Blue Sky laws.
The Company shall not, however, be required to pay for any of the Underwriters'
expenses (other than those related to qualification under NASD regulation and
State securities or Blue Sky laws as set forth above) except that, if this
Agreement shall not be consummated because the conditions in Section 6 hereof
are not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 11(b) hereof, or by reason of any failure,
refusal or inability on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on its part to be performed, unless such failure to satisfy said
condition or to comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. Conditions of Obligations of the Underwriters. The several obligations
of the Underwriters to purchase the Firm Shares on the Closing Date and the
Option Shares, if any, on the Option Closing Date are subject to the accuracy,
as of the Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties of the Company and IE contained herein, and to
the performance by the Company and IE of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Pepper, Hamilton &
Scheetz, counsel for the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating that it may
be relied on by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the Commonwealth of
Pennsylvania, with corporate power and authority to own its properties and
conduct its business as described in the Prospectus; each of the Subsidiaries
has been duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation with corporate
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power and authority to own its properties and conduct its business as described
in the Prospectus; the Company and the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of their business
requires such qualification, except where the failure to so qualify would not
have a materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; the outstanding shares of capital stock of each
of the Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable; and the outstanding shares of capital stock of each of the
Subsidiaries are owned by the Company or another Subsidiary, to the knowledge of
such counsel, free and clear of all liens, encumbrances and security interests,
and, to the knowledge of such counsel, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests of the
Subsidiaries are outstanding.
(ii) As of the date set forth in the Prospectus, the Company had
authorized and outstanding capital stock as set forth under the caption
"Capitalization" in the Prospectus; the authorized shares of its Common Stock
have been duly authorized; the outstanding shares of its Common Stock have been
duly authorized and validly issued and are fully paid and non-assessable; all of
the Shares conform to the description thereof contained in the Prospectus; and
the certificates for the Shares, assuming they are in the form filed with the
Commission, are in due and proper legal form; the shares of Common Stock,
including the Option Shares, if any, to be sold by the Company pursuant to this
Agreement have been duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this Agreement; and,
to the knowledge of such counsel, no preemptive rights of stockholders exist
with respect to any of the Shares or the issue and sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to have any Common Stock or other
securities of the Company included in the Registration Statement or the right,
as a result of the filing of the Registration Statement, to require registration
under the Act of any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, all Preliminary Prospectuses,
the Prospectus and each amendment or supplement thereto comply as to form in all
material respects with the
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<PAGE>
requirements of the rules and regulations under the Act (except that such
counsel need express no opinion as to the combined financial statements and
other financial information included therein).
(vi) The statements under the captions "Business--Government
Regulation," "Management--Long-Term Incentive Plan," "Management--Employment
Arrangements; Stock Option Grants under the Plan," "Relationship between the
Company and IE," "Description of Capital Stock," and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, are accurate summaries and
fairly and correctly present in all material respects the information called for
with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Such counsel knows of no material legal proceedings or
governmental proceedings or other claims pending or threatened against the
Company or any of the Subsidiaries or affecting any of their businesses or
assets, except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Articles of Incorporation or By-Laws of the
Company, or any agreement or instrument known to such counsel to which the
Company or the Subsidiaries is a party or by which the Company or the
Subsidiaries may be bound, except where such conflict, breach or violation could
not reasonably be expected to result in a materially adverse effect on the
Company.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the National Association of Securities
Dealers, Inc. or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been obtained or made,
specifying the same.
(xii) The Company is not, and will not become as a result of the
consummation of the transactions contemplated by this Agreement, and the
application of the net proceeds
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therefrom as described in the Prospectus, an "investment company" within the
meaning of the 1940 Act.
In rendering such opinion, Pepper, Hamilton & Scheetz may rely as to
matters governed by the laws of states other than Pennsylvania or Federal laws
on local counsel in such jurisdictions and with respect to the Federal
regulation of telecommunications providers upon Goldberg, Godles, Wiener &
Wright, the Company's special telecommunications counsel, provided that in each
case Pepper, Hamilton & Scheetz shall state that they believe that they and the
Underwriters are justified in relying on such other counsel and such other
counsel's opinion is also addressed to the Underwriters. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, at the time it became effective
under the Act, (but after giving effect to any modifications incorporated
therein pursuant to Rule 430A under the Act) and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements and other financial
information included therein). With respect to such statement, Pepper, Hamilton
& Scheetz may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(c) The Representatives shall have received from Piper & Marbury L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv), (v) and (x) of Paragraph (b) of this Section 6,
and that the Company is a validly organized and existing corporation under the
laws of the Commonwealth of Pennsylvania. In rendering such opinion Piper &
Marbury L.L.P. may rely as to all matters governed other than by the laws of the
State of Maryland or Federal laws on the opinion of counsel referred to in
paragraph (b) of this Section 6. In addition to the matters set forth above,
such opinion shall also include a statement to the effect that nothing has come
to the attention of such counsel which leads them to believe that the
Registration Statement, as of the time it became effective under the Act, and
the Prospectus or any amendment or supplement thereto, on the date it was filed
pursuant to Rule 424(b) as of the date of effectiveness of the Registration
Statement and the Registration Statement and the Prospectus, or any amendment or
supplement thereto, as of the Closing Date or the Option Closing Date, as the
case may be, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included
therein). With respect to such statement, Piper & Marbury L.L.P. may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
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(d) The Representatives shall have received at or prior to the Closing
Date from Piper & Marbury L.L.P. a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the State securities
or Blue Sky laws of such jurisdictions as the Representatives may reasonably
have designated to the Company.
(e) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a signed letter from KPMG Peat Marwick
LLP, dated the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you confirming that they are independent
certified public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
combined financial statements examined by them and included in the Registration
Statement comply in form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations; and
containing such other statements and information as is ordinarily included in
accountants' "comfort letters" to Underwriters with respect to the combined
financial statements and certain financial and statistical information contained
in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates on behalf
of the Company of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been
taken or are, to his or her knowledge, contemplated by the Commission.
(ii) The representations and warranties of the Company and IE
contained in Section 1 hereof are true and correct in all material
respects as of the Closing Date or the Option Closing Date, as the case
may be.
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective date
of the Registration Statement, the statements contained in the
Registration Statement were true and correct in all material respects,
and such Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein not misleading and, in his or her opinion, since
the effective date of the Registration Statement,
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no event has occurred which would have been required to be set forth in a
supplement to or an amendment of the Prospectus in order to comply with
the requirements of the Act and the Rules and Regulations, which has not
been so set forth in such supplement or amendment.
(v) To his or her knowledge, since the respective dates as of
which information is given in the Registration Statement and Prospectus,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries
taken as a whole or the earnings, business, management, properties,
assets, rights, operations, financial condition or prospects of the
Company and the Subsidiaries taken as a whole, whether or not arising in
the ordinary course of business.
(g) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties
contained herein and related matters as the Representatives may reasonably have
requested.
(h) The Firm Shares, and Option Shares, if any, have been approved for
listing upon official notice of issuance on the Nasdaq National Market.
(i) Alex. Brown & Sons Incorporated shall have received from each officer
and director of the Company a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which such person shall agree not
to publicly offer, sell, sell short or otherwise dispose of any shares of Common
Stock of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by such person (or as to which such person has
the right to direct the disposition of) for a period of 180 days after the date
of this Agreement, except with the prior written consent of the Representatives.
(j) The Formation Transactions shall have been completed in substantially
the manner in which they are described in the Prospectus.
(k) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate of an executive officer
of IE on behalf of IE, to the effect that, as of the Closing Date or the Option
Closing Date, as the case may be, such executive officer represents that the
representations and warranties of the Company and IE are true and correct in all
material respects.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representatives and to Piper & Marbury
L.L.P., counsel for the Underwriters.
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If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company. The obligations of the
Company to sell and deliver the Shares required to be delivered as and when
specified in this Agreement are subject to the conditions that at the Closing
Date or the Option Closing Date, as the case may be, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and in
effect or proceedings therefor initiated or threatened.
8. Indemnification
(a) The Company and IE, jointly and severally, agree to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses, claims, damages or
liabilities to which such Underwriter or such controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and will reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that the Company and IE will
not be liable in any such case to the extent that (i) any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof; or (ii) such statement or
omission was contained or made in any Preliminary Prospectus and corrected in
the Prospectus and (A) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and (B) such
Underwriter failed to deliver or provide a copy of the Prospectus to such person
at or prior to the confirmation of the sale of such Shares in any case where
such delivery is required by the Act. In no event, however, shall the liability
of IE for indemnification or contribution under this Section 8 or otherwise
under this Agreement exceed the amount paid to IE by the Company out
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of the net proceeds to the Company from its sale of the Shares hereunder. This
indemnity agreement will be in addition to any liability which the Company or IE
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company and IE, each of their respective directors, each of the
Company's officers who have signed the Registration Statement and each person,
if any, who controls the Company or IE within the meaning of the Act, against
any losses, claims, damages or liabilities to which the Company, IE or any such
director, officer, or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) (i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company, IE or any such
director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that each Underwriter will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission has been made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for use
in the preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but the failure to give such
notice shall not relieve the indemnifying party or parties from any liability
which it or they may have to the indemnified party for contribution or otherwise
than on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party and shall
pay as incurred the reasonable fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred the reasonable fees and
expenses of the counsel retained by the indemnified party in the event (i) the
- 19 -
<PAGE>
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them, or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and IE, on the one hand, and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under Section 8(c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and IE, on the one hand, and the Underwriters on the other
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company and IE, on the one hand, and the Underwriters, on the
other hand, shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
- 20 -
<PAGE>
information supplied by the Company and IE, on the one hand, or the Underwriters
on the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, IE and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company and IE set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, IE, their respective directors or officers or any
persons controlling the Company or IE, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, the Company, IE, their respective directors or officers, or any
person controlling the Company or IE, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for the
portion of the Shares which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of
- 21 -
<PAGE>
any default on the part of the Company), you, as Representatives of the
Underwriters, shall use your best efforts to procure within 36 hours thereafter
one or more of the other Underwriters, or any others, to purchase from the
Company such amounts as may be agreed upon and upon the terms set forth herein,
the Firm Shares or Option Shares, as the case may be, which the defaulting
Underwriter or Underwriters failed to purchase. If during such 36 hours you, as
such Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be, agreed
to be purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of shares of
Firm Shares or Option Shares, as the case may be, with respect to which such
default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case
may be, covered hereby, the Company or you as the Representatives of the
Underwriters will have the right, by written notice given within the next
36-hour period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or of the
Company except to the extent provided in Section 8 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 9, the
Closing Date or Option Closing Date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
Patrick J. Kerins, Managing Director; if to the Company, to XLConnect Solutions,
Inc., 411 Eagleview Boulevard, Exton, Pennsylvania 19341, Attention: Richard G.
Ellenberger, President and Chief Executive Officer; and if to IE, to Intelligent
Electronics, Inc., 411 Eagleview Boulevard, Exton, Pennsylvania 19341,
Attention: Richard D. Sanford, Chairman and Chief Executive Officer, with a copy
to Barry M. Abelson, Esquire, Pepper, Hamilton & Sheetz, 3000 Two Logan Square,
18th and Arch Streets, Philadelphia, Pennsylvania 19103.
11. Termination. This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 A.M. on
the date of this Agreement;
- 22 -
<PAGE>
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
financial condition of the Company and the Subsidiaries taken as a whole or the
earnings, business affairs, management or business prospects of the Company and
the Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency after the date hereof or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, escalation, declaration, emergency, calamity,
crisis or adverse change on the financial markets of the United States would, in
your reasonable judgment, make the offering or delivery of the Shares
impracticable or inadvisable, (iii) suspension of trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your reasonable opinion materially and adversely affects or will materially or
adversely affect the business or operations of the Company and the Subsidiaries
taken as a whole (v) declaration of a banking moratorium by either federal or
New York State authorities, (vi) the suspension of trading of the Company's
Common Stock by the Commission or the Nasdaq National Market; (vii) the taking
of any action by any governmental body or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse effect on
the securities markets in the United States or elsewhere, or (viii) any
litigation or proceeding is pending or threatened against the Underwriters which
seeks to enjoin or otherwise restrain, or seeks material damages in connection
with, or questions the legality or validity of this Agreement or the
transactions contemplated hereby; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Information Provided by Underwriters. The Company and the
Underwriters acknowledge and agree that the only information furnished or to be
furnished by any Underwriter to the Company for inclusion in any Prospectus or
the Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under the Act
and the information under the caption "Underwriting" in the Prospectus.
13. Successors. This Agreement has been and is made solely for the
benefit of the Underwriters, the Company and IE and their respective successors,
executors, administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Shares merely because of such purchase.
- 23 -
<PAGE>
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company, IE or their respective directors or officers and (c) delivery of
and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, IE and the
several Underwriters in accordance with its terms.
Very truly yours,
XLConnect Solutions, Inc.
By
------------------------------------------
Richard G. Ellenberger
President and Chief Executive Officer
Intelligent Electronics, Inc.
By:
------------------------------------------
Richard D. Sanford
Chairman and Chief Executive Officer
- 24 -
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
ALEX. BROWN & SONS INCORPORATED
MONTGOMERY SECURITIES
JANNEY MONTGOMERY SCOTT INC.
As Representatives of the
several Underwriters listed
on Schedule I
By ALEX. BROWN & SONS INCORPORATED
By
- ------------------------------------
Authorized Officer
- 25 -
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Alex. Brown & Sons Incorporated...........................
Montgomery Securities.....................................
Janney Montgomery Scott Inc...............................
---------
Total............ 2,900,000
=========
<TABLE>
<S> <C>
Microfilm Number _________________ Filed with the Department of State on ____________
Entity Number ____________________ ___________________________________________________
Secretary of the Commonwealth
</TABLE>
ARTICLES OF INCORPORATION-FOR PROFIT
DSCB:15-1306/2102/2303/2702/2903/7102A (Rev 90)
Indicate type of domestic corporation (check one):
<TABLE>
<S> <C> <C> <C>
X Business-stock (15 Pa.C.S.ss.1306) Management (15 Pa.C.S.ss.2702)
- ---- -----
Business-nonstock (15 Pa.C.S.ss.2102) Professional (15 Pa.C.S.ss.2903)
- ----- -----
Business-statutory close (15 Pa.C.S.ss.2303) Cooperative (15 Pa.C.S.ss.7102A)
- ----- -----
</TABLE>
In compliance with the requirements of the applicable provisions of 15
Pa.C.S. (relating to corporations and unincorporated associations) the
undersigned, desiring to incorporate a corporation for profit hereby state(s)
that:
1. The name of the corporation is: PSO Acquisition Corporation
2. The (a) address of this corporation's initial registered office in this
Commonwealth or (b) name of its commercial registered office provider
and the county of venue is:
<TABLE>
<S> <C>
(a) 411 Eagleview Boulevard Exton PA 19341 Chester
--------------------------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:
---------------------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office
provider, the county in (b) shall be deemed the county in which the
corporation is located for venue and official publication purposes.
3. The corporation is incorporated under the provisions of the Business
Corporation Law of 1988.
4. The aggregate number of shares authorized is: 100,000,000 shares of common stock, $.01 par value
---------------------------------------------------
(other provisions, if any, attach 8 1/2 x 11 sheet)
5. The name and address, including street and number, if any, of each incorporator is:
Name Address
Nancy P. Smith 3000 Two Logan Square, Philadelphia, PA 19102
-------------------------------------------------------------------------------------------------
6. The specified effective date, if any, is:
--------------------------------------------------------
month day year hour, if any
7. Any additional provisions of the articles, if any, attach an 8 1/2 x 11 sheet.
The shareholders of the corporation shall not be entitled to cumulate their votes for the election
of directors.
8. Statutory close corporation only: Neither the corporation nor any
shareholder shall make an offering of any of its shares of any class
that would constitute a "public offering" within the meaning of the
Securities Act of 1933 (15 U.S.C. ss. 77a et seq.).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
9. Cooperative corporations only: (Complete and strike out inapplicable term) The common bond of
membership among its members/shareholders is:
----------------------------------------------------
IN TESTIMONY WHEREOF, the incorporator has signed these Articles of Incorporation this 5th day
----
of January, 1996.
- ------------------
/s/ Nancy P. Smith
----------------------------------------
(Signature)
</TABLE>
<PAGE>
DEPARTMENT OF STATE
CORPORATION BUREAU
308 NORTH OFFICE BUILDING
HARRISBURG, PA 17120-0029
Robert P. Casey Christopher A. Lewis Charles A. Otaviano
Governor Secretary of the Commonwealth Director,
Corporation Bureau
Instructions for Completion of Form:
A. One original of this form is required. The form shall be completed
in black or blue-black ink in order to permit reproduction. The filing
fee for this form is $100 made payable to the Department of State.
PLEASE NOTE: A separate check is required for each form submitted.
B. Under 15 Pa.C.S. Sec. 135(c) (relating to addresses) an actual street or
rural route box number must be used as an address, and the Department of
State is required to refuse to receive or file any document that sets forth
only a post office box address.
C. The following, in addition to the filing fee, shall accompany this form:
(1) Three copies of a completed form DSCB:15-134A (Docketing Statement).
(2) Any necessary copies of form DSCB:17.2 (Consent to Appropriation of
Name) or form DSCB:17.3 (Consent to Use of Similar Name).
(3) Any necessary governmental approvals.
D. For general instructions relating to the incorporation of business
corporations see 19 Pa. Code Ch. 23 (relating to business corporations
generally). These instructions relate to such matters as corporate
name, stated purposes, term of existence, nonstock status, authorized share
structure and related authority of the board of directors, inclusion of
names of first directors in the Articles of Incorporation, optional
provisions on cumulative voting for election of directors, etc.
E. For required provisions in the Articles of a management corporation,
see 15 Pa.C.S. Sec. 2703 (relating to additional contents of Articles
of management corporations).
F. For restrictions on the stated purposes of professional corporations, see
15 Pa.C.S. Sec. 2903 (relating to formation of professional corporations).
G. Articles for a nonprofit cooperative corporation should be filed on Form
DSCb:15-7102B (Articles of Incorporation - Nonprofit Cooperative
Corporation).
H. One or more corporations or natural persons of full age may incorporate a
business corporation.
I. 15 Pa.C.S. Sec. 1307 (relating to advertisement) requires that the
incorporators shall advertise their intention to file or the corporation
shall advertise the filing of articles of incorporation. Proofs of
publication of such advertising should not be submitted to, and will not
be received by or filed in, the Department, but should be filed with the
minutes of the corporation.
<PAGE>
J. This form and all accompanying documents shall be mailed to:
Department of State
Corporation Bureau
308 North Office Building
Harrisburg, PA 17120-0029
K. To receive confirmation of the file date prior to receiving the microfilmed
original, send either a self-addressed, stamped postcard with the filing
information noted or a self-addressed, stamped envelope with a copy of
the filing document.
<PAGE>
<TABLE>
<S> <C>
Microfilm Number Filed with the Department of State on
------------------ -------------
Entity Number
------------------ ---------------------------------------------------
Secretary of the Commonwealth
</TABLE>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 89)
In compliance with the requirements of 15 Pa.C.S. ss. 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
<TABLE>
<S> <C>
1. The name of the corporation is: PSO ACQUISITION CORPORATION
2. The address of this corporation's current registered office in this
Commonwealth and the county of venue is (the Department is hereby authorized to
correct the following address to conform to the records of the Department):
411 Eagleview Blvd. Exton Pa 19341 Chester
--------------------------------------------------------------------------------------------------------
Number and Street City State Zip County
3. The statute by or under which it was incorporated is: 15 Pa. C.S.ss.1306
--------------------------------------------------
4. The original date of its incorporation is: January 5, 1996
-------------------------------------------------------------
5. X The amendment shall be effective upon filing these Articles of Amendment in the Department
--- of State.
6. (Check one of the following):
The amendment was adopted by the shareholders pursuant to 15 Pa.C.S. ss. 1914(a) and (b).
---
X The amendment was adopted by the board of directors pursuant to 15 Pa.C.S. ss. 1914(c).
---
7. (Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, is as follows:
---
RESOLVED, That it is deemed advisable and in the best interests of the
Company to amend the Articles of Incorporation in order to change the name
to "XLConnect Solutions, Inc."
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original Articles and all amendments
--- thereto. DSCB:15-1915 (Rev 89)-2
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this 24th day of
April , 1996.
PSO ACQUISITION CORPORATION
------------------------------------------
(Name of Corporation)
BY: /s/ T. J. Coffey
--------------------------------------
(Signature)
TITLE: VP & COO
-----------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Microfilm Number Filed with the Department of State on
---------------- -------------------
Entity Number
----------------- ---------------------------------------------------------
Secretary of the Commonwealth
</TABLE>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 89)
In compliance with the requirements of 15 Pa.C.S. ss. 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
<TABLE>
<S> <C>
1. The name of the corporation is: XLCONNECT SOLUTIONS, INC.
----------------------------------------------------------------
------------------------------------------------------------------------------------------------
2. The address of this corporation's current registered office in this
Commonwealth and the county of venue is (the Department is hereby authorized to
correct the following address to conform to the records of the Department):
411 Eagleview Blvd. Exton Pa 19341 Chester
-------------------------------------------------------------------------------------------------
Number and Street City State Zip County
3. The statute by or under which it was incorporated is: 15 Pa. C.S.ss.1306
--------------------------------------------
4. The original date of its incorporation is: January 5, 1996
-------------------------------------------------------
5. X The amendment shall be effective upon filing these Articles of Amendment in the Department
--- of State.
6. (Check one of the following):
The amendment was adopted by the shareholders pursuant to 15 Pa.C.S. ss. 1914(a) and (b).
---
X The amendment was adopted by the board of directors pursuant to 15 Pa.C.S. ss.1914(c).
---
7. (Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation is set forth in full in Exhibit
--- A attached hereto and made a part hereof.
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original Articles and all amendments
--- thereto. DSCB:15-1915 (Rev 89)-2
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this 18 day of June, 1996.
--
XLCONNECT SOLUTIONS, INC.
-----------------------------------------------------
(Name of Corporation)
BY: /s/ Stephanie Cohen
-------------------------------------------------
(Signature)
TITLE: Vice President
---------------------------------------------
</TABLE>
<PAGE>
EXHIBIT "A"
Article 4 of the Articles of Incorporation is amended and restated to read
in its entirety as follows:
"4. The aggregate number of shares authorized is:
"(a) One Hundred Million (100,000,000) shares of Common Stock, $.01 par
value per share; and
"(b) Ten Million (10,000,000) shares of Preferred Stock, $.01 par value
per share.
"The Board of Directors of the corporation shall have the full and
complete authority by resolution from time to time, to establish one or more
series and to issue shares of Preferred Stock and to fix, determine and vary the
voting rights, designations, preferences, qualifications, privileges,
limitations, options, conversion rights and other special rights of each series
of Preferred Stock, including but not limited to, dividend rates and manner of
payment, preferential amounts payable upon voluntary or involuntary liquidation,
voting rights, conversion rights, redemption prices, terms and conditions and
sinking fund and stock purchase prices, terms and conditions."
<PAGE>
[PEPPER, HAMILTON & SCHEETZ LETTERHEAD]
September 11, 1996
XLConnect Solutions, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Dear Gentlemen:
We have acted as counsel to XLConnect Solutions, Inc., a
Pennsylvania corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") of a
registration statement of the Company on Form S-1 (No. 333-08735), as amended,
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement relates to the proposed issuance and sale by
the Company to the public of 2,900,000 shares of the Company's common stock, par
value $.01 per share (the "Firm Shares"), as well as the issuance and sale by
the Company of up to an additional 430,000 shares of the Company's common stock,
par value $.01 per share (the "Option Shares"), to cover over-allotments.
In this connection, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of the Articles of
Incorporation and the By-Laws of the Company, as amended to date, resolutions of
the Company's Board of Directors and Shareholder and such other documents and
corporate records relating to the Company and the proposed issuance and sale of
the Firm Shares and Option Shares as we have deemed appropriate. The opinion
expressed herein is based exclusively on the applicable provisions of the
Pennsylvania Business Corporation Law of 1988, as amended ("PBCL"), in effect on
the date hereof.
On the basis of the foregoing, we are of the opinion that the
Firm Shares and the Option Shares, when issued and sold in accordance with the
Underwriting Agreement attached as an exhibit to the Registration Statement,
will be validly issued, fully paid and non-assessable under the PBCL.
<PAGE>
XLConnect Solutions, Inc.
September 11, 1996
Page 2
We hereby consent to the reference to our firm under the
caption "Legal Matters" in the Prospectus included in the Registration Statement
and to the filing of this opinion as an exhibit to the Registration Statement.
Such consent does not constitute a consent under Section 7 of the Act, since we
have not certified any part of such Registration Statement and do not otherwise
come within the categories of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
PEPPER, HAMILTON & SCHEETZ
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "Agreement") is made as of the 31st
day of May, 1996 by and between Intelligent Electronics, Inc., a Pennsylvania
corporation ("IE"), The Future Now, Inc., an Ohio corporation ("TFN") , The
Future Now, Inc. of Arkansas, an Arkansas corporation ("TFNA") and XLConnect
Solutions, Inc., a Pennsylvania corporation ("XLC").
Background
A. XLC and TFN are a wholly owned subsidiaries of IE, and TFNA is a wholly
owned subsidiary of TFN.
B. IE and XLC intend to effect an initial public offering of shares of
common stock of XLC (the "Offering").
C. In order to facilitate the Offering, the parties will effect a
restructuring of the corporate organization, following which XLC will be a
wholly owned subsidiary of TFNA.
D. Each of IE, TFN and TFNA (collectively referred to hereinafter as "IE",
except where the context requires "IE" to mean Intelligent Electronics, Inc.)
desires to contribute to XLC, and XLC desires to accept and receive, certain of
the assets and liabilities of IE, TFN and TFNA, respectively.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises and covenants contained in this Agreement, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the following meanings:
(a) "Assigned Contracts" has the meaning ascribed thereto in Section
3 hereof.
(b) "Business Day" means any calendar day which is not a Saturday,
Sunday or public holiday under the laws of the Commonwealth of Pennsylvania.
(c) "Contract" means any written or oral contract, agreement,
commitment, lease, license, consulting agreement, supply contract, repair
contract, distribution agreement, purchase order, technology and know-how
agreement, instrument or any other contractual commitment that is binding on any
Person or its property.
(d) "Governmental Entity" means any government and political
subdivisions thereof, court, arbitral tribunal, administrative agency, tribunal
or commission or
<PAGE>
any other governmental or regulatory body, instrumentality or authority, whether
domestic (federal, state or local) or foreign.
(e) "Liability" means any direct or indirect liability, loss,
damage, cost, expense, contingent liability, loss contingency, indebtedness,
obligation, responsibility, claim, deficiency (including deferred income tax and
other net tax deficiencies), guaranty or endorsement of or by any person,
whether accrued, absolute, or contingent, known or unknown, fixed or unfixed,
liquidated or unliquidated, secured or unsecured, and any other items which, in
accordance with GAAP, would be classified as a Liability.
(f) "Lien" means any mortgage, lien, security interest, pledge,
negative pledge, encumbrance, assessment, title retention agreement, restriction
or restraint on transfer, defect of title, charge in the nature of a lien or
security interest, or option (whether consensual, statutory or otherwise).
(g) "Permitted Liens" means (a) Liens for current taxes not yet
delinquent for which appropriate reserves in accordance with GAAP have been
created; (b) statutory liens imposed by law which are incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers and materialmen; and (c) consensual Liens granted on Contributed Assets
with respect to financing obligations assumed by XLC Liens.
(h) "Person" means an individual, a sole proprietorship, a
corporation, a partnership, a joint venture, an association, a trust, or any
other entity or organization, including a government or a political subdivision,
agency or instrumentality thereof.
(i) "Required Consents" means any and all licenses, waivers,
consents or approvals of or from any Governmental Entity, including the
expiration of any periods of time under statutory and regulatory notice
provisions without action on the part of any Governmental Entity, and any and
all approvals, consents or waivers from other parties to leases, licenses,
franchises, permits, indentures, Contracts and other instruments necessary to
consummate the transaction contemplated hereby.
1. Contributions of Assets by IE. Subject to the terms and conditions
contained herein, IE hereby contributes to XLC, free and clear of all Liens
(other than Permitted Liens), the assets of IE which are listed on Schedule A
attached hereto (collectively, the "Contributed Assets").
2. Assignment of Contracts and Contract Rights. IE hereby assigns,
transfers and delivers to XLC all of its right, title and interest in and to all
of the Contracts and contract rights identified on Schedule B hereto (the
"Assigned Contracts") and XLC hereby accepts the Assigned Contracts and agrees
to perform and comply with such Assigned Contracts as if XLC were the original
signatory thereunder.
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<PAGE>
3. Assumption of Liabilities. XLC hereby assumes only those debts,
liabilities and obligations of IE listed on Schedule C attached hereto (the "IE
Assumed Liabilities"). Except as set forth on Schedule C, XLC does not and will
not otherwise acquire, discharge, assume, or become responsible for any debts,
liabilities or obligations of IE. IE agrees to pay and satisfy when due those
liabilities and obligations not assumed by XLC, which, if not paid or satisfied,
could result in a liability to XLC which is not being assumed by XLC. To the
extent an Asset of IE being sold or contributed to XLC pursuant to Section 2 or
3 hereof is subject to a Lien that is not an IE Assumed Liability, IE expressly
acknowledges that it is retaining such Liability and agrees to pay and discharge
such Liability as the same shall become due.
4. Representations and Warranties.
(a) IE, TFN and TFNA, as applicable, represent and warrant to XLC as
follows:
(1) Corporate Power and Authority. Each of IE, TFN and TFNA has
the requisite power and authority to execute, deliver and perform this Agreement
and to contribute to XLC the Contributed Assets. The execution delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary action (corporate
or otherwise) on the part of each of IE, TFN and TFNA. This Agreement
constitutes the legal, valid and binding obligation of each of IE, TFN and TFNA,
enforceable in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws
affecting the enforcement of creditors' rights generally.
(2) Validity of Contemplated Transactions. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (a) violate, breach or
contravene any of the terms, conditions or provisions of the Articles of
Incorporation or Bylaws of IE, TFN or TFNA, (b) violate, or constitute a default
under, any material contract by which such entity or its property is bound, or
(c) violate any material provision of law.
(3) Title to Contributed Assets. Each of IE, TFN and TFNA is in
possession of and has good, valid and marketable title to, or has valid
leasehold interests in or valid rights under contract to use, all of the
Contributed Assets in which it has interest and IE, on a consolidated basis,
with TFN and TFNA, has such title to all of the Contributed Assets. All of the
Contributed Assets are free and clear of all Liens, other than Permitted Liens.
All tangible personal property comprising Contributed Assets is in good
operating condition (ordinary wear and tear excepted) and will be usable by XLC
for its intended purposes.
(4) Accounts Receivable. The accounts receivable that are
included in the Contributed Assets (the "Accounts Receivable") constitute valid
receivables, have arisen in the ordinary course of business consistent with past
practices, are collectible
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<PAGE>
and are not subject to any setoff or counterclaim. No part of the Accounts
Receivable is contingent upon performance by IE or any other party of any
obligation, and no agreements for deductions or discounts have been made with
respect to any part of such Accounts Receivable.
(b) XLC represents and warrants to IE, TFN and TFNA as follows:
(1) Corporate Power and Authority. XLC has the requisite power
and authority to execute, deliver and perform this Agreement and to accept the
Contributed Assets. The execution delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary action (corporate or otherwise) on the part of XLC.
This Agreement constitutes the legal, valid and binding obligation of XLC,
enforceable in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws
affecting the enforcement of creditors' rights generally.
(2) Validity of Contemplated Transactions. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (a) violate, breach or
contravene any of the terms, conditions or provisions of the Articles of
Incorporation or Bylaws of XLC, (b) violate, or constitute a default under, any
material contract by which such entity or its property is bound, or (c) violate
any material provision of law.
5. Further Assurances. Each party hereto agrees to cooperate with each
other to obtain, execute and deliver or cause to be so obtained, executed or
delivered, such other instruments, notices, documents, agreements,
acknowledgements or consents (including without limitation, the Required
Consents) and to such further acts as reasonably may be required for the
effective confirmation and consummation of the transactions contemplated
thereby, including without limitation the transfer, or confirmation thereof, of
such other assets as are necessary or desirable in connection with the operation
of the business of XLC, as such business is described in that certain
Registration Statement dated July 24, 1996, as amended from time to time, filed
with the Securities and Exchange Commission under the Securities Act of 1933
with respect to a proposed written public offering of the shares of common stock
of XLC.
6. Miscellaneous.
(a) Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. This Agreement may not be assigned by either
party hereto to any other person except that either party may assign this
Agreement to any of its affiliates.
(b) No Third-Party Beneficiaries. Nothing expressed or implied in
this Agreement shall be construed to give any person or entity other than the
parties hereto any legal or equitable rights hereunder.
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<PAGE>
(c) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof.
(d) Amendment. This Agreement may not be amended except by an
instrument signed by the parties hereto.
(e) Waivers. Either party hereto may (i) extend the time for the
performance of any of the obligations or other act of the other party or (ii)
waive compliance with any of the agreements contained herein. No waiver of any
term shall be construed as a subsequent waiver of the same term, or a waiver of
any other term, of this Agreement. The failure of any party to assert any of its
rights hereunder will not constitute a waiver of any such rights.
(f) Severability. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, such
provision shall be deemed severable and all other provisions of this Agreement
shall nevertheless remain in full force and effect.
(g) Headings. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
(h) Notices. All notices given in connection with this Agreement
shall be in writing. Service of such notices shall be deemed complete (i) if
hand delivered, on the date of delivery, (ii) if by mail, on the fourth business
day following the day of deposit in the United States mail, by certified or
registered mail, first-class postage prepaid, (iii) if sent by FedEx or
equivalent courier service, on the next business day, or (iv) if by telecopier,
upon receipt by the sender of written confirmation of successful transmission.
Such notices shall be addressed to the parties at the following addresses or at
such other address for a party as shall be specified by like notice (except that
notices of change of address shall be effective upon receipt):
If to IE, TFN or TFNA:
411 Eagleview Boulevard
Exton, PA 19341
Attention: President
Telecopier: (610) 458-0599
If to XLC:
411 Eagleview Boulevard
Exton, PA 19341
Attention: President
Telecopier: (610) 458-8217
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<PAGE>
(i) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania,
without giving effect to the principles of conflict of laws thereof.
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties to this Contribution Agreement have
caused this Agreement to be duly executed as of the date first written above.
INTELLIGENT ELECTRONICS, INC.
By:________________________________
Name:
Title:
THE FUTURE NOW, INC.
By:_________________________________
Name:
Title:
THE FUTURE NOW, INC. OF
ARKANSAS
By:________________________________
Name:
Title:
XLCONNECT SOLUTIONS, INC.
By:_________________________________
Name:
Title:
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<PAGE>
SCHEDULE A
CONTRIBUTED ASSETS
I. Capital Stock:
IE hereby contributes to TFN all of the issued and outstanding shares of:
XLConnect Solutions, Inc.
XLConnect Services, Inc. (f/k/a Intellicom Solutions, Inc.)
TFN hereby contributes to TFNA all of the issued and outstanding shares of:
XLConnect Solutions, Inc.
XLConnect Services, Inc.
TFNA hereby contributes to XLC all of the issued and outstanding shares of:
XLConnect Services, Inc.
II. Employees: Listing as of May 31, 1996 attached as Annex A-1
III. Accounts Receivable: Listing as of May 31, 1996 attached as Annex A-2
IV. Other Tangible Assets: Listing as of May 31, 1996 attached as Annex A-3
V. Intangible Assets: Listing as of May 31, 1996 attached as Annex A-4
VI. Deferred Items: Deferred taxes and associated accumulated
depreciation as of May 31, 1996
SA (1)
<PAGE>
SCHEDULE B
ASSIGNED CONTRACTS
All service agreements, and all service components included in bundled
agreements, either in effect as of May 31, 1996 or arising thereafter, relating
to Internetworking, Applications Development, Telecommunications and Managed
Services.
SB (1)
<PAGE>
SCHEDULE C
ASSUMED LIABILITIES
o Accounts Payable: Trade payables relating to the provision of services
(primarily subcontractors) and accounts payable for service parts
o Accrued Expenses:
o XLConnect employee relocation costs;
o legal and other professional fees and expenses;
o restructuring costs for Oracle-based systems supporting PBTH;
o current payroll and benefits liabilities;
o reserves for receivables delinquency.
o Deferred income: Service fees billed and not provided
o Due to Parent: Allocated indebtedness owed to IE
o Litigation: limited to pending XLConnect trademark issue
SC (1)
<PAGE>
ANNEX A-1
EMPLOYEES
SC (2)
<PAGE>
ANNEX A-2
ACCOUNTS RECEIVABLE
SC (3)
<PAGE>
ANNEX A-3
OTHER TANGIBLE ASSETS (PROPERTY AND EQUIPMENT)
SC (4)
<PAGE>
ANNEX A-4
INTANGIBLE ASSETS
All assets of each IE entity which would be
classified in accordance with GAAP as intangible
assets, including without limitation, all franchises,
licenses, permits, patents, patent applications,
copyrights, trademarks, trade-names, goodwill,
experimental or organization expenses and other like
intangibles, used or useful in connection with the
business to be conducted by XLC.
SC (5)
XLCONNECT SOLUTIONS, INC.
1996
LONG-TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
XLCONNECT SOLUTIONS, INC., a Pennsylvania corporation (the
"Company"), hereby grants to ____________________________ (the "Optionee") an
option (the "Option") to purchase a total of ______________ (___) shares of
Common Stock (the "Shares") of the Company, at the price and on the terms set
forth herein, and in all respects subject to the terms and provisions of the
XLCONNECT SOLUTIONS, INC. 1996 LONG-TERM INCENTIVE PLAN (the "Plan") applicable
to non-qualified incentive stock options, which terms and provisions are
incorporated herein by reference. Capitalized terms used but not otherwise
defined herein shall have the meanings given to them in the Plan.
1. Nature of the Option. The Option is intended by the Company
and the Optionee to be a nonstatutory stock option and is not intended to be an
incentive stock option within the meaning of Section 422 of the Code.
2. Date of Grant; Term of Option. The Option is granted this
____th day of ______________, 1996, and it may not be exercised later than
5:00 p.m. on the ____th day of ____________, 2006.
3. Option Exercise Price. The Option exercise price is $ per
Share.
4. Exercise of Option. Except as otherwise provided herein,
the Option shall be exercisable during its term only in accordance with the
terms and provisions of the Plan and this Option Agreement as follows:
(a) Vesting. The Option shall vest at a rate of
twenty-five percent (25%) of the total number of Shares subject to the Option
per year (the total number of shares so vested being the "Vested Amount") on
each consecutive anniversary of the date of this Option Agreement, commencing on
the date of this Option Agreement.
(b) Right to Exercise.
(i) Options that have not yet vested may not be
exercised. Options that have vested will be exercisable up to the Vested Amount
upon the second anniversary of the consummation by the Company of a firm
commitment underwritten public offering of Common Stock ("IPO"), which date will
be extended one year until the third anniversary of the IPO by the Committee if
so directed by IE.
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<PAGE>
(ii) The Option may not be exercised for a fraction of
a Share. In the event of a "cashless exercise" under Section 4(d) hereof, the
Company shall issue shares for the whole number of Shares acquired through such
cashless exercise and cash for the value of any fractional share.
(iii) In the event of Optionee's death, Disability or
other termination of employment, the exercisability shall be governed by this
Section 4 and Section 7 hereof and the provisions of the Plan.
(iv) In no event may the Option be exercised after the
date of expiration of the term of the Option, as set forth in Section 2 hereof.
(c) Method of Exercise. The Option shall be exercisable by
written notice that shall state the election to exercise the Option, the number
of Shares in respect to which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such Shares as may be required by the Company hereunder or pursuant
to the provisions of the Plan. Such written notice shall be signed by the
Optionee and shall be delivered in person or by certified mail to the Secretary
of the Company or such other person as may be designated by the Company. The
written notice shall be accompanied by payment of the purchase price, an
executed Stock Purchase and Restriction Agreement and any other agreements
required by the Administrator, the terms of the Plan and/or this Option
Agreement. The Option will be deemed to be exercised upon the receipt by the
Company of such written notice, payment of the purchase price, the Stock
Purchase and Restriction Agreement and any other agreements required by the
Administrator, the terms of the Plan and/or this Option Agreement. The Optionee
will have no right to vote or receive dividends and will have not other rights
as a shareholder with respect to such Shares notwithstanding the exercise of the
Option, until the issuance (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company) of the
stock certificate evidencing the Shares that are being issued upon exercise of
the Option. The Company will issue (or cause to be issued) such stock
certificates promptly following the exercise of the Option. The certificate or
certificates for the Shares as to which the Option shall be exercised shall be
registered in the name of the Optionee and shall contain any legend as may be
required under the Plan or any other agreements required by the Committee and/or
applicable law.
(d) Method of Payment. The method of payment of the
purchase price shall be determined by the Committee and may consist entirely of
cash, check, "cashless exercise" (as further set forth in the Plan) or any
combination of such methods of
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<PAGE>
payment, or such other consideration or method of payment as may be authorized
by the Committee and permitted under the Plan.
(e) Restrictions on Exercise. The Option may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of the Option, the Company may
require the Optionee to make any representations and warranties to the Company
as may be required by any applicable law or regulation.
5. Investment Representations. Unless the Shares have been
registered under the Securities Act, in connection with the grant of the Option,
the Optionee represents and warrants as follows:
(a) The Optionee is acquiring the Option, and upon
exercise of the Option, the Optionee will be acquiring the Shares for investment
for his or her own account, not as a nominee or agent, and not with a view to,
or for resale in connection with, any distribution thereof.
(b) The Optionee is aware of the Company's business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
Shares. The Optionee has received all information as the Optionee deems
necessary and appropriate to enable him or her to evaluate the financial risk
inherent in making an investment in the Shares and has received satisfactory and
complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
6. Termination of Service. Unless otherwise determined by the
Committee at or after the time of grant, if an Optionee's service terminates for
any reason other than death or Disability or Retirement, any Option held by such
Optionee may thereafter be exercised by the Optionee, to the extent it was
exercisable at the time of such termination or on such accelerated basis as the
Committee may determine at or after grant, for a period of thirty (30) days from
the date of such termination of service or the stated term of such Option,
whichever period is shorter, provided, however, that the Option must be
exercised no later than the date of termination if the termination occurs for
Cause. Unless otherwise determined by the Committee at or after grant, if an
Optionee's service terminates by reason of Retirement, any Option held by such
Optionee may thereafter be exercised by the Optionee, to the extent it was
exercisable at the time of such Retirement or on such accelerated basis as the
Committee may determine at or after grant, for a period of thirty (30) days from
the date of such termination of service, or the stated term of such Option,
whichever period is
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<PAGE>
shorter. Unless otherwise determined by the Committee at or after grant, if the
Optionee's service terminates due to death, any Option held by such Optionee may
be exercised at any time within one (1) year after the date of death by the
Optionee's estate or by a person who acquired the right to exercise this Option
by bequest or inheritance, but only to the extent the Optionee was entitled to
exercise the Option at the date of such termination. Unless otherwise determined
by the Committee at or after grant, if the Optionee's service terminates due to
Disability, any Option held by such Optionee may be exercised at any time within
six (6) months after the date of termination of service by the Optionee or his
legal guardian or representative, but only to the extent the Optionee was
entitled to exercise the option at the date of such termination; provided,
however, that if the Optionee dies within such six-month period, any unexercised
Option held by such Optionee shall, at the sole discretion of the Committee,
thereafter be exercisable to the extent to which it was exercisable at the time
of death for a period of one (1) year from the date of such death or until the
expiration of the stated term of such Option, whichever period is shorter. To
the extent an Option is not exercised within the time specified herein, the
Option shall terminate. Notwithstanding the foregoing, an Option shall not be
exercisable after the expiration of the term stated herein.
7. Change of Control. In the event of a Change of Control, the
Committee may, in its sole discretion, cause all outstanding Options to
immediately become exercisable.
8. Non-transferability of Option. The Option may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of the Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
9. Continuation of Employment. Neither the Plan nor this
Option Agreement shall confer upon any Optionee any right to continue in the
employment of the Company or limit in any respect the right of the Company to
discharge or release the Optionee at any time, with or without cause and with or
without notice.
10. Withholding. The Company reserves the right to withhold,
in accordance with any applicable laws, from any consideration payable to
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of the Option or the sale or other disposition
of the Shares issued upon exercise of the Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such
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<PAGE>
taxes or if no consideration is payable to the Optionee, upon the request of the
Company, the Optionee (or such other person entitled to exercise the Option
pursuant to Section 7 hereof) shall pay to the Company an amount sufficient for
the Company to satisfy any federal, state or local tax withholding requirements
it may incur, as a result of the grant or exercise of the Option or the sale or
other disposition of the Shares issued upon the exercise of the Option.
11. The Plan. The Option is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as such Plan may be amended from time to time in accordance with the terms
thereof. Pursuant to the Plan, the Board is authorized to adopt rules and
regulations not inconsistent with the Plan as it shall deem appropriate and
proper. A copy of the Plan in its present form is available for inspection
during business hours by the Optionee or the persons entitled to exercise the
Option at the Company's principal office.
12. Entire Agreement. The Option, together with the Plan and
the other exhibits attached thereto or hereto, represents the entire agreement
between the parties.
13. Governing Law. This Option shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania.
14. Amendment. Subject to the provisions of the Plan, this
Option Agreement may only be amended by a writing signed by each of the parties
hereto.
Date: XLCONNECT SOLUTIONS, INC.
----------------------------------
By:
----------------------------
Title:
-------------------------
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<PAGE>
ACKNOWLEDGMENT
The Optionee acknowledges receipt of a copy of the Plan, a
copy of which is attached hereto, and represents that he or she has read and is
familiar with the terms and provisions thereof, and hereby accepts the Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Committee upon any questions arising under the Plan.
Date:
-------------------------------- ------------------------------------
Signature of Optionee
------------------------------------
Address
------------------------------------
City, State, Zip
IN THE EVENT THAT AT THE TIME OF ANY REQUIRED ISSUANCE OF
SHARES UNDER THIS AGREEMENT, SUCH ISSUANCE IS NOT THE SUBJECT OF AN EFFECTIVE
AND CURRENT REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
THEN (1) THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR
IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF AND (2) NO SUCH
SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
<PAGE>
XLCONNECT SOLUTIONS, INC.
1996 LONG-TERM INCENTIVE PLAN
SECTION 1. Purpose; Definitions. The purpose of the XLConnect
Solutions, Inc. 1996 Long-Term Incentive Plan (the "Plan") is to offer to
certain employees and directors of Intelligent Electronics, Inc., a Pennsylvania
corporation ("Parent"), XLConnect Solutions, Inc., a Pennsylvania corporation
(the "Corporation") and their subsidiaries, equity interests in the Corporation,
options to acquire equity interests in the Corporation, and other
performance-based incentive awards, thereby attracting, retaining and motivating
such persons, and strengthening the mutuality of interests between such persons
and the Corporation's shareholders.
For purposes of the Plan, the following initially capitalized
words and phrases shall be defined as set forth below, unless the context
clearly requires a different meaning:
a. "Affiliate" means, with respect to a person or entity, a
person that directly or indirectly controls, or is controlled by, or is under
common control with such person or entity.
b. "Board" means the Board of Directors of the Corporation, as
constituted from time to time.
c. "Cause" means a felony conviction of a Participant or the
failure of a Participant to contest prosecution for a felony, or a Participant's
willful misconduct or dishonesty.
d. "Change of Control" means (i) the acquisition in one or
more transactions by any "Person" (as the term person is used for purposes of
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of "Beneficial ownership" (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of twenty-five percent (25%) or more of the
combined voting power of the Corporation's then outstanding voting securities
(the "Voting Securities"), provided that for purposes of this clause (i) the
Voting Securities acquired directly from the Corporation by any Person shall be
excluded from the determination of such Person's Beneficial ownership of Voting
Securities (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 Corporation of (A) a merger, reorganization or consolidation
involving the Corporation if the shareholders of the Corporation immediately
before such merger, reorganization or consolidation do not or will not own
directly or indirectly immediately following such merger, reorganization or
consolidation, more than fifty percent (50%) (or such other percentage ranging
from fifty
<PAGE>
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 Corporation or (2) an agreement for the sale
or other disposition of all or substantially all of the assets of the
Corporation; or (3) acceptance by shareholders of the Corporation of shares in a
share exchange if the shareholders of the Corporation 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.
e. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
f. "Committee" means the Committee referred to in Section 2
hereof.
g. "Disability" means permanent and total disability, as
determined under the Corporation's long-term disability program, except that
Disability of an optionee with respect to an Incentive Stock Option shall occur
if the optionee is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months.
h. "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3(b)(3)promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor definition adopted by the Securities and Exchange
Commission; provided, however, that the Board or the Committee may, in its sole
discretion, determine from time to time whether the rules and regulations under
Section 162(m) of the Code shall apply for purposes of determining which
individuals are "NonEmployee Directors" following the Annual Meeting of
Shareholders of the Corporation to be held in 1996.
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i. "Fair Market Value" means, as of any date: (1)the closing
price of the Stock as reported on the principal nationally recognized stock
exchange on which the Stock is traded on such date, or if no Stock prices are
reported on such date, the closing price of the Stock on the next preceding date
on which there were reported Stock prices; or (2) if the Stock is not listed or
admitted to unlisted trading privileges on a nationally recognized stock
exchange, the closing price of the Stock as reported by The Nasdaq Stock Market
on such date, or if no Stock prices are reported on such date, the closing price
of the Stock on the next preceding date on which there were reported Stock
prices; or (3) if the Stock is not listed or admitted to unlisted trading
privileges on a nationally recognized stock exchange or traded on The Nasdaq
Stock Market, then the "Market Price" shall be determined by the Board acting in
its discretion, in accordance with the standards set forth in Treasury
Regulation ss.1.421-4(d) (7).
j. "Incentive Stock Option" means any Stock Option intended to
be and designated as an "Incentive Stock Option" within the meaning of Section
422 of the Code.
k. "Long-Term Performance Award" or "Long-Term Award" means an
award made pursuant to Section 8 hereof that is payable in cash and/or Stock
(including Restricted Stock, Performance Shares and Performance Units) in
accordance with the terms of the grant, based on Corporation, business unit
and/or individual performance over a period of at least two years, in each case
as determined by the Committee and as set forth in the grant letter.
l. "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
m. "Participant" means an employee or director of the
Corporation or a Subsidiary to whom an award is granted pursuant to the Plan.
n. "Performance Share" means an award made pursuant to Section
9 hereof of the right to receive Stock at the end of a specified performance
period.
o. "Performance Unit" means an award made pursuant to Section
10 hereof of the right to receive cash at the end of a specified performance
period.
p. "Restricted Stock" means an award of shares of Stock that
is subject to restrictions pursuant to Section 7 hereof.
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q. "Retirement" means termination of the employment of a
Participant with the Corporation, an Affiliate or a Subsidiary other than a
termination effected at the direction of the Corporation (whether or not the
Corporation effects such termination for Cause). With respect to a director who
is not also an employee of the Corporation, Retirement shall occur at such time
as the individual ceases to be a director.
r. "Rules" means Section 16 of the Exchange Act and the
regulations promulgated thereunder.
s. "Securities Broker" means a registered securities broker
acceptable to the Corporation who agrees to effect the cashless exercise of an
Option pursuant to Section 5(m) hereof.
t. "Stock" means the common stock, $.01 par value per share,
of the Corporation, subject to substitution or adjustment as provided in Section
3(d) hereof.
u. "Stock Appreciation Right" means the right, pursuant to an
award granted under Section 6 hereof, to surrender to the Corporation all (or a
portion) of a Stock Option in exchange for cash and/or shares of stock in an
amount equal to the difference between (i) the Fair Market Value, as of the date
such Stock Option (or such portion thereof) is surrendered, of the shares of
Stock covered by such Stock Option (or such portion thereof) and (ii) the
aggregate exercise price of such Stock Option (or such portion thereof).
v. "Stock Option" or "Option" means any option to purchase
shares of Stock (including Restricted Stock, if the Committee so determines)
granted pursuant to Section 5 hereof.
w. "Subsidiary" means, in respect of the Corporation, a
subsidiary corporation, whether now or hereafter existing, as defined in
Sections 424(f) and (g) of the Code.
SECTION 2. Administration. The Plan shall be administered by a
Committee of not less than two members of the Board who are all Non-Employee
Directors and who shall be appointed by, and serve at the pleasure of the Board.
The Committee shall have full authority to grant to eligible
persons under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, (iv) Long-Term Performance Awards, (v) Performance
Shares and/or (vi) Performance Units. In particular, the Committee shall have
the authority:
a. to select the persons to whom Stock Options, Stock
Appreciation Rights, Restricted Stock, Long-Term
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Performance Awards, Performance Shares and Performance Units may from time to
time be granted hereunder;
b. to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted
Stock, Long-Term Performance Awards, Performance Shares and Performance Units,
or any combination thereof, are to be granted hereunder;
c. to determine the number of shares of Stock, if any, to be
covered by each such award granted hereunder;
d. to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, including, but not
limited to, the share price and any restriction or limitation, any vesting
provisions, or any vesting acceleration or forfeiture waiver regarding any Stock
Option or other award and/or the shares of Stock relating thereto, or the length
of the period following termination of employment of any Participant during
which any Stock Option or Stock Appreciation Right may be exercised (which, in
the case of an Incentive Stock Option, shall be no longer than one year in the
case of the termination of employment of a Participant by reason of death or
Disability, or three months in the case of the termination of employment of a
Participant for any reason other than death or Disability), based on such
factors as the Committee shall determine, in its sole discretion;
e. to determine whether and under what circumstances a Stock
Option may be settled in cash or stock, including Restricted Stock under Section
5(l);
f. to determine whether and under what circumstances a Stock
Option may be exercised without a payment of cash under Section 5(m); and
g. to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under the
Plan may be deferred either automatically or at the election of the Participant.
The Committee shall have the authority to adopt, alter and
repeal such administrative rules, guidelines and practices governing the Plan as
it shall, from time to time, deem advisable; to interpret the terms and
provisions of the Plan and any award issued under the Plan (and any agreements
relating thereto); to amend the terms of any agreement relating to any award
issued under the Plan; and to otherwise supervise the administration of the
Plan. The Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any award granted in the manner and to the
extent it shall deem necessary to carry out the intent of the Plan.
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All decisions made by the Committee pursuant to the provisions
of the Plan shall be final and binding on all persons, including the Corporation
and Participants. No member of the Committee shall be liable for any good faith
determination, act or failure to act in connection with the Plan or any award
made under the Plan.
SECTION 3. Stock Subject to the Plan.
a. Stock Subject to the Plan. The stock to be subject or
related to awards under the Plan shall be shares of Stock and may be either
authorized and unissued shares of Stock or shares of Stock held in the treasury
of the Corporation. The maximum number of shares of Stock that may be the
subject of awards under the Plan is Three Million (3,000,000) and the
Corporation shall reserve for the purposes of the Plan, out of its authorized
and unissued shares of Stock or out of shares of Stock held in its treasury, or
partly out of each, such number of shares.
Notwithstanding the foregoing, no individual shall receive,
over the term of the Plan, awards for more than an aggregate of 900,000, or 30%,
of the shares of Stock authorized for grant under the Plan.
b. Computation of Stock Available for the Plan. For the
purpose of computing the total number of shares of Stock available under the
Plan at any time during which the Plan is in effect, there shall be debited
against the total number of shares of Stock determined to be available pursuant
to paragraphs (a) and (c) of this Section 3 the maximum number of shares of
Stock subject to issuance upon exercise of Options or other stock based awards
made under the Plan.
c. Effect of the Expiration or Termination of Awards. If and
to the extent that an award made under the Plan expires, terminates or is
canceled or forfeited for any reason without having been exercised in full, the
shares of Stock associated with the expired, terminated, canceled or forfeited
portion of the award shall again become available for award under the Plan.
Notwithstanding anything contained herein, the number of shares of Stock
available for awards at any time under the Plan shall be reduced to such lesser
number as may be required pursuant to the methods of calculation necessary so
that the exemptions provided pursuant to Rule 16b-3 under the Exchange Act will
continue to be available for transactions involving all current and future
awards. In addition, during the period that any award remains outstanding under
the Plan, the Committee may make good faith adjustments with respect to the
number of shares of Stock attributable to such awards for purposes of
calculating the maximum number of shares available for the granting of future
awards under the Plan, provided that following such adjustments
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the exemptions provided pursuant to Rule 16b-3 under the Exchange Act will
continue to be available for transactions involving all current and future
awards.
d. Other Adjustment. In the event of any merger,
reorganization, consolidation, recapitalization, Stock dividend, or other change
in corporate structure affecting the Stock, such substitution or adjustment
shall be made in the aggregate number, type and issuer of the securities
reserved for issuance under the Plan, in the number and option price of
securities subject to outstanding options granted under the Plan and in the
number and price of securities to other awards made under the Plan, as may be
determined to be appropriate by the Committee in its sole discretion, provided
that the number of securities subject to any award shall always be a whole
number. Such adjusted option price shall also be used to determine the amount
payable by the Corporation upon the exercise of any Stock Appreciation Right
associated with any Stock Option.
SECTION 4. Eligibility. Directors, officers and other
employees of Parent, the Corporation or their Subsidiaries are eligible to be
granted awards under the Plan. Directors who are not employees of the
Corporation or a Subsidiary are eligible to be granted awards under the Plan,
but are not eligible to be granted Incentive Stock Options.
SECTION 5. Stock Options. Stock Options granted under the Plan
may be of two types: (i) Incentive Stock Options or (ii) Non-Qualified Stock
Options. Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee
eligible under Section 4, Incentive Stock Options, Non Qualified Stock Options,
or both types of Stock Options (in each case with or without Stock Appreciation
Rights). To the extent that any Stock Option does not qualify as an Incentive
Stock Option, it shall constitute a separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term
of the Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the optionee(s) affected, to disqualify any Incentive
Stock Option under such Section 422.
Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional
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terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem appropriate:
a. Option Price. The exercise price per share of Stock
purchasable under a Non-Qualified Stock Option shall be determined by the
Committee; provided, however, that if the Board or the Committee has determined
to comply with the rules and regulations under Section 162(m) of the Code, the
exercise price for any individual who is or (as of the time of grant) can be
reasonably anticipated to be subject to the provisions of Section 162(m) of the
Code shall not be less than the Fair Market Value at the time of grant. The
exercise price per share of Stock purchasable under an Incentive Stock Option
shall be 100% of the Fair Market Value of the Stock on the date of the grant.
However, any Incentive Stock Option granted to any optionee who, at the time the
Option is granted, owns more than 10% of the voting power of all classes of
stock of the Corporation or of a Subsidiary, shall have an exercise price per
share of not less than 110% of Fair Market Value per share on the date of the
grant.
b. Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercisable more than ten years
after the date the Option is granted. However, any Option granted to any
optionee who, at the time the Option is granted, owns more than 10% of the
voting power of all classes of stock of the Corporation or of a Subsidiary may
not have a term of more than five years. No Option may be exercised by any
person after expiration of the term of the Option.
c. Exercisability. Stock Options shall vest and be exercisable
at such time or times and subject to such terms and conditions as shall be
determined by the Committee at the time of grant; provided, however, that in no
event shall any Stock Options become exercisable until the expiration of the
period of two years commencing on the date of consummation of the Company's
initial underwritten public offering, which period may be extended for one
additional year by the Committee at the direction of Parent; provided, further,
that, except as otherwise provided herein, unless otherwise determined by the
Committee at grant, no Stock Option granted to a person who is subject to
Section 16 of the Exchange Act (a "Section 16 person") shall be exercisable
during the six-month period following the date of the grant of the Option. If
the Committee provides, in its discretion, that any Stock Option is exercisable
only in installments, the Committee may waive such installment exercise
provisions at any time at or after grant, in whole or in part, based on such
factors as the Committee shall determine, in its sole discretion.
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d. Method of Exercise. Subject to the exercise provisions
under Section 5(c), Stock Options may be exercised in whole or in part at any
time and from time to time during the term of the Option, by giving written
notice of exercise to the Corporation specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by certified or bank check, or such other instrument as the
Committee may accept. As determined by the Committee, in its sole discretion, at
or after grant, payment in full or in part of the exercise price of a Stock
Option may be made in the form of unrestricted Stock based on the Fair Market
Value of the Stock on the date the option is exercised; provided, however, that,
in the case of an Incentive Stock Option, the right to make a payment in the
form of already owned shares of Stock may be authorized only at the time the
Option is granted.
The Committee, in its sole discretion, may at the time of
grant or such later time as it determines, permit payment of a Stock Option
exercise price of a Non-Qualified Stock Option to be made in whole or in part in
the form of Restricted Stock based on the Fair Market Value of the Stock on the
date the Option is exercised (computed without regard to the restrictions
applicable to the Restricted Stock); provided, however, that in the case of an
Incentive Stock Option, the right to make a payment in the form of Restricted
Stock may be authorized only at the time the Option is granted. If such payment
is permitted, then Stock received upon the exercise of the option may be subject
to the same forfeiture restrictions as the Restricted Stock used to make the
payment, unless otherwise determined by the Committee, in its sole discretion,
at or after grant.
No shares of Stock shall be issued upon exercise of an Option
until full payment therefor has been made. An optionee shall generally have the
right to dividends and other rights of a shareholder with respect to shares of
Stock subject to the Option when the optionee has given written notice of
exercise, has paid in full for such shares, and, if requested, has given the
representation described in Section 13(a) hereof.
e. Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order, as defined
in the Code or Title I of the Employee Retirement Income Security Act, and all
Stock Options shall be exercisable, during the optionee's lifetime, only by the
optionee or, in the event of his Disability, by his personal representative.
f. Termination by Reason of Death. Subject to Section 5(j), if
an optionee's service with the Corporation or any Subsidiary terminates by
reason of death, any Stock Option held by such optionee may thereafter be
exercised, to the extent
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then exercisable or on such accelerated basis as the Committee may determine at
or after grant, by the legal representative of the estate or by the legatee of
the optionee under the will of the optionee, for a period expiring (1) at such
time as may be specified by the Committee at or after the time of grant, or (2)
if not specified by the Committee, then one year from the date of death, or (3)
if sooner than the applicable period specified under (1) or (2) above, then upon
the expiration of the stated term of such Stock Option.
g. Termination by Reason of Disability. Subject to Section
5(j), if an optionee's service with the Corporation or any Subsidiary terminates
by reason of Disability, any Stock Option held by such optionee may thereafter
be exercised by the optionee or his personal representative, to the extent it
was exercisable at the time of termination, or on such accelerated basis as the
Committee may determine at or after grant, for a period expiring (1) at such
time as may be specified by the Committee at or after the time of grant, or (2)
if not specified by the Committee, then six months from the date of termination
of service, or (3) if sooner than the applicable period specified under (1) or
(2) above, then upon the expiration of the stated term of such Stock Option;
provided, however, that if the optionee dies within such period, any unexercised
Stock Option held by such optionee shall, at the sole discretion of the
Committee, thereafter be exercisable to the extent to which it was exercisable
at the time of death for a period of one (1) year from the date of such death
(or such other period as may be specified by the Committee) or until the
expiration of the stated term of such Stock Option, whichever period is shorter.
h. Termination by Reason of Retirement. Subject to Section
5(j), if an optionee's service with the Corporation terminates by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such Retirement
or on such accelerated basis as the Committee may determine at or after the time
of grant, for a period expiring (1) at such time as may be specified by the
Committee at or after the time of grant, or (2) if not specified by the
Committee, then thirty (30) days from the he date of termination of service, or
(3) if sooner than the applicable period specified under (1) or (2) above, then
upon the expiration of the stated term of such Stock Option.
i. Other Termination. Unless otherwise determined by the
Committee at or after grant, if an optionee's service with the Corporation
terminates for any reason other than death or Disability, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of such termination or on such accelerated basis as
the Committee may determine at or after grant, for a period expiring (1) at such
time as may be specified
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by the Committee at or after the time of grant, or (2) if not specified by the
Committee, then on the date of termination of service in the event the
termination occurred for Cause or thirty (30) days from the date of termination
of service if the termination occurred for any reason other than death,
Disability, Retirement or Cause, or (3) if sooner than the applicable period
specified under (1) or (2) above, then upon the expiration of the stated term of
such Stock Option.
j. Change of Control. In the event of a Change of Control, the
Committee may, in its sole discretion, cause all outstanding Stock Options to
immediately become fully exercisable.
k. Incentive Stock Option Limitations. To the extent required
for "incentive stock option" status under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Stock with respect
to which Incentive Stock Options are exercisable for the first time by the
optionee during any calendar year under the Plan and/or any other plan of the
Corporation or any Subsidiary shall not exceed $100,000. For purposes of
applying the foregoing limitation, Incentive Stock Options shall be taken into
account in the order granted.
To the extent (if any) permitted under Section 422 of the Code
without causing an Incentive Stock Option to lose its status as such or to be
deemed to be a new Incentive Stock Option under the modification rules of
Section 424(h) of the Code, and subject to any restrictions imposed by the
Committee, if (i) a participant's service with the Corporation is terminated by
reason of death, Disability or Retirement and (ii) the portion of any Incentive
Stock Option that is otherwise exercisable during the post-termination period
specified under Section 5(f), (g) or (h), applied without regard to this Section
5(j), is greater than the portion of such option that is exercisable as an
"incentive stock option" during such post-termination period under Section 422
after taking the $100,000 limitation into account, such post- termination period
of exercisability shall automatically be extended (but not beyond the original
Option term) to the extent necessary to permit the optionee to exercise such
Incentive Stock Option without violating the $100,000 limitation.
l. Cash-out of Option; Settlement of Restricted Stock. On
receipt of written notice to exercise, the Committee may, in its sole
discretion, elect to terminate all or part of the portion of the Option(s)
proposed to be exercised provided that the Corporation pays the optionee an
amount in cash equal to the excess of the Fair Market Value of the Stock
otherwise issuable over the Option price (the "Spread Value") on the effective
date of such cash-out.
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In addition, if the option agreement so provides at grant or
is amended after grant and prior to exercise to so provide (with the optionee's
consent), the Committee may require that all or part of the shares to be issued
upon exercise of an Option take the form of Restricted Stock. For this purpose,
such Restricted Stock shall be valued on the date of exercise on the basis of
the Fair Market Value of such Restricted Stock determined without regard to the
forfeiture restrictions involved.
m. Cashless Exercise. To the extent permitted under the Rules,
and with the consent of the Committee, the Corporation agrees to cooperate in a
"cashless exercise" of an Option. The cashless exercise shall be effected by the
Participant delivering to the Securities Broker instructions to sell a
sufficient number of shares of Stock to cover the costs and expenses associated
therewith.
n. Automatic Grants to Nonemployee Directors. Each director of
the Company who is not also an employee of the Company will automatically
receive, without further action on the part of the Committee or the Board, (i)
an initial grant of a Stock Option to purchase 25,000 shares of Stock upon the
later of the date of the consummation of the Company's initial public offering
and the date of such director's initial appointment or election to the Board and
(ii) subsequent annual grants of Stock Options to purchase 5,000 shares of Stock
upon each re-election of such director to the Board by the Company's
shareholders, provided such re-election occurs at least six months after such
director's initial election or appointment.
SECTION 6. Stock Appreciation Rights.
a. Grant and Exercise. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option granted under the
Plan and, subject to Section 5(e) hereof, shall be transferable only upon
transfer of the related Stock Option. In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time of the grant of
such Stock Option. In the case of an Incentive Stock Option, such rights may be
granted only at the time of the grant of such Stock Option.
A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option, except
that, unless otherwise determined by the Committee, in its sole discretion at
the time of grant, a Stock Appreciation Right granted with respect to less than
the full number of shares covered by a related Stock Option shall not be reduced
until the number of shares covered by an exercise or termination of the related
Stock
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Option exceeds the number of shares not covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in
accordance with Section 6(b) of the Plan, by surrendering the applicable portion
of the related Stock Option. Upon such exercise and surrender, the optionee
shall be entitled to receive an amount determined in the manner prescribed in
Section 6(b) of the Plan. Stock Options which have been so surrendered, in whole
or in part, shall no longer be exercisable to the extent the related Stock
Appreciation Rights have been exercised.
b. Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the provisions of
the Plan, as shall be determined from time to time by the Committee, in its sole
discretion, including the following:
(1) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of Section 5 and this
Section 6 of the Plan; provided, however, that any Stock Appreciation Right
granted to Section 16 persons subsequent to the grant of the related Stock
Option shall not be exercisable during the first six months of its term.
(2) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive up to, but not more than, an amount in
cash and/or shares of Stock equal in value to the excess of the Fair Market
Value of one share of Stock over the Option price per share specified in the
related Stock Option, multiplied by the number of shares in respect of which the
Stock Appreciation Right shall have been exercised, with the Committee having
the right to determine the form of payment.
(3) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is related,
shall be deemed to have been exercised for the purpose of the limitation set
forth in Section 3 of the Plan on the number of shares of Stock to be issued
under the Plan, but only to the extent of the number of shares issued under the
Stock Appreciation Right at the time of exercise based on the value of the Stock
Appreciation Right at such time.
(4) Stock Appreciation Right granted in connection with a
Stock Option may be exercised only if and when the market price of the Stock
subject to the Stock Option exceeds the exercise price of such Stock Option.
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SECTION 7. Restricted Stock.
a. Administration. Shares of Restricted Stock may be issued
either alone or in addition to other awards granted under the Plan. The
Committee shall determine the persons to whom, and the time or times at which,
grants of Restricted Stock will be made, the number of shares to be awarded, the
price (if any) to be paid by the recipient of Restricted Stock, the time or
times within which such awards may be subject to forfeiture, and all other
conditions of the awards.
The Committee may condition the vesting of Restricted Stock
upon the attainment of specified performance goals or such other factors as the
Committee may determine, in its sole discretion, at the time of the award.
The provisions of Restricted Stock awards need not be the same
with respect to each recipient.
b. Awards and Certificates. The prospective recipient of a
Restricted Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Corporation, and has
otherwise complied with the applicable terms and conditions of such award. The
purchase price for shares of Restricted Stock may be zero.
Each Participant receiving a Restricted Stock award shall be
issued a stock certificate in respect of such shares of Restricted Stock. Such
certificate shall be registered in the name of such Participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) of the XLConnect Solutions,
Inc. 1996 Long-Term Incentive Plan and an Agreement entered
into between the registered owner and XLConnect Solutions,
Inc. Copies of such Plan and Agreement are on file in the
principal corporate offices of XLConnect Solutions, Inc."
The Committee shall require that the stock certificates
evidencing shares of Restricted Stock be held in custody by the Corporation
until the restrictions thereon shall have lapsed, and that, as a condition of
any Restricted Stock award, the Participant shall have delivered to the
Corporation a stock, power endorsed in blank, relating to the Stock covered by
such award.
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c. Restrictions and Conditions. The shares of Restricted Stock
awarded pursuant to this Section 7 shall be subject to the following
restrictions and conditions:
(1) During a period set by the Committee commencing with
the date of such award (the "Restriction Period"), the Participant shall not be
permitted to sell, transfer, pledge, assign or otherwise encumber shares of
Restricted Stock awarded under the Plan. The Committee, in its sole discretion,
may provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part, based on service,
performance and/or such other factors or criteria as the Committee may
determine, in its sole discretion.
(2) Except as provided in this paragraph (ii) and Section
7(c)(i), the Participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a shareholder of the Corporation, including the
right to vote the shares, and the right to receive any cash dividends. The
Committee, in its sole discretion, as determined at the time of award, may
permit or require the payment of cash dividends to be deferred and, if the
Committee so determines, reinvested in additional shares of Restricted Stock to
the extent shares are available under Section 3 of the Plan.
(3) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a Participant's service with
the Corporation for reasons other than death or Disability during the
Restriction Period, all shares of Restricted Stock still subject to restriction
shall be forfeited by the Participant. Subject to the provisions of the Plan,
the Committee, in its sole discretion, may provide for the lapse of such
restrictions in installments and may waive such restrictions, in whole or in
part, at any time, based on such factors as the Committee shall deem appropriate
in its sole discretion. Upon the death or Disability of a Participant during the
Restriction Period, restrictions will lapse with respect to a percentage of the
Restricted Stock award granted to the Participant that is equal to the
percentage of the Restriction Period that has elapsed as of the date of death or
the date on which such Disability commenced (as determined by the Committee in
its sole discretion), and a stock certificate or stock certificates representing
such shares of Stock shall be issued and delivered to the Participant or the
Participant's estate, as the case may be.
(4) In the event of hardship or other special circumstances
of a Participant whose service with the Corporation is involuntarily terminated
(other than for Cause), the Committee may, in its sole discretion, waive in
whole or in part any or all remaining restrictions with respect to such
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Participant's shares of Restricted Stock, based on such factors as the Committee
may deem appropriate.
(5) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction Period, the
certificates for such shares shall be promptly delivered by the Corporation to
the Participant.
(6) In the event of a Change of Control, the Committee in
its sole discretion, cause all Restricted Stock remaining subject to forfeiture
to immediately cease to be subject to forfeiture and a stock certificate or
stock certificates representing such shares of Stock to be issued and delivered
to the Participant.
SECTION 8. Long Term Performance Awards.
a. Awards and Administration. Long Term Performance Awards may
be awarded either alone or in addition to other awards granted under the Plan.
Prior to award of a Long Term Performance Award, the Committee shall determine
the nature, length and starting date of the performance period (the "performance
period") for each Long Term Performance Award, which shall be at least two years
(subject to Section 11 below). Performance periods may overlap and Participants
may participate simultaneously with respect to Long Term Performance Awards that
are subject to different performance periods and/or different performance
factors and criteria. Prior to award of a Long Term Performance Award, the
Committee shall determine the performance objectives to be used in valuing Long
Term Performance Awards and determine 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 and shall be based
upon such Corporation, business unit and/or individual performance factors and
criteria as the Committee may deem appropriate, including, but not limited to,
earnings per share or return on equity, as approved by the Shareholders of the
Corporation. If the Board or the Committee has determined to comply with the
rules and regulations under Section 162(m) of the Code, the Committee shall
determine, in its sole discretion, the extent to which the performance
objectives for any Long Term Performance Award should be disclosed to and
approved by the shareholders of the Corporation and otherwise comply with such
rules and regulations.
At the beginning of each performance period, the Committee
shall determine for each Long Term Performance Award subject to such performance
period the range of dollar values or number of shares of Stock to be awarded to
the Participant at the end of the performance period if and to the extent that
the relevant measure(s) of performance for such Long Term Performance
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<PAGE>
Award is (are) met; provided, however, that no Participant shall be awarded a
Long Term Performance Award with a dollar value in excess of One Million Dollars
($1,000,000) for the performance period to which the Long Term Performance Award
relates. Such dollar values or number of shares of Stock may be fixed or may
vary in accordance with such performance and/or other criteria as may be
specified by the Committee, in its sole discretion.
b. Adjustment of Awards. 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, to the extent deemed appropriate by the
Committee, in its sole discretion, to avoid unintended windfalls or hardship.
c. Termination of Service. Unless otherwise provided in the
applicable award agreements), if a Participant terminates service with the
Corporation during a performance period because of death, Disability or
Retirement, such Participant (or his estate) shall be entitled to a payment with
respect to each outstanding Long Term Performance Award at the end of the
applicable performance period:
(1) based, to the extent relevant under the terms of the
award, upon the Participant's performance for the portion of such performance
period ending on the date of termination and the performance of the applicable
business unit(s) for the entire performance period, and
(2) pro-rated, where deemed appropriate by the Committee,
for the portion of the performance period during which the Participant was
employed by the Corporation, all as determined by the Committee, in its sole
discretion.
However, the Committee may provide for an earlier payment in
settlement of such award in such amount and under such terms and conditions as
the Committee deems appropriate, in its sole discretion.
Except as otherwise determined by the Committee, if a
Participant terminates service with the Corporation during a performance period
for any other reason, then such Participant shall not be entitled to any payment
with respect to the Long Term Performance Awards subject to such performance
period, unless the Committee shall otherwise determine, in its sole discretion.
In the event of a Change of Control, the Committee may, in its
sole discretion, cause all conditions applicable to a Long Term Performance
Award to immediately terminate and a stock
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certificate or stock certificates representing shares of Stock subject to such
award, or cash, as the case may be, to be issued and/or delivered to the
Participant.
d. Form of Payment. The earned portion of a Long Term
Performance Award may be paid currently or on a deferred basis, together with
such interest or earnings equivalent as may be determined by the Committee, in
its sole discretion. Payment shall be made in the form of cash or whole shares
of Stock, including 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, all as the Committee shall determine at or after grant. If
and to the extent a Long Term Performance Award is payable in Stock and the full
amount of such value is not paid in Stock, then the shares of Stock representing
the portion of the value of the Long Term Performance Award not paid in Stock
shall again become available for award under the Plan, subject to Section 3(c).
Prior to any payment, the Committee shall certify that all of the performance
goals or other material terms of the award have been met.
SECTION 9. Performance Shares.
a. Awards and Administration. The Committee shall determine
the persons to whom and the time or times at which Performance Shares shall be
awarded, the number of Performance Shares to be awarded to any such person, the
duration of the period (the "performance period") during which, and the
conditions under which, receipt of the shares of Stock will be deferred, and the
other terms and conditions of the award in addition to those set forth below.
The Committee may condition the receipt of shares of Stock
pursuant to a Performance Share award upon the attainment of specified
performance goals or such other factors or criteria as the Committee shall
determine, in its sole discretion.
The provisions of Performance Share awards need not be the
same with respect to each Participant, and such awards to individual
Participants need not be the same in subsequent years.
b. Terms and Conditions. Performance Shares awarded pursuant
to this Section 9 shall be subject to the following terms and conditions and
such other terms and conditions, not inconsistent with the terms of this Plan,
as the Committee shall deem desirable:
(1) Conditions. The Committee, in its sole discretion,
shall specify the performance period during which, and the conditions under
which, the receipt of shares of Stock covered by the Performance Share award
will be deferred.
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<PAGE>
(2) Stock Certificate. At the expiration of the performance
period, if the Committee, in its sole discretion, determines that the conditions
specified in the Performance Share agreement have been satisfied, a stock
certificate or stock certificates representing the number of shares of Stock
covered by the Performance Share award shall be issued and delivered to the
Participant. A Participant shall not be deemed to be the holder of Stock, or to
have the rights of a holder of Stock, with respect to the Performance Shares
unless and until a stock certificate or stock certificates representing such
shares of Stock are issued to such Participant.
(3) Death, Disability or Retirement. Subject to the
provisions of the Plan, if a Participant terminates service with the Corporation
during a performance period because of death, Disability or Retirement, such
Participant (or his estate) shall 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
termination, provided that the Committee, in its sole discretion, determines
that the conditions specified in the Performance Share agreement have been
satisfied. In such event, a stock certificate or stock certificates representing
such shares of Stock shall be issued and delivered to the Participant or the
Participant's estate, as the case may be.
(4) Termination of Service. Unless otherwise determined by
the Committee at the time of grant, the Performance Shares will be forfeited
upon a termination of service during the performance period for any reason other
than death, Disability or Retirement.
(5) Change of Control. In the event of a Change of Control,
the Committee may, in its sole discretion, cause all conditions applicable to
the Performance Shares to immediately terminate and a stock certificate or stock
certificates representing shares of Stock subject to the Stock award to be
issued and delivered to the Participant.
SECTION 10. Performance Units.
a. Awards and Administration. The Committee shall determine
the persons to whom and the time or times at which Performance Units shall be
awarded, the number of Performance Units to be awarded to any such person, the
duration of the period (the "performance period") during which, and the
conditions under which, a Participant's right to Performance Units will be
vested, the ability of Participants to defer the receipt of payment of such
Performance Units, and the other terms and conditions of the award in addition
to those set forth below.
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<PAGE>
A Performance Unit shall have a fixed dollar value.
The Committee may condition the vesting of Performance Units
upon the attainment of specified performance goals or such other factors or
criteria as the Committee shall determine, in its sole discretion.
The provisions of Performance Unit awards need not be the same
with respect to each Participant, and such awards to individual Participants
need not be the same in subsequent years.
b. Terms and Conditions. Performance Units awarded pursuant to
this Section 10 shall be subject to the following terms and conditions and such
other terms and conditions, not inconsistent with the terms of this Plan, as the
Committee shall deem desirable:
(1) Conditions. The Committee, in its sole discretion,
shall specify the performance period during which, and the conditions under
which, the Participant's right to Performance Units will be vested.
(2) Vesting. At the expiration of the performance period,
the Committee, in its sole discretion, shall determine the extent to which the
performance goals have been achieved, and the percentage of the Performance
Units of each Participant that have vested.
(3) Death, Disability or Retirement. Subject to the
provisions of this Plan, if a Participant terminates service with the
Corporation during a performance period because of death, Disability or
Retirement, such Participant (or the Participant's estate) shall be entitled to
receive, at the expiration of the performance period, a percentage of
Performance Units that is equal to the percentage of the performance period that
had elapsed as of the date of termination, provided that the Committee, in its
sole discretion, determines that the conditions specified in the Performance
Unit agreement have been satisfied, and payment thereof shall be made to the
Participant or the Participant's estate, as the case may be.
(4) Termination of Service. Unless otherwise determined by
the Committee at the time of grant, the Performance Units will be forfeited upon
a termination of service during the performance period for any reason other than
death, Disability or Retirement.
(5) Change of Control. In the event of a Change of Control,
the Committee may, in its sole discretion, cause all conditions applicable to
Performance Units to immediately terminate and cash representing the full amount
of such award to be paid to the Participant.
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<PAGE>
SECTION 11. Amendments and Termination. The Board may amend,
alter or discontinue the Plan at any time and from time to time, but no
amendment, alteration or discontinuation shall be made which would impair the
rights of a Participant with respect to a Stock Option, Stock Appreciation
Right, Restricted Stock, Long Term Performance Award, Performance Share or
Performance Unit which has been granted under the Plan, without the
Participant's consent, or which, without the approval of the Corporation's
shareholders, would:
a. except as expressly provided in the Plan, increase the
total number of shares of Stock reserved for the purposes of the Plan;
b. change the persons or class of persons eligible to
participate in the Plan; or
c. extend the maximum option term under Section 5(b) of the
Plan.
The Committee may substitute new Stock options for previously
granted Stock options, including previously granted Stock Options having higher
exercise prices.
Subject to the above provisions, the Board shall have broad
authority to amend the Plan to take into account changes in applicable tax laws
and accounting rules, as well as other developments. Notwithstanding the
foregoing, no amendment to the Plan may be made by the Board without the
approval of the Corporation's shareholders if such approval would be required
under the Rules in order to ensure that transactions effected under the Plan are
eligible for the benefit of Rule 16b-3.
SECTION 12. Unfunded Status of Plan. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant or optionee by the
Corporation, nothing contained herein shall give any such Participant or
optionee any rights that are greater than those of a general creditor of the
Corporation. In its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Stock or payments in lieu of Stock or with respect to awards hereunder.
SECTION 13. General Provisions.
a. The Committee may require each person acquiring Stock or a
Stock based award under the Plan to represent to and agree with the Corporation
in writing that the Participant is acquiring the Stock or Stock based award for
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investment purposes and without a view to distribution thereof and as to such
other matters as the Committee believes are appropriate to ensure compliance
with applicable Federal and state securities laws. The certificate evidencing
such award and any securities issued pursuant thereto may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer
and compliance with securities laws.
All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock-transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities Act of 1933, as amended,
the Exchange Act, any stock exchange upon which the Stock is then listed, and
any other applicable Federal or state securities laws, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
b. Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
c. The adoption of the Plan shall not confer upon any employee
of the Corporation or a Subsidiary any right to continued employment with the
Corporation or such Subsidiary, nor shall it interfere in any way with the right
of the Corporation or such Subsidiary to terminate the employment of any of its
employees at any time.
d. No later than the date as of which an amount first becomes
includable in the gross income of the Participant for Federal income tax
purposes with respect to any award under the Plan, the Participant shall pay to
the Corporation, or make arrangements satisfactory to the Committee regarding
the payment, of any Federal, state or local taxes of any kind required by law to
be withheld with respect to such amount. Unless otherwise determined by the
Committee, the minimum required withholding obligations may be settled with
Stock, including Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Corporation under the Plan shall
be conditional on such payment or arrangements and the Corporation shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Participant.
e. At the time of grant of an award under the Plan, the
Committee may provide that the shares of Stock received as a result of such
grant shall be subject to a right of first refusal, pursuant to which the
Participant shall be required to
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<PAGE>
offer to the Corporation any shares that the Participant wishes to sell, with
the price being the then Fair Market Value of the Stock, subject to such other
terms and conditions as the Committee may specify at the time of grant.
f. The reinvestment of dividends in additional Restricted
Stock (or in other types of Plan awards) at the time of any dividend payment
shall only be permissible if sufficient shares of Stock are available under
Section 3 of the Plan for such reinvestment (taking into account then
outstanding Stock Options and other Plan awards).
g. The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
h. The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
SECTION 14. Effective Date of Plan. The Plan shall be
effective on the date it is approved by the affirmative vote of the holders of a
majority of the shares of Stock present, or represented, and entitled to vote on
the Plan at a meeting of shareholders, or the written consent of such holders;
provided, however, that if the Plan is not so approved, it shall become null and
void.
SECTION 15. Term of Plan. No Stock Option, Stock Appreciation
Right, Restricted Stock, Long Term Performance Award, Performance Share or
Performance Unit shall be granted pursuant to the Plan on or after the tenth
(10th) anniversary of the date of shareholder approval of the Plan, but awards
granted prior to such tenth (10th) anniversary may extend beyond that date.
PLAN HISTORY
Date Plan adopted by Board: June 20, 1996
----------------------
Date Plan approved by Shareholders June 20, 1996
----------------------
Effective date of Plan: June 20, 1996
----------------------
Date Plan ratified by Board with
minor amendments resulting
from stock split and
Section 16 rule changes: September 6, 1996
----------------------
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SERVICES AGREEMENT
This Services Agreement (this "Agreement") is made and entered
into this ___ day of September, 1996 by and between Intelligent Electronics,
Inc., a Pennsylvania corporation ("IE"), and XLConnect Solutions, Inc.,
Pennsylvania corporation ("XLC").
BACKGROUND
A. XLC is a wholly-owned, indirect subsidiary of IE.
B. IE and XLC intend to effect an initial public offering of shares of
common stock of XLC (the "Offering").
C. Historically, IE has provided to its subsidiaries, including XLC and
its subsidiaries, cash management, insurance and risk management and certain
other administrative and management services and has permitted employees of its
subsidiaries, including XLC and its subsidiaries, to participate in certain
employee benefit plans and programs sponsored and administered by IE.
D. The parties hereto desire to provide for the continuation of certain
of such services, on an interim basis, on the terms and conditions set forth
herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(a) "Advance" means an IE Advance or an XLC Advance, as the case
may be.
(b) "Average Balance" means, with respect to an Interest Period,
the average net daily balance (positive or negative) in the intercompany account
maintained by IE pursuant to Section 2(c) hereof, which shall equal the quotient
of (i) the algebraic sum of the balances of XLC Advances or IE Advances, as the
case may be, which have not been repaid by the close of business on each day of
the applicable Interest Period, with IE Advances treated as negative amounts,
divided by (ii) the number of days in such Interest Period.
(c) "Business Day" means a day on which banks are not required or
permitted to close in New York City, New York.
(d) "Effective Date" means the date on which the purchase and
sale of shares of common stock of XLC pursuant to the Offering first occurs.
<PAGE>
(e) "Financing Agreement" means that certain Amended and Restated
Inventory and Working Capital Financing Agreement dated as of April 5, 1996,
among IBM Credit Corporation ("IBMCC"), and IE and its subsidiaries, as the same
may be amended from time to time.
(f) "Interest Period" means a period of one month's duration;
provided, however, that the Interest Period applicable to the month in which
this Agreement terminates shall end on the third Business Day following such
termination.
(g) "XLC Account" means that certain deposit account to be
established by XLC at a financial institution to be selected by XLC.
(h) "XLC Lockbox Account" means that certain Lockbox Account to
be established, with the consent of IBMCC, if necessary, at a financial
institution to be selected by XLC.
2. Liquidity and Cash Management Services.
(a) XLC Account and Lockbox Account. XLC shall establish the XLC
Account and the XLC Lockbox Account. XLC and its subsidiaries shall deposit
receipts from operations and investment activities and the proceeds thereof into
the XLC Account. So long as XLC is a party to the Financing Agreement: (i) the
XLC Account shall be subject to a contingent blocked account agreement for the
benefit of IBMCC; and (ii) the XLC Account and the XLC Lockbox Account shall be
maintained, and transactions therein conducted, in accordance with the
applicable provisions of the Financing Agreement. Pursuant to and in accordance
with the Financing Agreement, funds available under the line of credit provided
thereby shall be available to XLC up to a maximum principal amount not to exceed
$20,000,000.
(b) Advances.
(i) IE Advances. From and after the Effective Date, IE may,
at the request of XLC, as directed, or within specific parameters prescribed,
from time to time, by its board of directors, advance to XLC and/or one or more
subsidiaries of XLC, as XLC may request, funds that are requested by XLC in
order to meet any additional cash requirements (each, an "IE Advance") not met
from the proceeds of the XLC Account and the XLC Lockbox Account; provided IE
receives a request for any such IE Advance (other than an IE Advance consisting
of interest payable by XLC) no later than by the close of business on the day
prior to the date on which funds are to be transferred, which notice shall
specify (i) the amount of funds to be transferred; (ii) the account to which
such funds are to be transferred; and (iii) the repayment date with respect to
such IE Advance. Any interest payable by XLC on an IE Advance (other than
interest payable on or after termination of this Agreement) shall be treated
(effective as of the day next following the last day of the Interest Period in
respect of which such interest is payable) as a separate IE Advance for purposes
of this Agreement. Each IE Advance
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<PAGE>
under this Section 2(b)(i) shall be deemed to be an Advance made to XLC
notwithstanding that such Advance may be made directly to one or more
subsidiaries of XLC.
(ii) XLC Advances. From and after the Effective Date, XLC
may, as directed, or within specific parameters prescribed, from time to time,
by its board of directors, advance to IE such funds as are not necessary to meet
XLC's daily cash requirements for short-term investment (each, an "XLC Advance")
in connection with IE's Cash Management System provided that XLC notifies IE
that it will make an XLC Advance (other than an XLC Advance consisting of
interest payable in connection with previously made XLC Advances) no later than
11:30 a.m. (New York City time) on the date funds are to be transferred, which
notice shall specify (i) the amount of funds to be transferred; and (ii) the
account to which such funds are to be transferred. Such notice shall specify the
duration of the investment requested by XLC. Any interest payable by IE on an
XLC Advance (other than interest payable on or after termination of this
Agreement) shall be treated (effective as of the day next following the last day
of the Interest Period in respect of which such interest is payable) as a
separate XLC Advance for purposes of this Agreement.
(c) Intercompany Account. IE shall maintain on its books an
intercompany account in which all Advances and all payments made with respect to
such Advances shall be recorded. IE shall afford to XLC access, during normal
business hours, to IE's books and records relating to Advances and payments made
with respect thereto.
(d) Interest. (i) Subject to the other provisions of this Section
2(d), interest shall accrue on all Advances at a rate of interest equal to the
rate available on the date of the requested Advance under the commercial credit
facilities then available to the entity making such Advance. Interest shall be
calculated on the basis of a 360-day year consisting of 12 months having 30 days
each and shall be payable in arrears on the first day of each month for the
Interest Period ending on the immediately preceding day, and on the third (3rd)
Business Day next following termination of this Agreement. Any Advances not
repaid when they become due and payable upon the termination of this Agreement
as provided in Section 2(e) shall bear interest from and after the date of
termination to, but excluding, the date of payment at a rate per annum equal to
two percent (2%) in excess of otherwise applicable interest rates, and such
interest shall be payable upon demand.
(ii) Interest payable under this Agreement shall be
calculated by applying the interest rate specified in Section 2(d)(i) hereof to
the Average Balance for the applicable Interest Period. To the extent the
Average Balance is positive, interest shall be payable by IE, and to the extent
the Average Balance is negative, interest shall be payable by XLC. Except for
interest payable upon or after the termination of this Agreement, interest shall
not be paid by either party but shall be treated (effective on the fifth (5th)
Business Day following the last day of the Interest Period in respect of which
such interest is payable as an additional Advance to the party owing such
interest, as provided in Section 2(b) hereof. The applicable party shall
calculate the amount of interest payable for each Interest Period, and provide
notice thereof to the other party not later than the Business Day next following
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<PAGE>
the last day of the Interest Period in respect of which such interest is
payable. Upon the request of XLC, IE shall promptly provide XLC with a
calculation of any such interest payment, together with reasonable support
therefor.
(e) Repayment. During the term of this Agreement, IE Advances
shall be repaid to IE on the date identified in accordance with Section 2(b)(i)
hereof and XLC Advances shall be repaid to XLC upon the expiration of the
investment period identified in accordance with Section 2(b)(ii) hereof;
provided that all Advances received by either party under this Agreement shall
be offset and shall be treated as repaid to the extent of any Advances made by
such party to the other. Upon termination of this Agreement, any Advances which
have not theretofore been repaid as provided in the immediately preceding
sentence will become due and payable in full.
3. Administrative and Marketing Services.
(a) Administrative Services. In addition to the foregoing
Liquidity Services, each of IE and XLC shall provide or cause to be provided to
the other, if, when and to the extent required by such other party, the
administrative services described in Exhibit A- 1 and Exhibit A-2, respectively,
and such other services that IE or XLC, as the case may be, is capable of
providing with its then-current personnel and facilities without unreasonable
interference with IE's or XLC's respective normal business operations (the
"Administrative Services" and, collectively with the Liquidity Services and the
Marketing Services (defined below), the "Services").
(b) Marketing Services. IE will allow XLC the opportunity to
evaluate and participate in service opportunities which may come to IE's
attention, at competitive rates, provided that reasonable service levels can be
provided by XLC. Similarly, XLC will allow IE the opportunity to evaluate and
participate in hardware and systems opportunities which may come to XLC's
attention, at competitive rates, provided that reasonable product can be
provided by IE on reasonable terms and conditions. IE and TFN business
consultants and sales associations shall remain employed by or associated with
such entity for the purposes of assisting in market and business development
activities; promoting effective cooperative selling and cross selling of
hardware and services; providing technical skill transfer and cross training;
and preserving and enhancing the mutual reputations of IE and XLC.
4. Employee Benefits. From and after the Effective Date, IE shall
permit the employees of XLC and its subsidiaries (the "XLC Employees") to
continue to participate in the employee benefit plans and programs listed on
Exhibit B hereto (collectively, the "Employee Benefit Plans") on the same basis
as such employees participated immediately prior to the Effective Date;
provided, however, that nothing contained in this Agreement shall prohibit IE
from modifying or terminating the Employee Benefit Plans so long as such
modification or termination shall apply to all participants in such Employee
Benefit Plans or, with respect to any modification or termination that does not
apply to all participants in such Employee Benefit
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<PAGE>
Plans, XLC consents thereto (any such consent not to be unreasonably withheld).
IE shall provide to XLC ninety (90) days prior written notice of its intent to
terminate any Employee Benefit Plan or effect the modification thereof in a
manner adverse to either XLC or any XLC Employee. Notwithstanding anything to
the contrary contained herein, XLC may terminate the participation of the XLC
Employees in any Employee Benefit Plan upon the occurrence of the following: (a)
the receipt of notice of IE's intent to terminate any Employee Benefit Plan or
effect the modification thereof in a manner adverse to either XLC or any XLC
Employee; or (b) the disposition by IE of a sufficient number of shares of XLC
Common Stock, in the aggregate, such that the ability of XLC Employees to be
included in such a Plan may be terminated. The contributions of XLC Employees to
any Employee Benefit Plan and the costs associated with participation by XLC
Employees in the Employee Benefit Plans shall be accounted for separately from
contributions of and costs associated with participation by persons who are not
XLC employees. XLC shall pay or reimburse IE for the costs associated with
participation by the XLC Employees in the Employee Benefit Plans calculated on
the basis of its respective percentage of compensation (including benefits) of
participants covered by such Plans.
5. Commissions and Referral Fees. IE's direct sales force intends to
continue to provide to XLC sales leads and referrals, but is not obligated to do
so. XLC shall compensate IE for such leads and referrals that result in revenues
to XLC consistent with and substantially similar to current practices between
the companies; provided, however, that nothing contained in this Agreement shall
prohibit XLC from terminating its commission program, effective on or after
December 31, 1997, upon XLC's provision of written notice thereof to IE. XLC
shall pay to TFN commissions at a rate of five percent (5%) of revenue billed
and collected by XLC for services rendered in connection with opportunities
closed by TFN on behalf of XLC; provided, however, that no such commissions
shall be payable with respect to services rendered by XLC in connection with
Power by the Hour, Break Fix, Network Management Center, Help Desk,
Telecommunications Services, and other services which are provided solely by
XLC.
6. Charges for Services.
(a) Services Rendered by IE. For all costs and expenses,
including third-party charges, incurred by IE in providing the Services to XLC
or any of its subsidiaries that are separately identifiable, XLC shall pay to IE
the actual cost thereof. For all costs and expenses, including third-party
charges, incurred by IE in providing the Services to XLC or any of its
subsidiaries that are not separately identifiable, XLC shall pay to IE that
portion of such costs and expenses reasonably attributable to XLC based on such
methodology as is described on Exhibit A-1 hereto, which methodology the parties
have mutually determined to be appropriate.
(b) Services Rendered by XLC. For all costs and expenses,
including third-party charges, incurred by XLC in providing the Services to IE
or any of its subsidiaries that are separately identifiable, IE shall pay to XLC
the actual cost thereof. For all costs and expenses, including third-party
charges, incurred by XLC in providing the Services to IE or any of its
subsidiaries that are not separately identifiable, IE shall pay to
-5-
<PAGE>
XLC that portion of such costs and expenses reasonably attributable to IE based
on such methodology as is described on Exhibit A-2 hereto, which methodology the
parties have mutually determined to be appropriate.
7. Payments.
(a) Invoices. Except for items as to which other payment
arrangements have been made, IE or XLC, as applicable, shall submit to the other
party, by the 15th day of each month an invoice for all charges associated with
the Services (and, in the case of IE, Employee Benefit Plans) for the preceding
month and any adjustments for prior months. All invoices shall describe in
reasonable detail (i) the Services provided during the preceding month and the
charges associated therewith, (ii) the charges to XLC associated with
participation by the XLC Employees in the Employee Benefit Plans during the
preceding month, and (iii) any prior month adjustments. Except as provided in
Section 7(b) hereof, each of XLC and IE, as applicable, shall remit payment in
full for all charges invoiced on or before the last day of the month in which
the invoice is received, unless such invoice is received after the 15th day of
such month, in which event, such invoice shall be paid on or before the last day
of the next succeeding month. Notwithstanding any other provision of this
Section 7(a), IE shall timely make any and all payments to third parties
necessary to ensure continued services of the types contemplated in this
Agreement.
(b) Disputes. In the event of a dispute as to an invoiced amount,
the obligor with respect to such invoice shall promptly pay all undisputed
amounts, but shall be entitled to withhold amounts in dispute. Each party shall
promptly notify the other of any such dispute. Each party will provide the other
sufficient records and information to resolve any such dispute and, without
limiting the rights and remedies of the parties hereunder, will negotiate in
good faith a resolution thereto.
(c) Method of Payment. Transfer of funds pursuant to this
Agreement shall be made in U.S. dollars by company check or wire transfer of
immediately available funds to an account or accounts specified by the party
receiving such payment. Whenever any payment hereunder is required or requested
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and any such extension of time shall be included in the
computation of the payment of interest.
8. Performance of Services.
(a) Degree of Care. Each party performing Services hereunder
shall perform such Services with the same degree of care, skill and prudence
customarily exercised by it in respect of its own business, operations and
affairs. It is understood and agreed that the Services shall be substantially
identical in nature and quality to the Services performed by such party for the
other party immediately prior to the Effective Date.
(b) Certain Limitations. Each party acknowledges that the
Services shall be provided only with respect to the respective businesses of IE
and XLC and their
-6-
<PAGE>
respective subsidiaries as such businesses exist as of the Effective Date or as
otherwise mutually agreed by the parties. IE will not be obligated to provide
Services for the benefit of entities other than XLC and its subsidiaries; and
XLC will not be obligated to provide Services for the benefit of entities other
than IE and its subsidiaries (other than XLC and its subsidiaries). Each party
shall use the Services only in accordance with all applicable federal, state and
local laws and regulations.
(c) Certain Information. Each of IE and XLC shall provide, and
shall cause each of its subsidiaries to provide, in a manner consistent with the
practices employed by the parties prior to the Effective Date, any information
needed by the other party or its subsidiaries, as the case may be, to perform
the Services pursuant hereto. If the failure to provide such information renders
the performance of any requested Service impossible or unreasonably difficult,
IE or XLC, as applicable, may, upon reasonable notice to the other party hereto,
refuse to provide such Service.
(d) Further Assurances. During the term of this Agreement, each
of IE and XLC shall use their best efforts to: (i) preserve their respective and
mutual reputations and market positions in strategic markets; (ii) promote their
mutual businesses and cause the retention and expansion of common clients
(including without limitation, mutual assistance in market and business
development activities); (iii) provide technical skill transfer and cross
training to employees of each entity; and (iv) refrain from taking any action
which may jeopardize any such client relationships (whether now existing or
hereafter arising or developed) without the prior notification to and consent of
the other, including without limitation, releasing or transferring mutually
beneficial employees, including business consultants and sales associates in
branch locations; placing holds and limits on customer credit; commencing or
continuing collection and enforcement action as to any accounts; and undertaking
billing practices deviating from ordinary course in the industry and present and
past practices.
9. Limitations on Liability and Indemnification.
(a) Limitations on Liability. Neither party shall have any
liability under this Agreement (including any liability for its own negligence)
for damages, losses or expenses suffered by the other party or its subsidiaries
as a result of the performance or non-performance of such party's obligations
hereunder, unless such damages, losses or expenses are caused by or arise out of
the willful misconduct or gross negligence of such party or a breach by such
party of any of the express provisions hereof. In no event shall either party
have any liability to the other party for indirect, incidental or consequential
damages that such other party or its subsidiaries or any third party may incur
or experience on account of the performance or non-performance of such party's
obligations hereunder. Notwithstanding the foregoing, each party shall use its
best efforts to timely cure any defect in or failure of performance (whether as
a result of negligence or otherwise) and to otherwise correct or improve the
level of performance in order to render services substantively and qualitatively
equal to or better than those presently being rendered.
-7-
<PAGE>
(b) Indemnification. Subject to the limitations on liability set
forth in the last sentence of Section 9(a) hereof, each party shall indemnify,
defend and hold harmless the other party and its directors, officers, employees,
agents and representatives from and against all claims, liabilities, damages,
losses and expenses (including reasonable attorneys fees and expenses) caused by
or arising out of the willful misconduct or gross negligence of such
indemnifying party in the performance or non-performance of its obligations
hereunder or the breach by such indemnifying party of any of the express
provisions hereof.
(c) The provisions of this Section 9 shall survive any
termination of this Agreement.
10. Term of Agreement. This Agreement shall become effective on the
Effective Date and shall automatically terminate on the first Business Day
following the occurrence of either (a) a pro rata distribution (the
"Distribution") by IE to its shareholders of shares of common stock of XLC (the
"XLC Shares") or (b) upon the sale by IE of a sufficient number of the XLC
Shares, in the aggregate, such that IE no longer owns a majority of the
outstanding XLC Shares; in each case unless earlier terminated (i) on the date
specified on Exhibit A with respect to particular Service; or (ii) by either
party upon not less than 90 days' prior written notice to the other party;
provided, however, that, except as provided otherwise in Section 5 and Exhibit
A-2 hereof, neither party may give a notice that would result in a termination
of this Agreement or any service contemplated hereby prior to December 31, 1996.
IE will provide at least five (5) Business Days' prior written notice to XLC of
the date of (i) any Distribution and (ii) each sale of XLC shares; provided
however that in the event any sale of XLC Shares will result in IE no longer
holding a majority of the outstanding XLC Shares, IE shall provide at least
thirty (30) days' prior written notice thereof. Termination under this Section
10 or otherwise shall have no effect on the respective obligations of the
parties prior to the effective date of such termination or their respective
obligations to make any payment required to be made pursuant to the terms
hereof.
11. Confidentiality. Each party will hold in trust and maintain
confidential and, except as required by law, not disclose to others without the
prior written approval of the other party, any information received by it from
the other party or developed or otherwise obtained by it in connection with the
performance of its obligations hereunder (the "Information"). Within ninety (90)
days after the date of termination of this Agreement, each party will return to
the other party, or, with the written consent of the other party, destroy all
documents, data and other materials of whatever nature relating to the
businesses of the other and its subsidiaries that it obtained in connection with
the performance of its obligations hereunder, provided that the parties may
retain any Information to the extent reasonably needed to comply with applicable
tax, accounting or financial reporting requirements or to resolve any legal
issues identified at the time of termination. The provisions of this Section 11
shall survive any termination of this Agreement.
12. Miscellaneous.
-8-
<PAGE>
(a) Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. This Agreement may not be assigned by either
party hereto to any other person except that either party may assign this
Agreement to any of its affiliates.
(b) No Third-Party Beneficiaries. Except for the persons entitled
to indemnification pursuant to Section 9(b) hereof, each of whom is an intended
third-party beneficiary hereunder, nothing expressed or implied in this
Agreement shall be construed to give any person or entity other than the parties
hereto any legal or equitable rights hereunder.
(c) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof.
(d) Amendment. This Agreement may not be amended except by an
instrument signed by the parties hereto.
(e) Waivers. Either party hereto may (i) extend the time for the
performance of any of the obligations or other act of the other party or (ii)
waive compliance with any of the agreements contained herein. No waiver of any
term shall be construed as a waiver of the same term, or a waiver of any other
term, of this Agreement. The failure of any party to assert any of its rights
hereunder will not constitute a waiver of any such rights.
(f) Severability. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, such
provision shall be deemed severable and all other provisions of this Agreement
shall nevertheless remain in full force and effect.
(g) Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
(h) Notices. All notices given in connection with this Agreement
shall be in writing. Service of such notices shall be deemed complete (i) if
hand delivered, on the date of delivery, (ii) if by mail, on the fourth business
day following the day of deposit in the United States mail, by certified or
registered mail, first-class postage prepaid, or (iii) if sent by FedEx or
equivalent courier service, on the next business day, or (iv) if by telecopier,
upon receipt by the sender of confirmation of successful transmission. Such
notices shall be addressed to the parties at the following addresses or at such
other address for a party as shall be specified by like notice (except that
notices of change of address shall be effective upon receipt):
If to IE:
411 Eagleview Boulevard
Exton, PA 19341
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<PAGE>
Attention: President
Telecopier: 610-458-0599
If to XLC:
411 Eagleview Boulevard
Exton, PA 19341
Attention: President
Telecopier: 610-458-8217
(i) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the Commonwealth of Pennsylvania,
without giving effect to the principles of conflict of laws thereof.
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
but one and the same instrument.
IN WITNESS WHEREOF, IE and XLC have caused this Services Agreement
to be executed on the date first above written.
INTELLIGENT ELECTRONICS, INC.
By:______________________________
Name:
Title:
XLCONNECT SOLUTIONS, INC.
By:______________________________
Name:
Title:
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<PAGE>
EXHIBIT A-1
Administrative Services to be Provided by IE
1. BILLING SERVICES:
o Use of AS400 for XLC's billing and general ledger and accounts
receivable function o Payment by XLC shall be consistent with current
practices o Upon termination of XLC's use of the AS400, XLC shall
contribute its interest in the AS400 to IE at book value
2. PAYROLL:
o Use of ADP or other common paymaster
o Payment by XLC shall be made as billed, with XLC's allocable share
calculated on the basis of its respective number of employees
3. TREASURY FUNCTIONS:
o Daily reports
o Account reconciliation
o Cash Management as needed
4. INSURANCE AND RISK MANAGEMENT:
o Provision of insurance coverage through group policies issued under
American Phoenix Programs or successor policies
o Administration of risk management matters
o Insurance premiums shall be paid directly by XLC to American Phoenix
as billed, consistent with the premiums described in Annex 1 hereto.
5. TAX:
o Preparation and filing of all consolidated tax returns
o Assistance with state and local sales tax and property tax compliance
o Assistance with financial accounting for taxes o Supervision of all
federal, state and local tax audits, protests, administrative
proceedings and litigation
o Qualification and design of all employee benefit plans
o Preparation and submission of all tax ruling requests
o Rendering and obtaining all tax opinions
o Qualification and reporting of stock options
o Services provided by the Tax Director and his or her support
personnel shall be billed to XLC on the basis of reasonable, actual
time spent at reasonable hourly rates to be mutually agreed, from
time to time, by IE and XLC.
A-1
<PAGE>
6. HUMAN RESOURCES:
o Advice and assistance with respect to employee benefits, plan
administration, and other employee matters
o Payment by XLC shall be made as billed, with XLC's allocable share
calculated on the basis of its respective percentage of compensation
7. OPERATION AND UTILITIES:
o Phone and communications services, water and sewer, electricity, gas
and other fuel o Mechanisms will be established to permit employees
to specifically identify services provided for XLC.
o To the extent amounts are not specifically identifiable, allocation
will be consistent with current practices and calculated based on the
respective portion of space in a given facility occupied by each
party in accordance with the Space Sharing Agreement dated as of
May 31, 1996.
8. MATTERS RELATING TO HARDWARE
o Sales of hardware, configuration and distribution, including with
respect to returns of hardware used in XLC service programs;
o Any fee arrangement shall be bourne by the customer;
o Reserves for such equipment and functions to be retained by IE.
A-2
<PAGE>
EXHIBIT A-2
Administrative Services to be Provided by XLC
1. VENDOR FUNDING
o XLC will continue to receive an allocated share of vendor funding
revenues for XLC's training of technical staff and sales force and
assistance in certain marketing and advertising programs.
o Allocation, calculated in a manner consistent with present practices,
is $315,000 per quarter, payable in three monthly installments, until
September 30, 1997. The arrangement will be reviewed and adjusted, if
necessary, following that date.
2. SERVICE CALLS
o XLC will bill IE and its subsidiaries, at XLC's standard billing
rates, for services rendered to IE or its subsidiaries in connection
with service calls. Such services may include break fix, on-site
configuration.
A-3
<PAGE>
EXHIBIT B
Employee Benefits Plans
o Intelligent Electronics, Inc. 1995 Employee Stock Purchase Plan
o Intelligent Electronics, Inc. 1995 Long Term Incentive Plan
(Stock Option Plan, including non-wholly-owned subs.)
o Intelligent Electronics, Inc. 1995 Long Term Incentive Plan amended
and restated (Options granted before June 1995 - valid only for
employees of wholly-owned subs.)
o Intelligent Electronics, Inc. 401(k) Tax Deferred Savings Plan
o Intelligent Electronics, Inc. Life AD&D Medical and Dental Plan
o Intelligent Electronics, Inc. Long Term Disability Plan
B-1
<PAGE>
SPACE SHARING AGREEMENT
This Space Sharing Agreement (the "Agreement") is made as of the 31st
day of May, 1996 by and between Intelligent Electronics, Inc., a Pennsylvania
corporation ("IE"), The Future Now, Inc., an Ohio corporation ("TFN") and
XLConnect Solutions, Inc., a Pennsylvania corporation ("XLC").
RECITALS
A. IE is a party to a lease agreement (the "Headquarter Lease") pursuant
to which IE leases certain office space for its corporate headquarters (the
"Premises").
B. TFN and/or certain of its subsidiaries are parties to leases for
other facilities (such facilities, together with the Premises, are collectively
referred to herein as the "IE Facilities") as listed on Exhibit A hereto.
C. XLC desires to use a portion of the Premises and certain of the other
IE Facilities and, subject to the terms and provisions herein (IE, TFN, and the
applicable subsidiaries are collectively referred to hereinafter as "IE") IE
agrees that XLC shall be permitted to use a portion of the Premises.
NOW, THEREFORE, in consideration of the agreements set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Premises. IE agrees that XLC shall be permitted to use a portion of
the Premises for the purposes permitted under the Headquarter Lease subject to
the terms and conditions set forth in this Agreement. XLC's right to use a
portion of the Premises (and its obligation to pay consideration therefore as
required pursuant to Section 3 hereof) shall terminate on the earlier of (i)
ninety (90) days after XLC notifies IE that XLC no longer desires to use any
portion of the Premises, or (ii) ninety (90) days after IE notifies XLC that XLC
may no longer use any portion of the Premises.
2. Shared Facilities. IE and XLC acknowledge that as of the date hereof
(i) XLC and its subsidiaries are using space at the other IE Facilities. IE
agrees that XLC shall be permitted to continue to use the portion of the other
IE Facilities described on Exhibit A for the purposes permitted under the
applicable lease agreements (the "IE Leases"), subject to the terms and
conditions of this Agreement. XLC's right to use any other IE Facility (and its
obligation to pay consideration therefore as required pursuant to Section 3
hereof) shall terminate on the earliest of (i) ninety (90) days after IE
notifies XLC that XLC may no longer use such IE Facility, (ii) ninety (90) days
after XLC notifies IE that XLC no longer desires to use such IE Facility, and
(iii) upon termination of the applicable IE Lease.
<PAGE>
3. Consideration. So long as XLC uses any IE Facility, XLC shall pay to
IE on the first day of each calendar month the amount shown on Exhibit A with
respect to such IE Facility as the "Monthly Allocable Rent". Such Monthly
Allocable Rent shall be increased, as to any IE Facility, by the same percentage
as any rent increase (including without limitation, for rent adjustments based
on increases in operating expenses, common area maintenance charges and similar
items) provided under the terms of the applicable IE Lease, such increase to be
effective on the later of (a) thirty (30) days after XLC has received written
notice of such increase, and (b) the date such increase becomes effective under
the applicable IE Lease. Payments for any partial calendar month shall be
prorated on a per diem basis.
4. Modification and Termination.
(a) Modification. If either party hereto desires to increase or
decrease the portion of any IE Facility used pursuant to this Agreement, XLC and
IE will negotiate in good faith with respect to such increase and decrease and
the adjustment to the rent resulting therefrom.
(b) Term; Termination Rights. This Agreement shall become effective
on the effective date of that certain Contribution Agreement dated the date
hereof, by and among, inter alia, the parties hereto, and shall terminate as to
any of the IE Facilities (including the Premises) on the effective date of the
termination contemplated by Section 2 hereof.
5. Compliance with Leases. IE has provided to XLC a copy of the
Headquarter Lease and each other IE Lease and XLC acknowledges receipt thereof.
Each of IE and XLC hereby agrees not to take any action or fail to take any
action in connection with its use of a portion of the Premises and the other IE
Facilities a result of which would be IE's violation of any of the terms and
conditions of the Headquarter Lease or such other IE Lease, the provisions of
which are hereby incorporated by reference. XLC agrees to comply with the terms
and provisions (other than with respect to payment of monies) of the Headquarter
Lease and any other IE Lease with respect to its use of a portion of the
applicable IE Facilities or Premises, it being understood, acknowledged and
agreed that XLC's obligations to make payments on account of rent, additional
rent, or operating expense or common area maintenance surcharges with respect to
any and all IE Facilities or the Premises shall be governed solely by the terms
of this Agreement.
6. Modification of Leases. XLC acknowledges and agrees that IE has the
right to modify or otherwise amend the Headquarter Lease and each other IE Lease
without the consent of XLC; provided, however, that in the event such
modification results in an increase in the rent or other amounts payable
thereunder or a decrease or diminution of the services or space provided
therein, XLC's rights and obligations with respect to such IE Facility shall
nonetheless remain as they were prior to such modification unless XLC consents,
in writing, to any such modifications. IE will provide XLC with prior notice of,
and a copy of, any such amendment.
-2-
<PAGE>
7. Indemnity.
(a) By XLC. XLC will indemnify and hold harmless IE and IE's
directors, officers, employees and agents (collectively, the "IE Indemnities")
from and against all liabilities, obligations, claims, damages, penalties,
causes of action, costs and expenses (including without limitation reasonable
attorneys' fees and expenses) imposed upon or incurred by or asserted against
any one or more of the IE Indemnities by reason of (a) any accident, injury to
or death of persons, (b) any failure on the part of XLC to perform or comply
with any of the terms of this Agreement, the Headquarter Lease or the IE Leases
or (c) IE being held in default under the terms and provisions of the
Headquarter Lease or the IE Leases, in any such case as a result of any act or
omission on the part of XLC.
(b) By IE. IE will indemnify and hold harmless XLC and XLC's
directors, officers, employees and agents (collectively, the "XLC Indemnities")
from and against all liabilities, obligations, claims, damages, penalties,
causes of action, costs and expenses (including without limitation reasonable
attorneys' fees and expenses) imposed upon or incurred by or asserted against
any one or more of the XLC Indemnities by reason of (a) any accident, injury to
or death of persons, (b) any failure on the part of IE to perform or comply with
any of the terms of this Agreement, the Headquarter Lease or the XLC Leases or
(c) XLC being held in default under the terms and provisions of the Headquarter
Lease or the XLC Leases, in any such case as a result of any act or omission on
the part of IE.
8. Relocation. XLC acknowledges that IE may relocate its corporate
headquarters in which case IE shall provide XLC with ninety (90) days prior
written notice of its intention. The parties hereto acknowledge and agree that,
in such event, IE may vacate the Premises and, upon request by XLC, shall use
its best efforts to cause XLC to become successor lessee under such lease.
9. Insurance. The parties acknowledge that IE presently maintains and
will continue to maintain, pursuant to the terms of that certain Services
Agreement entered into or to be entered into by and between IE and XLC (the
"Services Agreement"), insurance coverage with respect to IE's leasehold
interests (and following the effective date of this agreement, XLC's interests)
in any and all of the IE Facilities and the contents (whether owned by IE or
XLC) of such IE Facilities until the earlier to occur of (i) the termination of
this Agreement; or (ii) notification in writing by XLC that such coverage is no
longer required. IE shall continue to maintain in full force and effect
(including, without limitation, the timely payment of premiums therefor) such
insurance coverage in amounts no less than, and for coverages at least as
comprehensive as, those maintained as of the date hereof. Notwithstanding the
foregoing, XLC shall reimburse IE with respect to XLC's allocable share of the
premiums for such insurance coverage in accordance with the terms of the
Services Agreement.
10. Notices. All notices given in connection with this Agreement shall
be in writing. Service of such notices shall be deemed complete (i) if hand
delivered, on the date of delivery, (ii) if by mail, on the fourth business day
following the day of deposit in the
-3-
<PAGE>
United States mail, by certified or registered mail, first-class postage
prepaid, (iii) if sent by FedEx or equivalent courier service, on the next
business day, or (iv) if by telecopier, upon receipt by the sender of written
confirmation of successful transmission. Such notices shall be addressed to the
parties at the following addresses or at such other address for a party as shall
be specified by like notice (except that notices of change of address shall be
effective upon receipt):
If to IE or TFN:
411 Eagleview Boulevard
Exton, PA 19341
Attention: President
Telecopy: 610-458-0599
If to XLC:
411 Eagleview Boulevard
Exton, PA 19341
Attention: President
Telecopy: 610-458-8217
11. Governing Law. This Agreement shall be governed by, and be
construed in accordance with, the substantive laws of the Commonwealth of
Pennsylvania, without giving effect to the principles of the conflict of laws
thereof.
12. Amendment. This Agreement may be amended or supplemented at any
time provided that any such amendment or supplement shall be made in writing and
signed by each of the parties hereto.
13. Assignment. This Agreement shall be binding upon, and shall inure
to the benefit of, the parties hereto and their respective successors and
permitted assigns. This Agreement and the rights, duties, obligations and
privileges hereunder may not be assigned by either party without the prior
written consent of the other party.
14. Entire Agreement. This Agreement constitutes the entire agreement
between the parties relating to the subject matter hereof.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all which
together will constitute but one agreement.
-4-
<PAGE>
16. Section Headings. The section headings contained herein are for
convenience only and shall not affect in any way the interpretation of any of
the provisions contained herein.
IN WITNESS WHEREOF, the parties hereto have executed this Space Sharing
Agreement as of the date first above written.
INTELLIGENT ELECTRONICS, INC.
By:______________________________
Name:
Title:
THE FUTURE NOW, INC.
By:______________________________
Name:
Title:
XLCONNECT SOLUTIONS, INC.
By:______________________________
Name:
Title:
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<PAGE>
EXHIBIT A
ALLOCATION OF LEASES AND SPACE TO XLC
<TABLE>
<CAPTION>
=================================================================================================================================
ALLOCATED ALLOCATED/ ALLOCATED
LOCATION/BRANCH SQUARE FEET TOTAL SQUARE FEET ANNUAL RENT MONTHLY RENT
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exton-Corp, Hdqt. 5,000 31,000 104,516 8,710
- ---------------------------------------------------------------------------------------------------------------------------------
Chicago 1,428 4,500 21,523 1,794
- ---------------------------------------------------------------------------------------------------------------------------------
Cincinnati 9,850 32,834 77,738 6,478
- ---------------------------------------------------------------------------------------------------------------------------------
GE Whse 12,121 30,302 47,184 3,932
- ---------------------------------------------------------------------------------------------------------------------------------
Cleveland 5,225 17,416 60,206 5,017
- ---------------------------------------------------------------------------------------------------------------------------------
Columbus 2,874 9,580 45,634 3,803
- ---------------------------------------------------------------------------------------------------------------------------------
Dallas 5,000 38,607 62,336 5,196
- ---------------------------------------------------------------------------------------------------------------------------------
Detroit 1,498 4,993 17,478 1,457
- ---------------------------------------------------------------------------------------------------------------------------------
Houston 2,350 12,582 32,430 2,703
- ---------------------------------------------------------------------------------------------------------------------------------
Indianapolis 7,500 25,000 55,339 4,612
- ---------------------------------------------------------------------------------------------------------------------------------
Little Rock 5,110 15,600 37,188 3,099
- ---------------------------------------------------------------------------------------------------------------------------------
Louisville 3,587 12,815 46,134 3,845
- ---------------------------------------------------------------------------------------------------------------------------------
Memphis 1,029 11,916 12,344 1,029
- ---------------------------------------------------------------------------------------------------------------------------------
Milwaukee 2,212 7,932 34,965 2,914
- ---------------------------------------------------------------------------------------------------------------------------------
Nashville 1,736 5,088 24,737 2,061
A-1
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------------------
Pittsburgh 4,557 15,190 50,756 4,230
- ---------------------------------------------------------------------------------------------------------------------------------
Quad Cities 5,822 7,500 98,734 8,228
- ---------------------------------------------------------------------------------------------------------------------------------
St. Louis 1,370 4,565 6,390 533
- ---------------------------------------------------------------------------------------------------------------------------------
New York 4,880 24,000 83,970 6,998
- ---------------------------------------------------------------------------------------------------------------------------------
Orange County 4,046 13,485 37,440 3,120
- ---------------------------------------------------------------------------------------------------------------------------------
San Mateo 900 4,500 15,574 1,298
- ---------------------------------------------------------------------------------------------------------------------------------
Washington 4,260 14,201 82,714 6,893
- ---------------------------------------------------------------------------------------------------------------------------------
Atlanta 9,790 17,596 227,871 18,989
- ---------------------------------------------------------------------------------------------------------------------------------
NMC 35,976 2,998
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
</TABLE>
- ----------
1. Although IE has additional leases for active locations, including in
Dayton, Baltimore, New Jersey, Fort Wayne and Long Island, as well as a
number of locations in which no activity occurs, XLC will not be occupying
these locations and therefore, no allocation has been made.
A-2
EXHIBIT 10.5
TAX ALLOCATION AGREEMENT
This Tax Allocation Agreement is effective as of January 29,
1995 by and among Intelligent Electronics, Inc. ("IE") and each of the
undersigned corporations (the "Subsidiaries").
Missing Link Communications, Inc.
XLConnect Services, Inc.
Intellinet, Ltd.
Intelligent Advanced Systems, Inc.
Intelligent Distribution Services, Inc.
Intelligent Express, Inc.
Intelligent SP, Inc.
Intelligent Systems Group, Inc.
RND, Inc.
The Future Now, Inc.
XLConnect Solutions, Inc.
Intelevest Holdings, Inc.
The Future Now, Inc. of Arkansas
Intellicom Solutions, Inc.
BACKGROUND
Intelligent Electronics, Inc. ("IE") and its affiliated
subsidiaries have been filing a consolidated federal income tax return in
accordance with Section 1501 of the Internal Revenue Code of 1986. No
affirmative elections have been made by IE or its affiliates concerning the
allocation or payment of the consolidated Federal Income Tax Liability. It is
the intent and desire of IE and its affiliates to make the elections described
below for the allocation of the Federal Income Tax Liability, to agree on the
payment of such allocations, to establish a method for compensating a member of
the group for tax savings created by the member, to deal with the administration
of the federal income tax liability and to provide for the allocation and
payment of any refund received in subsequent years.
NOW, THEREFORE, the parties to this Agreement agree as
follows:
1. Definitions. The following defined terms shall
have the following meanings when used in this Agreement:
(a) "Agreement" means this Tax Allocation Agreement.
(b) "Affiliates" means all Members of the Consolidated
Group, other than IE.
(c) "Consolidated Group" means the "affiliated group" of
corporations of which IE is the "common parent corporation" as such terms are
defined in ss.1504(a)(1) of the Code.
<PAGE>
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Consolidated Return" means the consolidated federal
income tax return of the Consolidated Group for each year to be filed by IE on
behalf of the Consolidated Group.
(f) "Consolidated Tax Liability" shall mean with respect to
a taxable year or portion thereof the consolidated federal income tax liability
shown on a Consolidated Return.
(g) "CR Tax" shall mean that portion of the Consolidated
Tax Liability allocated to a Member pursuant to Section 4(a)(i) of this
Agreement.
(h) "IRS" means the Internal Revenue Service.
(i) "Loss Member" shall mean a Member whose losses and/or
credits have resulted in Tax Savings for one or more Members.
(j) "Member" shall mean IE and each Subsidiary listed above
which is part of the Consolidated Group, including any corporation which
subsequent to the date of this Agreement is an "includible corporation" as
defined in ss.1504(b) of the Code, for which the ownership requirements of
ss.1504(1) are met, and which becomes a party to this Agreement pursuant to
Section 15 of this Agreement.
(k) "Other Taxes" shall mean any taxes (including any
penalties and interest) other than federal income taxes (e.g., state and local
income taxes, franchise taxes, and various taxes, foreign income, transfer
taxes).
(l) "SR Tax" shall mean with respect to a particular tax
year the "separate return tax liability" of a Member as determined pursuant to
Treas. Reg. ss.1.1552-1(a)(2)(ii) except that such determination shall not take
into account any net operating losses or tax credits which are not utilized in
the computation of Consolidated Tax Liability.
(m) "Tax Savings" shall mean with respect to a Member for
any particular tax year, the excess of such corporation's SR Tax over such
corporation's CR Tax.
(n) "Tax Savings Member" with respect to a particular tax
year shall mean a Member who has a Tax Savings.
(o) "Treas. Reg." shall mean the regulations promulgated
under the Code by the United States Department of the Treasury, as such
regulations may be amended from time to time.
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<PAGE>
2. Filing Consolidated Return. A Consolidated Return shall be
filed by IE for the taxable year ended February 3, 1996, and for each year
thereafter in which the Consolidated Group is permitted to so file, unless IE,
in its sole discretion, elects to no longer file a Consolidated Return.
(a) The Affiliates agree to furnish all information,
execute all consents and elections, and provide all other documents which may be
required or appropriate to evidence such consent and to prepare and file such
Consolidated Returns, including extensions, as IE may request.
(b) IE shall have the exclusive authority to represent any
Member before the IRS or any other governmental agency or authority or any court
regarding all federal income tax matters relating to the Consolidated Return,
including (i) the exclusive control of any response to any examination by the
IRS or any other taxing authority, and (ii) the exclusive control over any
contest or controversies relating to the Consolidated Return, including whether
and in what forum to conduct such contest and whether and on what basis to
settle such contest. IE shall notify the relevant Affiliate of any
correspondence or other inquiry from the IRS concerning such Affiliate and will
allow such Affiliate to consult with IE concerning the inquiry, examination or
controversy. The agreement in this section 2(b) shall survive the termination of
this Agreement with respect to any taxable year (or portion thereof) ending on
or prior to termination of this Agreement.
3. Allocation of Consolidated Tax Liability. With respect
to the determination of earnings and profits for federal income tax purposes,
the Consolidated Tax Liability for each taxable year shall be allocated
among the Members in accordance with the methods prescribed in Treas.
Reg.ss.1.1552-1(a)(2) and Treas. Reg.ss.1.1502-33(d)(2)(ii) commencing with
the tax year ending February 3, 1996. The fixed percentage to be used for
purposes of Treas. Reg.ss.1.1502-33(d)(2)(ii)(b) is 100 percent.
4. Compensation for Tax Savings.
(a) In order to compensate a Member for the use of its net
operating losses or tax credits in arriving at the Consolidated Tax Liability,
the following steps shall be taken:
(i) The Consolidated Tax Liability shall be determined
under Treasury Regulation ss. 1.1502-2 and shall be allocated to each Member in
accordance with Treasury Regulation ss. 1.1552-1(a)(2). Each Member shall be
liable to IE for the amount of Consolidated Tax Liability allocated to it
pursuant to the provisions of this Section 4(a)(i).
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<PAGE>
(ii) The Tax Savings shall be calculated with respect
to each Member.
(iii) Each Tax Savings Member shall be liable for and
pay, pursuant to the provisions of paragraph 5 of this Agreement, the amount of
its Tax Savings to IE. Any Loss Member or Loss Members which cause a Tax Savings
shall be paid the amount of such Tax Savings by IE in accordance with the
"consistent method" requirements of Treas. Reg. ss.1.1502-33(d)(ii)(c). Such
payments will generally be deemed consistent if the payment to the Loss Member
is equal to (a) in the case of net operating losses, the product of (i) the
amount of net operating losses of such Loss Member claimed as deductions in
computing the Consolidated Tax Liability used in the calculation of the Tax
Savings times (ii) the effective overall tax rate applicable to the Consolidated
Return filed for the taxable year in which the net operating losses are so
claimed as deductions and (b) in the case of tax credits, (i) 100 percent of the
tax credits of such Loss Member utilized in the determination of Consolidated
Tax Liability, reduced by (ii) the amount by which the SR Tax of the Loss Member
computed without regard to such credits exceeds the CR Tax of the Loss Member.
(b) In determining the "net operating loss" of a Loss
Member, the principles of Revenue Ruling 66-374, 1966-2 C.B. 427, shall be
utilized; thus, the "net operating loss" of a Loss Member is the deduction which
such Loss Member would have had available if it actually filed a separate return
for the year and would not include any portion of a Loss Member's net operating
loss sustained in a prior or subsequent year which had been absorbed by the
Consolidated Group or by the Loss Member in computing the Consolidated Tax
Liability or an SR Tax.
(c) In no event shall a Tax Savings payment be made to a
Loss Member unless the net operating loss and/or tax credit to which such
payment relates resulted in a reduction in the Consolidated Tax Liability.
(d) In calculating the amount of Tax Savings resulting from
a carryback or carryover of net operating losses, adjustment shall be made to
the SR Tax for such prior or subsequent year as required under Section 172(b)(2)
and 172(d) of the Code. For purposes of this calculation, the election under
Section 172(b)(3)(C) of the Code shall be made on a separate return basis;
provided, however, the decision to make any such election under Section
172(d)(3)(C) shall be in the sole discretion of IE.
(e) The liability of an Affiliate to IE for the amount of
such Affiliate's CR Tax shall be represented on the books of such Affiliate and
IE, as an account payable and account receivable, respectively. The liability of
a Tax Savings Member
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<PAGE>
to pay the amount of its Tax Savings to IE shall be represented on the books of
such Tax Savings Member as an account payable, and the right of a Loss Member to
receive payments of Tax Savings from IE shall be represented on the books of
such Loss Member as an account receivable. Payment of such accounts shall be
made in accordance with the provisions of paragraph 5 of this Agreement.
5. Payments by and to Members. With respect to each taxable
year (or relevant portion thereof), each Affiliate shall pay to IE the amount of
such Affiliate's CR Tax. With respect to the discharge of intercompany accounts
relating to payments of Tax Savings, a Tax Savings Member shall pay the amount
of its Tax Savings to IE. With respect to payment of Tax Savings to Loss
Members, IE shall pay to each Loss Member such Loss Member's allocable share of
the total Tax Savings. All payments to be made pursuant to this paragraph 5
shall be made within 30 days of the date of filing of the Consolidated Return to
which such payments relate.
6. Estimated Consolidated Tax Liability Payments. IE shall
have the right to assess each Affiliate for its share of estimated federal
income tax payments to be made with respect to the projected Consolidated Tax
Liability for each taxable year. Each Affiliate shall make such payment to IE
within fifteen days after such assessment. Each Affiliate that makes payments
under this section will receive credit for its payments of estimated federal
income tax in the computation of the payments under Section 5 of this Agreement.
7. Carrybacks and Carryovers of Losses and Credits. If part of
or all of an unused consolidated net operating loss or tax credit is allocated
to a Member pursuant to Treas. Reg. ss.1.1502-79, and it is carried back or
forward to a year in which such Member filed a separate income tax return or was
included in a consolidated federal income tax return with another affiliated
group, any refund or reduction in federal income tax liability arising from the
carryback or carryover shall be retained by such Member (or, if appropriate,
paid to such Member if a refund is received by another Member).
8. Adjustments to Consolidated Tax Liability.
(a) If Consolidated Tax Liability is adjusted for any
taxable period, whether by means of an amended return, claim for refund, or
examination by the IRS, the computations made under Sections 3 and 4 of this
Agreement shall be recomputed taking into account such adjustments, and
appropriate conforming payments made. In the case of a refund, if any, IE shall
make payment to the appropriate Member within fifteen days after the refund is
received by IE. In the case of an increase in the Consolidated Tax Liability,
each Member obligated to make payment
-5-
<PAGE>
under the recomputed allocation shall pay such amount to IE upon the receipt of
notice of such liability from IE.
(b) If any interest is to be paid or received as a result
of a consolidated federal income tax deficiency or refund, such interest shall
be allocated to the Members in the ratio that each Member's allocated share of
the change in Consolidated Tax Liability bears to the total change in
Consolidated Tax Liability. Any penalty not specifically allocated to a Member
by the IRS shall be allocated upon such basis as interest is allocable as
described above; provided, however, that if XLConnect disagrees with any
reporting position taken by IE as agent for XLConnect on a Consolidated Return
for any taxable year in which XLConnect has shareholders other than Members, and
XLConnect obtains an opinion of counsel or a national accounting firm that such
reporting position would result in the imposition of one or more penalties by
the IRS, IE agrees to indemnify and reimburse XLConnect for any penalties paid
by or allocated to it which are attributable to such reporting position.
9. Term of this Agreement. This Agreement shall apply to the
taxable year ending February 3, 1996, and all subsequent years, unless the
Members agree in writing to terminate the Agreement. Notwithstanding such
termination, this Agreement shall continue in effect with respect to any payment
or refunds due for all taxable periods prior to termination. Nothing herein
shall be construed to prevent IE from terminating its election to file a
Consolidated Return.
10. Assignability. This Agreement may not be assigned by a
party without the prior written consent of the other parties to this Agreement.
11. Effect of Changes to the Code. Any alteration,
modification, addition, deletion, or other change in the federal income tax laws
or regulations relating to consolidated federal income tax returns shall
automatically be applicable to this Agreement, provided, however, that if all of
the parties to this Agreement agree, this Agreement shall be amended or
terminated in the event of any such alteration, modification, addition, deletion
or other change.
12. Other Taxes. To the extent two or more Members are
permitted or required to file consolidated, combined or unitary tax returns with
respect to Other Taxes, the provisions of this Agreement relating to federal
income tax matters shall apply to such Other Taxes as if they were federal
income taxes. If such a consolidated, combined or unitary tax return with
respect to any other Taxes is not filed, each Member shall be responsible for
the reporting and payment of any Other Taxes applicable to such Member.
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<PAGE>
13. Record Retention. Records relating to the calculation and
reporting of the Consolidated Tax Liability, including returns, supporting
schedules, workpapers, correspondence, software and data bases, shall be
retained by the Members in accord with IE's record retention policy, but for at
least as long as they may be material to the determination of such liability or
refunds. IE shall make reasonably available to Members all such materials.
14. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the respective successors and assigns of the parties
hereto; but no assignment shall relieve any party's obligations hereunder
without the written consent of the other parties. If a Member leaves the
Consolidated Group, they shall continue to be bound by this Agreement with
respect to any matter which involves a taxable year (or portion thereof) during
which such Member was included in a Consolidated Return.
15. New Members. The Members recognize that from time to time
other corporations may become Members of the Consolidated Group and agree that
such new Members may become parties to this Agreement by signing a joinder
substantially in the form of that attached as Exhibit A.
16. Governing Law. This Agreement shall be governed by the
laws of the state of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have caused their names
to be subscribed and executed by their respective authorized officers on the
dates indicated, effective as of the date first written above.
INTELLIGENT ELECTRONICS, INC.
Date: By:
-------------------------------- ---------------------------------
MISSING LINK COMMUNICATIONS, INC.
Date: By:
-------------------------------- ---------------------------------
XLCONNECT SERVICES, INC.
Date: By:
-------------------------------- ---------------------------------
INTELLINET, LTD.
Date: By:
-------------------------------- ---------------------------------
INTELLIGENT ADVANCED SYSTEMS, INC.
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<PAGE>
Date: By:
-------------------------------- ---------------------------------
INTELLIGENT DISTRIBUTION
SERVICES, INC.
Date: By:
-------------------------------- ---------------------------------
INTELLIGENT EXPRESS, INC.
Date: By:
-------------------------------- ---------------------------------
INTELLIGENT SP, INC.
Date: By:
-------------------------------- ---------------------------------
INTELLIGENT SYSTEMS GROUP, INC.
Date: By:
-------------------------------- ---------------------------------
RND, INC.
Date: By:
-------------------------------- ---------------------------------
THE FUTURE NOW, INC.
Date By:
-------------------------------- ---------------------------------
XLCONNECT SOLUTIONS, INC.
Date: By:
-------------------------------- ---------------------------------
INTELEVEST HOLDINGS, INC.
Date: By:
-------------------------------- ---------------------------------
THE FUTURE NOW, INC. OF ARKANSAS
Date: By:
-------------------------------- ---------------------------------
INTELLICOM SOLUTIONS, INC.
Date: By:
-------------------------------- ---------------------------------
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<PAGE>
Exhibit A
to
Tax Allocation Agreement
This instrument forms part of the Tax Allocation Agreement
dated __________, 1996 among Intelligent Electronics, Inc. and its subsidiaries
(the "Agreement"). The Agreement provides that a corporation which becomes a
Member of the Consolidated Group (as such capitalized words are used in the
Agreement) may become a party to the Agreement by signing this joinder. The
below identified authorized officer of XLConnect Systems, Inc. acknowledges
having received a copy of the Agreement and having read the Agreement, hereby
agrees that XLConnect Systems, Inc. as of April 25, 1996, shall be a party to
the Agreement for the taxable year ending February 1, 1997 and all subsequent
years and shall be a Member as defined in the Agreement.
- ----------------------------- [Corporate name]
Date
By:
----------------------------------
Title:
----------------------------------
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STOCK REGISTRATION AND OPTION AGREEMENT
THIS STOCK REGISTRATION AND OPTION AGREEMENT (the "Agreement") is made
and entered into as of May 31, 1996, by and between XLCONNECT SOLUTIONS, INC., a
Pennsylvania corporation (the "Company"), on the one hand, and INTELLIGENT
ELECTRONICS, INC., a Pennsylvania corporation ("IE"), and THE FUTURE NOW OF
ARKANSAS, INC., an Arkansas corporation, the parent of the Company and an
indirect, wholly-owned subsidiary of IE ("TFNA"), on the other hand (IE and TFNA
are sometimes together referred to herein as the "Holder").
RECITALS
A. Upon the completion of the initial public offering of shares of
common stock, par value $0.01 per share ("Common Stock"), of the Company (the
"Initial Public Offering"), the Company will cease to be a wholly-owned
subsidiary of the Holder. IE has informed the Company that it has no current
plan or intention other than to hold its shares of Common Stock for the
foreseeable future. After the Initial Public Offering, other options which may
be considered by the Holder regarding its interest in the Company are whether to
sell all or a portion of its shares of Common Stock to the public in another
public offering or to a strategic investor or to distribute pro rata to IE's
shareholders its remaining shares in a tax-free or taxable distribution (the
"Distribution").
B. In connection with the Initial Public Offering, the Company is
preparing to file a registration statement with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the
"Securities Act").
C. Following the Initial Public Offering, the Common Stock will be
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
D. The Holder may desire to cause one or more of the potential
alternative transactions that it may pursue involving its shares of Common Stock
to be registered under the Securities Act and other applicable securities laws.
E. The Holder may desire to maintain a sufficient equity ownership in
the Company prior to the Distribution, if it were to occur, or any alternative
transaction involving its shares of Common Stock to allow the Company and its
subsidiaries to continue to be included in IE's consolidated federal income tax
returns and to increase the likelihood that the Distribution would be tax-free
to the Holder and its shareholders.
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<PAGE>
NOW, THEREFORE, the parties hereto agree as follows:
1. Demand Registration.
(a) Request for Registration. As used in this Agreement,
"Restricted Stock" shall mean all shares of Common Stock owned by the Holder as
of the date of the consummation of the Initial Public Offering and any shares of
Common Stock acquired by the Holder pursuant to the continuing option granted
under Section 8 hereof, together with any securities issued or issuable by the
Company or any successor thereto with respect to any such Common Stock by way of
stock dividend or in connection with a stock split, combination of shares,
recapitalization, merger, consolidation, reorganization or otherwise. As to any
particular outstanding shares of Restricted Stock, such securities shall cease
to be Restricted Stock when (i) a registration statement with respect to the
offer and sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (ii) such securities shall have been
distributed to the public pursuant to Rule 144 (or any successor provision)
under the Securities Act, (iii) such securities shall have been distributed to
the Holder's shareholders in the Distribution, (iv) such securities shall have
otherwise become freely distributable by the Holder thereof in a public offering
or otherwise without the necessity of registration or qualification of such
securities under the Securities Act or any similar state law then in force or
compliance with the volume and manner of sale or similar limitations under Rule
144 (or any successor provision) under the Securities Act, (v) such securities
shall have ceased to be outstanding, or (vi) the Holder thereof shall agree in
writing that such Restricted Stock shall no longer be Restricted Stock. The
Holder and any permitted assignee of the Holder's rights hereunder are referred
to herein as "Holders" and a Holder selling or distributing Restricted Stock
pursuant hereto is referred to herein as a "Selling Holder." Subject to the
provisions of Section 4 hereof, at any time and from time to time any Holder or
Holders holding in the aggregate 50% or more of the shares of the Restricted
Stock then outstanding may make a written request for registration under the
Securities Act of all or part of its or their Restricted Stock pursuant to this
Section 1 (a "Demand Registration"), provided that the number of shares of
Restricted Stock proposed to be sold or distributed pursuant to such
registration shall be equal to 20% or more of the aggregate number of shares of
Restricted Stock then outstanding, but (if fewer than all outstanding shares of
Restricted Stock are proposed to be so sold or distributed) in no event less
than 5% of the initial aggregate number of shares of Restricted Stock (subject
to appropriate adjustment for any stock dividend, stock split, combination,
recapitalization, merger, consolidation, reorganization or other occurrence
affecting the
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<PAGE>
number of shares of Restricted Stock then outstanding). Such request will
specify the aggregate number of shares of Restricted Stock proposed to be sold
or distributed and will also specify the intended method of disposition thereof.
Within 10 business days after receipt of such request, the Company will give
written notice of such registration request to all other Holders of Restricted
Stock and include in such registration all Restricted Stock with respect to
which the Company has received written requests for inclusion therein within 15
business days after the date on which such notice is so given. Each such request
will also specify the number of shares of Restricted Stock to be registered and
the intended method of disposition thereof. No party other than a Holder shall
be permitted to include securities in any Demand Registration unless the Holder
or Holders of 67% of the shares of Restricted Stock to be included therein shall
have consented thereto in writing.
(b) Priority on Demand Registration. If the Holders of a
majority of the shares of the Restricted Stock to be included in a Demand
Registration so elect, the offering of such Restricted Stock pursuant to such
Demand Registration shall be in the form of an underwritten offering. In such
event, if the managing underwriter or underwriters of such offering advise the
Company and the Holders in writing that in their opinion the aggregate amount of
Restricted Stock requested to be included in such offering is so large that it
will materially and adversely affect the success of such offering, the Company
will include in such registration the aggregate number of shares of Restricted
Stock which in the opinion of such managing underwriter or underwriters can be
sold without any such material adverse effect, and such number of shares shall
be allocated pro rata among the Holders of Restricted Stock on the basis of the
number of shares of Restricted Stock requested by such Holders to be included in
such registration. To the extent that 10% or more of the Restricted Stock so
requested to be registered is excluded from the registration, then the Holders
of such excluded Restricted Stock shall have the right to one additional Demand
Registration under this Section 1 with respect to such Restricted Stock,
provided that the failure of such Restricted Stock to be registered is through
no fault of such Holders, and provided, further, that such right to one
additional Demand Registration applies only to the first time that shares of
Restricted Stock are so excluded.
(c) Selection of Underwriters and Counsel. If any Demand
Registration is in the form of an underwritten offering, the Holders of a
majority of the shares of Restricted Stock to be registered will select and
obtain the services of the managing underwriter or underwriters that will
administer the offering and the counsel to such managing underwriter or
underwriters; provided that such managing underwriter or underwriters and
counsel must be reasonably satisfactory to the Company.
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<PAGE>
2. Piggyback Registration. If the Company proposes to file a
registration statement under the Securities Act with respect to an offering for
its own account of any class of its equity securities (other than a registration
statement on Form S-8 (or any successor form) or any other registration
statement relating solely to employee benefit plans or filed in connection with
an exchange offer, a transaction to which Rule 145 (or any successor provision)
under the Securities Act applies or an offering of securities solely to the
Company's existing shareholders), then the Company shall in each case give
written notice of such proposed filing to the Holders as soon as practicable
(but no later than 20 business days) before the anticipated filing date, and
such notice shall offer each Holder the opportunity to register such number of
shares of Restricted Stock as such Holder may request. Each Holder desiring to
have Restricted Stock included in such registration statement shall so advise
the Company in writing within 10 business days after the date on which the
Company's notice is so given, setting forth the number of shares of Restricted
Stock for which registration is requested. If the Company's offering is to be an
underwritten offering, the Company shall, subject to the further provisions of
this Agreement, use its reasonable best efforts to cause the managing
underwriter or underwriters to permit the Holders of the Restricted Stock
requested to be included in the registration for such offering to include such
Restricted Stock in such offering on the same terms and conditions as any
similar securities of the Company included therein. The right of each Holder to
registration pursuant to this Section 2 in connection with an underwritten
offering by the Company shall, unless the Company otherwise assents, be
conditioned upon such Holder's participation as a seller in such underwritten
offering and its execution of an underwriting agreement with the managing
underwriter or underwriters selected by the Company. Notwithstanding the
foregoing, if the managing underwriter or underwriters of such offering deliver
a written opinion to the Company that either because of (a) the kind of
securities that the Company, the Holders and any other persons or entities
intend to include in such offering or (b) the size of the offering that the
Company, the Holders and any other persons or entities intend to make, the
success of the offering would be materially and adversely affected by inclusion
of the Restricted Stock requested to be included, then (i) in the event that the
size of the offering is the basis of such managing underwriter's opinion, the
number of shares of Restricted Stock to be registered and offered for the
accounts of Holders shall be reduced pro rata on the basis of the number of
securities requested by such Holders to be registered and offered to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by such managing underwriter or underwriters
(provided that if securities are being registered and offered for the account of
other persons or entities in addition to the Company, such reduction shall not
be proportionally greater than
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<PAGE>
any similar reductions imposed on such other persons or entities) and (ii) in
the event that the combination of securities to be offered is the basis of such
managing underwriters opinion, (x) the Restricted Stock to be included in such
registration and offering shall be reduced as described in clause (i) above or
(y) if such actions would, in the judgment of the managing underwriter, be
insufficient to substantially eliminate the adverse effect that inclusion of the
Restricted Stock requested to be included would have on such offering, such
Restricted Stock will be excluded entirely from such registration and offering.
Any Restricted Stock excluded from an underwriting shall, if applicable, be
withdrawn from registration and shall not, without the consent of the Company,
be transferred in a public distribution prior to the earlier of 90 days (or such
other shorter period of time as the managing underwriter may require) after the
effective date of the registration statement or 150 days after the date the
Holders of such Restricted Stock are notified of such exclusion.
3. Registration Procedures. Whenever, pursuant to Section 1 or 2
hereof, Holders of Restricted Stock have requested that any Restricted Stock be
registered, the Company shall, subject to the provisions of Section 4 hereof,
use its reasonable best efforts to effect the registration and the sale or
distribution of such Restricted Stock in accordance with the intended method of
disposition thereof as promptly as practicable, and in connection with any such
request, the Company shall:
(a) in connection with a request pursuant to Section 1 hereof,
prepare and file with the SEC, not later than 45 days after receipt of such a
request, a registration statement on any form for which the Company then
qualifies and which counsel for the Company shall deem appropriate and which
form shall be available for the sale or distribution of such Restricted Stock in
accordance with the intended method of distribution thereof, and use its
reasonable best efforts to cause such registration statement to become
effective; provided that, if the Company shall furnish to the Holders making
such a request a certificate signed by either the Chief Executive Officer or the
Chief Financial Officer of the Company stating that in his or her good faith
judgment it would be significantly disadvantageous to the Company for such a
registration statement to be filed on or before the date filing would otherwise
be required hereunder and explaining the reasons therefor, the Company shall
have an additional period of not more than 90 days within which to file such
registration statement; and, provided further, that (i) before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to one counsel selected by the Holders of a majority of
the shares of Restricted Stock covered by such registration statement copies of
all such documents proposed to be filed, which documents will
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<PAGE>
be subject to the review and comment of such counsel and (ii) after the filing
of the registration statement, the Company shall promptly notify each Selling
Holder of Restricted Stock of any stop order issued or, to the knowledge of the
Company, threatened by the SEC and take all reasonable actions to prevent the
entry of such stop order or to remove it if entered;
(b) in connection with a request pursuant to Section 1 hereof,
prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 90 days or such shorter period as shall terminate when the distribution of
all Restricted Stock covered by such registration statement shall have
terminated (but not before the expiration of the 90-day period referred to in
Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the Selling Holders
thereof set forth in such registration statement;
(c) as soon as reasonably practicable, furnish to each Selling
Holder, prior to filing a registration statement, copies of such registration
statement as proposed to be filed and thereafter furnish to such Selling Holder
such number of copies of such registration statement, each amendment and
supplement thereto, the prospectus included in such registration Statement
(including each preliminary prospectus) and such other documents as such Selling
Holder may reasonably request in order to facilitate the disposition of the
Restricted Stock owned by such Selling Holder;
(d) use its reasonable best efforts to register or qualify
such Restricted Stock under such other securities or blue sky laws of such
jurisdictions within the United States and Canada as any Selling Holder
reasonably (in light of such Selling Holder's intended plan of distribution)
requests and do any and all other acts and things which may be reasonably
necessary or advisable to enable such Selling Holder to consummate the
disposition in such jurisdictions of the Restricted Stock owned by such Selling
Holder; provided that the Company shall not be required to (i) qualify generally
to do business or file a general consent to service of process in any
jurisdiction or (ii) take any action that would subject itself to taxation in
any such jurisdiction;
(e) promptly notify each Selling Holder of such Restricted
Stock, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the occurrence of any event known to the
Company requiring the
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preparation of a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers or recipients of such Restricted Stock,
such prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and promptly make available to each
Selling Holder any such supplement or amendment;
(f) in connection with a request pursuant to Section 1 hereof,
enter into an underwriting agreement in customary form, the form and substance
of such underwriting agreement being subject to the reasonable satisfaction of
the Company and a majority in interest of the Selling Holders;
(g) make available for inspection by any Selling Holder, any
underwriter participating in any sale or distribution pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such Selling Holder or underwriter (collectively, the "Inspectors") all
financial and other records, pertinent corporate documents and properties of the
Company (collectively, the "Records") as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the Company's
officers and employees to supply all information reasonably requested for such
purpose by any such Inspector in connection with such registration statement;
provided that the Company shall have no obligation to permit such access to the
Records or its officers or employees in a manner that would unreasonably disrupt
the normal conduct of its business operations. Each such Selling Holder and
Inspector that actually reviews Records supplied by the Company that include
information that the Company identifies, in good faith, as being confidential or
proprietary ("Confidential Information") shall be required at the Company's
option, prior to any such review, to execute an agreement with the Company
providing that such Inspector shall not publicly disclose any Confidential
Information unless such disclosure is required by applicable law or legal
process and shall not use such information for any purpose other than the
limited purpose contemplated by this subsection (g). Each such Selling Holder
and Inspector shall be required further to agree that it shall, upon learning
that disclosure of Confidential Information is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of the Confidential
Information;
(h) in the event such sale is pursuant to an underwritten
offering, use its reasonable best efforts to obtain a comfort letter or letters
from the Company's independent public accountants in customary form and covering
such matters of the type customarily covered by comfort letters as the managing
underwriter reasonably requests; and
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<PAGE>
(i) otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the SEC and make available to its security
holders, as soon as reasonably practicable, an earnings statement complying with
the provisions of Section 11(a) of the Securities Act (including, at the option
of the Company, pursuant to Rule 158 (or any successor provision) under the
Securities Act).
Upon receipt of any notice from the Company of the occurrence of any
event of the kind described in subsection (e) hereof, such Selling Holder shall
forthwith discontinue all offerings, sales and other dispositions of Restricted
Stock pursuant to the registration statement covering such Restricted Stock
until such Selling Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by subsection (e) hereof. In the event the Company shall
give any such notice, the Company shall extend the period during which such
registration statement shall be maintained effective pursuant to this Agreement
(including the period referred to in subsection (b) hereof) by the number of
days during the period from and including the date of the giving of such notice
pursuant to subsection (b) hereof to and including the first date on which each
Selling Holder of Restricted Stock covered by such registration statement shall
have received the copies of the supplemented or amended prospectus contemplated
by subsection (e) hereof. Each Selling Holder shall notify the Company if any
event relating to such Selling Holder occurs which would require the preparation
of a supplement or amendment to the prospectus so that such prospectus will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
4. Conditions and Limitations.
(a) The Company's obligations under Section 1 hereof
shall be subject to the following limitations:
(i) the Holders rights to registration hereunder
shall not become effective until the end of the 180 day period immediately
following the closing of the Initial Public Offering and shall expire on the
tenth anniversary of the date of such closing;
(ii) the Company need not file a registration
statement either (x) during the period starting with the date 60 days prior to
the Company's estimated date of filing of, and ending 90 days after the
effective date of, any registration statement pertaining to securities of the
Company (other than a registration of securities on Form S-4 (or any successor
form) with respect to a transaction to which Rule 145 (or any successor
provision) under the Securities Act applies, or in an exchange
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offer, or on Form S-8 (or any successor form) with respect to any employee
benefit plan or dividend reinvestment plan); provided that if such Company
registration statement is not filed within 90 days after the first date on which
the Company notifies a Holder of Restricted Stock that it will delay a Demand
Registration pursuant to this clause (x), the Company may not further postpone
such Demand Registration pursuant to this clause (x), or (y) during the period
specified in the first proviso of subparagraph (a) of Section 3 hereof;
(iii) except as provided in Section 1(b) hereof,
the Company shall not be required to cause to become effective more than three
Demand Registrations in total, and no more than two Demand Registration
Statements within any six month period; and
(iv) the Company shall have received the
information and documents specified in Section 5 hereof and each Selling Holder
shall have observed or performed its other covenants contained in Sections 5 and
7 hereof.
(b) The Company's obligation under Section 2 hereof shall be
subject to the limitations and conditions specified in such section and in
clause (iii) of subsection (a) of this Section 4, and to the condition that the
Company may at any time terminate its proposal to register equity securities for
its own account and discontinue its efforts to cause a registration statement to
become or remain effective as to any and all shares of Restricted Stock that
would otherwise have been eligible for inclusion in such registration.
5. Information from and Certain Covenants of Holders of Restricted
Stock. Notices and requests delivered to the Company by Holders for whom
Restricted Stock is to be registered pursuant to this Agreement shall contain
such information regarding the Restricted Stock to be so registered, the Holder
and the intended method of disposition of such Restricted Stock as shall
reasonably be required in connection with the actions contemplated to be taken
pursuant to this Agreement. Any Holder whose Restricted Stock is included in a
registration statement pursuant to this Agreement shall execute all consents,
powers of attorney, registration statements and other documents reasonably
required to be executed by it in order to cause such registration statement to
became effective. Each Selling Holder covenants that, in disposing of such
Holder's shares, such Holder will comply with Rules 10b-2, 10b-5, 10b-6 and
10b-7 (or any successor provisions) under the Exchange Act and all other
requirements of applicable law.
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6. Registration Expenses.
(a) All Registration Expenses (as defined herein) will be
borne by the Company. Underwriting discounts and commissions applicable to the
sale of Restricted Stock shall be borne by the Holder of the Restricted Stock to
which such discount or commission relates, and each Selling Holder shall be
responsible for the fees and expenses of any legal counsel, accountants or other
agents retained by such Selling Holder and all other out-of-pocket expenses
incurred by such Selling Holder in connection with any registration under this
Agreement.
(b) As used herein, the term Registration Expenses means all
expenses incident to the Company's performance of or compliance with this
Agreement (whether or not the registration in connection with which such
expenses are incurred ultimately becomes effective), including without
limitation all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws (including reasonable fees and disbursements Of
counsel in connection with blue sky qualifications of the Restricted Stock),
rating agency fees, printing expenses, the fees and expenses incurred in
connection with the listing or admission for quotation of the securities to be
registered an any securities exchange or quotation system and fees and
disbursements of counsel for the Company and its independent certified public
accountants (including the expenses of any special audit or comfort letters
required by or incident to such performance), securities act liability insurance
(if the Company elects to obtain such insurance), the reasonable fees and
expenses of any special expert retained by the Company in connection with such
registration and the fees and expenses of other persons retained by the Company.
7. Indemnification; Contribution.
(a) Indemnification by the Company. In connection with any
offering of Restricted Stock pursuant to this Agreement, the Company shall
indemnify and hold harmless each Selling Holder, its officers, directors and
agents and each person, if any, who controls such Selling Holder within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages, liabilities and
expenses (including reasonable fees and disbursements of counsel) arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or prospectus relating to
Restricted Stock or in any amendment or supplement thereto or in any preliminary
prospectus relating to Restricted Stock or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, except insofar
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as such losses, claims, damages, liabilities or expenses arise out of, or are
based upon, any such untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished in writing to the Company by
such Selling Holder or on such Selling Holder's behalf expressly for use
therein. In connection with any underwritten offering of Restricted Stock
registered pursuant to this Agreement, the Company shall cause to be included in
any underwriting agreement with the underwriters of such offering provisions
indemnifying and providing for contribution to such underwriters and their
officers and directors and each person who controls such underwriters on
substantially the same basis as the provisions of this Section 7 indemnifying
and providing for contribution to the Selling Holders.
(b) Indemnification by Holders of Restricted Stock. In
connection with any offering of Restricted Stock pursuant to this Agreement,
each Selling Holder, severally and not jointly, shall indemnify and hold
harmless the Company, its officers, directors and agents and each person, if
any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, and, in accordance with
industry practice, in the case of an offering of Restricted Stock pursuant to
Section 2 of this Agreement, each underwriter of such Restricted Stock if
requested by such underwriter, from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable fees and disbursements
of counsel) arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or
prospectus relating to Restricted Stock or in any amendment or supplement
thereto or in any preliminary prospectus relating to Restricted Stock, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made,
provided that (i) such losses, claims, damages, liabilities or expenses arise
out of, or are based upon, any such untrue statement or alleged untrue statement
or omission or alleged omission based upon information furnished in writing to
the Company by such Selling Holder or on such Selling Holder's behalf expressly
for use therein and (ii) no Selling Holder shall be liable for any
indemnification under this Section 7 in an aggregate amount which exceeds the
total net proceeds received by such Selling Holder from such offering. In
connection with any underwritten offering of Restricted Stock registered
pursuant to this Agreement, each Selling Holder shall cause to be included in
any underwriting agreement with the underwriters of such offering provisions
indemnifying and providing for contribution to such underwriters, their officers
and directors and each person who controls such underwriters on substantially
the same basis as the provisions of this Section 7 indemnifying and providing
for contribution to the Company.
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<PAGE>
(c) Conduct of Indemnification Proceedings. If any
action or proceeding (including any governmental investigation) shall be
brought or asserted against any indemnified party hereunder in respect of which
indemnity may be sought from an indemnifying party hereunder, such indemnifying
party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party, and shall assume the payment
of all expenses. Such indemnified party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expenses of such indemnified
party unless (i) the indemnifying party has agreed to pay such fees and
expenses, (ii) the indemnifying party shall have failed to assume the defense of
such action or proceeding and employ counsel reasonably satisfactory to such
indemnified party, or (iii) the named parties to any such action or proceeding
(including any impleaded parties) include both such indemnified party and such
indemnifying party, and such indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to such
indemnified party which are different from or additional to those available to
the indemnifying party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action or proceeding on behalf of such
indemnified party; it being understood, however, that the indemnifying party
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for such indemnified party, which firm
shall be designated in writing by such indemnified party and reasonably
satisfactory to the indemnifying party). The indemnifying party shall not be
liable for any settlement of any such action or proceeding erected without its
written consent, but if settled with its written consent, or if there is a final
judgment for the plaintiff in any such action or proceeding, the indemnifying
party shall indemnify and hold harmless the indemnified party from and against
any loss or liability (to the extent stated above) by reason of such settlement
or judgment.
(d) Contribution. If the indemnification provided for in this
Section 7 is unavailable to the Company or the Selling Holders in respect of any
losses, claims, damages, liabilities or judgments referred to herein, then each
such indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments in such proportion as
is appropriate to reflect the relative
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<PAGE>
fault of each such party in connection with such statements or omissions or
alleged statements or omissions, as well as any other relevant equitable
considerations. The relative fault of each such party shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Selling Holders agree that it would
not be just and equitable if contribution pursuant to this Section 7(d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding sentences. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding sentences shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claims. Notwithstanding the provisions of this
Section 7(d), no Selling Holder shall be required to contribute an amount in
excess of the amount by which the total price at which the Restricted Stock of
such Selling Holder was offered to the public exceeds the amount of any fee
which such Selling Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) or
the Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation.
8. Option to Purchase Shares.
(a) Grant of Option. The Company hereby grants to the Holder
an option (the "Option"), exercisable at any time or from time to time prior to
the Expiration Date (as defined below) upon the original issuance of shares of
Common Stock by the Company, to purchase from the Company such number of shares
of Common Stock (and/or preferred stock of the Company if any shall be issued
and outstanding), as the Holder may determine in its sole judgment (i) to be
appropriate to ensure that the Holder may continue to include the Company and
its subsidiaries in the Holder's consolidated federal income tax returns (in
accordance with Section 1504 of the Internal Revenue Code of 1986, as amended
(including the regulations thereto, the "Code"), or any successor or additional
section dealing with the inclusion of any entity within an affiliated group for
purposes of filing a consolidated return), regardless of the circumstances which
may give rise to such determination by the Holder, or (ii) to permit the
Distribution to be tax free under Section 355 of the Code or any successor or
additional section dealing with the tax-free
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<PAGE>
distribution of subsidiary stock. The per share purchase price for any shares
purchased pursuant to the Option shall be the closing price, on the business day
immediately preceding the payment of such purchase price, for shares of Common
Stock (or, to the extent applicable, preferred stock) on the Nasdaq National
Market, as published in the Wall Street Journal, or if the Common Stock (or, to
the extent applicable, preferred stock) was not traded on the Nasdaq National
Market, then the closing price for shares of Common Stock (or, to the extent
applicable, preferred stock) on such day on such other securities exchange or
recognized trading system as published in the Wall Street Journal, and if the
Common Stock (or, to the extent applicable, preferred stock) was not traded on
any exchange or recognized trading system, then the fair market value of a share
of Common Stock (or, to the extent applicable, preferred stock) on such day. The
purchase price for any shares purchased pursuant to the Option may be paid, at
the option of the Holder, in cash or in property of a type used by the Company
in its business, such property to be valued pursuant to the mutual agreement of
the Company and the Holder. The Option shall expire and cease to be exercisable
upon the earlier to occur of (i) the Distribution, (ii) the sale by the Holder
of such number of shares of Common Stock that the Holder is no longer eligible
to make the Distribution tax free or to include the Company and its subsidiaries
in the Holder's consolidated federal income tax returns pursuant to the
provisions of the Code and (iii) the tenth anniversary of the date hereof
(subject to extension for one or more successive 10-year terms at the Holder's
option, upon delivery by the Holder to the Company of a written notice to that
effect), the date of such expiration being the "Expiration Date."
(b) Exercise of Option; Time and Place of Closing. The Holder
may, at any time or from time to time prior to the Expiration Date, exercise the
Option by delivering to the Company a written notice (an "Exercise Notice") to
such effect specifying the number of shares of Common Stock and/or preferred
stock of the Company that the Holder has determined to purchase. Except to the
extent that the parties may otherwise agree, the closing of the purchase and of
the shares specified in any Exercise Notice shall occur at the principal
executive offices of the Company at 10:00 a.m. local time on the third business
day following the date an which such Exercise Notice is delivered to the
Company. At each such closing, the Company shall deliver to the Holder one or
more certificates representing the shares specified in the Exercise Notice,
registered in the name at the Holder, against delivery by the Holder to the
Company of the aggregate purchase price therefor, the election of the Holder, in
cash or in property of a type used by the Company in its business, such property
to be valued pursuant to the mutual agreement of the Company and the Holder.
Notwithstanding anything to the contrary herein contained, in the event that any
shares of Common Stock are issued prior to the Distribution upon
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the exercise of any option or other award granted under the Company's 1996
Long-Term Incentive Plan (a "Company Stock Option") and the Holder reasonably
believes that such issuance may otherwise prevent the Holder from continuing to
include the Company in IE's consolidated federal income tax return or effecting
the Distribution an a tax-free basis, the Option shall automatically be deemed
to have been exercised in respect of a number of shares of Common Stock equal to
4 times the number of shares of Common Stock issued upon the exercise of the
Company Stock Option (unless the Holder shall have theretofore notified the
Company in writing that the Holder shall have terminated the foregoing automatic
exercise feature of the option), and the closing of the purchase and sale of the
shares of Common Stock subject to such automatic exercise of the Option (the
"Automatic Exercise Shares") shall occur (or shall be deemed to have occurred)
concurrently with the issuance of shares of Common Stock pursuant to the Company
Stock Option. In the event that it shall have been impractical to effect the
deliveries contemplated by the second preceding sentence at the time that the
closing of the purchase and sale of the Automatic Exercise Shares shall have
been deemed to have occurred, such deliveries shall be made as promptly as
practicable thereafter; provided, however, that such Automatic Exercise Shares
shall nonetheless be deemed to have been issued to the Holder concurrently with
the issuance of shares of Common Stock pursuant to the Company Stock Option and
legal title to funds of the Holder (which shall be held in trust by the Holder
for the benefit of the Company pending the delivery thereof to the Company) in
an amount equal to the aggregate purchase price for the Automatic Exercise
Shares shall be deemed to have concurrently passed to the Company in
consideration of such issuance of the Automatic Exercise Shares.
(c) Representations and Warranties: Corporate Action. The
Company hereby represents and warrants to the Holder that all shares of Common
Stock (or, to the extent applicable, preferred stock) issued to the Holder upon
any exercise of the Option shall, upon issuance thereof as provided herein
against payment of the purchase price therefor as provided herein, be duly
authorized, validly issued, fully paid and nonassessable, and hereby undertakes
(i) to cause any and all corporate and other actions required in connection
therewith to be taken in a timely manner and (ii) not to take any action that
would prevent the foregoing representations and warranties from being true and
correct.
9. Miscellaneous.
(a) Effectiveness. This Agreement shall become effective on
the date on which the purchase and sale of shares of Common Stock pursuant to
the Initial Public Offering first occurs.
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<PAGE>
(b) Successors and Assigns. This Agreement shall be binding
upon the parties hereto and their respective successors and permitted assigns
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement may not be assigned by either
party hereto to any other person, except that either party may assign this
Agreement to any of its affiliates, and the Holder may assign its rights
hereunder to any transferee of at least 25% of the shares of Restricted Stock
that are outstanding on the date of the closing of the Initial Public Offering.
(c) No Third-Party Beneficiaries. Nothing expressed or
implied in this Agreement shall be construed to give any person or entity
other than the parties hereto any legal or equitable rights hereunder.
(d) Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof.
(e) Amendment. This Agreement may not be amended except by
an instrument signed by the parties hereto.
(f) Waivers. Either party hereto may (i) extend the time for
the performance of any of the obligations or other act of the other party,
(ii) waive any inaccuracies in the representations and warranties contained
herein, or (iii) waive compliance with any of the agreements contained herein.
No waiver of any term shall be construed as a waiver of the same term, or a
waiver of any other term, of this Agreement. The failure of any party to assert
any of its rights hereunder will not constitute a waiver of any such rights.
(g) Severability. If any provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, such provision shall be deemed severable and all other provisions of
this Agreement shall nevertheless remain in full force and effect.
(h) Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
(i) Notices. All notices given in connection with this
Agreement shall be in writing. Service of such notices shall be deemed complete
(i) if hand delivered, on the date of delivery, (ii) if by mail, on the fourth
business day following the day of deposit in the United States mail, by
certified or registered mail, first-class postage prepaid, (iii) if sent by
Federal Express or equivalent courier service, on the next business day, or
(iv) if sent by telecopier facsimile, on the date of the confirmation of
delivery. Such notices shall be
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addressed to the parties at the following addresses or at such other address for
a party as shall be specified by like notice (except that notices of change of
address shall be effective upon receipt):
If to Holder: Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, Pennsylvania 19341
Attn: President
Telecopy No.: (610) 458-5500
If to the Company: XLConnect Solutions, Inc.
411 Eagleview Boulevard
Exton, Pennsylvania 19341
Attn: President
Telecopy No.: (610) 458-5500
(j) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania,
without giving effect to the principles of conflict of laws of such
Commonwealth.
(k) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the Company and the Holder have caused
this Agreement to be executed on the date first above written.
XLCONNECT SOLUTIONS, INC.
By:____________________________
Name:
Title: President
THE FUTURE NOW OF ARKANSAS, INC.
By:____________________________
Name:
Title: President
INTELLIGENT ELECTRONICS, INC.
By:____________________________
Name:
Title: President
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INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made this __ day
of ____________, 1996, by and between Intelligent Electronics, Inc., a
Pennsylvania corporation ("IE"), and XLConnect Solutions, Inc., a Pennsylvania
corporation ("XLC").
RECITALS
A. XLC is a wholly-owned, indirect subsidiary of IE.
B. IE and XLC intend to effect an initial public offering of shares of
common stock of XLC (the "Offering").
C. Upon completion of the Offering, XLC will cease to be a wholly-owned
subsidiary of IE. Thereafter, IE intends to consider its options regarding its
interest in XLC, including whether to retain its investment in XLC, to sell all
or a portion of its remaining shares of common stock of XLC to the public in
another public offering or to a strategic investor or to distribute pro rata to
IE's shareholders its remaining shares in a tax-free or taxable distribution.
D. In connection with the Offering, XLC has filed a registration statement
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "1933 Act").
E. Each of IE and XLC desires to indemnify the other, and to be indemnified
by the other, against certain liabilities relating to, arising out of or
resulting from their respective businesses, operations and assets and the
above-mentioned registration statement, on the terms set forth in this
Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(a) "Business Day" means any calendar day which is not a Saturday,
Sunday or public holiday under the laws of the Commonwealth of Pennsylvania.
(b) "Closing" means the consummation of the first purchase and sale
of shares of common stock of XLC pursuant to the Offering.
(c) "Closing Date" means the date on which the Closing occurs.
<PAGE>
(d) "Code" shall means the Internal Revenue Code of 1986, as
amended.
(e) "Effective Date" means the date on which the purchase and sale
of shares of common stock of XLC pursuant to the Offering first occurs.
(f) "Excluded Employees" means all persons who as of the Closing
Date are employees of both (i) any XLC Company and (ii) any IE Company.
(g) "IE Companies" means (unless otherwise expressly provided)
Intelligent Electronics, Inc. and each of its direct and indirect subsidiaries
at the time of, or at any time after, the Closing, other than XLC and its
subsidiaries.
(h) "IE Employees" means all employees or former employees of any of
the IE Companies other than the XLC Employees and the Excluded Employees.
(i) "IE Guarantee" means any guarantee, surety or performance bond,
letter of credit or other contractual arrangement in effect as of the Closing
pursuant to which any IE Company has guaranteed or secured or caused a third
party to guarantee or secure any liability or obligation of any XLC Company.
(j) "IE Liabilities" means all Liabilities (other than Liabilities
for Taxes that are allocated pursuant to the Tax Allocation Agreement or
formerly conducted) relating to, resulting from or arising out of the businesses
or operations conducted or formerly conducted or assets owned or formerly owned
by any of the IE Companies, other than XLC Liabilities. "IE Liabilities" shall
also include all liabilities for any benefits due and payable in respect of IE
Employees under any "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
maintained or formerly maintained by any of the IE Companies or such a plan
maintained or formerly maintained by any of the IE Companies or, in respect of
periods prior to the Closing Date, any of the XLC Companies in which any IE
Employee has at any time participated, as well as any taxes, penalties, interest
or other charges imposed by any governmental agency with respect to the
maintenance and administration of any such plan, whether by any of the IE
Companies or any of the XLC Companies; provided, however, that (i) any such
liability for taxes, penalties, interest or other charges posed by any
governmental agency with respect to any such employee benefit plan shall be
limited to that portion of the tax, penalty, interest or other charge which
bears the same relationship to the whole as the benefit liabilities under such
plan attributable to IE Employees bears to all benefit liabilities under such
plan, (ii) "IE Liabilities" shall include all taxes, penalties, interest and
other charges imposed solely in relation to the participation of IE Employees
and shall not include any taxes, penalties, interest or other charges imposed
solely in relation to the participation of XLC Employees, and (iii) "IE
Liabilities" shall not include any taxes, penalties, interest and other charges
imposed as a result of any error or omission by XLC or its failure to take any
action within XLC's exclusive control in connection with the maintenance and
administration of any plan.
-2-
<PAGE>
(k) "IE Securities Liabilities" means any Liability under the 1933
Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") or any
other federal or state securities law or regulation resulting from or arising
out of the Offering and arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in a registration
statement filed with the Securities and Exchange Commission in connection with
the Offering, or any amendment or supplement thereto (a "Registration
Statement"), or in any prospectus relating to the Offering or in any amendment
or supplement thereto (a "Prospectus"), or the omission or alleged omission to
state in a Registration Statement or Prospectus a material fact required to be
stated therein or necessary to make the statements made therein not misleading,
but only to the extent that such Liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission concerning the business and operations of any of the IE Companies or
relating to any IE Employee or otherwise contained in material furnished in
writing by IE expressly for use therein.
(l) "Liabilities" means all liabilities and obligations, actual or
contingent, liquidated or unliquidated, accrued or unaccrued, known or unknown,
whenever and however arising, including all costs and expenses (including
reasonable fees and disbursements of counsel) relating thereto, and including
without limitation liabilities and obligations arising in connection with any
actual or threatened claim, action, suit or proceeding by or before any court or
regulatory or administrative agency or commission or any arbitration panel.
(m) "Litigation" means any and all actions, suits, proceedings or
claims which as of the date hereof are pending or threatened against IE or XLC
or both of them, including without limitation those listed on Schedule A hereto.
(n) "Registration Rights Agreement" means the Stock Registration and
Option Agreement between IE and XLC dated as of the date hereof.
(o) "Tax Allocation Agreement" means the Tax Allocation Agreement
between IE and XLC dated as of the date hereof.
(p) "Taxes" means any and all taxes (including interest, penalties
and additions to tax), fees and charges (including sales, use, excise, value
added, personal property and other taxes) imposed by any federal, state or local
or government tax authority in the United States of America or by any foreign
government or taxing authority.
(q) "Trademark Litigation" means the activity commenced as a result
of a letter dated April 17, 1996, from counsel for an entity named USConnect,
Inc. ("USCI") to IE demanding that XLC cease using the term "XLCONNECT" either
as a corporate name or as a service mark because such use was allegedly
confusingly similar to USCI's use of the term "USCONNECT".
-3-
<PAGE>
(r) "Underwriting Agreement" means the Underwriting Agreement
between and among Alex. Brown & Sons Incorporated, Montgomery Securities and
Janney Montgomery Scott Inc. (as representatives of the several underwriters)
and IE and XLC dated _________ __, 1996.
(s) "XLC Companies" means XLConnect Solutions, Inc. and each of its
direct and indirect subsidiaries at the time of, or at any time after, the
Closing.
(t) "XLC Employees" means all employees or former employees of any
of the XLC Companies other than any person who as of the Closing Date is an
employee of any of the IE Companies.
(u) "XLC Guarantee" means any guarantee, surety or performance bond,
letter of credit or other contractual arrangement in effect as of the Closing
pursuant to which any XLC Company has guaranteed or secured or caused a third
party to guarantee or secure any liability or obligation of any IE Company.
(v) "XLC Liabilities" means all Liabilities (other than Liabilities
for Taxes that are allocated pursuant to the Tax Allocation Agreement) relating
to, resulting from or arising out of the businesses or operations conducted or
formerly conducted or assets owned or formerly owned by any of the XLC
Companies. "XLC Liabilities" shall also include all liabilities for any benefits
due and payable in respect of XLC Employees accruing from and after May 31,
1996, under any "employee benefit plan," as defined in Section 3(3) of ERISA,
maintained or formerly maintained by any of the XLC Companies or any of the IE
Companies in which any XLC Employee has at any time participated, as well as any
taxes, penalties, interest or other charges imposed by any governmental agency
and caused by or resulting from any action or omission by XLC with respect to
the maintenance and administration of any such plan, whether by any of the IE
Companies or any of the XLC Companies; provided, however, that (i) any such
liability, including without limitation, liability for taxes, penalties,
interest or other charges imposed by any governmental agency with respect to an
employee benefit plan maintained or formerly maintained by any of the IE
Companies shall be limited to that portion of such liability or other charge
which bears the same relationship to the whole as the benefit liabilities under
such plan attributable to XLC Employees bears to all benefit liabilities under
such plan, (ii) "XLC Liabilities" shall include all taxes, penalties, interest
and other charges imposed solely in relation to the participation of XLC
Employees and shall not include any taxes, penalties, interest or other charges
imposed solely in relation to the participation of IE Employees; and (iii) "XLC
Liabilities" shall not include any taxes, penalties, interest and other charges
imposed as a result of any error or omission by IE or failure to take any action
within IE's exclusive control in connection with the maintenance and
administration of any plan.
(w) "XLC Securities Liabilities" means any Liability under the 1933
Act, the 1934 Act, or any other federal or state securities law or regulation
resulting from or arising out of the Offering, including without limitation any
such Liability arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in
-4-
<PAGE>
a Registration Statement, or in any Prospectus, or (ii) the omission or alleged
omission to state in a Registration Statement or Prospectus a material fact
required to be stated therein or necessary to make the statements made therein
not misleading, but only to the extent that such Liability arises out of or is
based upon any such untrue statement or alleged untrue statement or any such
omission or alleged omission concerning the businesses and operations of any of
the XLC Companies, or relating to any XLC Employee or otherwise contained in
material furnished in writing by XLC expressly for use therein.
2. Indemnification by XLC. XLC shall indemnify, defend and
hold harmless the IE Companies and the respective past, present and future
directors, officers, employees, agents and representatives thereof (regardless
in each case of whether any such person serves in one or more similar capacities
for XLC and its subsidiaries) from and against any and all losses, claims,
damages, liabilities, demands, suits and actions, including all reasonable
attorneys' fees and disbursements and other costs and expenses incurred in
connection therewith (collectively, "Indemnifiable Losses"), relating to,
resulting from or arising out of (a) any XLC Liabilities, (b) any XLC Securities
Liabilities, (c) any misrepresentation or material breach by XLC of any covenant
of XLC, or any failure by XLC to satisfy any condition required to be satisfied
by XLC, contained in this Agreement, the Underwriting Agreement or any other
agreement executed by XLC in connection with the Offering, except to the extent
that such misrepresentation, breach or failure was caused by or resulted from
any statement, act or omission within the exclusive knowledge or control of IE,
or (d) the Trademark Litigation.
3. Indemnification by IE. IE shall indemnify, defend and hold harmless
the XLC Companies and the respective past, present and future directors,
officers, employees, agents and representatives thereof (regardless in each case
of whether any such person serves in one or more similar capacities for IE and
its subsidiaries) from and against any and all Indemnifiable Losses relating to,
resulting from or arising out of (a) any IE Liabilities, (b) any IE Securities
Liabilities, or (c) any misrepresentation or material breach by IE of any
covenant of IE, or any failure of IE to satisfy and condition required to be
satisfied by IE, contained in this Agreement, the Underwriting Agreement, or any
other agreement executed by IE in connection with the Offering, except to the
extent that such misrepresentation, breach or failure was caused by or resulted
from any statement, act or omission within the exclusive knowledge or control of
XLC or (d) the Litigation, other than the Trademark Litigation.
4. Guarantees
(a) XLC shall use reasonable efforts to obtain promptly the release
of each of the IE Companies from all of their respective obligations under or in
respect of all material IE Guarantees, and IE shall cooperate with XLC in
obtaining such releases, provided that neither party shall be required to incur
any non-de minimis liability or unreimbursed expense in doing so. XLC shall
indemnify, defend and hold harmless the IE Companies, and their respective
directors, officers, employees, agents and representatives, from and against any
Indemnifiable Losses relating to, resulting from, or arising out of, any IE
Guarantee. IE shall not terminate unilaterally or withdraw any IE Guarantee and
shall abide by the terms of
-5-
<PAGE>
the IE Guarantees. XLC shall reimburse each IE Company for its direct costs (or,
in the case of an IE Guaranty that relates to both liabilities or obligations of
both one or more XLC Companies and one or more third parties, a pro rata share
of such direct costs), if any, of maintaining the IE Guarantees pending the
procurement of the releases contemplated hereby.
(b) IE shall use reasonable efforts to obtain promptly the release
of each of the XLC Companies from all of their respective obligations under or
in respect of all material XLC Guarantees, and XLC shall cooperate with IE in
obtaining such releases, provided that neither party shall be required to incur
any non-de minimis liability or unreimbursed expense in doing so. IE shall
indemnify, defend and hold harmless XLC and its subsidiaries, and their
respective directors, officers, employees, agents and representatives, from and
against any Indemnifiable Losses relating to, resulting from, or arising out of,
any XLC Guarantee. XLC shall not terminate unilaterally or withdraw any XLC
Guarantee and shall abide by the terms of the XLC Guarantees. IE shall reimburse
each XLC Company for its direct costs (or, in the case of an XLC Guaranty that
relates to both liabilities or obligations of both one or more IE Companies and
one or more third parties, a pro rata share of such direct costs), if any, of
maintaining the XLC Guarantees pending the procurement of the releases
contemplated hereby.
5. Third Party Claims.
(a) If any person entitled to indemnification under this Agreement
(an "Indemnitee") receives notice of the assertion of any claim or of the
commencement of any action or proceeding by any person that is not a party to
this Agreement or a subsidiary of any such party (a "Third Party Claim") against
such Indemnitee, the Indemnitee shall promptly provide written notice thereof
(including a description of the Third Party Claim and an estimate of any
Indemnifiable Losses (which estimate shall not be conclusive as to the final
amount of such Indemnifiable Losses) to the party required to provide
indemnification under this Agreement (the "Indemnifying Party") within ten (10)
Business Days after the Indemnitee's receipt of notice of such Third Party
Claim. Any delay by the Indemnitee in providing such written notice shall not
relieve the Indemnifying Party of any liability for indemnification hereunder
except to the extent that the rights of the Indemnifying Party are materially
prejudiced by such delay.
(b) The Indemnifying Party shall have the right to participate in
or, by giving written notice to the Indemnitee, to assume the defense of any
Third Party Claim at such Indemnifying Party's expense and by such Indemnifying
Party's own counsel (which shall be reasonably satisfactory to the Indemnitee),
and the Indemnitee will cooperate in good faith in such defense. The
Indemnifying Party shall not be liable for any legal expenses incurred by the
Indemnitee after the Indemnitee has received notice of the Indemnifying Party's
intent to assume the defense of a Third Party Claim; provided, however, that if
the Indemnifying Party fails to take steps reasonably necessary to diligently
pursue the defense of such Third Party Claim within ten (10) Business Days of
receipt of notice from the Indemnitee that such steps are not being taken, the
Indemnitee may assume its own defense and the Indemnifying Party shall be liable
for the reasonable costs thereof.
-6-
<PAGE>
(c) The Indemnifying Party may settle any Third Party Claim which it
has elected to defend so long as the written consent of the Indemnitee to such
settlement is first obtained (which consent shall not be unreasonably withheld).
The Indemnified Party shall not settle any Third Party Claim without the written
consent of the Indemnifying Party (which consent shall not be unreasonably
withheld).
(d) In the event that a Third Party Claim involves a proceeding as
to which both IE and XLC may be Indemnifying Parties, the parties hereto agree
to cooperate in good faith in a joint defense of such Third Party Claim.
6. Contribution. If the indemnification provided for in this Agreement
with respect to XLC Securities Liabilities or IE Securities Liabilities is for
any reason held by a court or other tribunal to be unavailable on policy grounds
or otherwise, IE and XLC shall contribute to any Indemnifiable Losses relating
to, resulting from or arising out of the XLC Securities Liabilities or the IE
Securities Liabilities in such proportion as to reflect each party's relative
fault in connection with such Indemnifiable Losses. The relative fault of the
parties shall be determined by reference to, among other things, whether the
conduct or information giving rise to the Indemnifiable Losses is attributable
to IE or XLC and each party's relative intent, access to information and
opportunity to prevent or correct the Indemnifiable Losses. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who is not guilty of
fraudulent misrepresentation.
7. Allocations Relating to Excluded Employees. Liabilities for any
benefits due and payable in respect of Excluded Employees under any "employee
benefit plan," as defined in Section 3(3) of ERISA, maintained or formerly
maintained by any of the XLC Companies or any of the IE Companies in which any
Excluded Employee has at any time participated shall be allocated as between the
XLC Companies, on the one hand, and the IE Companies, on the other hand as
follows: (a) to the extent such liabilities are directly attributable to periods
prior to the Closing Date, they shall be allocated entirely to the IE Companies;
(b) to the extent such liabilities are directly attributable to periods on or
after the Closing Date and are directly attributable to an Excluded Employee's
service to one or more XLC Companies on the one hand or one or more IE Companies
on the other hand, they shall be allocated entirely to the XLC Companies or the
IE Companies, respectively; and (c) in all other events, such liabilities shall
be allocated in a manner as nearly proportionate to the services rendered by
such Excluded Employee to the XLC Companies and the IE Companies, respectively,
as may be practicable under the circumstances or as otherwise mutually agreed by
XLC and IE. Liabilities allocated to the XLC Companies pursuant to this Section
7 shall be deemed to be XLC Liabilities for all purposes of this Agreement, and
liabilities allocated to the IE Companies pursuant to this Section 7 shall be
deemed to be IE Liabilities for all purposes of this Agreement.
8. Cooperation. So long as any books, records and files retained after
the Closing Date by IE (or any of the other IE Companies), on the one hand, or
XLC (or any of the other XLC Companies), on the other hand, relating to the
businesses, operations or assets
-7-
<PAGE>
of the other party and its subsidiaries (including any books, records and files
retained by the XLC Companies relating to the conduct of their businesses or
operations or the ownership of their assets prior to the Closing) remain in
existence and available, such other party shall have the right upon prior
written notice to inspect and copy the same at any time during business hours
for any proper purpose, provided that such right will not extend to any books,
records or files the disclosure of which in accordance herewith would result in
a waiver of the attorney-client, work product or other privileges which permit
non-disclosure of otherwise relevant material in litigation or other
proceedings, or which are subject on the date hereof and at the time inspection
is requested to a non-disclosure agreement with a third party and a waiver
cannot reasonably be obtained. IE and XLC agree that neither they nor any of
their subsidiaries shall destroy any such books, records or files without
reasonable notice to the other party or if such party receives within ten (10)
Business Days of such notice any reasonable objection from the other party to
such destruction. Except in the case of dispute between the parties hereto, IE
and XLC shall cooperate with one another in a timely manner in any
administrative or judicial proceeding involving any matter affecting the actual
or potential liability of either party hereunder. Such cooperation shall
include, without limitation, making available to the other party during normal
business hours all books, records and information, and officers and employees
(without substantial disruption of operations or employment) necessary or useful
in connection with any inquiry, audit, investigation or dispute, any litigation
or any other matter requiring any such books, records, information, officers or
employees for any reasonable business purpose. The party requesting or otherwise
entitled to any books, records, information, officers or employees pursuant to
this Section 7 shall bear all reasonable out-of-pocket costs and expenses
(except for salaries, employee benefits and general overhead) incurred in
connection with providing such books, records, information, officers or
employees.
9. Effectiveness. This Agreement shall become effective on the Closing
Date.
10. Successors and Assigns. This Agreement shall be binding upon the
parties hereto and their respective successors and permitted assigns and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned by either party hereto to
any other person except that either party may assign this Agreement to any of
its affiliates.
11. No Third-Party Beneficiaries. Except for the persons entitled to
indemnification pursuant to Section 2 or Section 3 hereof, each of whom is an
intended third-party beneficiary hereunder, nothing expressed or implied in this
Agreement shall be construed to give any person or entity other than the parties
hereto any legal or equitable rights hereunder.
12. Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof.
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<PAGE>
13. Amendment. This Agreement may not be amended except by an
instrument signed by the parties hereto.
14. Waivers. Either party hereto may (i) extend the time for the
performance off any of the obligations or other act of the other party, (ii)
waive any inaccuracies in the representations and warranties contained herein,
or (iii) waive compliance with any of the agreements contained herein. No waiver
shall be effective unless signed by the parties hereto. No waiver of any term
shall be construed as a subsequent waiver of the same term, or a waiver of any
other term, of this Agreement. The failure of any party to assert any of its
rights hereunder will not constitute a waiver of any such rights.
15. Severability. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, such
provision shall be deemed severable and all other provisions of this Agreement
shall nevertheless remain in full force and effect.
16. Headings. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
17. Notices. All notices given in connection with this Agreement shall
be in writing. Service of such notices shall be deemed complete (i) if hand
delivered, on the date of delivery, (ii) if by mail, on the fourth business day
following the day of deposit in the United States mail, by certified or
registered mail, first-class postage prepaid, (iii) if sent by FedEx or
equivalent courier service, on the next business day, or (iv) if by telecopier,
upon receipt by the sender of confirmation of successful transmission. Such
notices shall be addressed to the parties at the following addresses or at such
other address for a party as shall be specified by like notice (except that
notices of change of address shall be effective upon receipt):
If to IE: Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Attn: President
Telecopy No.: (610) 458-0599
If to XLC: XLConnect Solutions, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Attn: President
Telecopy No.: (610) 458-0599
18. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the Commonwealth of Pennsylvania,
without giving effect to the principles of conflict of laws of such
Commonwealth.
19. Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
but one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Indemnification Agreement as of the date first above written.
INTELLIGENT ELECTRONICS, INC.
By:_______________________________________
Name:
Title:
XLCONNECT SOLUTIONS, INC.
By:_______________________________________
Name:
Title:
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<PAGE>
SCHEDULE A
LITIGATION
A-1
March 16,1996
Mr. Timothy W. Wallace
Dear Tim:
I am pleased to offer employment to you as Executive Vice President of XL
Connect, Inc. an enterprise to be created through the merger of The Future Now's
Professional Services Organization (PSO) and Intellicom, Inc. You will report to
the Chief Executive Officer, effective immediately.
XL Connect's mission is to offer its customers a distinct competitive advantage
in the communications-computer convergence industry. Our goal is for this
organization to capitalize on the established customer base and to enhance and
expand its current professional services offerings which include applications
services, enterprise consulting, internetworking, technology & deployment
services, and distributed computing.
As an exempt, full time employee, your starting salary will be at the rate of
$7692.30 bi-weekly, effective January 1, 1996. Additionally, you will have the
opportunity to earn up to an additional $125,000 per year based upon specific
criteria to be mutually agreed upon. This bonus amount will be paid
semi-annually if you achieve the plan set forth by the CEO of XL Connect. In
addition, you will be eligible to participate in Intelligent Electronics'
optional life insurance program.
Your compensation package will include our current standard benefit program,
subject to eligibility requirements, any limitations as described in the plan
description booklets, your payment of required premiums, and the plan being
offered to all employees. Our benefit program currently includes medical,
dental, vision, life and accidental death and dismemberment insurance; short and
long term disability insurance; 401(k) program; paid holiday, vacation,
personal, and sick leave; tuition reimbursement; and employee purchase
discounts. These benefits are subject to review, modification, or deletion at
the discretion of the Company.
In order to allow you to participate in the long term growth of the Company and
to further compensate you for the contribution to that growth, I will recommend
that the stock option committee of the board grant you options for the purchase
of 300,000 shares at a price of 85% of the IPO price of the newly formed
company. These options will vest over four years (25% per year), the only
restriction being that you may not sell for two years from the IPO.
Your acceptance of this offer is contingent upon your eligibility for lawful
employment in the United States and your timely presentation of valid
documentation to that effect. Your documentation must be present
<PAGE>
by the third day of employment. Upon employment you will be required to sign
several agreements including, but not limited to, Confidentiality, Code of
Ethics, and Insider Trading Information. As a condition of employment,
Intelligent Electronics requires your signature on these agreements within seven
(7) days.
Intelligent Electronics conducts drug screening tests and criminal history
background checks. Only candidates who test negative for drugs and successfully
pass the criminal history check are eligible for employment.
This letter does not constitute a guarantee of employment or benefits for any
definite period, and you may terminate your employment at any time, with or
without cause, and without any previous notice. We retain the same right to do
so. However, if you are involuntarily terminated without cause within the first
12 months of employment, Intelligent Electronics agrees to pay an amount equal
to your base salary, payable on a bi-weekly basis, and subject to appropriate
wage and tax regulations. In addition, IE agrees to allow you to exercise your
stock options in the newly formed company for a period of two years from the
date of this letter.
The Company agrees that you have until September 1, 1996 to execute your
relocation to the Exton, PA office.
I sincerely hope that you will accept this employment offer to participate in
this dynamic opportunity. If you should have any questions regarding the nature
of this offer, please contact W. Evelyn Walker at (610)458-6526.
Tim, please confirm your acceptance of this employment offer by signing where
indicated below.
Sincerely,
/s/ Richard Ellenberger
- ------------------------
Richard Ellenberger Agreed: /s/ Timothy Wallace
-----------------------
Dated: 3/15/96
<PAGE>
February 1,1996
Mr. Jack Chidester
1311 Shadow Oak Drive
Malvern, PA 19355
Dear Jack:
I am pleased to offer employment to you as Executive Vice President of XL
Connect, Inc. an enterprise to be created through the merger of The Future Now's
Professional Services Organization (PSO) and Intellicom, Inc. You will report to
the Chief Executive Officer of ISI. Your first day of employment will be March
4, 1996.
XL Connect's mission is to offer its customers a distinct competitive advantage
in the communications-computer convergence industry. Our goal is for this
organization to capitalize on the established customer base and to enhance and
expand its current professional services offerings which include applications
services, enterprise consulting, internetworking, technology & deployment
services, and distributed computing.
As an exempt, full-time employee, your starting salary will be at the rate of
$7692.30 bi-weekly. Additionally, you will have the opportunity to earn up to an
additional $125,000 per year based upon specific criteria to be mutually agreed
upon. This bonus amount will be paid semi-annually if you achieve the plan set
forth by the CEO of XL Connect. In addition, you will be eligible to participate
in Intelligent Electronics' optional life insurance program.
Your compensation package will include our current standard benefit program,
subject to eligibility requirements, any limitations as described in the plan
description booklets, your payment of required premiums, and the plan being
offered to all employees. Our benefit program currently includes medical,
dental, vision, life and accidental death and dismemberment insurance; short and
long term disability insurance; 401(k) program; paid holiday, vacation,
personal, and sick leave; tuition reimbursement; and employee purchase
discounts. These benefits are subject to review, modification, or deletion at
the discretion of the Company.
It is our intent to cause Intellicom to become a separate public company as soon
as practicable within one year, conditions permitting and at the sole discretion
of Intelligent Electronics.
In order to allow you to participate in the long term growth of the Company and
to further compensate you for the contribution to that growth, I will recommend
that the stock option committee of the board grant you options for the purchase
of 250,000 shares at a price of 85% of the IPO price of the newly formed
company. These options will vest over four years (25% per year), the only
restriction being that you may not sell for two years from the IPO.
<PAGE>
Your acceptance of this offer is contingent upon your eligibility for lawful
employment in the United States and your timely presentation of valid
documentation to that effect. Your documentation must be presented by the third
day of employment. Upon employment you will be required to sign several
agreements including, but not limited to, Confidentiality, Code of Ethics, and
Insider Trading Information.
Intelligent Electronics conducts drug screening tests and criminal history
background checks. Only candidates who test negative for drugs and successfully
pass the criminal history check are eligible for employment.
This letter does not constitute a guarantee of employment or benefits for any
definite period, and you may terminate your employment at any time, with or
without cause, and without any previous notice. We retain the same right to do
so. However, if you are involuntarily terminated without cause within the first
24 months of employment, Intelligent Electronics agrees to pay an amount equal
to your salary, payable on a bi-weekly basis, and subject to appropriate wage
and tax regulations.
In addition, Intelligent Electronics requires your signature on the non-
disclosure agreement as a condition of employment. You will be given these
documents on your first day to review and sign.
I sincerely hope that you will accept employment with XL Connect and participate
in this dynamic opportunity. If you should have any questions regarding the
nature of this offer, please contact me.
Jack, please confirm your acceptance of this employment offer by signing where
indicated below.
Sincerely,
/s/ Richard Ellenberger
- -------------------------
Rick Ellenberger Agreed: /s/ Jack Chidester
----------------------
Dated: 3/15/96
<PAGE>
February 14, 1996
Mr. Richard G. Ellenberger
1070 Vintage Club Drive
Duluth, GA 30136
I am pleased to set forth this offer of employment to you as Chief Executive
Officer of IntelliCom Solutions, Inc. (ISI), an enterprise to be created through
the merger of The Future Now's Professional Services Organization (PSO) and
IntelliCom, Inc.
As we discussed, this officer is subject to approval by the Intelligent
Electronics Board of Directors and its Compensation and Stock Option Committees
Please note that to facilitate this approval, certain documentation relating to
your current compensation plan and benefit package will be required as well as
confirmation that you are not subject to any non-competition or similar
restrictions.
In this capacity you will have complete responsibility for all the day to day
operations and growth of ISI, including the development of the integrated or
organization as well as responsibility for the marketing and financial
requirements.
ISI's mission is to offer its customers a distinct competitive advantage in the
communications-computer convergence industry. As we discussed, our goal is for
this organization to capitalize on the established customer base and to enhance
and expand its current PSO offerings which include applications services,
enterprise consulting, internetworking, technology & deployment services, and
distributed services.
As discussed, it is my intention to take on the responsibility of Chairman of
the Board of ISI and therefore, you would report directly to me. In addition,
you will also be appointed to the Board of Directors of ISI.
As an exempt, full time ISI employee, your salary will be at the rate of
$13,461.54 bi-weekly, which approximates to $350,000 annually. Additionally, you
will have the opportunity to earn up to an additional $250,000 per year upon
specific criteria to be mutually agreed upon. Fifty percent of this bonus
potential, or $125,000, will be guaranteed for the first six (6) months of
employment. The company will provide you with a one million dollar life
insurance policy and an executive car. You will receive all of the usual health
and life insurance benefits and such other employee benefits, including the
401(k) plan, which are available to the company's employees, all in accordance
with the company's current personnel policies and benefit guidelines, copies of
which you have already received. We anticipate your date to be on or about March
1, 1996.
Your relocation will be covered in agreement with the terms set forth as
follows:
o IE/ISI has agreed to cover any loss in equity associated with the sale
of your current residence at 1070 Vintage Club Drive, Duluth, GA. If your
equity investment is impaired upon the sale of your house, IE/ISI will
pay you the differential upon submission of proper documentation;
o While we understand it is your intent to sell your home within 90 days,
if this goal is not met, a relocation company will take possession of the
property. In this instance, equity in your home will immediately transfer
to you;
o Until the time your family establishes full time residency in
Pennsylvania, IE/ISI agrees to fund airfare for weekly visits for you
from PA to GA;
o While it will become necessary for Mrs. Ellenberger to travel to PA to
search for residences, IE/ISI agrees to pay for her trips back and forth,
as well as a trip for your children to establish local education
enrollment requirements;
o IE/ISI will accommodate expenses involved in your temporary living
until September 1, 1996 or until you gain full-time residence, whichever
is sooner. Your temporary living expenses will include rent and
utilities.
In order to allow you to participate in the long term growth of the company and
to further compensate you for the contribution to that growth, I will recommend
that the stock option committee of the board grant you options for the purchase
of 1,000,000 shares (3.3% of the fully-diluted ownership of the company before
its IPO) at a price of 85% of the IPO price of the newly formed company,
IntelliCom. These options will vest over four years (25% per year), the only
restriction being that you may not sell for two years from the IPO.
Consistent with IE's policies, this letter does not constitute an employment
agreement and you will be an employee-at-will. However, if the company should
terminate your employment other than for cause, the following severance terms
will apply:
Less than 12 months 12 months to 24 months
------------------- ---------------------
Severance 18 months 12 months
In both scenarios you will retain your vested stock options, plus the next 25%
installment.
I am confident that you will feel comfortable with the Intelligent Electronics
"family". Rick, as I have mentioned on numerous occasions, I sincerely hope that
you will accept employment with ISI and participate in this dynamic opportunity
I am looking forward to a long and mutually beneficial association with you.
Please call me with any questions or execute this offer letter where indicated.
If you so choose, you may call me at home to discuss any further concerns.
Sincerely,
/s/ Richard D. Sanford
- -------------------------------
Richard D. Sanford
Chairman of the Board and CEO
Agreed to by: /s/ Richard Ellenberger Date:
----------------------------- ------------------
<PAGE>
April 16,1996
Ms. Stephanie Cohen:
Dear Stephanie:
I am pleased to offer employment to you as Chief Financial Officer and
Executive Vice President of XL Connect, Inc. an enterprise to be created through
the merger of The Future Now's Professional Services Organization (PSO) and
Intellicom, Inc. In this capacity, you will report to the Chief Executive
Officer of XL Connect.
XLConnect's mission is to offer its customers a distinct competitive
advantage in the communications-computer convergence industry. Our goal is for
this organization to capitalize on the established customer base and to enhance
and expand its current professional services offerings which include
applications services, enterprise consulting, internetworking, technology &
deployment services, and distributed computing.
As an exempt, full time employee, your base salary will be at the rate
of $6730.77 bi-weekly, effective April 1, 1996. Additionally, you will have the
opportunity to earn up to an additional $75,000 per year based upon specific
criteria to be mutually agreed upon. This bonus amount will be paid semiannually
if you achieve the plan set forth by the CEO of XL Connect. In addition, you
will be eligible to participate in Intelligent Electronics' optional life
insurance program.
Your compensation package will include our current standard benefit
program, subject to eligibility requirements, any limitations as described in
the plan description booklets, your payment of required premiums, and the plan
being offered to all employees. Our benefit program currently includes medical,
dental, vision, life and accidental death and dismemberment insurance; short and
long term disability insurance; 401 (k) program; paid holiday, vacation,
personal, and sick leave; tuition reimbursement; and employee purchase
discounts. These benefits are subject to review, modification, or deletion at
the discretion of the Company.
In order to allow you to participate in the long term growth of the
Company and to further compensate you for the contribution to that growth, I
will recommend that the stock option committee of the board grant you options
for the purchase of 250,000 shares at a price of 85% of the IPO price of the
newly formed company. These options will vest over four years (25% per year),
the only restriction being that you may not sell for two years from the IPO.
Your acceptance of this offer is contingent upon your eligibility for
lawful employment in the United States and your timely presentation of valid
documentation to that effect. Your documentation must be present by the third
day of employment. Upon employment you will be required to sign several
agreements including, but not limited to,
<PAGE>
Confidentiality, Code of Ethics, and Insider Trading Information. As a condition
of employment, Intelligent Electronics requires your signature on these
agreements within a reasonable period of time.
Intelligent Electronics conducts drug screening tests and criminal
history background checks. Only candidates who test negative for drugs and
successfully pass the criminal history check are eligible for employment.
This letter does not constitute a guarantee of employment or benefits
for any definite period, and you may terminate your employment at any time, with
or without cause, and without any previous notice. We retain the same right to
do so. If you are terminated without cause, IE agrees to allow you to exercise
your stock options in the newly formed company for a period of two years from
the date of this letter.
I sincerely hope that you will accept this employment offer to
participate in this dynamic opportunity. If you should have any questions
regarding the nature of this offer, please contact W. Evelyn Walker at
(610)458-6526.
Please confirm your acceptance of this employment offer by signing
where indicated below.
Sincerely,
/s/ Richard Ellenberger
- ---------------------------------
Richard Ellenberger
Agreed: /s/ Stephanie Cohen
--------------------------
Dated: 4/20/96
--------------------------
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