SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-28892
XLCONNECT SOLUTIONS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2832796
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
(Address of principal executive offices, including zip code)
(610) 458-5500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of March 27, 1998, the aggregate market value of the voting
stock held by non-affiliates of the registrant was $61,298,184 based
on the last reported sale price on the Nasdaq Stock Market of
$19.3125 per share as reported by Nasdaq.
As of March 27, 1998, there were 16,684,100 shares of the
registrant's Common Stock, $.01 par value per share, outstanding.
Documents Incorporated by Reference
None
PAGE
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
XLConnect Solutions, Inc. ("XLConnect" or the "Company") is a professional
services organization providing enterprise-wide solutions to clients with
complex computing and communications requirements. As a single source
provider, the Company offers comprehensive internetworking, applications
development, managed 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").
Internetworking services include consulting, design and implementation of
LANs and WANs. Applications development 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, microwave and voice transmission. XLConnect
believes that its information technology solutions enable its clients to
increase productivity and enhance competitiveness by improving the flow of
information among clients' employees, customers and suppliers.
The Company, incorporated in January 1996, currently is an indirect, 80%-
owned subsidiary of Intelligent Electronics, Inc. (including all of its
subsidiaries other than the Company, "IE"). All references herein to the
"Company" or "XLConnect" include the consolidated historical operating
results and activities of, and the assets and liabilities assigned to, the
business and operations which IE contributed to form the Company.
On March 4, 1998, IE and the Company entered into an Agreement and Plan of
Merger with Xerox Corporation ("Xerox") whereby Xerox will acquire all of
the outstanding shares of capital stock of IE in exchange for $7.60 per
share and all of the outstanding shares of capital stock of the Company not
owned by IE in exchange for $20.00 per share through the merger of
acquisition subsidiaries of Xerox with and into each of IE and the Company
(together, the "Mergers"). The closing of the Mergers is subject to
shareholder approval and other customary terms and conditions. There can
be no assurance that the Mergers will be completed. After the closing of
the Mergers, currently anticipated to occur not later than June 30, 1998,
the Company will be an indirect wholly-owned subsidiary of Xerox.
Services Offered
The Company provides internetworking, applications development, managed 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
provides services to enhance clients' information security over the
Internet by customizing and implementing firewalls.
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. Finally, the Company offers its own suite
of proprietary, intranet-based applications which it bundles together with
customization and other services such as training and refers to as
"XLConnectNets."
End-user Training. The Company offers comprehensive training through
cooperative relationships with vendors such as Microsoft, Novell and
IBM/Lotus 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.
Additionally, technical certification training centers are located in eight
of the Company's 27 locations and provide vendor-certified instructors.
Managed Services
XLConnect's managed services help clients to organize and manage 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, asset management,
software distribution and other support services. The Company places personnel
on-site and dispatches personnel as needed to provide desktop and LAN support
services. In addition, 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. Most of the
calls involve software support for the clients' end-users.
Telecommunications and Other Services
The Company's telecommunications services include the provision of data,
microwave 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 sales agent, and in limited
circumstances a reseller, of value-enhanced services including voice,
Internet access, ISDN and frame relay services, utilizing public switched
and dedicated private networks.
In addition, effective July 1, 1997, the Company assumed for IE certain
management responsibilities as a result of IE's restructuring in which it
sold its indirect computer product business and the majority of its direct
computer product business. IE has agreed to pay the Company a fee of
$225,000 per month for such services.
Operations
Branch Office and Facilities Network. XLConnect operates from its
headquarters and 26 branch locations throughout the United States, which
include its Network Management Center and two Help Desk Centers. The
branch network is divided into nine geographic regions, with a vice
president responsible for all aspects of operations within each region.
The number of technical personnel in each location ranges from
approximately 10 to 145 persons (other than Seattle and Hartford which
have one person each), 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 practice managers who oversee specific
services provided by that office. Reporting to each practice manager in
the larger branches are project managers, senior and staff engineers,
technicians and developers, and administrative personnel.
Project Planning and Review. When the Company is presented with a
service opportunity, the Company typically first performs a needs assessment
of the opportunity and, for larger projects, a separate risk assessment
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 generally contracts to provide
its services on either a time and materials or fixed-price project basis.
Most of the Company's contracts are terminable by the client upon
relatively short notice, often 30 to 90 days or shorter. For smaller
projects, the Company typically enters into statements of work, letters of
understanding or short form contracts which provide for agreed upon
pricing, payment terms and scope of work. The Company also often charges a
time and materials based fixed monthly fee to maintain technical personnel
on site at a client's location long-term. Fixed-price contracts are
generally 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. They are also commonly used for
network management, help desk and certain other managed services engagements
which are typically priced per device or per resolved call. Time and
materials pricing is used for most consulting services, internetworking
and staffing engagements and for out of scope services on fixed price
managed services contracts.
Technical Capabilities
Professional Technical Staff. The Company's professional staff of
engineers and technicians is authorized by many industry-leading hardware
and software manufacturers, including Bay Networks Inc. ("Bay"), Cisco
Systems, Inc. ("Cisco"), Hewlett-Packard Company ("HP"), International
Business Machines Corporation, including its Lotus Division ("IBM/Lotus"),
Microsoft Corporation ("Microsoft"), Novell, Inc. ("Novell") and 3Com
Corporation ("3Com"). These authorizations enable XLConnect to provide
advanced network services and support for each vendor's products and
services.
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
several 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. As of February 27, 1998, the Company utilizes 13 full-time
recruiters to identify and recruit technical personnel. At any given time,
the Company typically has 200 or more auxiliary personnel subcontracted
from temporary employment agencies to meet changes in staffing requirements
quickly. Several of these agencies allow XLConnect to hire the
subcontractors after 90 to 180 days without placement fees, providing a
cost-effective source of full-time engineers and technicians whom the
Company can evaluate on a trial basis.
Advanced Education. As 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 are required
to complete intensive training and certification programs through
"XLConnect University." XLConnect University's programs feature three
methods of technical instruction: regularly scheduled certification classes
offered in eight of the Company's offices, boot camps, which are vendor-
sponsored training events offered in centralized locations throughout the
United States and self study using computer-based training materials offered
through CBT Systems. Key certified vendor technologies include IBM/Lotus,
Microsoft and Novell. The Company also offers online, remote training, as
well as self-study 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 obtained Microsoft Partner Status in several
branches since August 1993. Working with Microsoft, the Company has
developed consulting methodologies that support client needs in the areas
of NT Server, Windows 95, Exchange Server migrations and other Microsoft
BackOffice technologies. Eight 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 BackOffice Products. Microsoft's participation in XLConnect's
employee training programs enables XLConnect engineers and technicians to
maintain and enhance their skills.
The Company entered into an agreement with Microsoft in February 1997 to
develop and maintain, with Microsoft's assistance, a Microsoft Services
Practice. The Company's Microsoft Services Practice is a professional
services practice dedicated to Microsoft technologies. As of February 27,
1998, this practice initiative was comprised of approximately 345 certified
professionals dedicated to creating and delivering complex business
information solutions.
This initiative also includes an arrangement through which Microsoft
Consulting Services and XLConnect will align senior level Microsoft
consultants, known as Partner Program Managers ("PPMs"), throughout
XLConnect's major market locations. The PPMs will provide technical
leadership, business development support, high level project management and
mentoring to XLConnect's national base of technical professionals. In
addition, XLConnect participates in Microsoft's Service Advantage Program.
IBM/Lotus. The Company has a long-standing relationship with IBM/Lotus.
Three of the Company's offices operate as Lotus authorized education
centers. 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.
Finally, the Company executed an agreement with IBM in June 1997 in which
IBM has agreed to provide the Company with certain levels of funding for
the Company to develop and maintain a dedicated IBM/Lotus practice of at
least 100 certified professionals. As of February 27, 1998, this practice
was comprised of approximately 130 certified professionals.
XLConnect has agreements or relationships with other leading technology and
telecommunications companies such as Bay, Boise Cascade Office Products
Corporation ("Boise Cascade"), Cisco, HP, Ingram Micro, Inc. ("Ingram"),
IBM/Lotus, MCI Telecommunications Corporation ("MCI"), Microsoft, Novell
and Softmart, Inc. ("Softmart"). 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. XLConnect's direct sales organization is
comprised of approximately 125 persons as of February 27, 1998, including 4
support staff persons and 30 practice directors and other senior field
management personnel with sales responsibilities. In addition, XLConnect
continues to utilize IE's approximately 105 person sales department, as of
February 27, 1998, as its largest indirect sales channel. Prior to 1997,
IE's sales staff generated a substantial portion of the Company's sales,
and the Company currently continues to utilize IE's sales staff for a
significant percentage of its sales leads in select markets.
The Company's direct sales staff has 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. 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.
The Company has a marketing department of 4 persons as of February 27,
1998. The Company's external marketing efforts currently include the
development of brochures, direct mail campaigns, formulation of marketing
strategies and field programs 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 1997, approximately 625 clients, including many Fortune 1000
corporations, purchased at least $10,000 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,
General Electric Aircraft Engines ("GEAE"), a division of General Electric
Company, principally managed services, accounted for 6.3%, 13.6% and 14.8%
of the Company's revenues during 1997, 1996 and 1995, respectively. No
other client accounted for more than 5% of the Company's revenues during
1997, 1996 or 1995. Sales to the Company's top 25 clients totaled 36.6%,
42.7%, and 52.4% for 1997, 1996 and 1995, respectively. Effective on July
18, 1997, the Company sold its Power by the Hour ("PBTH") contract with
GEAE to GE Capital Information Technology Solutions Acquisition Corp., a
subsidiary of GE Capital Information Technology Solutions, Inc. ("GECITS").
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.
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, such
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 Company's markets, either through
internal efforts or by forming strategic alliances with hardware or
software vendors, telecommunication providers or other competitors of the
Company, to offer new or improved services to the Company's clients or to
increase their efforts to gain and retain market share through competitive
pricing. There can be no assurance that the Company will be able to
continue to compete successfully.
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 before and Ingram
after the July 18, 1997 closing of the sale by IE of its indirect computer
product business to Ingram. The Company generally does not purchase, take
title to nor resell products. Instead, the supplier, whether IE, Ingram or
another distributor, VAR or vendor, in effect serves as a subcontractor on
a project-specific basis and typically invoices the end-user directly.
Intellectual Property Rights
The Company's client contracts generally provide that the specific
deliverables, documentation and customized solutions created for the client
become the property of the Company's clients, with exceptions, in
particular with respect to applications development projects, for certain
residual pre-existing rights and generic computer consulting know-how and
techniques, and with respect to projects in which the Company licenses the
use of its XLConnectNets. 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.
Employees
As of February 27, 1998, the Company employed 1,517 persons, of whom 131
were engaged in sales and marketing (including 4 support staff persons as
well as 30 branch practice directors and senior field management personnel
who also have management responsibilities), 1,219 were engaged in providing
the Company's technical services and training and 167 were engaged in
finance, administration and management functions.
None of the Company's employees are covered by a collective bargaining
agreement. Most of the Company's employees have executed confidentiality
and proprietary rights and/or non-solicitation agreements. In addition,
the Company requires that all new employees execute such agreements as a
condition of employment by the Company since 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.
ITEM 2. PROPERTIES
The Company does not own any real property and currently either subleases
its office space from IE pursuant to the terms of a Space Sharing Agreement
or leases space directly from third parties. As of February 27, 1998, the
Company subleases from IE approximately 5,000 square feet as its
headquarters space in Exton, Pennsylvania. The Company's headquarters,
including additional space in the facility available from IE, contains
sufficient space for certain of its sales, administrative and technical
personnel and its marketing, finance and senior executive staffs. In
addition, the Company subleases from IE a total of approximately 58,000
square feet of office space pursuant to the Space Sharing Agreement at 13
of its branch office locations, including Cincinnati and Bettendorf, Iowa
(which include the Help Desk Centers) and Houston (which includes the
Network Management Center), and leases directly from third parties a total
of approximately 57,000 square feet. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation and arbitration matters in
the ordinary course of business. The Company believes that it has
meritorious defenses in and is vigorously defending against all such
matters. Management believes the resolution of these matters will not have
a material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter in the Nasdaq
National Market (symbol XLCT). As of March 27, 1998, there were 24
shareholders of record representing in excess of 3,000 beneficial owners.
Set forth below is the range of the high and low sale prices for the
Company's Common Stock as reported by Nasdaq during each fiscal quarter
within the two most recent fiscal years:
Quarter ended High Low
--------------------------------- ---------- ----------
March 31, 1998 (through March 27) $ 22 1/2 $ 14 13/16
December 31, 1997 $ 17 7/8 $ 11 1/2
September 30, 1997 $ 15 7/8 $ 7 1/2
June 30, 1997 $ 8 3/4 $ 5 3/4
March 31, 1997 $ 30 3/8 $ 5
December 31, 1996 (from October 17) $ 31 3/4 $ 26
On October 17, 1996, the Company consummated its initial public offering
("IPO") at an IPO price of $15 per share. On March 27, 1998, the closing
sale price for the Company's Common Stock as reported by Nasdaq was
$19.3125. The market price of the Company's Common Stock has been, and may
continue to be, extremely volatile. Factors such as those listed under
"Management's Discussion and Analysis of Financial Conditions and Results
of Operations and Quarterly Results and Seasonality" may have a significant
impact on the market price of the Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain future earnings for use in its business
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1997 1996 (2) 1995 1994 1993
-------- -------- ------- ------- -------
(In thousands, except for share data)
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Revenues $135,703 $114,892 $79,862 $50,965 $49,653
Cost of revenues 91,911 81,077 56,327 37,159 33,816
-------- -------- ------- ------- -------
Gross profit 43,792 33,815 23,535 13,806 15,837
Operating expenses:
Selling and marketing 13,245 8,779 3,975 3,755 3,815
General and administrative 18,227 12,467 9,178 6,543 5,294
Depreciation and amortization 4,200 4,782 3,123 1,060 816
-------- -------- ------- ------- -------
35,672 26,028 16,276 11,358 9,925
-------- -------- ------- ------- -------
Income from operations 8,120 7,787 7,259 2,448 5,912
Other income (expense), net 276 (3,262) (2,578) (1,763) (941)
Gain on sale of PBTH (3) 1,991 - - - -
-------- -------- ------- ------- -------
Income before income taxes 10,387 4,525 4,681 685 4,971
Provision for income taxes 5,417 2,479 2,259 435 2,092
-------- -------- ------- ------- -------
Net income $ 4,970 $ 2,046 $ 2,422 $ 250 $ 2,879
======== ======== ======= ======= =======
Basic earnings per common share $ 0.30 $ 0.15
======== ========
Diluted earnings per common share $ 0.29 $ 0.14
======== ========
Balance Sheet Data (1):
Working capital $ 30,194 $ 19,529 $11,298 $ 3,346 $ 8,424
Total assets 79,920 61,667 54,473 31,918 40,034
Long-term debt, less
current portion 5,139 - 39,556 13,282 27,887
Shareholders' equity 58,026 52,286 5,130 2,708 2,458
</TABLE>
______
(1) See Note 1 to the Consolidated Financial Statements for the year ended
December 31, 1997 for information regarding the Company's IPO.
(2) Restated to reflect current year's presentation.
(3) See Note 3 to the Consolidated Financial Statements for the year ended
December 31, 1997 for information regarding the sale of specified
Power-by-the-Hour contracts and related assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's historical financial statements consist of the results of
operations and financial condition of the professional services
organization of The Future Now, Inc. ("TFN") both prior to and after TFN's
acquisition by IE in August 1995, as well as the incremental goodwill and
indebtedness associated with that acquisition. The Company's financial
statements also include the accounts of IE's telecommunications subsidiary,
IntelliCom Solutions, Inc. ("IntelliCom"), beginning on January 1, 1996.
Prior to June 1996, IE conducted the Company's businesses through various
divisions and subsidiaries. As of May 31, 1996, IE constituted the Company
by contributing to it the assets and liabilities related to TFN's
professional services business and the stock of IntelliCom and by entering
into certain agreements with the Company governing various interim and
ongoing relationships between the two companies (the "Formation
Transactions").
XLConnect's revenues are generated from the provision of professional
services, which include internetworking, applications development, managed
and telecommunications services and other fees. The Company began offering
its telecommunications services in January 1996.
On March 4, 1998, IE and the Company entered into an Agreement and Plan of
Merger with Xerox whereby Xerox will acquire through the Mergers all of the
outstanding shares of capital stock of IE in exchange for $7.60 per share
and all of the outstanding shares of capital stock of the Company not owned
by IE in exchange for $20.00 per share. The closing of the Mergers is
subject to shareholder approval and other customary terms and conditions.
However, there can be no assurance that the Mergers will be completed.
After the closing of the Mergers, currently anticipated to occur not later
than June 30, 1998, the Company will be an indirect wholly-owned subsidiary
of Xerox.
Formation Transactions Allocations. The historical 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. The Company's financial statements are presented as if the
Company had existed as a corporation separate from IE prior to the
Formation Transactions 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 reporting period. Actual results could
differ from those estimates.
For the periods presented, and to a greater extent for those prior to
January 1, 1996, certain general and administrative expenses reflected in
the financial statements include allocations of certain corporate expenses
from IE. These allocations generally include administrative expenses
related to general management, insurance, information management, and other
miscellaneous services. 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. The Company also
received allocations of IE's total vendor funding related to the businesses
of the Company in the amounts of $1,260,000, $1,223,000, and $777,992 for
1997, 1996 and 1995, respectively. These allocations were based on the
relationship of services business volumes to total business volumes of the
Company and IE except for funding related to IntelliCom's
telecommunications services after January 1, 1996. Subsequent to the
Formation Transactions and the Company's IPO, except as set forth in Note
14 to the Company's Consolidated Financial Statements, the Company has
managed various required administrative functions using its own resources
or contracted with third parties to perform these services and, in
addition, has been 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 was a
stand-alone corporation filing separate Federal and state income tax
returns for all periods presented. The Company's intercompany borrowings
from IE, prior to the IPO, 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.
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 period indicated the percentage of
revenues represented by expense items in the Company's Consolidated
Statements of Income.
Year ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Revenues 100.0 % 100.0 % 100.0 %
Cost of revenues 67.7 70.6 70.5
-------- -------- --------
Gross profit 32.3 29.4 29.5
Operating expenses:
Selling and marketing 9.8 7.6 5.0
General and administrative 13.4 10.9 11.5
Depreciation and amortization 3.1 4.2 3.9
-------- -------- --------
26.3 22.7 20.4
-------- -------- --------
Income from operations 6.0 6.7 9.1
Other income (expense), net 0.2 (2.8) (3.3)
Gain on sale of PBTH 1.5 - -
-------- -------- --------
Income before income taxes 7.7 3.9 5.8
Provision for income taxes 4.0 2.1 2.8
-------- -------- --------
Net income 3.7 % 1.8 % 3.0 %
======== ======== ========
The following table sets forth the components of revenues of the Company
for the periods presented:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1997 1996 (1) 1995(1)
------------------- ------------------- -------------------
Amount % of Revenue Amount % of Revenue Amount % of Revenue
-------- ---------- -------- ---------- -------- ----------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Internetworking $ 42,551 31.4% $ 35,613 31.0% $ 25,106 31.4%
Applications development 23,553 17.4 17,188 15.0 12,518 15.7
Managed services 52,770 38.9 44,063 38.4 33,974 42.6
Telecommunications &
other fees 16,829 12.3 18,028 15.6 8,264 10.3
-------- ---------- -------- ---------- -------- ----------
$135,703 100.0% $114,892 100.0% $ 79,862 100.0%
======== ========== ======== ========== ======== ==========
</TABLE>
_____
(1) Restated to reflect current year's presentation.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. The Company's revenues increased 18.1% for 1997 to $135.7
million from $114.9 million for 1996. The increase in revenues resulted
principally from growth in most of the Company's service areas combined
with fees received from IE of approximately $1.4 million for management
responsibilities assumed by the Company in connection with the completion
of IE's restructuring resulting from the sale of its indirect computer
product business and the majority of its direct computer product business.
Partially offsetting these increases were the sale as of July 18, 1997 to
GECITS of specified PBTH managed services contracts which include the
Company's largest account GEAE, and the decrease in telecommunications
services sold to IE as a result of IE's sale of its indirect computer
product business and the majority of its direct computer product business.
Pro forma revenues (assuming the sale to GECITS occurred on January 1,
1996) increased 28.5% to $124.9 million for 1997 from $97.2 million for
1996.
Cost of Revenues. Cost of revenues increased 13.4% for 1997 to $91.9
million from $81.1 million for 1996, primarily as a result of an increased
number of technical personnel needed to support the growth in revenues
combined with incremental costs associated with increased revenues from the
Company's PBTH program prior to the sale to GECITS. Cost of revenues as a
percentage of revenues decreased to 67.7% for 1997 compared to 70.6% for
1996 resulting primarily from the fees received for managing IE's remaining
organizations and the sale of certain low margin managed service contracts.
Selling and Marketing. Selling and marketing expenses increased 50.9% for
1997 to $13.2 million from $8.8 million for 1996 and increased as a
percentage of revenues to 9.8% for 1997 from 7.6% for 1996. The increases
were a result of continued development of the Company's direct sales force
combined with incremental promotional and advertising costs associated with
the Company developing its name and service offerings within the
marketplace.
General and Administrative. General and administrative expenses increased
46.2% for 1997 to $18.2 million from $12.5 million for 1996 and increased
as a percentage of revenues to 13.4% for 1997 from 10.9% for 1996. The
increases were due to the increased costs associated with securing separate
facilities in a number of branch locations as XLConnect continued its
separation from IE's direct business with which XLConnect shared certain
facilities and related expenses, as well as the Company's growth and new
market expansion. Overhead costs also increased in order to support the
Company's growth and to enable it to operate as a separate public company.
The overhead costs include an expanded management and operations team,
associated employee benefits and insurance costs. The Company anticipates
continued increases in general and administrative expenses as a result of
business growth and final separation from IE's direct computer product
business.
Depreciation and Amortization. Depreciation and amortization decreased
12.2% for 1997 to $4.2 million from $4.8 million for 1996 and decreased as
a percentage of revenues to 3.1% for 1997 from 4.2% for 1996. The
decreases resulted from assets becoming fully depreciated during the year
in greater amounts than capital additions were made, combined with the
write-off of goodwill specifically associated with the sale to GECITS of
the specified PBTH managed services contracts and related assets.
Income from Operations. Income from operations increased 4.3% for 1997 to
$8.1 million from $7.8 million for 1996 and decreased as a percentage of
revenues to 6.0% in 1997 from 6.7% in 1996, for the reasons stated above.
Other Income (Expense), Net. The Company recognized other income of $2.3
million for 1997 as compared to other expense of $3.3 million in 1996. The
change is a result of the Company paying off its outstanding borrowings
from IE with the proceeds of the IPO, investing the remaining proceeds of
the IPO along with the proceeds from a third party loan into short-term
securities which generated net interest income and recognizing a gain on
the sale of the PBTH contracts and related assets in the GECITS
transaction.
Provision for Income Taxes. Provision for income taxes increased 118.5%
for 1997 to $5.4 million from $2.5 million for 1996. The effective tax
rate decreased to 52.2% for 1997 from 54.8% in 1996. The increase in
income taxes and the decrease in the effective income tax rate is a result
of greater income before taxes which exceeded the effects of the write-off
of non-deductible goodwill associated with the GECITS transaction.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. The Company's revenues increased 43.9% for 1996 to $114.9
million from $79.9 million for 1995. The increase in revenues resulted
principally from growth in managed services, particularly LAN and desktop
support and administration and the PBTH program, and to a lesser extent
growth in internetworking and applications development services. The
increase was also partly attributable to the introduction of
telecommunications services on January 1, 1996, which accounted for $6.3
million, or 5.5% of revenues.
Cost of Revenues. Cost of revenues increased 43.9% for 1996 to $81.1
million from $56.3 million for 1995, primarily as a result of an increased
number of technical personnel, due in part to the expansion of the
Company's help desk operations, and incremental costs incurred due to the
growth in the PBTH program. The increase also reflects $5.6 million of
costs associated with revenue from telecommunications services. Cost of
revenues as a percentage of revenues remained nearly constant at 70.6% for
1996 compared to 70.5% for 1995. During the relevant periods, the effect
of improved management of funding ancillary costs (e.g., travel, training)
via client billings and vendor funding combined with improvements relating
to the tracking of warranty repair parts was offset by the introduction of
lower margin telecommunications services and growth in certain managed
service offerings, primarily the PBTH program and hardware repair, which
provide recurring or repeat revenues at lower margins than other Company
services.
Selling and Marketing. Selling and marketing expenses increased 120.9% for
1996 to $8.8 million from $4.0 million for 1995 and increased as a
percentage of revenues to 7.6% for 1996 from 5.0% for 1995. The increase
in dollars and as a percentage of revenues was a result of additional sales
personnel as the Company continues to develop its direct sales force. In
addition, the dollar increase resulted from the additional commission and
bonus expense incurred on the increase in revenues from 1995 to 1996.
General and Administrative. General and administrative expenses increased
35.8% for 1996 to $12.5 million from $9.2 million for 1995. As a
percentage of revenues, general and administrative expenses decreased to
10.9% for 1996 from 11.5% for 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
53.1% for 1996 to $4.8 million from $3.1 million for 1995. As a percentage
of revenues, depreciation and amortization increased to 4.2% for 1996 from
3.9% for 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 7.3% for 1996 to
$7.8 million from $7.3 million for 1995 and decreased as a percentage of
revenues to 6.7% in 1996 from 9.1% in 1995, for the reasons stated above.
Other Income (Expense), Net. Other expense, net increased 26.5% for 1996
to $3.3 million from $2.6 million for 1995, primarily as a result of an
increase in interest expense due from the increase in 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. With the IPO net proceeds of $45.1 million, the Company paid off
its then outstanding borrowings from IE.
Provision for Income Taxes. Provision for income taxes increased 9.7% for
1996 to $2.5 million from $2.3 million for 1995. The effective income tax
rate increased to 54.8% for 1996 from 48.3% for 1995, primarily due to the
increase in nondeductible goodwill amortization associated with the
acquisition of TFN by IE in August 1995.
Quarterly Results and Seasonality
The Company's quarterly results may vary depending upon a number of
factors, including the following: changes in the levels of revenues derived
from internetworking, applications development, managed services and
telecommunications and other fees; the size and timing of significant
projects; changes in the mix of employee and subcontractor technicians; the
number of business days in a period and the closing of client facilities
for holidays and other reasons; cost overruns on fixed-price contracts; the
potential for increased expenditures and loss of sales generation activity
resulting from the sale of the majority of the direct computer product
business of IE with which XLConnect shared facilities and related expenses,
employee benefits, insurance policies and other services and relied on
significantly for sales leads; business distractions resulting from the
relocation of branch locations for various reasons; the timing of new
service offerings by the Company or its competitors; new branch office
openings by the Company; the loss of senior management or key technical
personnel; 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
potential for Year 2000-related expenditures; the effect of acquisitions;
and industry and general economic factors. In addition, the Company
believes that its business is subject to some seasonality, and 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, applications development and managed services projects
until the following year when capital budgets are renewed.
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
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
-------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 (1) 1996 (1) 1996 (1) 1996 (1) 1997 1997 1997 1997 (3)
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $23,718 $28,283 $31,644 $31,247 $33,075 $36,547 $33,552 $32,529
Cost of revenues 17,004 19,370 21,905 22,798 23,074 25,044 22,521 21,272
-------- -------- --------- -------- -------- -------- --------- --------
Gross profit 6,714 8,913 9,739 8,449 10,001 11,503 11,031 11,257
Operating expenses:
Selling and marketing 1,653 2,096 2,511 2,519 2,858 3,214 3,223 3,950
General and administrative 2,330 2,779 3,681 3,677 4,603 4,766 4,666 4,192
Depreciation and amortization 1,302 1,189 1,081 1,210 1,027 1,189 929 1,055
-------- -------- --------- -------- -------- -------- --------- --------
Total operating expenses 5,285 6,064 7,273 7,406 8,488 9,169 8,818 9,197
-------- -------- --------- -------- -------- -------- --------- --------
Income from operations 1,429 2,849 2,466 1,043 1,513 2,334 2,213 2,060
Other income (expense) (1,079) (996) (1,023) (164) 25 78 53 120
Gain on sale of PBTH (2) - - - - - - 1,546 445
-------- -------- --------- -------- -------- -------- --------- --------
Income before income taxes 350 1,853 1,443 879 1,538 2,412 3,812 2,625
Provision for income taxes 291 898 740 550 771 1,121 2,319 1,206
-------- -------- --------- -------- -------- -------- --------- --------
Net income $ 59 $ 955 $ 703 $ 329 $ 767 $ 1,291 $ 1,493 $ 1,419
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 (1) 1996 (1) 1996 (1) 1996 (1) 1997 1997 1997 1997 (3)
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 71.7 68.5 69.2 73.0 69.8 68.5 67.1 65.4
-------- -------- --------- -------- -------- -------- --------- --------
Gross profit 28.3 31.5 30.8 27.0 30.2 31.5 32.9 34.6
Operating expenses:
Selling and marketing 7.0 7.4 7.9 8.1 8.6 8.8 9.6 12.2
General and administrative 9.8 9.8 11.6 11.8 13.9 13.0 13.9 12.9
Depreciation and amortization 5.5 4.2 3.4 3.8 3.1 3.3 2.8 3.2
-------- -------- --------- -------- -------- -------- --------- --------
Total operating expenses 22.3 21.4 22.9 23.7 25.6 25.1 26.3 28.3
-------- -------- --------- -------- -------- -------- --------- --------
Income from operations 6.0 10.1 7.9 3.3 4.6 6.4 6.6 6.3
Other income (expense) (4.6) (3.5) (3.2) (0.5) 0.1 0.2 0.2 0.4
Gain on sale of PBTH (2) - - - - - - 4.6 1.4
-------- -------- --------- -------- -------- -------- --------- --------
Income before income taxes 1.4 6.6 4.7 2.8 4.7 6.6 11.4 8.1
Provision for income taxes 1.2 3.2 2.4 1.7 2.4 3.1 7.0 3.7
-------- -------- --------- -------- -------- -------- --------- --------
Net income 0.2% 3.4% 2.3% 1.1% 2.3% 3.5% 4.4% 4.4%
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
______________
(1) Restated to reflect current year's presentation
(2) See Note 3 to the Consolidated Financial Statements for the year ended
December 31, 1997 for information regarding the sale of specified
Power-by-the-Hour contracts and related assets.
(3) Adjustments relating to the settlement of year end reserves and
capitalization of internal costs associated with capitalized software
costs increased income before income taxes by approximately $700,000
(pre-tax).
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 provided cash of $3.1 million in 1997
and $1.6 million in 1996. The primary increase was due to the increase in
net income during 1997. The decrease in working capital, primarily due to
an increase in accounts receivable resulting from the growth in revenues,
was partially offset by the gain recognized on the sale of specified PBTH
contracts and related assets.
The Company's investing activities provided cash of $4.9 million in 1997
and used cash of $3.9 million in 1996. Cash was generated in 1997 from the
proceeds of the sale of specified PBTH contracts and related assets.
Offsetting this were purchases of property and equipment of $5.5 million
for the Company's new remote time, billing and contract management system
and equipment necessary to support the growing technical staff. The
increase in capital purchases in comparison to 1996 was primarily due to
the new contract management system.
The Company's financing activities provided cash of $5.8 million in both
1997 and 1996. The cash generated in 1997 resulted from borrowings from a
third party while the net cash generated in 1996 was from the IPO, net
of the repayment of intercompany indebtedness to IE.
The foregoing cash flows presented prior to January 1, 1997 are not
necessarily indicative of the cash flows that would have resulted if the
Company were a stand-alone entity throughout the periods since 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 had not
maintained any cash. Pursuant to an agreement between the companies, IE
and XLConnect may make advances to each other bearing interest at market
rates.
As of March 26, 1997, the Company, IE and IBM Credit Corporation ("IBMCC")
amended IE's credit facility to terminate a sub-facility, which allowed
the Company to borrow directly from IBMCC up to $20 million of IE's total
credit facility of $225 million, subject to a collateral-based formula, and
to limit the Company's joint and several liability to IBMCC at $20 million
(whether arising from direct borrowings or a guaranty of IE's
indebtedness), including the Company's joint and several liability to IE
under IE's credit facility. At such time, the Company and IBMCC entered
into a separate credit agreement providing the Company with a credit
facility in the amount of $25 million, subject to a collateral-based
formula, which is secured by all of the assets of the Company and its
subsidiaries (the "XLC Credit Facility"). Interest is payable at LIBOR
plus 1.5% decreasing to 1.2%, depending upon the amount of outstanding
borrowings. No amounts were outstanding under the XLC Credit Facility as
of December 31, 1997. Various customary restrictive covenants must also be
observed. Concurrent with establishing the XLC Credit Facility, the
Company and IE agreed to amend their Intercompany Debt Agreement whereby IE
will reimburse the Company for the difference between LIBOR plus .75% and
the interest rate paid by the Company to IBMCC and for other direct
expenses that the Company would not have been required to incur if it had
entered into an unsecured credit facility.
Additionally, on February 28, 1997, the Company entered into a transaction
with a third party whereby the third party agreed to provide an unsecured
loan of up to $11 million (the "Loan") to be used for specific business
purposes. The Company borrowed $5.5 million available under the first
traunch which remained outstanding as of December 31, 1997. The remaining
amount was drawn on March 2, 1998. Interest is payable at an initial
annual rate of 4% for the first two years and adjusts to 5% and then 6% for
the remaining term. Principal payments of $750,000 will be made quarterly
beginning in August 1999 with a final payment of $1.25 million due on
August 28, 2002. In connection with the Loan, the Company issued to the
third party a warrant to purchase up to 325,000 shares of its Common Stock,
which became exercisable on February 28, 1998 at a per share exercise price
of $6.65 and expires on February 27, 2007. The third party has agreed
not to exercise the warrant prior to the earlier of the closing of the
Mergers or June 30, 1998. After considering the effect of the additional
interest associated with the issuance of the warrant and the resultant
discounting of the Loan, the effective interest rate is 7.5%.
During 1998, the Company anticipates making approximately $5 million in
capital expenditures, expected to be funded from cash flows from operations
and available external financing sources. These expenditures are expected
to include additional purchases of computers to support the technical staff
and expanding the network management center. The Company has no current
plans for any additional material capital expenditures through December 31,
1998.
The Company believes that its cash flows from operations, funds available
from the XLC Credit Facility and the Loan, and the use of operating or
capital leases 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.
Year 2000 Issues
The "Year 2000" issue relates to the impact of the year 2000 on the computer
processing of date-sensitive information and results from computer programs
being written using two digits (rather than four) to define the applicable
year. Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000,
which could result in miscalculations or systems failures. The Company
presently believes that after finalizing its conversion to its new remote
time, billing and contract management system, the Year 2000 issue will
not pose significant operational problems for the Company's computer
systems or have a material adverse impact on the Company's financial
position. However, there can be no assurance that the systems of the
Company's partners, vendors, customers and other companies on which the
Company's systems rely also will be timely converted or that any such
failure to convert by another company would not have an adverse effect on
the Company's systems.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. In addition, the FASB issued SFAS No.
132, Employees' Disclosures about Pensions and Other Postretirement
Benefits in February 1998.
SFAS No. 130 defines comprehensive income as the change in equity (net
assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The Statement
requires comprehensive income to be reported in a financial statement that
is displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
The Company does not expect the implementation of this Statement to have a
material effect on the consolidated financial statements.
SFAS No. 131 changes the way public companies report information about
segments of their business in their annual financial statements and
requires them to report seleced segment information in their quarterly
report to shareholders. The Statement requires that companies disclose
segment data based on how management makes decisions about allocating
resources to segments and measuring their performance. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company
does not expect the implementation of this Statement to have a material
effect on the consolidated financial statements.
SFAS No. 132 standardizes the disclosure requirements of SFAS Nos. 87 and
106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other post retirement benefits.
This Statement is effective for fiscal years beginning after December 15,
1997. The Company does not expect the implementation of this Statement to
have a material effect on the consolidated financial statements.
Forward-Looking Statements
Some statements contained or incorporated by reference in this Report on
Form 10-K regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements.
The words "expect", "project", "estimate", "predict", "anticipate",
"believes" and similar expressions are also intended to identify forward-
looking statements. Such statements and XLConnect's results are subject to
numerous risks, uncertainties and assumptions, including but not limited
to: risks related to the impact on XLConnect of the sale by IE of its
indirect computer product business and the majority of its direct computer
product operations; the risks of any substantial legal proceedings that
could be instituted in the future; and the risk factors described in
"Quarterly Results and Seasonality" in this Form 10-K and in "Risk
Factors" in XLConnect's Prospectus dated October 17, 1996 filed with the
Securities and Exchange Commission in connection with its IPO.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those indicated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-2 through F-
20 and is listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age, position with the Company and
biographical information concerning each member of the Board of Directors
and the Executive Officers of the Company, as of March 27, 1998.
Name Age Position with the Company
- ---------------------------------------------------------------------------
Richard D. Sanford (1) 54 Chairman of the Board
Timothy W. Wallace 40 President, Chief Operating
Officer and Director
Barry M. Abelson (1) 51 Director
J.B. Doherty (1)(2)(3) 54 Director
William E. Johnson (1)(2)(3) 56 Director
John A. Porter (1)(2)(3) 53 Director
Jeffrey A. Blain 38 Executive Vice President,
Field Operations
Stephanie D. Cohen 36 Executive Vice President,
Chief Financial Officer and
Secretary
James P. Joyce 37 Senior Vice President,
Great Lakes
P. Thomas Goldman 37 Vice President, Sales
Robert J. Kabel 33 Vice President,
Business Services
John E. Royer, Jr. 35 Vice President, General
Counsel and Assistant
Secretary
--------------------------------------------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Benefits Committee
(3) Member of the Nominating Committee
Richard D. Sanford has been the Company's Chairman of the Board since its
formation in January 1996. He has been the Chairman and Chief Executive
Officer of IE since he founded IE in 1982.
Timothy W. Wallace joined the Company upon its formation as Executive Vice
President, Field Operations. He was promoted to President in December 1996
and elected to the Board of Directors in February 1997. Between 1991 and
March 1996, Mr. Wallace served in various management positions with TFN,
the predecessor to the Company's business and a wholly-owned subsidiary of
IE, 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.
Barry M. Abelson has been a director of the Company since its formation in
January 1996 and of IE since January 1989. Since May 1992, Mr. Abelson has
been a partner of the law firm of Pepper Hamilton LLP, 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 ACSYS, Inc.
J.B. 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. and TDH II Limited (the latter since
1983), venture capital funds. In addition, between 1983 and 1992, Mr.
Doherty was a general partner of K.S. Sweet Associates, a venture capital
management and real estate company.
William E. Johnson has been a director of the Company since March 1996 and
was a director of IE from November 1994 until December 31, 1997. 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.
John A. Porter has been a director of the Company since March 1996 and was
a director of IE from May 1994 until December 31, 1997. 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.
Jeffrey A. Blain joined the Company upon its formation as Vice President,
Central/Southwest Area. In January 1997, Mr. Blain was named Senior Vice
President, Central/Southwest Area, and in January 1998, Mr. Blain was promoted
to Executive Vice President, Field Operations. Between 1983 and 1996, Mr.
Blain served in various management positions with TFN that included Sales
Manager, Branch Manager, Regional Vice President, Vice President of Corporate
Services and, most recently, Area Vice President.
Stephanie D. 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.
James P. Joyce joined the Company upon its formation as Vice President,
Great Lakes/West area. In January 1997, Mr. Joyce was named Senior Vice
President, Great Lakes/West area. Prior to the formation of the Company,
Mr. Joyce held the positions of Area Vice President and Area Sales Manager
for TFN between January 1996 and October 1994. Between December 1991 and
October 1994, Mr. Joyce served in various management positions with LDI
Computer Systems, Inc.
P. Thomas Goldman joined the Company as Vice President of Sales in
September 1997. Prior to joining the Company, Mr. Goldman was employed by
Bell Atlantic Network Integration from November 1995 to September 1997,
most recently as a Vice President responsible for sales and operations in
the Northeast United States. From November 1993 to November 1995, Mr.
Goldman served as the Vice President, Operations of Lipe Rollway
Corporation.
Robert J. Kabel joined the Company upon its formation as Vice President,
Business Services. Between 1990 and March 1996, Mr. Kabel served in
various management positions with TFN, most recently as a National
Director, Internetworking Services. Before joining TFN, Mr. Kabel was
employed by Memorex Telex as an Area Manager of Systems Engineering
Services.
John E. Royer, Jr. joined the Company in September 1996 as Vice President
and General Counsel. Between September 1988 and September 1996, Mr. Royer
practiced law with the firm of Pepper Hamilton LLP in the Corporate and
Securities practice group.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons
who own more than ten percent of the outstanding shares of Common Stock, to
file with the Commission initial reports of ownership and reports of
changes in ownership of the Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required under regulations promulgated by the Commission to furnish the
Company with copies of all Section 16(a) forms which they file. To the
Company's knowledge, based solely on a review of copies of such reports
furnished to the Company, during the fiscal year ended December 31, 1997,
all Section 16(a) filing requirements were satisfied except for one Form 4
which was filed late by Mr. Johnson after a purchase and one Form 3 which
was filed late by Mr. Goldman after he joined the Company.
PAGE
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
for 1997 and 1996 and by IE and TFN for 1995 to the Chief Executive Officer
and each of the four other most highly compensated executive officers of
the Company (including its predecessor business):
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------------- -------------------------
Name and Other Annual Options/ All Other
Principal Position(1) Year Salary Bonus Compensation(2) SARs(#) Compensation(3)
- --------------------- ---- -------- ----- --------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <S> <C>
Timothy W. Wallace 1997 $263,942 $ 65,000 $51,828 - $ 4,750
President; Chief 1996 $199,039 $140,153 $55,720 260,000 $ 4,225
Operating Officer(4) 1995 $150,000 $ 96,600 $ - - $ 2,287
Stephanie D. Cohen 1997 $175,000 $ 29,630 $ - - $ 4,750
Chief Financial Officer; 1996 $162,885 $37,500 $ - 215,000 $ 4,750
Executive Vice President- 1995 $130,000 $ - $ - - $ 3,900
Finance; Secretary
Jeffrey A. Blain (5) 1997 $175,000 $ 39,681 $ - 80,000 $ 4,056
Executive Vice President 1996 $148,077 $48,532 $ - 90,000 $ 3,932
Field Operations 1995 $125,000 $ 37,151 $ - - $ 1,494
James P. Joyce (5) 1997 $175,000 $ 20,129 $ - 80,000 $ 3,768
Senior Vice President 1996 $146,154 $ 49,987 $ - 90,000 $ 3,774
1995 $94,616 $ 75,830 $ - - $ 1,379
Robert J. Kabel (5) 1997 $117,692 $ 30,115 $ - 41,200 $ 2,483
Vice President 1996 $106,154 $ 34,541 $ - 22,000 $ -
1995 $97,204 $ 34,194 $ - - $ -
</TABLE>
(1) Mr. Richard Ellenberger joined the Company in March 1996 as its Chief
Executive Officer and President and resigned from the Company as of January
30, 1997. Mr. Ellenberger earned salary of $39,039 from the Company and
separation and other compensation payments of $240,000 from IE and the
Company during 1997. Mr. Ellenberger's 1996 compensation included salary
of $282,692, bonus of $125,000 and other annual compensation of $183,177,
which included $178,182 of relocation expenses (including an equity make-
whole on his prior residence) paid by the Company. Mr. Tom Goldman joined
the Company in September 1997 as Vice President, Sales and would have
appeared in the table if he had been employed by the Company for all of
1997.
(2) 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, in amounts that exceed the
lesser of $50,000 or 10% of annual salary and bonus for any of the named
executive officers.
(3) Represents allocations to accounts of executive officers under the
Company's Retirement Savings Plan, which is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended
(the "401(k) Plan"). Employees of the Company are eligible upon hiring to
make contributions to the 401(k) Plan on a pre-tax basis of between 1% and
15% of the participant's compensation in any year in accordance with
certain limitations defined in the Code. After one year of service, the
Company matches 50% of each employee's pre-tax contributions, up to a
maximum matching contribution of 3.0% of such participant's annual
compensation. The pre-tax contributions by participants and the earnings
thereon are at all times fully vested. The Company's contribution vests to
the employee over three years at the rate of 25%, 55% and 100% of the
contribution. A participant's vested benefit under the 401(k) Plan may be
distributed to the participant upon his retirement, death, disability or
termination of employment or upon reaching age 59.
(4) Mr. Wallace became President of the Company on December 30, 1996. Mr.
Wallace's 1996 bonus includes $46,403 paid during the first quarter of 1996
on account of 1995 performance. Mr. Wallace's 1996 other annual
compensation includes $55,601 of relocation expenses paid by the Company.
(5) Messrs. Blain, Joyce and Kabel's options granted on the IPO date in
1996 were all cancelled upon each of their acceptance of the Company's
exchange offer made to employees holding IPO options as of July 9, 1997.
The following table presents information with respect to grants of stock
options pursuant to the Company's 1996 Long-Term Incentive Plan, during the
year ended December 31, 1997, to the named executive officers reflected in
the Summary Compensation.
<TABLE>
<CAPTION>
Option Grants in the Last Fiscal Year
Individual Grants
Potential
Realizable Values at
% of Total Assummed Annual
Options Granted Exercise or Rates of Stock Price
Options to Employees Base Price Expiration Appreciation through
Name Granted(1) in Fiscal Year(2) Per Share Date Expiration Date(3)
- ------------------- --------- ----------------- ---------- ---------- --------------------
5% 10%
--------- ---------
<S> <C> <S>
Timothy W. Wallace - - - - - -
Stephanie D. Cohen - - - - - -
Jeffrey A. Blain 9,000 $6.81 1/30/07
17,000 $7.50 6/25/07
54,000(4) $7.50 7/8/07
-------- ----------------- ---------- --------- ---------
80,000 6.3% $7.42 $358,079 $946,348
James P. Joyce 9,000 $6.81 1/30/07
17,000 $7.50 6/25/07
54,000(4) $7.50 7/8/07
-------- ---------------- ---------- --------- ---------
80,000 6.3% $7.42 $358,079 $946,348
Robert J. Kabel 8,000 $6.81 1/30/07
20,000 $7.50 6/25/07
13,200(4) $7.50 7/8/07
--------- ---------------- ---------- --------- ---------
41,200 3.2% $7.37 $183,010 $483,669
</TABLE>
(1) Granted pursuant to the Company 1996 Long-Term Incentive Plan, such
options become exercisable over a four-year period at the rate of 25%
of the shares underlying each option per year.
(2) Includes options granted to employees of IE and members of the Boards
of Directors of the Company and IE on the date of the Company's IPO.
(3) These are hypothetical values using assumed growth as prescribed by
the Commission.
(4) Granted in exchange for the cancellation of an option to purchase
90,000, 90,000 and 22,000 shares of Common Stock, respectively, that had
been originally granted to each of Messrs. Blain, Joyce and Kabel on the
IPO date. See Note 12 to the Company's Consolidated Financial
Statements for the year ended December 31, 1997.
No stock options were exercised by any of the named executive officers
during the fiscal year ended December 31, 1997. The following table
presents information concerning the stock option values as of the end of
1997 for unexercised stock options held by each of the named executive
officers:
<TABLE>
<CAPTION>
Option Exercises in Last Fiscal Year
And Fiscal Year-End Option Values
Number of Value of Unexercised
Shares Number of Unexercised In-the Money
Acquired Value Options at Year End Options/SARs at Year End
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <S> <C> <S> <C> <C> <C> <C>
Timothy W. Wallace - $ - 65,000 195,000 $411,187 $1,233,563
Stephanie D. Cohen - $ - 53,750 161,250 $206,563 $1,027,187
Jeffrey A. Blain - $ - - 80,000 $ - $ 766,000
James P. Joyce - $ - - 80,000 $ - $ 766,000
Robert J. Kabel - $ - - 41,200 $ - $ 396,920
</TABLE>
(1) Represents the product of the number of shares acquired on exercise,
multiplied by the difference between (i) the per share fair market
value of the Common Stock on the date of exercise and (ii) the
exercise price per share
Employment Agreements
Effective upon the closing of the Mergers, all of the Company's named
executive officers other than Stephanie Cohen, the Company's Chief
Financial Officer, will enter into new Employment Agreements with the
Company and Xerox. Ms. Cohen entered into an agreement dated July 31, 1997
and amended by an agreement with XLConnect on March 2, 1998, in which the
parties agreed that Ms. Cohen would continue to serve XLConnect as its
Chief Financial Officer through the earlier of June 30, 1998 or such time
as she and Richard D. Sanford, XLConnect's Chairman of the Board, agree
otherwise. Under this agreement, she is entitled to an annual salary of
$175,000, plus certain living expense reimbursements. Ms. Cohen is also
eligible to receive $225,000 and continuation for one year of certain
standard benefits upon termination of her employment for any reason.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 27, 1998, certain information
regarding the beneficial ownership of the Company's Common Stock by each
shareholder known to the Company to be the beneficial owner of more than 5%
of the Common Stock, each of the Company's directors and named executive
officers, and all directors and executive officers as a group.
___________________________________________________________________________
Name and Address of Shares Beneficially Owned (1) Number
Beneficial Owner Number Percent
Intelligent Electronics, Inc. 13,348,280 80%
411 Eagleview Boulevard
Exton, PA 19341
Richard D. Sanford (2) 131,250 *
Timothy W. Wallace 65,000 *
Stephanie D. Cohen 53,750 *
Jeffrey A. Blain 2,575 *
James P. Joyce 2,250 *
Robert J. Kabel 2,000 *
Barry M. Abelson (2) 14,675 *
J.B. Doherty 14,675 *
William E. Johnson 39,675 *
John A. Porter 14,675 *
All executive officers and directors
as a group (12 persons) (2) 344,009 2.1%
* represents less than 1% of the outstanding shares of Common Stock.
(1) For purposes of this table, a person is deemed to be the "beneficial
owner" of any shares that such person has the right to acquire within
60 days, including upon the exercise of stock options. For purposes
of computing the percentage of outstanding shares held by each person
named above on a given date, any security that such person has the
right to acquire within 60 days is deemed to be outstanding, but is
not deemed to be outstanding for the purpose of computing the
percentage of ownership of any other person. The number of shares of
Common Stock indicated in this table as beneficially owned by the
following individuals includes the respective number of shares
purchasable upon the exercise of stock options which are exercisable
within 60 days of March 27, 1998: Mr. Sanford, 31,250; Mr. Wallace,
65,000; Ms. Cohen, 53,750; Mr. Blain, 2,250; Mr. Joyce, 2,250; Mr.
Kabel, 2,000; Mr. Abelson, 6,250; Mr. Doherty, 6,250; Mr. Johnson,
6,250; Mr. Porter, 6,250; and all directors and executive officers as
a group, 182,125.
(2) Mr. Sanford is the Chairman and Chief Executive Officer of IE and Mr.
Abelson is a member of the Board of Directors of IE. Messrs. Sanford
and Abelson may be deemed to share beneficial ownership of the shares
of Common Stock owned by IE; however, each disclaims beneficial
ownership of such shares, except to the extent of his respective
beneficial interest in IE.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Sanford and Abelson are the Chairman of the Board and a director
of the Company, respectively, who are also, respectively, the Chief
Executive Officer and Chairman of the Board and a member of the Board of
Directors of IE, the beneficial owner of 80.0% of the Company's
outstanding Common Stock. Mr. Abelson is a partner of the law firm of
Pepper Hamilton LLP, which provides various legal services for the Company.
Messrs. Johnson and Porter were members of the IE Board of Directors until
their resignations, effective December 31, 1997.
The Company and IE have entered into a number of agreements for the purpose
of defining certain relationships between them. These agreements are
described in Note 14 to the Company's Consolidated Financial Statements in
this Annual Report on Form 10-K. The discussion regarding these agreements
is hereby incorporated herein by this reference.
Compensation and Benefits Committee Interlocks
and Insider Participation
The Compensation and Benefits Committee of the Board of Directors currently
consists of Messrs. Doherty, Johnson and Porter. Messrs. Johnson and
Porter were members of the Board of Directors of IE until December 31,
1997, as noted above.
PAGE
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income, Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, Years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements
or notes thereto.
(2) Exhibits
2.1-- Asset Purchase Agreement between GE Capital Information
Technology Solutions Acquisition Corp. and IE and certain
of its subsidiaries dated as of July 1, 1997 (7)
2.2-- First Amendment to Asset Purchase Agreement between GE
Capital Information Technology Solutions Acquisition Corp.
and IE and certain of its subsidiaries dated as of July
18, 1997 (7)
2.3-- Agreement between the Company, IE and certain of its
subsidiaries dated as of July 18, 1997 relating to
allocation of purchase price and indemnities (7)
2.4-- Agreement and Plan of Merger dated as of March 4, 1998
among Xerox Corporation, TDC Subsidiary Corporation, TDC
Two Subsidiary Corporation, Intelligent Electronics, Inc.
and XLConnect Solutions, Inc.
2.5-- Second Amendment to Asset Purchase Agreement between GE
Capital Information Technology Solutions Acquisition Corp.
and IE and certain of its subsidiaries dated as of February
6, 1998.
3.1-- Articles of Incorporation of the Company, as amended (2)
3.2-- By-Laws of the Company (1)
4.1-- Specimen Stock Certificate (4)
10.1-- Contribution Agreement between IE, TFN, the Future Now,
Inc. of Arkansas and the Company dated as of May 31, 1996
(2)
10.2-- 1996 Long-Term Incentive Plan (including form of option
agreement) (2)
10.3-- Amended and Restated Services Agreement between the
Company, IE and XLSource, Inc. dated as of September 30,
1997 (9)
10.4-- Space Sharing Agreement between the Company, IE and TFN,
with respect to the Company's principal executive offices
and branch offices dated as of May 31, 1996 (5)
10.5-- Tax Allocation Agreement between the Company, IE and IE's
other subsidiaries effective as of January 29, 1995 (5)
10.6-- Stock Registration and Option Agreement between the
Company, IE and The Future Now, Inc. of Arkansas dated as
of May 31, 1996, and Amendment No. 1 thereto dated as of
December 1, 1997 (9)
10.7-- Indemnification Agreement between the Company and IE dated
as of October 22, 1996 (5)
10.8-- Offer Letters for Executive Officers of the Company (2)
10.9-- Amended Credit Agreement between IBMCC and IE and the
Company terminating the $20 million Sub-facility and
Credit Agreement between IBMCC and the Company dated as of
March 26, 1997 (6)
10.10-- Amended and Restated Intercompany Debt Agreement dated as
of March 26, 1997 by and between IE and the Company (8)
10.11-- Services Agreement for Telecommunications Services by and
between XLConnect Services, Inc. (a wholly-owned
subsidiary of the Company, formerly named IntelliCom
Solutions, Inc.) and IE dated as of January 1, 1996 (5)
10.12-- Services Practice Agreement between Microsoft Corporation
and the Company dated as of February 28, 1997 (6)
27.1-- Financial Data Schedule (submitted electronically only to
Securities and Exchange Commission)
__________
(1) Incorporated by reference herein from the Company's Registration
Statement on Form S-1 (No. 333-08735) filed on July 24, 1996.
(2) Incorporated by reference herein from Amendment No. 1 to the
Company's Registration Statement on Form S-1 filed on September
16, 1996.
(3) Incorporated by reference herein from Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed on October 3,
1996
(4) Incorporated by reference herein from Amendment No. 3 to the
Company's Registration Statement on Form S-1 filed on October 15,
1996.
(5) Incorporated by reference herein from the Company's Quarterly
Report on Form 10-Q filed on December 2, 1996.
(6) Incorporated by reference herein from the Company's Quarterly
Report on Form 10-Q filed on May 15, 1997. The Company has
requested and received confidential treatment for portions of
Exhibit 10.12.
(7) Incorporated by reference herein from the Company's Current
Report on Form 8-K filed on August 1, 1997.
(8) Incorporated by reference herein from the Company's Quarterly
Report on Form 10-Q filed on August 14, 1997.
(9) Incorporated by reference herein from the Company's Quarterly
Report on Form 10-Q/A filed on February 6, 1998.
(b) Reports filed on Form 8-K.
None.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of
March 1998.
XLCONNECT SOLUTIONS, INC.
By: /s/ Timothy W. Wallace
---------------------------------
Timothy W. Wallace
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date/s/
--------- ----- -------
/s/ Richard D. Sanford Chairman of the Board March 31, 1998
- ------------------------
Richard D. Sanford
/s/ Timothy W. Wallace President and Chief Operating March 31, 1998
- ------------------------ Officer; Director
Timothy W. Wallace (principal executive officer)
/s/ Stephanie D. Cohen Executive Vice President, March 31, 1998
- ------------------------ Finance and Chief Financial
Stephanie D. Cohen Officer (principal financial
officer and principal
accounting officer)
/s/ Barry M. Abelson Director March 31, 1998
- ------------------------
Barry M. Abelson
/s/ J.B. Doherty Director March 31, 1998
- ------------------------
J.B. Doherty
/s/ William E. Johnson Director March 31, 1998
- ------------------------
William E. Johnson
/s/ John A. Porter Director March 31, 1998
- ------------------------
John A. Porter
<PAGE>
XLCONNECT SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
PAGE
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
XLConnect Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of XLConnect
Solutions, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of XLConnect Solutions,
Inc. as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Cincinnati, Ohio
February 6, 1998
<PAGE>
<PAGE>
<TABLE> <CAPTION>
XLCONNECT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
December 31,
---------------
1997 1996
------- -------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $17,232 $ 3,467
Trade accounts receivable, less allowance of $1,154 and $1,072
at December 31, 1997 and 1996, respectively 27,607 23,063
Deferred tax asset 967 1,225
Prepayments and other current assets 1,143 1,155
------- -------
Total current assets 46,949 28,910
Property and equipment, net of accumulated depreciation 7,497 4,985
Intangible asset, net of accumulated amortization 24,111 27,006
Other long-term assets 1,363 766
------- -------
Total assets $79,920 $61,667
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 67
Accounts payable 3,006 3,144
Accrued expenses 7,583 4,464
State income taxes 841 -
Deferred income and other 1,090 1,449
Due to parent 4,235 257
------- -------
Total current liabilities 16,755 9,381
------- -------
Long-term debt 5,139 -
------- -------
Total liabilities 21,894 9,381
------- -------
Commitments and contingencies (Notes 7, 14, and 15)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
no shares issued and outstanding as of December 31, 1997 and 1996
- -
Common stock, $.01 par value, 100,000,000 shares authorized;
16,683,125 and 16,655,000 shares issued and outstanding as of
December 31, 1997 and 1996, respectively 166 166
Additional paid-in capital 50,844 50,074
Retained earnings 7,016 2,046
------- -------
Total shareholders' equity 58,026 52,286
------- -------
Total liabilities and shareholders' equity $79,920 $61,667
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
<PAGE>
XLCONNECT SOLUTIONS, INC.
CONSOLDIATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
---------------------------
1997 1996 1995
-------- -------- -------
Revenues $135,703 $114,892 $79,862
Cost of revenues 91,911 81,077 56,327
-------- -------- -------
Gross profit 43,792 33,815 23,535
Operating expenses:
Selling and marketing 13,245 8,779 3,975
General and administrative 18,227 12,467 9,178
Depreciation and amortization 4,200 4,782 3,123
-------- -------- -------
35,672 26,028 16,276
-------- -------- -------
Income from operations 8,120 7,787 7,259
Other income (expense), net:
Interest 375 (3,257) (2,591)
Other (99) (5) 13
Gain on sale of PBTH (Note 3) 1,991 - -
-------- -------- -------
2,267 (3,262) (2,578)
-------- -------- -------
Income before income taxes 10,387 4,525 4,681
Provision for income taxes 5,417 2,479 2,259
-------- -------- -------
Net income $ 4,970 $ 2,046 $ 2,422
======== ======== =======
Basic earnings per common share $ 0.30 $ 0.15
Diluted earnings per common share $ 0.29 $ 0.14
See accompanying notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
XLCONNECT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Additional Shareholder's
Preferred Stock Common Stock Paid-in Retained Net
Shares Amount Shares Amount Capital Earnings Investment Total
-------- ------ ------ ------ --------- -------- ---------- -------
<S> <C>
Balance,
December 31, 1994 - $ - - $ - $ - $ - $ 2,708 $ 2,708
Net income - - - - - - 2,422 2,422
-------- ------ ------ ------ --------- -------- ---------- -------
Balance,
December 31, 1995 - - - - - - 5,130 5,130
Initial issuance
of stock - - 1 - - - - -
Contribution of
shareholder's
net investment - - - - 5,130 - (5,130) -
Stock split - - 13,324 133 (133) - - -
Public issuance
of stock, net
of expenses - - 3,330 33 45,077 - - 45,110
Net income - - - - - 2,046 - 2,046
-------- ------ ------ ------ --------- -------- ---------- -------
Balance,
December 31, 1996 - - 16,655 166 50,074 2,046 - 52,286
Initial public
offering costs - - - - (74) - - (74)
Issuance of
detanchable
warrants - - - - 437 - - 437
Issuance of
common stock
pursuant to
exercise of
stock options - - 28 - 407 - - 407
Net income - - - - - 4,970 - 4,970
-------- ------ ------ ------ --------- -------- ---------- -------
Balance,
December 31, 1997 - $ - 16,683 $ 166 $50,844 $7,016 $ - $58,026
======== ====== ====== ====== ========= ======== ========== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
<PAGE>
XLCONNECT SOLUTIONS, INC.
CONSOLDIATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net Income $ 4,970 $ 2,046 $ 2,422
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 4,200 4,782 3,123
Gain on sale of PBTH (1,991) - -
Loss on disposal of property and equipment 108 5 20
Amortization of debt discount 76 - -
Provision for allowance on trade
accounts receivable 595 441 335
Deferred income taxes 217 957 (278)
Changes in assets and liabilities:
Trade accounts receivable (10,636) (5,044) (4,576)
Prepayments and other current assets - (740) 505
Other long-term assets (556) (195) 500
Accounts payable (138) 439 (5,809)
Accrued expenses 1,840 (1,061) 2,614
State income taxes 841 - -
Due to parent 3,978 - -
Deferred income and other (359) 5 (528)
------- ------- -------
Net cash provided by (used in)
operating activities 3,145 1,635 (1,672)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (5,476) (3,933) (2,148)
Repayment of note receivable - - 2,783
Proceeds from sale of PBTH 10,330 - -
------- ------- -------
Net cash provided by (used in)
investing activities 4,854 (3,933) 635
------- ------- -------
Cash flows from financing activities:
Borrowings of long-term debt 5,500 - -
Repayments of long-term debt (67) (147) (2,495)
Net changes due to parent - (39,198) 3,532
Net proceeds from common stock issuance - 45,110 -
Net proceeds from exercise of stock options 407 - -
Payment of intitial public offering costs (74) - -
------- ------- -------
Net cash provided by financing activities 5,766 5,765 1,037
------- ------- -------
Net change in cash and cash equivalents 13,765 3,467 -
Cash and cash equilavents-beginning of year 3,467 - -
------- ------- -------
Cash and cash equivalents-end of year $17,232 $ 3,467 $ -
======= ======= =======
See accompanying notes to Consolidated Financial Statements
<PAGE>
XLCONNECT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollars in thousands, except per share data)
Note 1. Operations, Formation and Initial Public Offering
XLConnect Solutions, Inc. (the Company or XLConnect), through its wholly-
owned subsidiary, XLConnect Systems, Inc., provides enterprise-wide
solutions 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,
microwave and voice transmission services.
The accompanying Consolidated Financial Statements as of and for the years
ended December 31, 1997 and 1996 include the accounts of the Company and
its wholly-owned subsidiaries which incorporates the operations of the
Professional Services Organization (PSO) of IntelliCom Solutions, Inc.
(IntelliCom), formerly a wholly-owned subsidiary of Intelligent
Electronics, Inc. (IE). All material transactions between entities included
in these financial statements have been eliminated. The accompanying
Combined Financial Statements of the Company for the year ended December
31, 1995 include the combined operations of the PSO of The Future Now, Inc.
(TFN) and 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. The Company was incorporated under the laws of the
Commonwealth of Pennsylvania in January 1996 and issued 1,000 shares of
Common Stock to IE at such time in connection with its initial
capitalization. The Company changed its name to XLConnect Solutions, Inc.
in May 1996. In addition (i) as of May 31, 1996, IE contributed to the
Company the stock of IntelliCom and the assets and liabilities, including
debt, relating to the PSO business, and began accumulating its retained
earnings, (ii) the Company and IE entered into certain contractual
arrangements effective as of the date set forth on each agreement for the
purpose of defining certain relationships between them (see Note 14) and
(iii) on September 6, 1996, the Company effected a 13,325-for-1 stock split
of the Company's issued and outstanding shares of Common Stock. On October
17, 1996, the Company consummated an initial public offering (IPO) of
3,330,000 of its authorized and unissued shares of Common Stock, or
approximately 20% of the Company's outstanding shares after the IPO, at an
initial public offering price of $15 per share. Approximately $41,000 of
the total net proceeds of $45,110 were used to repay the Company's then
outstanding indebtedness to IE, with the remaining proceeds used for
working capital and general corporate purposes. As a result of the IPO,
the Company currently is an indirect, 80%-owned subsidiary of IE.
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 financial statements consist of the financial statements
of the Company as described in Note 1. The Consolidated Financial
Statements 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. For the periods
presented, certain general and administrative expenses reflected in the
financial statements include allocations of certain corporate expenses from
IE. These allocations 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 for the years ended December 31, 1996 and 1995 reflects interest
expense associated with the Company's share of the aggregate borrowings of
IE and all of its subsidiaries for each of the periods presented.
Additionally, income taxes are calculated on a separate tax return basis.
Management believes that such allocations are reasonable.
Prior to January 1, 1997, the Company participated in IE's central cash
management system which resulted in all cash generated from and cash
required to support the Company's operations being deposited and received
through IE's corporate operating cash accounts. As a result, there were no
separate bank accounts or accounting records for these transactions.
Accordingly, the amounts represented by the caption "Net changes in due to
parent" on the Company's Consolidated Statements of Cash Flows represent
the net effect of all cash transactions between the Company and IE.
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.
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Company
had it 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. Beginning in 1997, the Company transitioned its
telecommunication services to a sales agent model in which revenues are
recognized at time of sale. Revenues from proprietary software license
agreements is recognized upon delivery of the license, provided there are no
significant performance obligations remaining. Funds received through IE
from vendors for training, capital expenditures and marketing programs are
accounted for either as fee income or as a reduction of cost of revenues,
capitalized costs or selling and marketing expenses according to the nature
of the program when earned. The Company received allocations of IE's total
vendor funding related to the businesses of the Company in the amounts of
$1,260, $1,223, and $778 for 1997, 1996 and 1995, respectively. These
allocations were based on the relationship of service business volumes to
total business volumes of the Company and TFN except for funding related to
IntelliCom's telecommunications services after January 1, 1996. The
Company and IE renegotiated the basis of this allocation for 1997 based on
the Company's contribution to IE's generation of vendor funding.
Effective July 1, 1997, the Company began recognizing a fee of $225 per
month from IE for managing its operations (see Note 14).
Cash and Cash Equivalents
Cash and cash equivalents comprise the Company's cash balances and short-
term investments with an initial maturity of less than ninety days.
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.
Computer equipment is comprised of both hardware and software costs.
Capitalized software costs consist of both internal and external amounts
incurred directly by the Company to obtain and install the software for
internal use. Amortization of capitalized software costs is provided on a
straight-line basis, over the estimated useful life of the software, five
years.
Intangible Asset
The intangible asset, composed of costs in excess of net assets acquired,
represents 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. The intangible asset is being
amortized on a straight-line basis over the expected period to be
benefited, twenty years. The Company assesses the recoverability of the
intangible asset by determining whether the amortization of the balance
over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation.
Other Long-term Assets
Included in other long-term assets is software development costs which are
capitalized when the project reaches technological feasibility and ceases
capitalization when the product is ready for release. Research and
development costs related to software development that has not reached
technological feasibility are expenses as incurred. Software development
costs are amortized over the greater of the straight-line method over 18
months, the expected life of the product, or the ratio of current revenues
to the total of current and anticipated revenues. Total of capitalized
software costs for December 31, 1997 was $320. There were no costs
capitalized as of December 31, 1996. Accumulated amortization at December
31, 1997 was $35. The Company performs a net realizability evaluation of
its software products. No write-offs were recognized in 1997 due to
impairment of net realizable value.
Income Taxes
The provision for income taxes of the Company for Federal and state income
taxes has been calculated as if the Company was a stand-alone corporation
filing separate tax returns since the Company is included in the
consolidated returns of IE.
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
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
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.
Cash and Cash Equivalents, Trade Accounts Receivables Accounts Payable and
Due to Parent - The carrying amount of these items are a reasonable
estimate of their fair value due to the short-term maturity of these
instruments.
Long-Term Debt - Rates currently available to the Company for debt with
similar terms is used to estimate its fair value. Accordingly, the
carrying amount of debt is a reasonable estimate of its fair value.
Earnings Per Common Share
The Company adopted SFAS No. 128, Earnings per Share (SFAS No. 128) which
is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 simplifies the previous standards for
computing earnings per share and requires restatement of all prior periods
presented and discloses basic and diluted earnings per share. The
implementation of SFAS No. 128 did not have a material effect on the
Company's calculation of earnings per common share.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the
current year's presentation.
Note 3. Sale of Specified Service Contracts and Related Assets
On July 18, 1997, XLConnect and IE completed a transaction (the
Transaction) with GE Capital Information Technology Solutions Acquisition
Corp. (Buyer), a subsidiary of GE Capital Information Technology Solutions,
Inc. (GECITS), whereby XLConnect sold to Buyer specified "Power-by-the-
Hour" (PBTH) managed services contracts and related assets, consisting
principally of accounts receivable and fixed assets. In the Transaction, IE
also sold the majority of its direct computer product operations to the
Buyer. The Transaction was pursuant to an Asset Purchase Agreement dated
July 1, 1997, as amended on July 18, 1997, the closing date (the Purchase
Agreement). The Purchase Agreement includes mutual one-year non-competition
and no-hire provisions between the parties.
Of the total purchase price of approximately $136,000 paid by the Buyer in
the Transaction, the Company received $10,330 (based on the tangible assets
sold). The purchase price was subject to adjustment after closing based on
the actual net book value of such assets as of the closing date. A portion
of the purchase price due to IE was placed in escrow pending receipt of
certain third-party consents and to fund purchase price adjustments and
obligations of IE and the Company under the Purchase Agreement, including
the obligation to repurchase from the Buyer any transferred accounts
receivable which remain uncollected after 120 days following the closing date.
The Company has agreed to repay IE for any of the Company's accounts
receivable required to be repurchased by IE and for certain other
liquidated damages incurred by IE to the Buyer as a result of the non-
performance of certain undertakings by the Company in the Purchase
Agreement. The Company has also agreed to reimburse IE for any losses by
reason of the indemnification undertakings in the Purchase Agreement
arising out of or based upon misrepresentations or material breaches of
covenants in the Purchase Agreement by the Company. IE has agreed to
indemnify, defend and hold harmless the Company from any claim asserted
against or liability imposed on the Company under the Purchase Agreement
arising out of or based upon misrepresentations or material breeches of
covenants in the Purchase Agreement by IE.
The Company, IE and the Buyer reached an agreement, dated as of February 6,
1998, whereby the outstanding issues related to the Transaction have been
settled. As part of this agreement, IE and the Buyer have agreed to the
following:
All closing balance sheet issues have been resolved. The Buyer will
receive a payment from IE in the amount of $4,351. The Buyer has assigned to
IE and the Company uncollected receivables in the amount of $13,574 and
$546, respectively. IE will use the escrow balance of $13,823 plus a cash
payment of $297 to fund this purchase. The above payments will be treated
as a reduction in the purchase price.
Unaudited pro forma results of operations of the Company for the years
ended December 31, 1997 and 1996, assuming the Transaction was consummated
on January 1, 1996, are as follows:
December 31,
---------------------
1997 1996
---------------------
Revenues $ 124,931 $ 97,247
Net income 4,511 1,572
Basic earnings per common share 0.27 0.11
Diluted earnings per common share 0.26 0.11
Pro forma financial information presented above is not necessarily
indicative of the results of operations that would have occurred had the
Transaction taken place at the beginning of the periods presented or of
future results of operations.
Note 4. 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:
1997 1996 1995
-------- -------- --------
Balance at beginning of year $1,072 $710 $158
Charged to expense 595 441 335
Deductions/write-offs (513) (79) (40)
Charged to other accounts - - 257
-------- -------- --------
Balance at end of year $1,154 $1,072 $710
======== ======== ========
Note 5. Property and Equipment
Net property and equipment is comprised of the following as of December 31:
1997 1996
-------- --------
Computer equipment $12,209 $ 8,248
Office equipment 2,780 2,250
Leasehold improvements 809 593
Equipment under capital leases 526 347
Vehicles 98 -
-------- --------
16,422 11,438
Less: Accumulated depreciation (8,925) (6,453)
-------- --------
$7,497 $ 4,985
======== ========
Note 6. Intangible Asset
Net intangible asset is comprised of the following as of December 31:
1997 1996
-------- --------
Goodwill $27,367 $29,000
Less: Accumulated amortization (3,256) (1,994)
-------- --------
$24,111 $27,006
======== ========
During July 1997, $1,633 of goodwill specifically related to the specified
PBTH managed services contracts and related assets was written off as a
result of the Transaction.
Note 7. Debt and Lease Obligations
During 1996, the Company was a party to IE's credit facility (the IE Credit
Facility). As of March 26, 1997, the Company, IE and IBM Credit
Corporation (IBMCC) amended the IE Credit Facility to terminate the Sub-
facility, which had allowed the Company to borrow directly from IBMCC up to
$20 million of the total $225 million, subject to a collateral-based
formula, and to limit the Company's joint and several liability to IBMCC at
$20 million (whether arising from direct borrowings or a guaranty of IE's
indebtedness, and the Company's joint and several liability to IE under the
IE Credit Facility. The Company and IBMCC entered into a separate credit
agreement providing the Company with a credit facility in the amount of $25
million, subject to a collateral-based formula, which is secured by all of
the assets of the Company and its subsidiaries (the XLC Credit Facility).
Interest is payable at LIBOR plus 1.5% decreasing to 1.2%, depending upon
the amount of outstanding borrowings. No amounts were outstanding under the
XLC Credit Facility as of December 31, 1997. Various customary restrictive
covenants must be observed. Concurrent with establishing the XLC Credit
Facility, the Company and IE have amended their Intercompany Debt
Agreement whereby IE will reimburse the Company for the difference between
LIBOR plus .75% and the interest rate paid by the Company to IBMCC and for
other direct expenses that the Company would not have been required to
incur if it had entered into an unsecured credit facility.
On February 28, 1997, the Company entered into a transaction with a third
party whereby the third party agreed to provide an unsecured loan of up to
$11,000 (the Loan) to be used for specific business purposes. The Company
borrowed $5,500 available under the first traunch, which remained
outstanding as of December 31, 1997. The remaining amount was drawn
subsequent to year end. Interest is payable at an initial annual rate of
4% for the first two years and adjusts to 5% and then 6% for the remaining
term. Principal payments of $750 will be made quarterly beginning in
August 1999 with a final payment of $1,250 due on August 28, 2002. In
connection with the Loan, the Company issued to the third party a warrant
to purchase up to 325,000 shares of its Common Stock, which became
exercisable on February 28, 1998 at a per share exercise price of $6.65 and
expires on February 27, 2007. The third party has agreed not to exercise
the warrant prior to the earlier of the closing of the Mergers or June 30,
1998. The Company assigned a value of $437 to the warrant using an option
pricing model and recorded the amount as a discount on the Loan and
additional paid-in capital. After considering the effect of the additional
interest associated with the issuance of the warrant and the resultant
discounting of the Loan, the effective interest rate is 7.5%. $78 of the
discount was amortized during the year and reflected in interest expense.
The annual maturities of the Loan as of December 31, 1997 is as follows:
1998 $ -
1999 1,500
2000 3,000
2001 3,000
2002 3,500
------------
$ 11,000
============
The Company leases certain equipment and facilities under operating leases
with IE or a third party. At December 31, 1997, the Company's portion of
future minimum payments under noncancellable leases with initial or
remaining terms in excess of one year is as follows:
1998 $ 1,602
1999 1,567
2000 1,421
2001 1,096
2002 727
Thereafter 1,731
-----------
$ 8,144
===========
Rent expense under these leases for 1997, 1996 and 1995 was $1,690, $1,346,
and $692, respectively.
The Company has certain usage fee or sub-lease arrangements for computer
desktop equipment with IE. At December 31, 1997, the Company's future
minimum lease payments under these agreements are as follows:
1998 $ 688
1999 688
2000 281
2001 31
-----------
$ 1,688
===========
Rent expense under these agreements for 1997, 1996 and 1995 was $9,924,
$11,407 and $6,465, respectively.
Note 8. Income Taxes
Income tax expense (benefit) for the years ended December 31 consists of
the following:
1997 1996 1995
-------- -------- --------
Current:
Federal $4,165 $1,219 $2,032
State 1,035 303 505
-------- -------- --------
5,200 1,522 2,537
Deferred:
Federal 173 767 (223)
State 44 190 (55)
-------- -------- --------
217 957 (278)
-------- -------- --------
$5,417 $2,479 $2,259
======== ======== ========
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate is as follows:
1997 1996 1995
------ ------ ------
Statutory U.S. federal tax rate $3,635 $1,584 $1,638
Amortization of intangible asset 495 508 313
State and local income tax, net
of federal benefit 701 320 292
Goodwill write-off related
to Transaction (Note 6) 518 - -
Other, net 68 67 16
------ ------ ------
$5,417 $2,479 $2,259
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1997 and 1996 are
presented below:
1997 1996
------ ------
Deferred Tax Asset:
Allowance for trade accounts receivable $ 464 $ 431
Depreciation 589 549
Accrued expenses 504 252
Deferred income - 542
------ ------
$1,557 $1,774
====== ======
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.
The Company and IE have entered into a Tax Allocation Agreement to provide
for (i) the allocation of payments of taxes for periods during which the
Company and IE are included in the same consolidated group for Federal
income tax purposes or the same consolidated, combined or unitary tax
returns for state, local or foreign tax purposes, (ii) the allocation of
responsibility for the filing of tax returns, (iii) the conduct of tax
audits and the handling of tax controversies, and (iv) various related
matters. For periods during which the Company is included in the
aforementioned returns, the Company will be required to pay to IE its
allocable portion of the consolidated Federal income and state tax
liability and will be entitled to receive from IE its allocable share of
any tax benefit attributable to the use of the Company's losses, if any.
The Company will be responsible for the filing of Federal, state, local and
foreign tax returns and related liabilities for itself for all periods, to
the extent not included in IE's combined or consolidated tax returns.
Notwithstanding the Tax Allocation Agreement, under Federal income tax law,
each member of a consolidated group for Federal income tax purposes is also
jointly and severally liable for the Federal income tax liability of each
other member of the consolidated group. Similar rules may apply under
state income tax laws.
Note 9. Supplemental Cash Flow Information
The Company's non-cash investing and financing activities for the years
ended December 31 were as follows:
1997 1996 1995
------- ------- -------
Details of Investing Activities:
Allocation of intangible asset $ - $ - $22,819
======= ======= =======
Details of Financing Activities:
Contribution of shareholder's
net investment (Note 1) $ - $5,130 $ -
======= ======= =======
Issuance of detachable warrants $ 437 $ - $ -
======= ======= =======
As a result of the Company participating in IE's central cash management
system, through December 31, 1996, the Company made no cash payments for
interest and income taxes during 1995 and 1996. In 1997, the Company made
cash payments for interest and income taxes of $132 and $276, respectively.
Note 10. Preferred Stock
The Company has 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 voting
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 rights 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 December 31, 1997, no shares
of Preferred Stock are outstanding and the Company has no current intention
to issue any shares of Preferred Stock.
Note 11. Significant Customer
Sales to one customer accounted for approximately 6%, 14% and 15% of the
Company's revenue for 1997, 1996 and 1995, respectively. The contract with
this customer was sold on July 18, 1997 (See Note 3).
Note 12. Employee Benefit Plans
The Company maintains a 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 1997, 1996 and 1995 were
$497, $549 and $172, respectively.
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 issuance pursuant to the exercise of stock options under the Plan.
This 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 on the
date of grant. The options vest evenly over four years and expire ten
years after the date of grant, subject to earlier termination and other
provisions relating to the cessation of employment.
SFAS No. 123, Accounting for Stock-Based Compensation, 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 rules and disclose pro forma net income and earnings per share
assuming the fair value method had been applied. 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. Accordingly, no
compensation cost has been recognized in the accompanying Consolidated
Statements of Income.
Transactions with respect to stock options during 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average Price
Shares Range per Share Per Share
--------- --------------- -------------
<S> <C> <C> <C> <S>
Balance outstanding - December 31, 1995 - - -
--------- --------------- -------------
Granted 2,584 $9.35 - $15.00 $11.73
--------- --------------- -------------
Balance outstanding - December 31, 1996 2,584 $9.35 - $15.00 $11.73
--------- --------------- -------------
Granted 1,628 $6.81 - $15.375 $ 7.87
Excercised (6) $15.00 $15.00
Cancelled (1,739) $6.81 - $15.00 $11.46
--------- --------------- -------------
Balance outstanding - December 31, 1997 2,467 $6.81 - $15.375 $ 9.31
--------- --------------- -------------
</TABLE>
Effective July 9, 1997, the Company offered all option holders with options
granted on the IPO date with an exercise price of $15.00 per share, other
than directors of the Company or IE, the right to exchange such options for
new options to purchase 60% of the number of their IPO options with an
exercise price of $7.50 per share, the closing price of the Common Stock on
July 9, 1997. The IPO options of all option holders who accepted the
exchange offer were cancelled (approximately 508 options) concurrently with
the grant of new options to such holders.
As of December 31, 1997, there were 259 options exercisable under the Plan
at exercise prices ranging from $9.35 to $15.00 per share. The weighted
average exercise price for these options is $11.24 per share and the
weighted average remaining life is 8.75 years. There were no options
excercisable under the Plan as of December 31, 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: dividend yield of 0% and 0%;
expected volatility of 72% and 45%; risk-free interest rate of 6.2% and
6.2%; and expected life of 2.4 and 2.6 years, respectively.
Pro forma results of operations of the Company for 1997 and 1996, assuming
SFAS No. 123 had been applied, is as follows:
1997 1996
-------- --------
As Reported $ 4,970 $2,046
======== ========
Net income $ 921 $1,481
======== ========
Basic earnings per common share $ 0.06 $ 0.11
Diluted earnings per common share $ 0.05 $ 0.10
Note 13. Earnings per Common Share
Net Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1997
Basic earnings per share:
Net income available to common shareholders $4,970 16,658 $0.30
Effect of dilutive securities stock options $ - 402 $0.01
Effect of dilutive detachable warrants $ - 111 $ -
----------- ------------- ------
$ - 513 $0.01
----------- ------------- ------
Diluted earnings per share:
Net income available to common shareholders
and assummed conversions $4,970 17,171 $0.29
=========== ============ ======
1996
Basic earnings per share:
Net income available to common shareholders $2,046 14,009 $0.15
Effect of dilutive securities stock options $ - 439 $0.01
----------- ------------- ------
Diluted earnings per share:
Net income available to common shareholders
and assummed conversions $2,046 14,448 $0.14
=========== ============ ======
Note 14. Related Party Transactions
The Company and IE have entered into a number of agreements, in addition to
the Amended and Restated Intercompany Debt Agreement and the agreement
providing for mutual indemnities arising from the Transaction referred to
herein, for the purpose of defining certain relationships between them. As
a result of IE's approximately 80% 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 arms-length negotiation. The
following summaries of these agreements are qualified in all material
respects by the terms and conditions of the agreements.
The "Due to Parent" balance of $4,235 at December 31, 1997 represents the
net payable to IE for the services provided by IE to XLConnect under the
Services, Space Sharing and Tax Allocation Agreements described below as
well as amounts received by XLConnect from shared customers of IE and
XLConnect for product sold by IE. These amounts have been paid in full
subsequent to December 31, 1997.
Services Agreement
The Company and IE entered into an Amended and Restated Services Agreement
(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 coverage, employee benefit plan coverage,
human resources, administration and tax management services, that IE has
historically provided to the Company. The Company will pay the direct costs
of services provided by IE; 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. In addition, effective July 1, 1997,
the Company assumed for IE and its subsidiaries certain management
responsibilities as a result of IE's restructuring in which it sold its
direct computer product business and the majority of its direct computer
product business. IE has agreed to pay the Company a fee of $225 per month
for such services. The Services Agreement will automatically terminate on
(i) the occurrence of a pro rata distribution to IE's shareholders of its
remaining shares by means of a tax-free or taxable transaction (the
Distribution) or (ii) such time that IE no longer owns a majority of the
outstanding shares of Common Stock. In addition, the Services Agreement
may also be terminable by either party on 90 days' prior written notice.
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. Upon termination of the
Services Agreement, all outstanding advances and accrued but unpaid
interest will become due and payable.
In addition, the Services Agreement 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 remaining 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 the current practices between the
companies. The Company is continuing this practice subsequent to December
31, 1997.
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. The Company and IE have renegotiated
the basis of the Company's allocation of vendor funding for 1997 based on
the Company's relative contribution to the generation of the funding.
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.
Indemnification Agreement
The Company and IE have also entered into an Indemnification Agreement
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 liabilities arising out of or based upon alleged
misrepresentations in or omissions from the Registration Statement with
respect to the IPO. 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 (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 guarantee obligations with respect to the Sub-
facility and IE's guarantee obligations with respect to the XLC Credit
Facility that replaces the Sub-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 IPO.
The Company is obligated to pay all expenses incidental to such
registration, excluding underwriters' discounts and commissions and certain
legal fees and expenses. This agreement also grants to IE until the
earlier to occur of (i) the completion of a distribution by IE to its
shareholders of the shares of Common Stock of the Company held by IE (the
Distribution) or (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 exercisable only upon the original issuance
of shares by the Company, to purchase from the Company at then-current
market prices such number of shares of Common Stock as necessary for IE to
continue to own at least 80% of the outstanding share 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
telecommunication 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. Total revenues received from IE were $2,374 and $3,634 for the
years ended December 31, 1997 and 1996, respectively. The services
agreement requires IE to purchase sufficient telecommunications services to
permit the Company to meet the minimum volume requirements imposed by the
Company's agreement with MCI, which expired on December 31, 1997. The
Company met its volume requirements with MCI in 1996 and 1997. 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 the Company with at least 90
days' notice prior to the expiration of such term that it has received a
bona fide offer to provide telecommunication services that in quantity,
quality and duration are equal to or better than the services then being
provided to IE by the Company at a price of 5% or more below the price the
Company charges for such services and the Company does not match the offer.
Note 15. Contingencies
The Company continuously evaluates contingencies based upon the best
available evidence. Management believes that allowances for loss have been
provided to the extent necessary and that its assessment of contingencies
is reasonable.
Note 16. Subsequent Event (Unaudited)
On March 4, 1998, IE and the Company entered into an Agreement and Plan of
Merger with Xerox whereby Xerox will acquire all of the outstanding shares
of capital stock of IE in exchange for $7.60 per share and all of the
outstanding shares of capital stock of the Company not owned by IE in
exchange for $20.00 per share through the merger of acquisition
subsidiaries of Xerox with and into each of IE and the Company (together,
the Mergers). The closing of the Mergers is subject to shareholder
approval and other customary terms and conditions. There can be no
assurance that the Mergers will be completed. After the closing of the
Mergers, currently anticipated to occur not later than June 30, 1998, the
Company will be an indirect wholly-owned subsidiary of Xerox.
PAGE
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.4 Agreement and Plan or Merger dated as of March 4, 1998
among Xerox Corporation, TDC Subsidiary Corporation, TDC
Two Subsidiary Corporation, Intelligent Electronics, Inc.
and XLConnect Solutions, Inc.
2.5 Second Amendment to Asset Purchase Agreement between GE
Capital Information Technology Solutions Acquisition
Corp. and IE and certain of its subsidiaries dated as
of February 6, 1998
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
-----------------------------
The Board of Directors
XLConnect Solutions, Inc.:
We consent to the incorporation by reference in the registration statement
(No. 333-14899) on Form S-8 of XLConnect Solutions, Inc. of our report
dated February 6, 1998 relating to the consolidated balance sheets of
XLConnect Solutions, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, which
report appears in the December 31, 1997 annual report on Form 10-K of
XLConnect Solutions, Inc.
KPMG Peat Marwick LLP
Cincinnati, Ohio
March 30, 1998
Exhibit 2.4
_______________________________________________________________________________
AGREEMENT AND PLAN OF MERGER
Dated as of March 4, 1998
Among
Xerox Corporation
TDC Subsidiary Corporation
TDC Two Subsidiary Corporation
Intelligent Electronics, Inc.
and
XLConnect Solutions, Inc.
_______________________________________________________________________________
<PAGE>
Execution
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (the "Agreement") entered into as of
March 4, 1998 by and among Xerox Corporation, a New York corporation
("Purchaser"), TDC Subsidiary Corporation, a Pennsylvania corporation and a
wholly-owned subsidiary of Purchaser ("Acquisition Sub One"), TDC Two
Subsidiary Corporation, a Pennsylvania corporation and a wholly-owned
subsidiary of Purchaser ("Acquisition Sub Two"), Intelligent Electronics,
Inc., a Pennsylvania corporation ("Parent"), and XLConnect Solutions, Inc.,
a Pennsylvania corporation ("Sub"). Purchaser, Acquisition Sub One,
Acquisition Sub Two, Parent and Sub are referred to individually herein as
a "Party" and collectively herein as the "Parties".
Recitals
--------
WHEREAS, this Agreement contemplates a transaction in which Purchaser
will indirectly acquire, through a reverse triangular merger of Acquisition
Sub One with and into Sub (the "Sub Merger"), all of the capital stock of
Sub that is not owned directly or indirectly by Parent;
WHEREAS, this Agreement contemplates that immediately after completion
of the Sub Merger, Purchaser will acquire, through a reverse triangular
merger of Acquisition Sub Two with and into Parent (the "Parent Merger")
all of the capital stock of Parent;
WHEREAS, the Board of Directors of Sub (the "Sub Board") has
determined that the Sub Merger is fair to and in the best interests of the
holders of Sub's common stock and has resolved to recommend the acceptance
and approval of the Sub Merger by the holders of Sub Shares and Parent-
Owned Sub Shares (as defined in Section 1.2);
WHEREAS, the Independent Committee of the Board of Directors of Sub
(the "Independent Committee") has determined that the Sub Merger is fair to
and in the best interests of the holders of Sub Shares and has resolved to
recommend the acceptance and approval of the Sub Merger by the holders of
Sub Shares;
WHEREAS, the Sub Board, the Independent Committee and the respective
Boards of Directors of Purchaser and Acquisition Sub One have approved the
Sub Merger pursuant to and subject to the terms and conditions of this
Agreement;
WHEREAS, the Board of Directors of Parent (the "Parent Board") has
determined that the Parent Merger is fair to and in the best interests of
the holders of Parent's common stock and has resolved to take all necessary
action to approve the Sub Merger and to recommend the acceptance and
approval of the Parent Merger by the holders of Parent Shares (as defined
in Section 2.2);
WHEREAS, the Parent Board and the respective Boards of Directors of
Purchaser and Acquisition Sub Two have approved the Parent Merger pursuant
to and subject to the terms and conditions of this Agreement;
WHEREAS, the Parties desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth herein, and in consideration of the representations,
warranties and covenants set forth herein, intending to be legally bound
hereby, the Parties agree as follows:
ARTICLE I
The Sub Merger
--------------
1.1 The Sub Merger. Subject to the terms and conditions of this
Agreement, at the Sub Effective Time (as defined in Section 1.8),
Acquisition Sub One shall be merged with and into Sub pursuant to the Sub
Merger and the separate corporate existence of Acquisition Sub One shall
thereupon cease. Sub shall be the surviving corporation in the Sub Merger
(sometimes hereinafter referred to as the "Sub Surviving Corporation") and
shall continue to be governed by the laws of the Commonwealth of
Pennsylvania, with all of Sub's rights, privileges, immunities, powers and
franchises unaffected by the Sub Merger except as set forth in Sections 3.1
and 3.2 hereof. The Sub Merger shall have the effects specified in the
Pennsylvania Business Corporation Law of 1988, as amended (the "PABCL").
1.2 Conversion of Securities. At the Sub Effective Time, by virtue
of the Sub Merger and without any action on the part of the holder of any
shares of capital stock of Sub or common stock of Acquisition Sub One:
(i) each share of common stock of Sub issued and outstanding
immediately before the Sub Effective Time ("Sub Shares") shall as of
the Sub Effective Time be converted into and become the right to
receive from Purchaser the Sub Share Conversion Price, as provided in
Section 1.3; provided, however, that Sub Shares shall not include any
shares of common stock of Sub which immediately before the Sub
Effective Time are owned directly or indirectly by Parent ("Parent-
Owned Sub Shares");
(ii) each option or warrant to purchase a share of common stock
of Sub that is outstanding as of the Sub Effective Time ("Sub
Options") shall as of the Sub Effective Time be converted into and
become the right to receive from Purchaser the applicable Sub Option
Conversion Price, if any, as provided in Section 1.4;
(iii) each share of common stock of Sub issued and held in the
treasury of Sub at the Sub Effective Time shall as of the Sub
Effective Time be cancelled and no such shares shall be converted into
rights to receive the Sub Share Conversion Price;
(iv) each Parent-Owned Sub Share shall remain issued,
outstanding and unchanged, which shares shall be the only capital
stock of Sub outstanding after the Sub Effective Time, and as of the
Sub Effective Time Sub shall be a wholly-owned subsidiary of XLSource,
Inc., an Arkansas corporation and indirect wholly-owned subsidiary of
Parent; and
(v) the shares of common stock of Acquisition Sub One issued and
outstanding at the Sub Effective Time shall be surrendered and
cancelled.
1.3 Sub Share Conversion Price. The "Sub Share Conversion Price"
shall be an amount equal to $20.00.
1.4 Sub Option Conversion Price. The "Sub Option Conversion Price"
means, in the case of any Sub Option, the excess, if any, of $20.00 over
the exercise price of each such Sub Option, which excess shall be payable
at such time or times, if any, as shall be determined pursuant to the terms
and conditions of the applicable plan and/or agreement pursuant to which
such Sub Option is governed.
1.5 Payment for Sub Shares and Sub Options. Prior to the Sub
Effective Time, Purchaser shall designate a bank or trust company
reasonably acceptable to Sub to act as Paying Agent in connection with the
Sub Merger ("Paying Agent") and to receive and disburse the cash to which
holders of Sub Shares or Sub Options become entitled pursuant to Section
1.2. At the Sub Effective Time, Purchaser will provide Paying Agent with
sufficient cash to allow the Sub Share Conversion Price and the Sub Option
Conversion Price to be paid to the holders of each Sub Share or Sub Option
then entitled to be so paid. Promptly after the Sub Effective Time, the
Sub Surviving Corporation shall cause to be mailed to each Person who was,
at the Sub Effective Time, a holder of record of Sub Shares or Sub Options
forms (in a form mutually agreed to by Purchaser and Sub) of letters of
transmittal, with instructions for use in effecting the surrender of
certificates that represented Sub Shares before the Sub Effective Time in
exchange for payment of the Sub Share Conversion Price or in connection
with the payment of the applicable Sub Option Conversion Price. Upon
surrender to Paying Agent of such certificates and proper submittal of the
related letter of transmittal (in connection with Sub Shares), or upon
proper submittal of the letter of transmittal (in connection with Sub
Options), the Sub Surviving Corporation shall promptly cause to be paid to
the Persons entitled thereto a check in the amount of the Sub Share
Conversion Price and/or Sub Option Conversion Price to which such Persons
are entitled, after giving effect to any required tax withholdings. No
interest will be paid or will accrue on the amount payable to any such
Person. If payment of any Sub Share Conversion Price is to be made to a
Person other than the registered holder of the certificate surrendered, it
shall be a condition of such payment that the certificate so surrendered
shall be properly endorsed or otherwise in proper form for transfer and
that the Person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a Person other than the
registered holder of the certificate surrendered or establish to the
satisfaction of the Sub Surviving Corporation or the Paying Agent that such
tax has been paid or is not applicable. The Sub Surviving Corporation
shall pay all charges and expenses, including those of the Paying Agent, in
connection with the exchange of cash for Sub Shares and Sub Options. In
the event any certificate representing Sub Shares shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such certificate to be lost, stolen or destroyed, the
Paying Agent will issue in exchange for such lost, stolen or destroyed
certificate the Sub Share Conversion Price payable in respect thereof;
provided, however, the Person to whom the Sub Share Conversion Price is
paid shall, as a condition precedent to the payment thereof, give the Sub
Surviving Corporation a bond in such sum as it may direct or otherwise
indemnify the Sub Surviving Corporation in a manner satisfactory to it
against any claim that may be made against the Sub Surviving Corporation
with respect to the certificate alleged to have been lost, stolen or
destroyed. Promptly following the first anniversary of the Sub Effective
Time, the Paying Agent shall deliver to the Sub Surviving Corporation all
cash held for payment for Sub Shares or Sub Options and all other documents
in its possession relating to the transactions described in this Agreement,
and the Paying Agent's duties shall terminate. Thereafter each holder of a
certificate representing Sub Shares, and each holder of a Sub Option, may
surrender such certificate and/or other appropriate documentation to the
Sub Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws) and receive in exchange therefor the Sub Share
Conversion Price or Sub Option Conversion Price in respect thereof, without
interest thereon.
1.6 Transfers After the Sub Effective Time. No transfers of Sub
Shares or Sub Options shall be made on the stock transfer or other
applicable books of Sub at or after the Sub Effective Time.
1.7 Sub Closing. The closing of the Sub Merger (the "Sub Closing")
shall take place at the offices of Pepper Hamilton LLP, 3000 Two Logan
Square, Philadelphia, PA 19103-2799 at 10:00 A.M. on the first business day
after the last of the conditions set forth in Article 7 hereof shall be
fulfilled or waived in accordance with this Agreement, or at such other
place and time and/or on such other date as Sub and Purchaser may agree;
provided that the Sub Closing and the Parent Closing shall occur on the
same day.
1.8 Filing of Sub Merger Documents; Sub Effective Time. In
connection with the Sub Closing, Sub and Acquisition Sub One will execute
and file, and Purchaser will cause Acquisition Sub One to execute and file,
Articles of Merger relating to the Sub Merger ("Sub Articles of Merger")
with the Secretary of State of Pennsylvania as provided in the PABCL. The
Sub Merger shall become effective at the time at which the Sub Articles of
Merger have been duly filed with the Secretary of State of Pennsylvania
(the "Sub Effective Time"), which shall occur immediately prior to the
Parent Effective Time.
1.9 Dissenters Rights. Notwithstanding any provision of this
Article I to the contrary, shares held of record by shareholders who shall
not have voted such shares in favor of the Sub Merger and who shall have
properly exercised rights to demand payment of the fair value of such
shares in accordance with the applicable provisions of the PABCL ("Sub
Dissenting Shares") shall not be converted into the right to receive the
Sub Share Conversion Price, but the holders thereof shall be entitled to
payment of the fair value of such shares in accordance with the applicable
provisions of the PABCL; provided, however, that (i) if such a holder fails
to file a notice of election to dissent in accordance with the PABCL, or
after having done so delivers an effective withdrawal of such notice or
fails to establish (if he is required to do so) his entitlement to
dissenters rights as provided in the PABCL, or (ii) if a court shall
determine that such holder is not entitled to receive payment for his
shares or such holder shall otherwise lose his dissenters rights, each Sub
Share held of record by such holder shall automatically be converted into
and represent only the right to receive the Sub Share Conversion Price,
upon the surrender of the certificate or certificates representing such Sub
Shares. Sub will give Purchaser prompt notice of any demands received by
Sub for payment of the fair value of such shares, and Purchaser shall have
the right to participate in all negotiations and proceedings with respect
to such demands, Sub will not, except with the prior written consent of
Purchaser, make any payment (except to the extent that any such payment is
made pursuant to a court order) with respect to, or settle or offer to
settle, any such demands.
1.10 PABCL. Section 1906 of the PABCL shall apply to the Sub
Merger. Dissenters rights shall be available to the holders of Sub Shares
as provided in Section 1.9.
ARTICLE II
The Parent Merger
-----------------
2.1 The Parent Merger. Subject to the terms and conditions of this
Agreement, at the Parent Effective Time (as defined in Section 2.8),
Acquisition Sub Two shall be merged with and into Parent pursuant to the
Parent Merger and the separate corporate existence of Acquisition Sub Two
shall thereupon cease. Parent shall be the surviving corporation in the
Parent Merger (sometimes hereinafter referred to as the "Parent Surviving
Corporation") and shall continue to be governed by the laws of the
Commonwealth of Pennsylvania, with all of Parent's rights, privileges,
immunities, powers and franchises unaffected by the Parent Merger except as
set forth in Sections 3.1 and 3.2 hereof. The Parent Merger shall have the
effects specified in the PABCL.
2.2 Conversion of Securities. At the Parent Effective Time, by
virtue of the Parent Merger and without any action on the part of the
holder of any shares of capital stock of Parent or common stock of
Acquisition Sub Two:
(i) each share of common stock of Parent (and related Right,
as defined in the Rights Agreement) issued and outstanding
immediately before the Parent Effective Time ("Parent Shares")
shall as of the Parent Effective Time be converted into and become
the right to receive from Purchaser the Parent Share Conversion
Price, as provided in Section 2.3;
(ii) each option or warrant to purchase a share of common stock
of Parent that is outstanding as of the Parent Effective Time ("Parent
Options") shall as of the Parent Effective Time be converted into and
become the right to receive from Purchaser the applicable Parent
Option Conversion Price, if any, as provided in Section 2.4;
(iii) each share of common stock of Parent issued and held in
the treasury of Parent at the Parent Effective Time shall as of the
Parent Effective Time be cancelled and no such shares shall be
converted into rights to receive the Parent Share Conversion Price;
and
(iv) the shares of common stock of Acquisition Sub Two issued
and outstanding at the Parent Effective Time shall be converted into
and become the number of shares of common stock of Parent issued and
outstanding at the Parent Effective Time, which shares shall be the
only capital stock of Parent outstanding after the Parent Effective
Time, and as of the Parent Effective Time Parent shall become a
wholly-owned subsidiary of Purchaser.
2.3 Parent Share Conversion Price. The "Parent Share Conversion
Price" shall be an amount equal to $7.60.
2.4 Parent Option Conversion Price. The "Parent Option Conversion
Price" means, in the case of any Parent Option, the excess, if any, of
$7.60 over the exercise price of each such Parent Option, or such other
amount, if any, and which excess or other amount shall be payable at such
time or times, if any, as shall be determined pursuant to the terms and
conditions of the applicable plan and/or agreement pursuant to which such
Parent Option is governed.
2.5 Payment for Parent Shares and Parent Options. The Paying Agent
shall receive and disburse the cash to which holders of Parent Shares or
Parent Options become entitled pursuant to Section 2.2. At the Parent
Effective Time, Purchaser will provide Paying Agent with sufficient cash to
allow the Parent Share Conversion Price and the Parent Option Conversion
Price to be paid to the holders of each Parent Share or Parent Option then
entitled to be so paid. Promptly after the Parent Effective Time, the
Parent Surviving Corporation shall cause to be mailed to each Person who
was, at the Parent Effective Time, a holder of record of Parent Shares or
Parent Options forms (in a form mutually agreed to by Purchaser and Parent)
of letters of transmittal, with instructions for use in effecting the
surrender of certificates that represented Parent Shares before the Parent
Effective Time in exchange for payment of the Parent Share Conversion Price
or in connection with the payment of the applicable Parent Option
Conversion Price. Upon surrender to Paying Agent of such certificates and
proper submittal of the related letter of transmittal (in connection with
Parent Shares), or upon proper submittal of the letter of transmittal (in
connection with Parent Options), the Parent Surviving Corporation shall
promptly cause to be paid to the Persons entitled thereto a check in the
amount of the Parent Share Conversion Price and/or Parent Option Conversion
Price to which such Persons are entitled, after giving effect to any
required tax withholdings. No interest will be paid or will accrue on the
amount payable to any such Person. If payment of any Parent Share
Conversion Price is to be made to a Person other than the registered holder
of the certificate surrendered, it shall be a condition of such payment
that the certificate so surrendered shall be properly endorsed or otherwise
in proper form for transfer and that the Person requesting such payment
shall pay any transfer or other taxes required by reason of the payment to
a Person other than the registered holder of the certificate surrendered or
establish to the satisfaction of the Parent Surviving Corporation or the
Paying Agent that such tax has been paid or is not applicable. The Parent
Surviving Corporation shall pay all charges and expenses, including those
of the Paying Agent, in connection with the exchange of cash for Parent
Shares and Parent Options. In the event any certificate representing
Parent Shares shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the Person claiming such certificate to be
lost, stolen or destroyed, the Paying Agent will issue in exchange for such
lost, stolen or destroyed certificate the Parent Share Conversion Price
payable in respect thereof; provided, however, the Person to whom the
Parent Share Conversion Price is paid shall, as a condition precedent to
the payment thereof, give the Parent Surviving Corporation a bond in such
sum as it may direct or otherwise indemnify the Parent Surviving
Corporation in a manner satisfactory to it against any claim that may be
made against the Parent Surviving Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed. Promptly
following the first anniversary of the Parent Effective Time, the Paying
Agent shall deliver to the Parent Surviving Corporation all cash held for
payment for Parent Shares or Parent Options and all other documents in its
possession relating to the transactions described in this Agreement, and
the Paying Agent's duties shall terminate. Thereafter each holder of a
certificate representing Parent Shares, and each holder of a Parent Option,
may surrender such certificate and/or other appropriate documentation to
the Parent Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws) and receive in exchange therefor the Parent Share
Conversion Price or Parent Option Conversion Price in respect thereof,
without interest thereon.
2.6 Transfers After the Effective Time. No transfers of Parent
Shares or Parent Options shall be made on the stock transfer or other
applicable books of Parent at or after the Parent Effective Time.
2.7 Parent Closing. The closing of the Parent Merger (the "Parent
Closing") shall take place at the offices of Pepper Hamilton LLP, 3000 Two
Logan Square, Philadelphia, PA 19103-2799 at 10:00 A.M. on the first
business day after the last of the conditions set forth in Article 7 hereof
shall be fulfilled or waived in accordance with this Agreement, or at such
other place and time and/or on such other date as Parent and Purchaser may
agree; provided that the Parent Closing and the Sub Closing shall occur on
the same day.
2.8 Filing of Parent Merger Documents; Parent Effective Time. In
connection with the Closing, Parent and Acquisition Sub Two will execute
and file, and Purchaser will cause Acquisition Sub Two to execute and file,
Articles of Merger relating to the Parent Merger ("Parent Articles of
Merger") with the Secretary of State of Pennsylvania as provided in the
PABCL. The Parent Merger shall become effective at the time at which the
Parent Articles of Merger have been duly filed with the Secretary of State
of Pennsylvania (the "Parent Effective Time"), which shall occur
immediately after the Sub Effective Time.
2.9 Dissenters Rights. Notwithstanding any provision of this
Article II to the contrary, and to the extent required under the applicable
provisions of the PABCL, Parent Shares held of record by shareholders who
shall not have voted such shares in favor of the Parent Merger and who
shall have properly exercised rights to demand payment of the fair value of
such shares in accordance with the applicable provisions of the PABCL
("Parent Dissenting Shares") shall not be converted into the right to
receive the Parent Share Conversion Price, but the holders thereof shall be
entitled to payment of the fair value of such shares in accordance with the
applicable provisions of the PABCL; provided, however, that (i) if such a
holder fails to file a notice of election to dissent in accordance with the
PABCL, or after having done so delivers an effective withdrawal of such
notice or fails to establish (if he is required to do so) his entitlement
to dissenters rights as provided in the PABCL, or (ii) if a court shall
determine that such holder is not entitled to receive payment for his
shares or such holder shall otherwise lose his dissenters rights, each
Parent Share held of record by such holder shall automatically be converted
into and represent only the right to receive the Parent Share Conversion
Price, upon the surrender of the certificate or certificates representing
such Parent Shares. Parent will give Purchaser prompt notice of any
demands received by Parent for payment of the fair value of such shares,
and Purchaser shall have the right to participate in all negotiations and
proceedings with respect to such demands, Parent will not, except with
the prior written consent of Purchaser, make any payment (except to the
extent that any such payment is made pursuant to a court order) with
respect to, or settle or offer to settle, any such demands.
ARTICLE III
Articles of Incorporation and By-Laws
of the Surviving Corporations
-----------------------------
3.1 Articles of Incorporation. The Articles of Incorporation of the
Sub Surviving Corporation shall, upon the Sub Effective Time, be and remain
unchanged until further amended in accordance with the terms thereof and
the PABCL, subject, however, to the provisions of Section 6.2(f)(i) hereof.
The Articles of Incorporation of the Parent Surviving Corporation shall,
upon the Parent Effective Time, be and remain unchanged until
further amended in accordance with the terms thereof and the PABCL,
subject, however, to the provisions of Section 6.2(f)(i) hereof.
3.2 By-Laws. The By-Laws of the Sub Surviving Corporation in effect
at the Sub Effective Time shall be and remain unchanged until duly amended
in accordance with the terms thereof and the PABCL, subject, however, to
the provisions of Section 6.2(f)(i) hereof. The By-Laws of Parent
Surviving Corporation in effect at the Parent Effective Time shall be and
remain unchanged until duly amended in accordance with the terms thereof
and the PABCL, subject, however, to the provisions of Section 6.2(f)(i)
hereof.
ARTICLE IV
Officers and Directors
----------------------
4.1 Sub. At the Sub Effective Time, the directors of Acquisition
Sub One shall be all the directors of the Sub Surviving Corporation, each
of such directors to hold office, subject to the applicable provisions of
the Articles of Incorporation and By-Laws of the Sub Surviving Corporation,
until their respective successors shall be duly elected or appointed and
qualified. At the Sub Effective Time, the officers of Acquisition Sub One
immediately prior to the Sub Effective Time shall, subject to the
applicable provisions of the Articles of Incorporation and By-Laws of the
Sub Surviving Corporation, be the officers of the Sub Surviving Corporation
until their respective successors shall be duly elected or appointed and
qualified.
4.2 Parent. At the Parent Effective Time, the directors of
Acquisition Sub Two shall be all the directors of the Parent Surviving
Corporation, each of such directors to hold office, subject to the
applicable provisions of the Articles of Incorporation and By-Laws of the
Parent Surviving Corporation, until their respective successors shall be
duly elected or appointed and qualified. At the Parent Effective Time, the
officers of Acquisition Sub Two immediately prior to the Parent Effective
Time shall, subject to the applicable provisions of the Articles of
Incorporation and By-Laws of the Parent Surviving Corporation, be the
officers of the Parent Surviving Corporation until their respective
successors shall be duly elected or appointed and qualified.
ARTICLE V
Representations and Warranties
------------------------------
5.1 Representations and Warranties of Parent and Sub. Parent and
Sub hereby jointly and severally (but subject to Section 5.1(bb)) represent
and warrant to Purchaser that, except as set forth in the disclosure letter
of even date herewith delivered by Parent to Purchaser in conjunction with
execution of this Agreement (the "Disclosure Letter"):
(a) Organization, Qualification and Corporate Power. Each of
Parent and its subsidiaries (direct or indirect) (such subsidiaries,
including Sub, being collectively referred to as "Parent Subsidiaries") is
a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation, and is duly authorized to
conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of
such qualification would not result in a Material Adverse Change. Each of
the Parent and the Parent Subsidiaries has full corporate power and
corporate authority, and all foreign, federal, state and local governmental
permits, licenses and consents (collectively, "Permits"), to carry on the
businesses in which it is engaged and to own and use the properties owned
and used by it, except where the failure to have Permits would not result
in a Material Adverse Change. The Disclosure Letter contains an accurate
list of the Parent Subsidiaries and the Sub Subsidiaries, their
jurisdiction, date of incorporation and date of acquisition directly or
indirectly by Parent, and their respective material Permits as well as
material Permits the applicable entity does not have and which Parent or
Sub has knowledge that it is required to have.
(b) Capitalization. (I) The authorized capital stock of
Parent consists of 100,000,000 shares of common stock, par value $.01 per
share (the "Parent Common Stock") and 15,000,000 shares of preferred stock,
par value $50.00 per share (the "Parent Preferred Stock"). As of March 3,
1998, (i) 41,798,091 shares of Parent Common Stock are issued and
outstanding, and (ii) 7,006,540 shares of Parent Common Stock have been
reserved for issuance upon the exercise of outstanding options and
warrants. No shares of Parent Preferred Stock are issued and outstanding,
and 200,000 shares of Series A Junior Participating Preferred Stock have
been reserved for issuance upon exercise of the outstanding Rights (as
defined in the Rights Agreement), none of which is or will be outstanding
at or before the Parent Effective Time. All issued and outstanding shares
of Parent's capital stock and all issued and outstanding shares of each
Parent Subsidiary's capital stock, have been validly issued and are fully
paid and nonassessable, and are not subject to, nor were they issued in
violation of, any preemptive rights. Except as detailed in the Disclosure
Letter, neither Parent nor any of the Parent Subsidiaries has any
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other agreements relating to
the acquisition of capital stock, or any cash settlement option, phantom
stock, stock appreciation right or similar instrument (the "Stock Rights")
relating to any capital stock of Parent or any Parent Subsidiary.
(II) The authorized capital stock of Sub consists of
100,000,000 shares of common stock, par value $.01 per share (the "Sub
Common Stock") and 10,000,000 shares of preferred stock, par value $.01 per
shares (the "Sub Preferred Stock"). As of March 3, 1998, (i) 16,684,100
shares of Sub Common Stock are issued and outstanding, (ii) 13,348,280
shares of Sub Common Stock are owned by XLSource, Inc., an indirect wholly-
owned subsidiary of Parent, and (iii) 2,791,645 shares of Sub Common Stock
have been reserved for issuance upon the exercise of outstanding options
and warrants. No shares of Sub Preferred Stock are issued and outstanding.
All issued and outstanding shares of Sub's capital stock have been validly
issued and are fully paid and nonassessable, are entitled to full voting
rights as to the election of directors and other matters, and are not
subject to, nor were they issued in violation of, any preemptive rights.
Except as detailed in the Disclosure Letter, there exist no Stock Rights
relating to any capital stock of Sub. No stock of Sub or of any Sub
Subsidiary owned by Parent or any Parent Subsidiary is subject to any put
option, redemption agreement (including a right to cause redemption of
stock) or any other instrument that provides for the right to transfer such
stock. Disregarding the execution of this Agreement, the Parent Merger and
the Sub Merger, (x) neither the shares of Sub capital stock directly or
indirectly owned by Parent nor the holders of any such shares are subject
to any limitations, pursuant to any provision of Chapter 25 of the PABCL,
of voting rights afforded generally to holders of shares of such class or
series of capital stock, and (y) no transaction has occurred or state of
facts exists which has triggered dissenters rights or any other right on
the part of a shareholder under the PABCL to receive payment in respect of
such shares. Since December 1, 1997, neither Parent nor any Parent
Subsidiary has purchased or otherwise acquired any shares of common stock
of Sub for a per share price in excess of the Sub Share Conversion Price.
(III) The Disclosure Letter describes the equity
capitalization of each Parent Subsidiary, including the authorized capital
stock, the issued and outstanding capital stock, and the ownership thereof.
With the exception of Sub and the Sub Subsidiaries, Parent is directly or
indirectly the owner of all shares of capital stock of each Parent
Subsidiary. All Sub Subsidiaries are 100% owned by Sub.
(c) Authorization of Transaction. Each of Parent and Sub has
the requisite corporate power and authority, and has taken all required
action necessary, to properly execute and deliver this Agreement and to
perform its obligations hereunder, and this Agreement constitutes the valid
and legally binding obligation of each of Parent and Sub, enforceable in
accordance with its terms and conditions, except as limited by (i)
applicable bankruptcy, insolvency reorganization, moratorium and other laws
of general application affecting enforcement of creditors' rights generally
and (ii) general principles of equity, regardless of whether asserted in a
proceeding in equity or at law; provided, however, that Parent cannot
consummate the Parent Merger and Sub cannot consummate the Sub Merger
unless and except upon receipt of the approval of the holders of Parent
Common Stock and Sub Common Stock to the extent required by the PABCL.
(d) Noncontravention. Neither the execution and delivery of
this Agreement, nor the consummation by Parent or Sub of the transactions
contemplated hereby, will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree or other restriction
of any government, governmental agency or court to which Parent or any of
the Parent Subsidiaries is subject or any provision of the charter or
bylaws of Parent or any of the Parent Subsidiaries, or (ii) conflict with,
result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify or cancel or require any notice under any contract required to be
listed on the Disclosure Letter or under any other material agreement,
contract, lease, license, instrument or other arrangement to which Parent
or any of the Parent Subsidiaries is a party or by which any of them is
bound or to which any of their respective assets is subject (or result in
the imposition of any lien, encumbrance or other security interest (a
"Security Interest") upon any of their respective assets), except in the
case of clause (ii) as disclosed in the Disclosure Letter. Other than
filings required in connection with the provisions of the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "HSR Act"), the PABCL
and the Exchange Act, neither Parent nor any of the Parent Subsidiaries
needs to give any notice to, make any filing with or obtain any
authorization, consent or approval of any government or government agency
in order for the Parties to consummate the transactions contemplated by
this Agreement.
(e) Filings with the SEC. Since January 1, 1992, Parent and
Sub have made all filings with the SEC that either of them has been
required to make under the Securities Act and the Exchange Act
(collectively, the "Public Reports"). Each of the Public Reports complied
with the requirements of the Securities Act and the Exchange Act in all
material respects and none of the Public Reports, as of their respective
dates, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(f) Financial Statements. (I) Parent has filed an Annual
Report on Form 10-K, as amended by its Form 10-K/A (the "Parent 10-K"), for
the fiscal year ended on February 1, 1997 and a Quarterly Report on Form
10-Q (the "Parent 10-Q") for the fiscal quarter ended November 1, 1997 (the
"Parent Most Recent Quarter End"). The financial statements included in
the Parent 10-K and the Parent 10-Q (including the related notes and
schedules) have been prepared from the books and records of Parent and the
Parent Subsidiaries in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
covered thereby, and present fairly in all material respects the financial
condition of Parent and the Parent Subsidiaries as of the indicated dates
and the results of operations and cash flows of Parent and the Parent
Subsidiaries for the indicated periods. In the opinion of Parent's
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair statement of operating results
for the interim periods presented have been made.
(II) Sub has filed an Annual Report on Form 10-K (the "Sub
10-K") for the fiscal year ended on December 31, 1996 and a Quarterly
Report on Form 10-Q, as amended by its Form 10-Q/A (the "Sub 10-Q") for the
fiscal quarter ended September 30, 1997 (the "Sub Most Recent Quarter
End"). The financial statements included in the Sub 10-K and the Sub 10-Q
(including the related notes and schedules) have been prepared from the
books and records of Sub and the Sub Subsidiaries in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby, and
present fairly in all material respects the financial condition of Sub and
the Sub Subsidiaries as of the indicated dates and the results of
operations and cash flows of Sub and the Sub Subsidiaries for the indicated
periods. In the opinion of Parent's and Sub's management, all adjustments
(consisting only of normal recurring adjustments) which are necessary for a
fair statement of operating results for the interim periods presented have
been made.
(g) Events Subsequent to Most Recent Quarter End. (I) Since
the Parent Most Recent Quarter End, there has not been any Material Adverse
Change or any development or combination of developments relating to Parent
or any of the Parent Subsidiaries of which Parent has knowledge and which
would result in a Material Adverse Change.
(II) Since the Sub Most Recent Quarter End, there has not
been any Material Adverse Change or any development or combination of
developments relating to Sub or any of the Sub Subsidiaries of which Parent
or Sub has knowledge and which would result in a Material Adverse Change.
(h) Compliance. Parent and the Parent Subsidiaries are in
compliance with all applicable laws, rules and regulations, except where
the failure to be in compliance would not result in a Material Adverse
Change.
(i) Litigation and Liabilities. There are (i) no actions,
suits or proceedings pending or, to the knowledge of Parent or Sub,
threatened against Parent or any of the Parent Subsidiaries which (x) if
adversely determined against Parent or any of the Parent Subsidiaries could
reasonably be expected to result in a Material Adverse Change, or (y) could
reasonably be expected to materially impair or delay the Parties' ability
to consummate the transactions contemplated by this Agreement, and (ii) no
obligations or liabilities of Parent or any of the Parent Subsidiaries
known to Parent or Sub and not disclosed in the Disclosure Letter or
reflected in the financial statements or related notes included in the
Parent 10-K, the Parent 10-Q, the Sub 10-K or the Sub 10-Q which could
reasonably be expected to result in a Material Adverse Change. The
Disclosure Letter lists all pending and, to the knowledge of Parent or Sub,
threatened EEOC and similar investigations, actions, suits or proceedings
against Parent or any Parent Subsidiary (regardless of the materiality
thereof) and copies of the pleadings for each such pending matter have been
made available to Purchaser by Parent.
(j) Taxes. (I) Each of Parent and the Parent Subsidiaries has
duly filed all federal, state, local and foreign tax returns required to be
filed by it and has duly paid, caused to be paid or made adequate provision
for the payment of all Taxes (as hereinafter defined) required to be paid
in respect of the periods covered by such returns. No claims for Taxes
have been asserted against Parent or any of the Parent Subsidiaries, and no
deficiency for any Taxes has been proposed, asserted or assessed against
Parent or any of the Parent Subsidiaries, in either case which has not been
resolved or paid in full. To Parent's knowledge, no Tax return for any
taxable period of Parent or any Parent Subsidiary is under examination by
any taxing authority, Parent has not received written notice of any pending
audit by any taxing authority against the Parent or any of the Parent
Subsidiaries, and there are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any Tax return for any
taxable period of Parent or any of the Parent Subsidiaries. "Taxes" means
all federal, state, territorial, local, foreign and other net income, gross
income, gross receipts, sales, use, value added, ad valorem, transfer,
franchise, profits, license, lease, service, use, withholding, payroll,
employment, unemployment insurance, workers compensation, social security,
excise, severance, stamp, business license, occupation, premium, property,
environmental, windfall profits, customs, duties, alternative minimum,
estimated or other taxes, fees, premiums, assessments or charges of any
kind whatever imposed or collected by any governmental entity or political
subdivision thereof.
(II) Each of Sub and the Sub Subsidiaries has duly filed all
federal, state, local and foreign tax returns required to be filed by it
and has duly paid, caused to be paid or made adequate provision for the
payment of all Taxes required to be paid in respect of the periods covered
by such returns. No claims for Taxes have been asserted against Sub or any
of the Sub Subsidiaries, and no deficiency for any Taxes has been proposed,
asserted or assessed against Sub or any of the Sub Subsidiaries, in either
case which has not been resolved or paid in full. To Parent's and Sub's
knowledge, no Tax return for any taxable period of Sub is under examination
by any taxing authority, Sub has not received written notice of any pending
audit by any taxing authority against the Sub or any of the Sub
Subsidiaries, and there are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any Tax return for any
taxable period of Sub or any of the Sub Subsidiaries.
(III) Parent and each Parent Subsidiary has been a continuous
member of the consolidated group of companies of which Parent is the common
parent for Federal income tax purposes since the time such Subsidiary first
became affiliated with the Parent's consolidated group.
(k) Brokers' and Other Fees. Except for the fees and expenses
of Lazard Freres & Co. LLC ("Lazard") for Parent and NationsBanc Montgomery
Securities LLC ("Montgomery") for Sub, none of Parent or the Parent
Subsidiaries has any liability or obligation to pay any fees or commissions
to any investment adviser, broker, finder or agent with respect to the
transactions contemplated by this Agreement.
(l) Fairness Opinions. Montgomery has delivered to the
Independent Committee of the Board of Directors of Sub, and not withdrawn,
its opinion that the consideration being paid to the holders of Sub Shares
(other than shares held directly or indirectly by Parent) pursuant to
Section 1.2 hereof is fair to such holders, as of the date of such opinion,
from a financial point of view (the "Sub Fairness Opinion"), and a true and
complete copy thereof has been furnished to Purchaser. Lazard has
delivered to the Board of Directors of Parent, and not withdrawn, its
opinion that the consideration being paid pursuant to Section 2.2 hereof is
fair to the shareholders of Parent, as of the date of such opinion, from a
financial point of view (the "Parent Fairness Opinion"), and a true and
complete copy thereof has been furnished to Purchaser.
(m) Rights Plan. Parent has amended the Rights Agreement to
provide that the Purchaser and all direct and indirect wholly-owned
subsidiaries thereof and their respective Associates and Affiliates (as
such terms are defined in the Rights Agreement), for purposes of entering
into and consummating the transactions contemplated by this Agreement, are
considered an "Exempt Person", as defined in the Rights Agreement, until
such time as this Agreement shall terminate, if at all. Parent has taken
all necessary action so that none of the execution and delivery of this
Agreement or the consummation of the Sub Merger or Parent Merger
contemplated hereby will (i) cause the Rights (as such term is defined in
the Rights Agreement) issued pursuant to the Rights Agreement to become
exercisable, (ii) cause any Person to become an Acquiring Person (as such
term is defined in the Rights Agreement) or (iii) give rise to a
Distribution Date (as such term is defined in the Rights Agreement).
(n) Management Letters. There is no management letter of
outside auditors for the year ended February 1, 1997 (in the case of
Parent) or for the year ended December 31, 1996 (in the case of Sub).
(o) Environmental Matters. The conduct or operation of Parent
and Parent Subsidiaries and any condition of property presently or
previously owned, leased or operated by any of them violates or violated no
Environmental Laws in any material respect and no condition has existed or
event has occurred with respect to any of them or any such property that,
with notice or the passage of time, or both, is reasonably likely to result
in any material liability under Environmental Laws. Neither Parent nor any
of the Parent Subsidiaries has received any notice from any person or
entity that Parent or any Parent Subsidiary or the operation or condition
of any property ever owned, leased or operated by any of them are or were
in violation of or otherwise are alleged to have liability under any
Environmental Law. "Environmental Laws" means all applicable local, state
and federal environmental, health and safety laws and regulations,
including, without limitation, the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act,
the Clean Water Act, the Federal Clean Air Act, and the Occupational Safety
and Health Act, each as amended, regulations promulgated thereunder, and
state counterparts.
(p) Other Interests. Neither Parent nor any Parent Subsidiary
owns any shares of capital stock in any corporation (other than in the
Parent Subsidiaries as disclosed herein) or holds any debt or equity
interest in any joint venture, partnership or other entity.
(q) Intellectual Property. (I) Parent and each Parent
Subsidiary owns, or is licensed or otherwise possesses legally enforceable
rights to use, all material patents, trademarks, trade names, service
marks, copyrights, technology, know-how, computer software programs (which
shall exclude off-the-shelf software programs) that are used in the
business of Parent and each of the Parent Subsidiaries as currently
conducted (the "Intellectual Property").
(II) No claim against Parent or any Parent Subsidiary has
been asserted in writing or, to Parent's or Sub's knowledge, orally by a
third party respecting or related to the Intellectual Property or related
to the alleged infringement by Parent or any Parent Subsidiary of the
intellectual property of others and, in either case, Parent and the Parent
Subsidiaries do not know of any reasonable grounds for any such claim.
(III) To the knowledge of Parent and Sub, there is no
material unauthorized use, infringement or misappropriation of any
Intellectual Property by any third party, including any employee or former
employee of Parent or any Parent Subsidiary.
(r) Employment Matters. (I) The Disclosure Letter identifies
all stock options, restricted stock rights and other Stock Rights
outstanding under Parent's 1995 Long-Term Incentive Plan and Parent's Non-
Qualified Stock Option Plan for employees and directors and Sub's 1996
Long-Term Incentive Plan (the "Sub Plan") or any other agreement, plan or
arrangement of Parent or any Parent Subsidiary. Parent has provided
Purchaser with copies of all such agreements, plans and arrangements,
except for agreements utilizing a standard form of agreement, in which case
Parent has provided Purchaser with a copy of such standard form.
(II) Except as described in the Disclosure Letter, neither
Parent nor any Parent Subsidiary (i) is a party or subject to any contract
of employment with any person which is not terminable at will without
penalty (other than standard severance policies offered to all employees
generally), or which would entitle any person to any payment (severance or
otherwise) as a result of the Merger, or any collective bargaining
agreement, or (ii) maintains or contributes to any profit sharing, pension,
retirement, thrift, savings, incentive compensation, deferred compensation,
bonus, stock option, stock purchase, restricted stock, stock appreciation
right, performance share, performance unit, severance, salary continuation,
holiday, vacation, disability, insurance, medical or other employee
benefit, incentive or welfare plan, policy, material contract or material
arrangement (collectively, the "Employee Benefit Plans").
(III) During the last three years there have been no actual
or threatened strikes or labor stoppages involving any employees of Parent
or any Parent Subsidiary, and neither Parent nor any Parent Subsidiary is
aware of any organizing activity actively seeking to certify a collective
bargaining unit or representative for any employees.
(IV) All retirement and employee benefit or welfare plans of
Parent or any Parent Subsidiary have been maintained and operated in
accordance with their terms in all material respects, and all such plans
which are subject to the Employee Retirement Income Security Act of 1974
("ERISA") or the Internal Revenue Code ("IRC") have been maintained and
operated in material compliance with all applicable provisions of ERISA and
the IRC and the regulations thereunder and are not subject to any
accumulated funding deficiency within the meaning of ERISA and the
regulations thereunder or to any outstanding liability to the Pension
Benefit Guaranty Corporation (other than for routine premium payments).
All such plans are identified in the Disclosure Letter. No "prohibited
transaction" has occurred with respect to any such plan, nor has any
"reportable event" occurred in respect thereof, as such terms are defined
in ERISA and the regulations thereunder, and no such plan is a
"Multiemployer Plan" or a "Multiple Employer Plan", as such terms are
defined in ERISA and the regulations thereunder.
(s) Credit Support Arrangements. Neither the Parent nor any
Parent Subsidiary has issued any currently existing guarantee or credit
support or has obtained any currently existing letter of credit or bond
with respect to, or has directly or indirectly made any currently existing
promise, agreement or undertaking to fund, support, guarantee or otherwise
backstop any obligation or liability, contingent or otherwise, of any
person or entity other than Parent or a Parent Subsidiary.
(t) Changes. Since November 1, 1997 Parent and each Parent
Subsidiary has been operated only in the ordinary course of business and
there has not been any:
(i) Material Adverse Change;
(ii) casualty loss, whether or not covered by insurance,
involving in any instance an amount in excess of $50,000;
(iii) obligation or liability, contingent or otherwise,
incurred by Parent or any Parent Subsidiary other than obligations and
liabilities incurred in the ordinary course of business and consistent with
past practice, or loss of a customer otherwise required to be listed on the
Disclosure Letter pursuant to Section 5.1(v)(II);
(iv) payment, discharge or settlement of any claim against
or obligation or liability of Parent or any Parent Subsidiary except in the
ordinary course of business and consistent with past practice;
(v) capital expenditures or commitment to make any
capital expenditure by the Parent or any Parent Subsidiary not included in
Parent's or Sub's capital budget as set forth in the Disclosure Letter;
(vi) issuance, sale, transfer or pledge by Parent or any
Parent Subsidiary of any capital stock of Parent or any Parent Subsidiary;
(vii) sale, lease, transfer, pledge, mortgage or
encumbrance by Parent or any Parent Subsidiary of any capital assets in an
aggregate amount exceeding $100,000;
(viii) write-down or write off of any tangible or
intangible assets in an aggregate amount exceeding $100,000 except with
respect to accounts receivable and inventory in the ordinary course of
business and consistent with past practices; or
(ix) event which, if this Agreement were in effect, would
have required the consent of Purchaser pursuant to Section 6.1(a) (other
than (viii), (xiii) or (xiv) of Section 6.1(a)) and with respect to which
such consent was not obtained.
(u) Assets and Property. Parent and each Parent Subsidiary has
good and marketable title to all the assets it purports to own, free and
clear of all liens, claims and encumbrances, and valid leasehold interests
in all assets it purports to lease. Neither Parent nor any Parent
Subsidiary owns any real property.
(v) Contracts. (I) The Disclosure Letter lists all agreements
and arrangements pursuant to which Parent or any Parent Subsidiary has any
rights, obligations or liabilities with respect to (i) borrowed money, (ii)
real property leases, (iii) royalty agreements, (iv) joint venture or
product development agreements, (v) indemnification agreements, (vi)
limitations or restrictions on the use of assets it may own, the businesses
it may conduct, the persons or entities with whom it may do business or
whom it may hire or retain, or the locations in which it may own assets or
conduct business, or (vii) the performance of intercompany services or
other arrangements between or among Parent and any of the Parent
Subsidiaries.
(II) The Disclosure Letter lists all contracts and
arrangements to which Parent or any of the Parent Subsidiaries is a party
with vendors or customers that involve payments for services in excess of,
for any vendor or customer, $250,000 in the last fiscal year.
(III) Neither Parent or any Parent Subsidiary nor, to the
knowledge of Parent or Sub, any other party thereto is in breach or default
under any contract, agreement or instrument where the effect of such breach
or default would, singly or in the aggregate with breaches and defaults
under other contracts, agreements or instruments, result in a Material
Adverse Change.
(IV) Parent has provided Purchaser with a complete and
correct copy of each contract, agreement and instrument disclosed in the
Disclosure Letter (in the case of customer contracts, to the extent
available to Parent or Sub), and all such contracts, agreements and
instruments are in full force and effect, and are valid, binding and
enforceable in accordance with their terms subject, as to enforcement, to
laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(w) Insurance. The Disclosure Letter lists all insurance
policies insuring Parent or any Parent Subsidiary or any of their
respective assets or operations. All such policies are and will be in full
force and effect through the Parent Effective Time except to the extent
such policies expire and cannot be renewed on a commercially reasonable
basis. Except as disclosed in the Disclosure Letter there are no pending
or threatened disputes or communications with or from any insurance carrier
denying or disputing any claim or coverage or regarding cancellation or
nonrenewal of any such policy.
(x) Related Party Transactions. Except as described in the
Disclosure Letter, no executive officer of Parent or any Parent Subsidiary,
nor any entity in which any of the foregoing has a 1% or more equity
interest is a party to any contract, agreement or other financial or
business arrangement with Parent or any Parent Subsidiary.
(y) Reserves etc. (I) Parent has previously furnished to
Purchaser a list of (i) all reserves maintained on the unaudited books and
records of Parent or any Parent Subsidiary as of January 31, 1998, (ii)
each item in respect of which such reserves are maintained, and (iii) the
amount of reserves maintained for each such item. Parent management
believes no additional material reserves are required under GAAP.
(II) Neither Parent nor any Parent Subsidiary has any
liability in respect of the Novaquest or Pacific On Line notes receivable
totalling approximately $5.9 million as of May 1, 1997 that have been sold
to Ingram Micro.
(III) The reserves maintained on the unaudited books and
records of Parent and the Parent Subsidiaries respecting the sale
transaction with GE Capital are sufficient to satisfy any claims which
might reasonably be expected to arise out of either of those transactions.
(z) Board Action. The Boards of Directors of Parent and Sub
have duly and validly approved and taken all corporate action required to
be taken by the Boards of Directors for the execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement. The Boards of Directors of Parent and Sub have determined that
it is advisable and in the best interest of their respective stockholders
for the Parent Merger and the Sub Merger to occur upon the terms and
subject to the conditions of this Agreement and the Parent's Board of
Directors has resolved to recommend that Parent's stockholders approve and
adopt the Parent Merger and Sub's Board of Directors and Independent
Committee thereof have resolved to recommend that Sub's stockholders
approve and adopt the Sub Merger. The Board of Directors of Sub has
determined that the shareholders of Sub shall be entitled to dissenters
rights under Subchapter D of Chapter 15 of the PABCL in connection with
the Sub Merger in lieu of providing for a statutory class vote pursuant to
Section 1906(b) of the PABCL. The Board of Directors of Sub and the
Independent Committee thereof have approved an amendment to Sub's Articles
of Incorporation to provide that Subchapter E of Chapter 25 of the PABCL
shall not be applicable to Sub.
(aa) Expenses. Parent and Sub have provided to Purchaser a good
faith estimate and description of the expenses which either of them has
incurred or which either of them expects to incur in connection with the
transactions contemplated by this Agreement.
(bb) Effect of Certain Representations and Warranties. (i)
Insofar as any of the foregoing representations and warranties are
inaccurate with respect to or as a result of circumstances involving Sub,
and if Parent did not have knowledge of such inaccuracy, Parent will have
no liability for damages to Purchaser or Acquisition Sub One or Two for
breach of such representation and warranty; provided, however, that this
subparagraph shall have no effect on whether the condition set forth in
Section 7.2(b) has been satisfied, or on any right of Purchaser to
terminate this Agreement under Section 8.3, or on any obligation of Parent
and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b).
(ii) Insofar as any of the foregoing representations and
warranties are inaccurate with respect to or as a result of circumstances
involving Parent or any Parent Subsidiary (other than Sub or any Sub
Subsidiary), and if Sub did not have knowledge of such inaccuracy, Sub will
have no liability for damages to Purchaser or Acquisition Sub One or Two
for breach of such representation and warranty; provided, however, that
this subparagraph shall have no effect on whether the condition set forth
in Section 7.2(b) has been satisfied, or on any right of Purchaser to
terminate this Agreement under Section 8.3, or on any obligation of Parent
and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b).
5.2 Representations and Warranties of Purchaser, Acquisition Sub One
and Acquisition Sub Two. Purchaser, Acquisition Sub One and Acquisition
Sub Two jointly and severally represent and warrant to Parent and Sub that:
(a) Corporate Organization. Each of Purchaser, Acquisition Sub
One and Acquisition Sub Two is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each of Acquisition Sub One and Acquisition Sub Two is a
direct, wholly-owned subsidiary of Purchaser and was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement.
Except for obligations or liabilities incurred in connection with its
incorporation or other agreements or arrangements contemplated by this
Agreement, neither Acquisition Sub One nor Acquisition Sub Two has and will
not have incurred, directly or indirectly, through any subsidiary or
affiliate, any obligations or liabilities or engaged in any business
activities of any type or kind whatsoever or entered into any agreements or
arrangements with any Person.
(b) Corporate Authority. Purchaser, Acquisition Sub One and
Acquisition Sub Two each has the requisite corporate power and authority,
and has taken all required action necessary, to properly execute and
deliver this Agreement and to perform its obligations hereunder, and this
Agreement constitutes the valid and legally binding obligation of each of
Purchaser, Acquisition Sub One and Acquisition Sub Two, enforceable in
accordance with its terms and conditions, except as limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors' rights
generally and (ii) general principles of equity, regardless of whether
asserted in a proceeding in equity or at law.
(c) Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation by Purchaser, Acquisition Sub One
or Acquisition Sub Two of the transactions contemplated hereby, will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree or other restriction of any government, governmental agency
or court to which Purchaser, Acquisition Sub One or Acquisition Sub Two or
any of their respective subsidiaries is subject or any provision of the
charter or bylaws of the Purchaser, Acquisition Sub One or Acquisition Sub
Two or any of their respective subsidiaries, or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel or
require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which Purchaser, Acquisition Sub One or
Acquisition Sub Two or any of their respective subsidiaries is a party or
by which any of them is bound or to which any of their respective assets is
subject, and which would have a material adverse effect on the ability of
the Parties to consummate the transactions contemplated by this Agreement.
Other than filings required in connection with the provisions of the HSR
Act, the PABCL and the Exchange Act, neither Purchaser nor Acquisition Sub
One nor Acquisition Sub Two needs to give any notice to, make any filing
with or obtain any authorization, consent or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
(d) Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the executive officers of Purchaser,
Acquisition Sub One or Acquisition Sub Two, threatened against Purchaser,
Acquisition Sub One or Acquisition Sub Two which if adversely determined
against Purchaser, Acquisition Sub One or Acquisition Sub Two would
materially impair or delay the Parties' ability to consummate the
transactions contemplated by this Agreement.
(e) Funds. Purchaser has all of the funds in its control and
possession required in order to consummate the Parent Merger and the Sub
Merger and to pay all fees and expenses as contemplated by this Agreement
(the "Payment Funds").
(f) Brokers' and Other Fees. Neither Parent nor any Parent
Subsidiary has or will have any liability or obligation to pay any fees or
commissions to any investment advisor, broker, finder or agent engaged by
Purchaser, Acquisition Sub One or Acquisition Sub Two with respect to the
transactions contemplated by this Agreement. Any such fees or commissions
will be paid by Purchaser.
(g) Proxy Statement. None of the information supplied in
writing by Purchaser or any subsidiary of Purchaser specifically for
inclusion in the Proxy Statements (as defined in Section 6.1(c)), including
all amendments and supplements thereto, shall, in the case of the Proxy
Statements, at the date thereof and at the time of the meetings of
shareholders to vote on the matters covered thereby, contain any untrue
statement of a material fact, or omit a state material fact required to be
stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not misleading.
ARTICLE VI
Covenants
---------
6.1 Covenants of the Parent and Sub. Parent and Sub jointly and
severally (but subject to Section 6.4) covenant and agree that, except as
otherwise required by this Agreement:
(a) Interim Operations of Parent and Sub. From the date hereof
and continuing until the earlier of (i) the termination of this Agreement
or (ii) the Sub Effective Time (in the case of Sub) or (iii) the Parent
Effective Time (in the case of Parent), the business of Parent and Sub and
their respective subsidiaries, as applicable, shall be conducted only in
the ordinary and usual course and, to the extent consistent therewith,
Parent and Sub each shall use all commercially reasonable efforts to
preserve its business organization intact and maintain its existing
relations with customers, suppliers, employees and business associates.
Without limiting the generality of the foregoing from the date hereof and
continuing until the earlier of (i) the termination of this Agreement or
(ii) the Sub Effective Time (in the case of Sub) or (iii) the Parent
Effective Time (in the case of Parent), Parent and Sub will not with
respect to themselves or any Parent Subsidiary without the prior written
consent of Purchaser (or except as expressly permitted by the Disclosure
Letter or as required by this Agreement) do or commit to do any of the
following:
(i) authorize or effect any change in its charter or bylaws;
(ii) grant, amend or modify any Stock Rights or issue, sell
or otherwise dispose of any of its capital stock (except, in the case of
Parent, upon the exercise of Stock Rights outstanding as of the date of
this Agreement; it being understood, however, that Sub shall not issue any
capital stock, whether or not upon the exercise of Stock Rights);
(iii) declare, set aside or pay any dividend or distribution
with respect to its capital stock (whether in cash or in kind), or redeem,
repurchase or otherwise acquire any of its capital stock or any Stock
Rights;
(iv) issue any note, bond or other debt security or create,
incur, assume or guarantee any indebtedness for borrowed money or
capitalized lease obligation other than borrowings and reborrowings under
existing credit facilities to fund current obligations in the ordinary
course of business;
(v) impose or allow to be imposed any Security Interest upon
any of its assets except pursuant to after-acquired property clauses in
existing security arrangements disclosed in the Disclosure Letter or
purchase money security interests on inventory financed in the ordinary
course of business;
(vi) make any expenditure for a capital asset or lease any
real property except in accordance with the Parent or Sub capital budget as
disclosed in the Disclosure Letter;
(vii) implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by
generally accepted accounting principles and provided that same is promptly
disclosed to Purchaser;
(viii) (I) enter into or amend or renew any written
employment, consulting, severance, "golden parachute" or similar agreement
or arrangement with any director, officer or employee of Parent or of a
Parent Subsidiary, or (II) grant any salary or wage increase, or (III)
increase any employee benefit (including incentive or bonus payments),
except in the case of "(II)" for normal individual increases in
compensation to employees (other than officers and directors of Parent or a
Parent Subsidiary) in the ordinary course of business consistent with past
practice;
(ix) enter into, establish, adopt or amend (except as may be
required by applicable law) any pension, retirement, stock option, stock
purchase, savings, profit sharing, deferred compensation, consulting,
bonus, group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, in respect of any director, officer or
employee of Parent or any Parent Subsidiary, or take any action to
accelerate the vesting or exercisability of stock options, restricted stock
or other compensation or benefits payable thereunder;
(x) knowingly or negligently take or fail to take any
action, if such action or failure to act would, directly or indirectly,
cause any of the Parent Subsidiaries to cease to be a member of the
consolidated group of companies of which Parent is the common parent for
Federal income tax purposes; it being understood that compliance with
Section 6.1(g)(iii) and (iv) will not constitute a violation of this
Section 6.1(a)(x); and it being further understood that except as
contemplated by Section 6.1(g)(iv) or as otherwise agreed by Purchaser in
writing, Parent shall comply with this Section 6.1(a)(x) without resort to
exercising its rights to acquire additional shares of Sub pursuant to that
certain Stock Registration and Option Agreement dated as of May 31, 1996
among Parent, Sub and The Future Now of Arkansas, Inc., as amended;
(xi) take any action that would materially alter the
strategic business plan and/or services delivery capability of Sub;
(xii) make any capital investment in or make any loan to or
acquire the securities or assets of any other Person other than to or from
its subsidiaries in the ordinary course of business;
(xiii) make any change in employment terms for any of its
directors, officers and employees other than customary increases to non-
director or non-officer employees awarded in the ordinary course of
business consistent with past practices; or
(xiv) except as may be required by law, intentionally take
or fail to take any action the reasonably foreseeable effect of which would
be to cause any representation or warranty in this Agreement to be or
become inaccurate.
In the event Parent or Sub shall request Purchaser to consent in
writing to an action otherwise prohibited by this Section 6.1(a), Purchaser
shall use all reasonable efforts to respond in a prompt and timely fashion,
but may otherwise respond affirmatively or negatively in its sole
discretion exercised in good faith.
(b) Acquisition Proposals.
(1) Neither the Parent nor the Sub or any of their
respective officers and directors shall, and the Parent and Sub will cause
their respective employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by the
Parent or Sub) not to, solicit, initiate or encourage (including by way of
furnishing information), or take any other action designed or reasonably
likely to facilitate (including, without limitation, any amendment,
modification or termination, or any agreement to do any of the foregoing,
to the Rights Agreement or any redemption of rights issued thereunder) any
inquiries or the submission or any proposal or offer from any Person
relating to an Acquisition Proposal (as defined below) involving Parent,
Sub or any other Parent Subsidiary or participate in any discussions or
negotiations regarding any such Acquisition Proposal; provided, however,
that subject to compliance with this Section 6.1(b), the Parent, the Sub
and their respective directors and officers may participate in any
discussions or negotiations regarding, furnish any information with respect
to, assist or facilitate any effort or attempt by any Person to do or seek,
an Acquisition Proposal, solely to the extent that the Board of Directors
of Parent or Sub, as applicable, determines in good faith, that such
actions are necessary in order for the Board of Directors of Parent or Sub,
as applicable, to comply with its fiduciary obligations under applicable
law in response to an Acquisition Proposal or material modification to an
Acquisition Proposal, which Acquisition Proposal or material modification
was made after the date hereof and was not solicited after the date hereof.
As used herein, the term "Acquisition Proposal" means, with respect to a
particular Person, a merger, consolidation, share exchange, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving, or any purchase of all or any significant portion of
the assets or any equity securities of, or any tender offer or exchange
offer for shares of any class of equity securities of, such Person. The
transactions contemplated by this Agreement shall not be deemed an
Acquisition Proposal. The Parent and Sub will cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition Proposal and
will notify Purchaser promptly if any such Acquisition Proposal is received
by, any such information is requested from, or any such negotiations or
discussions are sought to be instituted or continued with, the Parent or
the Sub.
(2) Except as set forth in this paragraph (2), neither the
Board of Directors of Parent nor the Board of Directors of Sub nor any
committee of either of them shall (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Purchaser, or take
any action not explicitly permitted by this Agreement that would be
inconsistent with, the approval or recommendation by such Board of
Directors or such committee of the Parent Merger or the Sub Merger, (ii)
approve or recommend, or propose publicly to approve or recommend, any
Acquisition Proposal, or (iii) cause Parent or Sub to enter into any letter
of intent, agreement in principle, acquisition agreement or other similar
agreement (each, an "Acquisition Agreement") related to any Acquisition
Proposal. Notwithstanding the foregoing, in the event that the Board of
Directors of Parent or Sub has received a Superior Proposal (defined below)
and determines in good faith, after receipt of advice from outside counsel,
that it is necessary to do so in order to comply with its fiduciary
obligations under applicable law, the Board of Directors of Parent or Sub,
as applicable, may (subject to compliance with this Section 6.1(b) and
subject to payment of any Termination Fee (as hereinafter defined) then
required pursuant to this Agreement), (x) withdraw or modify its approval
or recommendation of the Parent Merger or the Sub Merger or (y) terminate
this Agreement (and concurrently with or after such termination, if it so
chooses, cause Parent or Sub, as applicable, to enter into any Acquisition
Agreement with respect to any Superior Proposal), but in any such case set
forth in this clause (y), only at a time that is after the fifth (5th) day
following Purchaser's receipt of written notice advising Purchaser that the
Board of Directors of Parent or Sub or any such committee has received a
Superior Proposal, specifying the material terms and conditions of such
Superior Proposal and identifying the Person making such Superior Proposal.
For purposes of this Agreement, a "Superior Proposal" means any bona fide
proposal made by a third party to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, all or substantially
all of the voting power of the shares of Parent Common Stock or Sub Common
Stock then outstanding or all or substantially all of the assets of Parent
(which proposal may include as a component thereof the purchase of all or
substantially all of the shares of capital stock of Sub) or Sub and
otherwise on terms which the Board of Directors of Parent or Sub or such
committee determines in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation) to be materially
more favorable to Parent's or Sub's stockholders than the Parent Merger and
the Sub Merger and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the Board of Directors of
Parent or Sub or such committee, is reasonably capable of being furnished
by such third party.
(c) Meetings of the Shareholders. Each of Parent and Sub will
take all action necessary in accordance with applicable law and its
Articles of Incorporation and By-Laws to convene a meeting of its
stockholders as promptly as practicable to consider and vote upon the
approval of this Agreement and the Parent Merger or Sub Merger, as
applicable (the "Stockholder Meetings"). Subject to Section 6.1(b)(2), the
Board of Directors of Parent shall recommend approval of the Parent Merger,
and the Board of Directors of Sub and the Independent Committee of Sub's
Board shall recommend approval of the Sub Merger, and the Parent and Sub
shall take all lawful action to solicit such approvals, as applicable.
Each of the Parent and Sub hereby severally represents, warrants and
covenants that the proxy or information statement with respect to such
meeting of its shareholders (each, a "Proxy Statement"), at the date
thereof and at the date of such meetings, will not include 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, in light of
the circumstances under which they were made, not misleading; provided,
however, the foregoing shall not apply to the extent that any such untrue
statement of a material fact or omission to state a material fact was made
in reliance upon and in conformity with written information concerning the
Purchaser, Acquisition Sub One or Acquisition Sub Two furnished by
Purchaser specifically for use in the Proxy Statement. No Proxy Statement
shall be filed, and no amendment or supplement to such Proxy Statement will
be made by the Parent or Sub, without consultation with Purchaser and its
counsel.
(d) Exchange Act Filings. Unless an exemption shall be
expressly applicable to the Parent or the Sub, or unless Purchaser agrees
otherwise in writing, the Parent and the Sub will each file with the SEC
and NASDAQ National Market System ("NASDAQ") all reports required to be
filed by it pursuant to the rules and regulations of the SEC (including,
without limitation, all required financial statements). Such reports and
other information shall comply in all material respects with all of the
requirements of the SEC rules and regulations and, when filed, will not
include 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, in light of the circumstances under which they were made, not
misleading. Purchaser and its counsel, shall be given a reasonable
opportunity to review and to comment on such filings prior to their being
filed with the SEC and NASDAQ.
(e) Access. Upon reasonable notice, the Parent and the Sub
shall afford Purchaser's officers, employees, counsel, accountants and
other authorized representatives access, during reasonable business hours
throughout the period prior to the Parent Effective Time and in a manner
which will not unreasonably interfere with the management of the business
of Parent or any Parent Subsidiary, to its officers, employees, agents,
independent auditors, representatives, properties, books and records and,
during such period, the Parent and the Sub each shall furnish promptly to
Purchaser all information concerning its business, properties and personnel
as Purchaser may reasonably request provided, however, neither the Parent
nor the Sub shall be obligated to furnish Purchaser with information
respecting any negotiations referred to in the last sentence of Section
6.1(b)(1) of this Agreement.
(f) Takeover Statutes. If any "fair price," "moratorium,"
"control share acquisition" or other similar anti-takeover statute or
regulation enacted under state or federal laws in the United States,
including, without limitation, Subchapter E, F, G or H of the PABCL (each,
a "Takeover Statute" and, collectively, "Takeover Statutes"), is or becomes
applicable to the Parent Merger or the Sub Merger or the transactions
contemplated hereby, Parent, Sub and their respective Boards or Directors
will use all commercially reasonable efforts (a) to grant such approvals
and take such actions as are reasonably necessary, lawful and requested or
consented to by Purchaser so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and thereby, and (b) to otherwise act to eliminate the
effects of any Takeover Statute on any of the transactions contemplated
hereby and thereby. Parent and Sub will use all commercially reasonable
efforts to effect, prior to the Sub Effective Time, the amendment to Sub's
Articles of Incorporation described in Section 5.1(z) hereof.
(g) Options and Warrants.
(i) Prior to the Parent Effective Time, the Parent shall
take such actions (including obtaining any required consents) as may be
necessary such that at the Parent Effective Time each Stock Right issued by
the Parent shall be cancelled or converted into the right to receive, as
the case may be, and the holder thereof, upon surrender thereof, shall
receive, the Parent Option Conversion Price to which such holder is
entitled, if any.
(ii) Prior to the Sub Effective Time, Sub shall take such
actions (including obtaining any required consents) as may be necessary
such that at the Sub Effective Time each Stock Right issued by Sub shall be
cancelled or converted into the right to receive, as the case may be, and
the holder thereof, upon surrender thereof, shall receive, the Sub Option
Conversion Price to which such holder is entitled, if any.
(iii) In connection with the exercise, prior to the Sub
Effective Time, of any employee stock options issued by Sub, Sub shall
(unless otherwise agreed by Purchaser in writing), in accordance with the
cash-out option of Sub under Section 3(l) of its 1996 Long-Term Incentive
Plan (the "XLC Plan"), pay to each holder of an option, upon notice of any
exercise thereof, cash in an amount equal to the spread between the
exercise price and the fair market value of the underlying common share or
the Spread Value (as defined in the XLC Plan), and will take all other
action as may be necessary to ensure that in no event will any capital
stock of Sub be issued upon or in connection with the exercise of any such
option. Parent will, if necessary, lend sufficient funds to Sub on
commercially reasonable terms to enable Sub to pay such cash in a timely
manner.
(iv) In connection with the exercise, prior to the Sub
Effective Time, of any Stock Rights issued by Sub (other than employee
stock options), Sub shall not issue or permit to be issued any shares of
capital stock of Sub upon the exercise thereof other than simultaneously
with or after Parent (or a direct or indirect wholly-owned subsidiary of
Parent) shall have purchased (which Parent hereby agrees to do or cause to
be done), and Sub shall have issued (which Sub agrees to do or cause to be
done) that number of validly issued shares of the same class to Parent or
such subsidiary that is equal to four times the number of shares of capital
stock issuable upon such exercise of such Stock Rights, it being understood
that Parent, Sub and Purchaser expect such purchase and issuance to occur
pursuant to that certain Stock Registration and Option Agreement dated as
of May 31, 1996 among Parent, Sub and The Future Now of Arkansas, Inc., as
amended; provided, however, that in no event will Parent or any Parent
Subsidiary purchase or otherwise acquire any such shares of Sub for a per
share amount in excess of the Sub Share Conversion Price.
(h) [intentionally left blank]
(i) IBMCC. Parent and Sub shall request that IBM Credit
Corporation ("IBMCC") give any consent to the Sub Merger or the Parent
Merger necessary under Parent's and Sub's credit arrangements with IBMCC.
If Purchaser so requests, Parent and Sub will take all action necessary to
pay, at the time the Parent Merger and Sub Merger are consummated, any or
all of the balance of any amounts owed to IBMCC, subject, however, to
Purchaser making available to Parent and Sub the cash necessary to do so.
(j) Third Party Consents. Parent and Sub shall use their
commercially reasonable efforts to obtain all necessary consents to the
transactions contemplated by this Agreement as may be required under
contracts to which Parent or any Parent Subsidiary is a party and as to
which Purchaser requests that such consents be obtained, including without
limitation the real property leases required to be listed in Section 5.1(v)
of the Disclosure Letter.
6.2 Covenants of the Parties. Each of the Parties, severally and
not jointly, covenants and agrees as to itself, as follows:
(a) Confidentiality. The terms and conditions of that certain
letter agreement dated December 8, 1997 entered into by the Purchaser and
the Parent (the "Confidentiality Agreement") are ratified and confirmed and
shall remain in full force and effect. Notwithstanding the foregoing, the
Parent and Purchaser hereby amend the Confidentiality Agreement such that
the provisions of the paragraph 2(c) thereof do not apply to any public
announcement effected in accordance with the provisions of Section 6.2(d)
below regarding the Parties' execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby.
(b) Hart-Scott-Rodino Filings. Each Party will file any
Notification and Report Forms and related material that it may be required
to file with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice under the HSR Act, will use
commercially reasonable efforts to obtain termination of the applicable
waiting period under the HSR Act, and will make any further filings
pursuant thereto that may be necessary or appropriate.
(c) Notification of Certain Matters. Each Party will give
prompt written notice to the others of any development causing a breach of
any of its own representations and warranties set forth in this Agreement.
(d) Publicity. The initial press release relating to the
transactions contemplated hereby shall be a joint press release and
thereafter the Parent, the Sub and Purchaser shall consult with each other
in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and in making any filings
with any federal or state governmental or regulatory agency or with any
national securities exchange with respect thereto. None of the Parties
shall issue any such press release or make any such public statement or
filing prior to such consultation, except as may be required by law or by
obligations pursuant to any listing agreement with any national securities
exchange or the NASDAQ.
(e) Cooperation. Each Party shall upon the request of another
Party provide its commercially reasonable cooperation and assistance to the
requesting Party in the latter's efforts to obtain any consents, approvals
and amendments to contracts required or to take such actions as may be
required to comply with any applicable laws to effect the Sub Merger, the
Parent Merger or otherwise required under this Agreement.
(f) Indemnification; Directors' and Officers' Insurance.
(i) The Parties agree that all rights to indemnification and
advancement of expenses by the Parent or the Sub now existing in favor of
each present and former director and officer of the Parent or the Sub
(acting in their capacities as directors and/or officers of the Parent or
the Sub, as applicable, the "Indemnified Parties") as provided in (i) the
Parent's or the Sub's respective Articles of Incorporation or By-Laws, or
(ii) the indemnification agreements listed in the Disclosure Letter as in
effect on the date thereof (the "Indemnification Agreements"), shall, with
respect to matters occurring at or prior to the Parent or Sub Effective
Time, as applicable, continue in full force and effect, shall survive the
Sub Merger and Parent Merger and shall continue in full force and effect
thereafter until the date which is six (6) years from the Sub Effective
Time or Parent Effective Time, as applicable; provided, however, in the
event any claim or claims are asserted or threatened within such period,
all rights to indemnification in respect of any such claim or claims shall
continue until final disposition of any and all such claims.
(ii) Subject to the provisions of Section 6.2(f)(iii) below,
after the Sub Effective Time or Parent Effective Time, as applicable, the
Purchaser shall, subject to the further terms set forth herein, indemnify
and hold harmless, to the fullest extent permitted under applicable law
(and shall also advance expenses as incurred to the fullest extent
permitted under applicable law provided the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification), each
Indemnified Party against any costs or expenses (including reasonable
attorneys' fees and disbursements), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to the
transactions contemplated by this Agreement (and whether commenced prior to
or after the Sub Effective Time or the Parent Effective Time), for a period
of six (6) years after the Sub Effective Time or Parent Effective Time, as
applicable, in each case regardless of by whom asserted and regardless of
whether such claim, action, suit, proceeding or investigation arises out
of, pertains to or results from, solely or in part, the active, passive or
concurrent negligence of any Indemnified Party; provided, however, in the
event any claim or claims are asserted or threatened within such six-year
period, all right to indemnification in respect of any such claim or claims
shall continue until final disposition of any and all such claims. Any
Indemnified Party wishing to claim indemnification under this Section
6.2(f)(ii), and notwithstanding the provisions set forth in the Parent's or
the Sub's respective Articles of Incorporation or By-Laws, or in the
Indemnification Agreements, upon learning of any such claim, action, suit,
proceeding or investigation, such Indemnified Party shall promptly notify
Purchaser thereof, but the failure to so notify shall not relieve Purchaser
of any liability it may have to such Indemnified Party if such failure does
not materially prejudice the indemnifying party. In the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Sub Effective Time or the Parent Effective Time), (i) Purchaser
shall have the right to assume the defense thereof and Purchaser shall not
be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Purchaser
fails to assume such defense or counsel for Purchaser advises that there
are issues which raise conflicts of interest between the Parties, on the
one hand, and the Indemnified Parties, on the other hand, or that there are
additional defenses available to the Indemnified Parties which are not
otherwise available to the Parties, the Indemnified Parties may retain
counsel satisfactory to them, and the Purchaser shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; provided, however, that Purchaser shall
be obligated pursuant to this paragraph (ii) to pay for only one firm of
counsel for all Indemnified Parties in any jurisdiction unless the use of
one counsel for such Indemnified Parties would present such counsel with a
conflict of interest, in which case Purchaser need only pay for separate
counsel to the extent necessary to resolve such conflict, (ii) the
Indemnified Parties will cooperate in the defense of any such matter and
(iii) Purchaser shall not be liable for any settlement effectuated without
its prior written consent. Purchaser shall not settle any action or claim
identified in this Section 6.2(f)(ii) in any manner that would impose any
liability on an Indemnified Party not paid by Purchaser or the Sub
Surviving Corporation or the Parent Surviving Corporation without such
Indemnified Party's prior written consent.
(iii) Notwithstanding any thing contained in paragraph (ii)
of this Section 6.2(f), Purchaser shall not have any obligation hereunder
to any Indemnified Party if the indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law, or the
conduct of the Indemnified Party relating to the matter for which
indemnification is sought involved willful misconduct.
(iv) Parent and Sub shall maintain their respective existing
officers' and directors' liability insurance ("D&O Insurance") for a period
of three (3) years after the Sub Effective Time or Parent Effective Time,
as applicable, so long as the annual premium therefor, in the aggregate, is
not in excess of 150% of the last annual premium paid prior to the date
hereof (the "Maximum Premium"); provided, however, if the existing D&O
Insurance expires, or is terminated or cancelled by the insurance carrier
during such three-year period, the Parent and Sub will use their
commercially reasonable efforts to obtain as much D&O Insurance as can be
obtained for the remainder of such period for a premium not in excess (on
an annualized basis) of the Maximum Premium.
(v) To the fullest extent not prohibited by applicable New
York law or federal securities laws, Purchaser agrees to guarantee the
payment and performance of the Parent's, Sub's, Acquisition Sub One's and
Acquisition Sub Two's obligations under this Section 6.2(f). This Section
6.2(f) shall survive the closing of the transactions contemplated hereby
and is intended to benefit each of the Indemnified Parties (each of whom
shall be entitled to enforce this Section against the Parties). If any
Party, or any of their respective successors or assigns (i) reorganizes or
consolidates with or merges into any other Person and is not the resulting,
continuing or surviving corporation or entity of such consolidation or
merger or (ii) liquidates, dissolves or transfers all or substantially all
of its properties and assets to any Person, then, and in each such case,
prior to such action, proper provision will be made so that the successors
and assigns of such party assume the obligations of such party set forth in
this Section.
6.3 Covenants of Purchaser. Purchaser covenants and agrees as
follows:
(a) Maintenance of Payment Funds. Prior to the Sub Effective
Time and Parent Effective Time, as applicable, Purchaser shall cause the
Payment Funds to be available to effect payment of the Sub Share Conversion
Price, the Sub Option Conversion Price, the Parent Share Conversion Price
and the Parent Option Conversion Price and neither Purchaser, Acquisition
Sub One nor Acquisition Sub Two will enter into any transaction, commitment
or obligation which could reasonably result in the Payment Funds not being
so available as and when required for such payments pursuant to the terms
and conditions of this Agreement.
(b) Purchaser Shares. At the Parent Stockholders' Meeting, all
Parent Shares then owned by Purchaser or any of its direct or indirect
wholly-owned subsidiaries shall be voted in favor of the Parent Merger. At
the Sub Stockholders' Meeting, all Sub Shares then owned by Purchaser or
any of its direct or indirect wholly-owned subsidiaries shall be voted in
favor or the Sub Merger.
6.4 Effect of Certain Covenants. (i) Insofar as any covenants in
this Article VI relate specifically to Sub, Parent shall have no obligation
to force Sub to comply therewith, but shall take such actions as may
reasonably assist and facilitate Sub in complying therewith. If Parent has
done so and Sub has nonetheless failed to comply with such covenant, Parent
will have no liability for damages to Purchaser, Acquisition Sub One or
Acquisition Sub Two for breach of such covenant; provided, however, that
this subparagraph shall have no effect on whether the condition set forth
in Section 7.2(a) has been satisfied, or on any right of Purchaser to
terminate this Agreement under Section 8.3, or on any obligation of Parent
and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b).
(ii) Insofar as any Covenants in this Article VI relate
specifically to Parent or any Parent Subsidiaries (other than Sub or any
Sub Subsidiaries), Sub shall have no obligation to force Parent to comply
therewith, but shall take such actions as may reasonably assist and
facilitate Parent in complying therewith. If Sub has done so and Parent
has nonetheless failed to comply with such covenant, Sub will have no
liability for damages to Purchaser, Acquisition Sub One or Acquisition Sub
Two for breach of such covenant; provided, however, that this subparagraph
shall have no effect on whether the condition set forth in Section 7.2(a)
has been satisfied, or on any right of Purchaser to terminate this
Agreement under Section 8.3, or on any obligation of Parent and Sub to pay
the Termination Fee to Purchaser pursuant to Section 9.1(b).
ARTICLE VII
Conditions
----------
7.1 Conditions to Obligations of the Parties. The obligations of
the Parties to consummate the Sub Merger and the Parent Merger are subject
to the fulfillment of each of the following conditions, any or all of which
may be waived in whole or in party by any of the Parties, as the case may
be, to the extent permitted by applicable law:
(a) Parent Shareholder Approval. The Parent Merger shall have
been duly approved by the holders of the outstanding stock of Parent in
accordance with the PABCL and the Articles of Incorporation and By-Laws of
the Parent.
(b) Sub Shareholder Approval. The Sub Merger and the amendment
to Sub's Articles of Incorporation described in Section 5.1(z) hereof shall
have been duly approved by the holders of the outstanding stock of Sub in
accordance with the PABCL and the Articles of Incorporation and By-Laws of
the Sub.
(c) Governmental and Regulatory Consent. (i) The HSR waiting
period shall have expired or been terminated, and (ii) other than the
filings provided for in Section 1.8, all other filings required to be made
prior to the Sub Effective Time or Parent Effective Time, as applicable, by
the Parties with, and all consents, approvals and authorizations required
to be obtained prior to the applicable Effective Time by the Parties from,
governmental and regulatory authorities in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby shall have been made or obtained (as the case may be).
(d) Statutes; Injunctions. Neither any statute, rule,
regulation, order, stipulation or injunction (each an "Order") shall be
enacted, promulgated, entered, enforced or deemed applicable to the Sub
Merger or the Parent Merger, nor shall any other action have been taken by
any governmental authority, administrative agency or court of competent
jurisdiction which (i) prohibits the consummation of the transactions
contemplated by this Agreement, or (ii) prohibits Purchaser's direct or
indirect ownership or operation of all or any material portion of the
business or assets of Parent or Sub, or (iii) could compel Purchaser to
dispose of or hold separate all or any material portion of such business or
assets as a result of the transactions contemplated by this Agreement.
(e) Both Mergers. No Party shall be obligated to consummate the
Parent Merger if the Sub Merger shall not have been consummated. No Party
shall be obligated to consummate the Sub Merger unless all conditions to
the Parent Merger have been satisfied or waived.
(f) Amendment to Articles. The Articles of Incorporation of
Sub shall have been amended as described in Section 5.1(z).
7.2 Conditions to Obligations of Purchaser, Acquisition Sub One and
Acquisition Sub Two. The obligation of Purchaser, Acquisition Sub One and
Acquisition Sub Two to consummate the Sub Merger and Parent Merger is
further subject to the fulfillment of the following conditions, which may
be waived by Purchaser, Acquisition Sub One or Acquisition Sub Two:
(a) Compliance. The Parent and the Sub each shall have
performed and complied with, in all material respects, all obligations and
covenants required to be performed or completed with by it under,
respectively, this Agreement at or prior to the Sub Effective Time or
Parent Effective Time, as applicable, and Parent and Sub shall each have
delivered to Purchaser a certificate of an executive officer so certifying.
(b) Representations. Each of the representations and
warranties of Parent and of Sub made in this Agreement shall be true and
correct in all material respects as of the date when made and shall be
deemed to be made again at and as of the Sub Closing and the Parent Closing
and shall then be true and correct in all material respects, except to the
extent changes are required, permitted or contemplated pursuant to this
Agreement, and Parent and Sub shall each have delivered to Purchaser a
certificate of an executive officer so certifying.
(c) Opinion of Counsel. Purchaser shall have received an
opinion of counsel to Parent and Sub in form and substance substantially
the same as previously agreed by Purchaser, Parent and Sub.
(d) Proceedings. No action or proceeding shall have been
instituted and be pending before any court or governmental body to restrain
or prohibit, or to obtain substantial damages in respect of, the
consummation of this Agreement and the transactions contemplated hereby
which, in the reasonable opinion of Purchaser based upon advice of counsel
respecting the likelihood of an adverse outcome in such action or
proceeding, may reasonably be expected to result in a preliminary or
permanent injunction against such consummation or damages which would
constitute a Material Adverse Change.
(e) Material Adverse Change. There shall not have occurred a
Material Adverse Change.
(f) Liens. With the exception of the Security Interest of
IBMCC as disclosed in the Disclosure Letter, in all instances and respects
Parent (or the applicable Parent Subsidiaries as the case may be) shall
hold all shares of stock in all Parent Subsidiaries free and clear of any
restrictions, liens, claims and encumbrances whatsoever.
(g) Tax Consolidation. Each of the Parent Subsidiaries shall
be, and shall have been at all times from the date hereof to the Parent
Effective Time, a member of the consolidated group of companies of which
Parent is the common parent for Federal income tax purposes, it being
understood that compliance with Section 6.1(g)(iii) and (iv) will (for
purposes only of Sub Stock Rights) be deemed to satisfy this subparagraph
(g).
(h) Employment Agreements. The employees of Sub previously
identified in writing by Purchaser shall be employees of Sub and shall have
entered into employment agreements on terms and conditions previously
identified in writing by Purchaser to Parent and Sub, and such employment
agreements shall be in full force and effect..
(i) Letter from Auditors. Purchaser shall have received a
letter (the "Agreed Upon Procedures Letter") from Parent's independent
certified public accountants substantially in the form previously agreed by
Purchaser, Parent and Sub.
(j) Stock Issuance, etc. Neither Parent, Sub nor any Parent
Subsidiary shall (I) after the date of this Agreement have granted, amended
or modified any Stock Rights (except as required pursuant to Section
6.1(g)(iii) or (iv)) or issued any capital stock (except, in the case of
Parent, but not Sub, upon the exercise of Stock Rights outstanding as of
the date of this Agreement), or (II) after December 1, 1997 have purchased
or otherwise acquired any shares of common stock of Sub for a per share
price in excess of the Sub Share Conversion Price.
(k) Stock Rights. There shall be outstanding no Stock Right
which by its terms does not either terminate upon the completion of the Sub
Merger or the Parent Merger or convert into the right to receive only the
Sub Option Conversion Price or the Parent Option Conversion Price, as the
case may be.
(l) Dividends, etc. After the date of this Agreement, neither
Parent nor Sub shall have declared, set aside or paid any dividend or
distribution with respect to its capital stock (whether in cash or in
kind), or shall have redeemed, repurchased or otherwise acquired any of its
capital stock or, except as required by this Agreement, any Stock Rights.
(m) XLSource Transition. Those portions of the XLSource
Transition Plan to have been implemented prior to the Sub Effective Time
shall have been implemented on a timely basis in all material respects, and
there shall not have occurred a material adverse effect on the ability of
Parent or any Parent Subsidiary to implement the XLSource Transition Plan
on a timely basis.
7.3 Conditions to Obligations of Parent. The obligation of Parent
to consummate the Parent Merger and of Parent and Sub to consummate the Sub
Merger is further subject to the fulfillment of the following conditions,
which may be waived by Parent and Sub:
(a) Compliance. Purchaser, Acquisition Sub One and Acquisition
Sub Two each shall have performed and complied with, in all material
respects, all obligations and covenants required to be performed or
completed with by it under this Agreement at or prior to the Sub Effective
Time or Parent Effective Time, as applicable, and Purchaser shall have
delivered to Parent and Sub a certificate of an officer of Purchaser so
certifying.
(b) Representations. Each of the representations and
warranties of Purchaser, Acquisition Sub One and Acquisition Sub Two made
in this Agreement shall be true and correct in all material respects as of
the date when made and shall be deemed to be made again at and as of the
Sub Closing and the Parent Closing and shall then be true and correct in
all material respects, except to the extent changes are required, permitted
or contemplated pursuant to this Agreement, and Purchaser shall have
delivered to Parent and Sub a certificate of an officer of Purchaser so
certifying.
(c) Opinion of Counsel. Parent shall have received an opinion
of counsel to Purchaser in form and substance substantially the same as
previously agreed by Purchaser, Parent and Sub.
ARTICLE VIII
Termination
-----------
8.1 Termination by Mutual Consent. This Agreement may be terminated
and the Sub Merger and the Parent Merger may be abandoned at any time prior
to consummation thereof, before or after the approval by the stockholders
of Parent or Sub, by the written mutual consent of Purchaser, Sub and
Parent.
8.2 Termination by Purchaser, Sub or Parent. This Agreement may be
terminated and the Merger may be abandoned by Purchaser, Sub or Parent if
(i) the Sub Merger or the Parent Merger shall not have been consummated by
July 31, 1998 (unless the failure to consummate by such date is due to the
wrongful action or failure to act of the party seeking to terminate), or
(ii) the stockholders of Parent disapprove the Parent Merger at the Parent
Stockholder Meeting, or (iii) any Order shall have become final and non-
appealable.
8.3 Termination by Purchaser. This Agreement may be terminated by
Purchaser and the Sub Merger and the Parent Merger may be abandoned at any
time prior to consummation thereof, before or after the approval by
stockholders of Parent or Sub if (a) the Parent Board shall have withdrawn
or modified in a manner adverse to Purchaser its approval or recommendation
of this Agreement, or the Parent Board, upon request by Purchaser, shall
fail to reaffirm its approval or recommendation, or shall have resolved to
do any of the foregoing, or at the Sub Stockholders' Meeting all shares of
Sub Common Stock owned directly or indirectly by Parent shall not have been
voted in favor of the Sub Merger and in favor of the amendment to Sub's
Articles of Incorporation described in Section 5.1(z) hereof; or (b) Parent
shall have failed to perform in any material way any of its covenants under
this Agreement in a manner so as not to satisfy the condition to closing in
Section 7.2(a), which failure to perform is incapable of being cured or has
not been cured within twenty (20) days after the giving of notice thereof
to Parent; or (c) Parent shall have breached any of its representations or
warranties in any material respect in a manner so as not to satisfy the
condition to closing in Section 7.2(b), which breach is incapable of being
cured or has not been cured within twenty (20) days after the giving of
notice thereof to Parent; or (d) the Board of Directors of Sub, or the
Independent Committee thereof, shall have withdrawn or modified in a manner
adverse to Purchaser its approval or recommendation of this Agreement, or
the Board of Directors of Sub, or the Independent Committee thereof, upon
request by Purchaser, shall fail to reaffirm its approval or
recommendation, or shall have resolved to do any of the foregoing; or (e)
Sub shall have failed to perform in any material way any of its covenants
under this Agreement in a manner so as not to satisfy the condition to
closing in Section 7.2(a), which failure to perform is incapable of being
cured or has not been cured within twenty (20) days after the giving of
notice thereof to Sub; or (f) Sub shall have breached any of its
representations or warranties in any material respect in a manner so as not
to satisfy the condition to closing in Section 7.2(b), which breach is
incapable of being cured or has not been cured within twenty (20) days
after the giving of notice thereof to Sub.
8.4 Termination by the Parent. This Agreement may be terminated by
Parent and the Sub Merger and the Parent Merger may be abandoned at any
time (i) prior to the consummation thereof, before or after the approval by
stockholders of Parent or Sub, by action of the Parent Board if the Parent
Board receives an unsolicited written offer with respect to a Superior
Proposal, or if an unsolicited tender or exchange offer for the Parent
Shares (with respect to a Superior Proposal) is commenced, and the Parent
Board determines to accept such Superior Proposal or recommend that its
shareholders accept such tender or exchange offer, but only after the
Parent Board has been advised by counsel that approval, acceptance or
recommendation of such transaction is necessary in order for the Parent
Board to act in a manner consistent with its fiduciary obligations under
applicable law, in accordance with clause "(y)" of Section 6.1(b)(2)
provided that Parent has complied with all provisions thereof, including
the notice provisions therein, and that Parent and Sub comply with
applicable requirements relating to the payment (including the timing of
any payment) of the Termination Fee, or (ii) before the Parent Effective
Time, if Purchaser shall have breached or failed to perform in any material
way any of its representations, warranties or covenants under this
Agreement which breach or failure to perform is incapable of being cured or
has not been cured within twenty (20) days after the giving of notice
thereof to Purchaser.
8.5 Termination by the Sub. This Agreement may be terminated by Sub
and the Sub Merger and the Parent Merger may be abandoned at any time (i)
prior to the consummation thereof, before or after the approval by
stockholders of Parent or Sub, by action of the Sub Board if the Sub Board
receives an unsolicited written offer with respect to a Superior Proposal,
or if an unsolicited tender or exchange offer for the Sub Shares (with
respect to a Superior Proposal) is commenced, and the Sub Board determines
to accept such Superior Proposal or recommend that its shareholders accept
such tender or exchange offer, but only after the Sub Board has been
advised by counsel that approval, acceptance or recommendation of such
transaction is necessary in order for the Sub Board to act in a manner
consistent with its fiduciary obligations under applicable law, in
accordance with clause "(y)" of Section 6.1(b)(2) provided that Sub has
complied with all provisions thereof, including the notice provisions
therein, and that Parent and Sub comply with applicable requirements
relating to the payment (including the timing of any payment) of the
Termination Fee, or (ii) before the Sub Effective Time, if Purchaser shall
have breached or failed to perform in any material way any of its
representations, warranties or covenants under this Agreement in a manner
so as not to satisfy the condition to closing in Section 7.3(a) or (b)
which breach or failure to perform is incapable of being cured or has not
been cured within twenty (20) days after the giving of notice thereof to
Purchaser.
8.6 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to
this Article 8, no party thereto (or any of its directors or officers)
shall have any liability or further obligation to any other party to this
Agreement, except as provided in Sections 9.1 and 9.2. No termination of
this Agreement shall result in the termination of the obligations of the
parties under Sections 5.1(k), 5.2(f), 6.2(a) or 9.1.
ARTICLE IX
Miscellaneous and General
-------------------------
9.1 Payment of Expenses.
(a) Except as set forth in subsection (b) below, whether or not
the Merger shall be consummated, each Party hereto shall pay its own
expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the Merger, except that and provided the
Merger is consummated, the expenses of Sub shall be borne by Parent.
(b) In the event that this Agreement is terminated by Purchaser
pursuant to Section 8.3(a), (b), (d) or (e), Parent and Sub shall pay
Purchaser an aggregate fee equal to $12,300,000 (the "Termination Fee"),
payable by wire transfer in immediately available funds, within one (1)
business day of the date of such termination in the respective proportions
set forth below, and such payment shall constitute Purchaser's and its
affiliates' exclusive remedy and be a limit on any damages to which
Purchaser and such affiliates may be entitled for any loss or injury
incurred with respect to any such termination. In the event that this
Agreement is terminated by Purchaser pursuant to Section 8.3(c) or (f), and
if the applicable breach of representation by Parent or Sub was
intentional, reckless or grossly negligent, Parent and Sub shall pay
Purchaser the Termination Fee, payable by wire transfer in immediately
available funds, within one (1) business day of the date of such
termination in the respective proportions set forth below, and such
payment shall constitute Purchaser's and its affiliates' exclusive remedy
and be a limit on any damages to which Purchaser and such affiliates may be
entitled for any loss or injury incurred with respect to any such
termination. Prior to any termination of this Agreement by Parent pursuant
to Section 8.4(i) or by Sub pursuant to Section 8.5(i), Parent and Sub
shall pay Purchaser the Termination Fee, payable by wire transfer of
immediately available funds in the respective proportions set forth below,
and such payment shall constitute Purchaser's and its affiliates exclusive
remedy and be a limit on any damages to which Purchaser and such affiliates
may be entitled for any loss or injury incurred with respect to any such
termination. Parent and Sub acknowledge that the agreements contained in
this Section 9.1(b) are an integral part of the transactions contemplated
by this Agreement, that Parent and Sub will derive substantial benefits
from the transactions involving Sub contemplated by this Agreement, and
that, without the agreements contained in this Section 9.1(b), Purchaser
would not enter into this Agreement; accordingly, if Parent or Sub fails to
promptly pay any amount due pursuant to this Section 9.1(b), and, in order
to obtain such payment, Purchaser commences a suit which results in a
judgment against Parent or Sub for the applicable portion of the
Termination Fee or damages in excess thereof (to the extent permitted
hereunder), Parent or Sub, as applicable, shall also pay to Purchaser its
costs and expenses (including reasonable attorneys' fees) in connection
with such suit, together with interest on the amount of the Termination Fee
at the prime rate of Citibank N.A. in effect on the date such payment was
required to be made. If Purchaser terminates this Agreement pursuant to
Section 8.3(a), (b), (d) or (e), or if Purchaser terminates this Agreement
pursuant to Section 8.3(c) or (f) and is entitled to be paid the
Termination Fee, or if Parent terminates this Agreement pursuant to Section
8.4(i), or if Sub terminates this Agreement pursuant to Section 8.5(i),
then 80% of the Termination Fee shall be paid to Purchaser by Parent and
20% of the Termination Fee shall be paid to Purchaser by Sub.
Notwithstanding the foregoing, if the breach by Parent which gave rise to
the ability to terminate this Agreement under Section 8.3(b) or (c) or if
the breach by Sub which gave rise to the ability to terminate this
Agreement under Section 8.3(e) or (f) constituted a bad faith attempt by
Parent or Sub to avoid its contractual obligations under this Agreement,
nothing in this Agreement shall limit the relief (in addition to the
Termination Fee) which Purchaser shall be entitled to recover under
applicable law. A good faith dispute as to whether the Termination Fee is
payable shall not constitute evidence of such bad faith.
(c) In the event that this Agreement is terminated by Parent
pursuant to Section 8.4(ii) or by Sub pursuant to Section 8.5(ii),
Purchaser shall pay Parent and Sub an aggregate amount equal to the
Termination Fee, payable by wire transfer in immediately available funds,
within one (1) business day of the date of such termination, payable 80% to
Parent and 20% to Sub, and such payment shall constitute Parent's and Sub's
any of their respective affiliates' exclusive remedy and be a limit on any
damages to which Parent or any such affiliate may be entitled for any loss
or injury incurred with respect to any such termination or breach or
failure to perform that gave rise to such termination. Notwithstanding the
foregoing, if the breach by Purchaser which gave rise to the ability to
terminate this Agreement under Section 8.4(ii) or 8.5(ii) constituted a bad
faith attempt by Purchaser to avoid its contractual obligations under this
Agreement, nothing in this Agreement shall limit the relief (in addition to
the Termination Fee) which Parent or Sub shall be entitled to recover under
applicable law. A good faith dispute as to whether the Termination Fee is
payable shall not constitute evidence of such bad faith. Purchaser
acknowledges that the agreements contained in this Section 9.1(c) are an
integral part of the transactions contemplated by this Agreement, that
Purchaser will derive substantial benefits from the transactions
contemplated by this Agreement, and that, without the agreements contained
in this Section 9.1(c), Parent and Sub would not enter into this Agreement;
accordingly, if Purchaser fails to promptly pay any amount due pursuant to
this Section 9.1(c), and, in order to obtain such payment, Parent or Sub
commences a suit which results in a judgment against Purchaser for the
Termination Fee or damages in excess thereof (to the extent permitted
hereunder), Purchaser shall also pay to Parent or Sub, as applicable, its
costs and expenses (including reasonable attorneys' fees but only for the
attorneys of either Parent or Sub, as the case may be, and not both) in
connection with such suit, together with interest on the amount of the
Termination Fee at the prime rate of Citibank N.A. in effect on the date
such payment was required to be made.
9.2 Survival. The representations, warranties, agreements and
covenants in this Agreement shall not survive the consummation of the Sub
Merger and the Parent Merger or the termination of this Agreement unless
the terms of a specific agreement or covenant specify otherwise, in which
case it shall survive in accordance with its terms. Without limiting the
foregoing, the provisions of Section 6.2(f) shall survive the consummation
of the Sub Merger and the Parent Merger.
9.3 Cooperation. The Parties will cooperate with one another in
effecting the transactions contemplated hereby, in the making of all
necessary governmental filings (including, without limitation, filings with
any applicable taxing authority) and in connection with the prosecution or
defense of any investigation, claim, suit, arbitration or other proceeding
brought by or against any governmental authority or other third party.
9.4 Modification or Amendment. Subject to the applicable provisions
of the PABCL, at any time prior to the Parent Effective Time or Sub
Effective Time, as applicable, the Parties hereto may modify or amend this
Agreement, by written agreement executed and delivered by duly authorized
officers of the respective Parties.
9.5 Waiver of Conditions. The conditions to each of the Parties'
obligations to consummate the transactions contemplated hereby are for the
sole benefit of such Party and may be waived by such Party in whole or in
part to the extent permitted hereby and by applicable law.
9.6 Counterparts and Facsimile Signatures. For the convenience of
the Parties hereto, this Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original
instrument, and all such counterparts shall together constitute the same
agreement. Execution of this Agreement may be made by facsimile signature
which, for all purposes, shall be deemed to be an original signature.
9.7 GOVERNING LAW; JURISDICTION; AND SERVICE OF PROCESS. EXCEPT AS
EXPRESSLY SET FORTH BELOW, THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA,
REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF THE PARENT,
THE PURCHASER AND ACQUISITION SUB HEREBY AGREE THAT ANY DISPUTE ARISING OUT
OF THIS AGREEMENT OR THE MERGER SHALL BE HEARD IN THE COURT OF COMMON
PLEAS, COUNTY OF CHESTER, OF THE COMMONWEALTH OF PENNSYLVANIA, OR IN THE
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA AND,
IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS TO
THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN
CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT OR THE MERGER MAY
BE GIVEN TO ANY OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, AT THE RESPECTIVE ADDRESSES SET FORTH IN SECTION 9.8 BELOW.
9.8 Notices. Any notice, request, instruction or other document to
be given hereunder by any party to the others shall be in writing and shall
be deemed delivered upon receipt, if to Purchaser, Acquisition Sub One or
Acquisition Sub Two, addressed to Purchaser, Acquisition Sub One or
Acquisition Sub Two, as the case may be, Attention: Barry D. Romeril, P.O.
Box 1600, 800 Long Ridge Road, Stamford, CT 06904, facsimile: (203) 968-
3633 (with a copy to Attention: Richard S. Paul, facsimile: (203) 968-3446;
and with a copy to Nixon, Hargrave, Devans & Doyle LLP, 437 Madison Avenue,
New York, NY 10022-7001, Attention: Richard F. Langan, Esq., facsimile
(212) 940-3111); and if to the Parent, addressed to the Parent c/o Pepper
Hamilton LLP, 3000 Two Logan Square, Philadelphia, Pennsylvania 19103-2799,
Attention Barry M. Abelson, facsimile (215) 981-4750 (with a copy to Pepper
Hamilton LLP, 3000 Two Logan Square, Philadelphia, PA 19103-2799,
Attention: Elam M. Hitchner, III, Esq., facsimile (215) 981-4750); and if
to the Sub, addressed to the Sub at 411 Eagleview Boulevard, Exton,
Pennsylvania 19341, Attention: Timothy W. Wallace, facsimile (610) 458-6530
(with a copy to McCausland, Keen & Buckman, Radnor Court, 259 Radnor-
Chester Road, Suite 160, Radnor, Pennsylvania 19087-5240, Attention Robert
H. Young, facsimile (610) 341-1099); or to such other Persons or addresses
as may be designated in writing by the party to receive such notice.
9.9 Entire Agreement, etc. This Agreement (including any schedules,
exhibits or Annexes hereto) and the Confidentiality Agreement (i)
constitute the entire agreement, and supersede all other prior agreements,
understandings, representations and warranties both written and oral among
the parties, with respect to the subject matter hereof, (ii) shall not be
assignable by operation of law or otherwise and are not intended to create
any obligations to, or rights in respect of, any Persons other than the
parties hereto; provided, however, Purchaser may cause Acquisition Sub One
and/or Acquisition Sub Two to assign its rights and obligations hereunder
to Purchaser or any other wholly-owned subsidiary of Purchaser, but no such
assignment shall relieve Purchaser, Acquisition Sub One and Acquisition Sub
Two of their obligations hereunder.
9.10 Obligation of Purchaser. Whenever this Agreement requires
Acquisition Sub One or Acquisition Sub Two to take any action (including,
without limitation, the making of payment for the Parent Shares or the Sub
Shares), such requirement shall be deemed to include an undertaking on the
part of Purchaser to cause Acquisition Sub One and/or Acquisition Sub Two
to take such action.
9.11 Captions. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
9.12 Specific Performance. The parties hereto agree that if any of
the provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached, irreparable damage would occur,
no adequate remedy at law would exist, and damages would be difficult to
determine, and that the parties shall be entitled to specific performance
of the terms hereof, in addition to any other remedy at law or equity.
9.13 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force
and effect except to the extent that the enforcement of such remaining
provisions would be inequitable.
9.14 Certain Definitions. (a) As used herein, the term "knowledge"
of a particular Person shall mean the actual knowledge of any such
individual or the actual knowledge of the executive officers (which, or
purposes hereof, shall mean those individuals who are required to file
reports under Section 16(a) of the Exchange Act) of any Person which is a
corporation or other entity.
(b) As used in this Agreement, the following terms shall have
the meanings set forth below:
"Acquisition Agreement" is defined in Section 6.1(b)(2).
"Acquisition Proposal" is defined in Section 6.1(b)(1).
"Acquisition Sub One" means TDC Subsidiary Corporation, a Pennsylvania
corporation.
"Acquisition Sub Two" means TDC Two Subsidiary Corporation, a
Pennsylvania corporation.
"Agreed Upon Procedures Letter" is defined in Section 7.2(j).
"Auditors" is defined in Section 7.2(j).
"Confidentiality Agreement" is defined in Section 6.2(a).
"D & O Insurance" is defined in Section 6.2(f)(iv).
"Disclosure Letter" is defined in Section 5.1.
"Employee Benefit Plans" is defined in Section 5.1(r)(II).
"Environmental Laws" is defined in Section 5.1(o).
"ERISA" is defined in Section 5.1(r)(II).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" is defined in Section 5.1(f).
"HSR Act" is defined in Section 5.1(d).
"IBMCC" is defined in Section 6.1(
"Indemnification Agreements" is defined in Section 6.2(f)(i).
"Indemnified Parties" is defined in Section 6.2(f)(i).
"Independent Committee" means the Independent Committee of the Sub
Board.
"Intellectual Property" is defined in Section 5.1(q).
"IRC" is defined in Section 5.1(r)(IV).
"January 1998 Financial Statements" is defined in Section 7.2(j).
"Lazard" is defined in Section 5.1(k).
"Material Adverse Change" means a material adverse effect on the
assets, property, prospects, business condition (financial or
otherwise) or results of operations of either Parent and the Parent
Subsidiaries (including Sub and the Sub Subsidiaries) taken as a
whole or Sub and the Sub Subsidiaries taken as a whole, or on the
ability of the Parties to consummate the transactions contemplated by
this Agreement. Whenever a representation, warranty, covenant,
agreement or condition involves a determination as to whether there
has been a Material Adverse Change, the market price of Parent Common
Stock and Sub Common Stock on NASDAQ shall not constitute evidence as
to whether or not a Material Adverse Change has occurred.
"Maximum Premium" is defined in Section 6.2(f)(iv).
"Montgomery" is defined in Section 5.1(k).
"Most Recent Financial Statements" is defined in Section 7.2(j).
"NASDAQ" is defined in Section 6.1(d).
"Order" is defined in Section 7.1(d).
"PABCL" is defined in Section 1.1.
"Parent" means Intelligent Electronics, Inc., a Pennsylvania
corporation.
"Parent Articles of Merger" is defined in Section 2.8.
"Parent Board" is defined in the recitals.
"Parent Closing" is defined in Section 2.7.
"Parent Common Stock" is defined in Section 5.1(b)(I).
"Parent Dissenting Shares" is defined in Section 2.9.
"Parent Effective Time" is defined in Section 2.8.
"Parent Fairness Opinion" is defined in Section 5.1(l).
"Parent Merger" is defined in the recitals.
"Parent Most Recent Quarter End" is defined in Section 5.1(f)(I).
"Parent Option Conversion Price" is defined in Section 2.4.
"Parent Options" is defined in Section 2.2(ii).
"Parent-Owned Sub Shares" is defined in Section 1.2(i).
"Parent Preferred Stock" is defined in Section 5.1(b).
"Parent Share Conversion Price" is defined in Section 2.3.
"Parent Shares" is defined in Section 2.2(i).
"Parent Subsidiaries" is defined in Section 5.1(a).
"Parent Surviving Corporation" is defined in Section 2.1.
"Parent 10-K" is defined in Section 5.1(f)(I).
"Parent 10-Q" is defined in Section 5.1(f)(I).
"Party" is defined in the introduction.
"Paying Agent" is defined in Section 1.5.
"Payment Funds" is defined in Section 5.2(e).
"Permits" is defined in Section 5.1(a).
"Person" means an individual, a partnership (general or limited), a
joint venture, a corporation, a trust, an unincorporated
organization, a limited liability company, a group and a government
or other department or agency thereof.
"Proxy Statement" is defined in Section 6.1(c).
"Public Reports" is defined in Section 5.1(e).
"Purchaser" means Xerox Corporation, a New York corporation.
"Purchaser Companies" means Purchaser and all direct and indirect
subsidiaries thereof.
"Rights Agreement" means the Rights Agreement dated as of March 22,
1996 between Parent and Chemical Mellon Shareholder Services L.L.C.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" is defined in Section 5.1(d).
"Stock Rights" is defined in Section 5.1(b)(I).
"Stockholders Meeting" is defined in Section 6.1(c).
"Sub" means XLConnect Solutions, Inc., a Pennsylvania corporation.
"Sub Articles of Merger" is defined in Section 1.8.
"Sub Board" is defined in the recitals.
"Sub Closing" is defined in Section 1.7.
"Sub Common Stock" is defined in Section 5.1(b)(II).
"Sub Dissenting Shares" is defined in Section 1.9.
"Sub Effective Time" is defined in Section 1.8.
"Sub Fairness Opinion" is defined in Section 5.1(l).
"Sub Merger" is defined in the recitals.
"Sub Most Recent Quarter End" is defined in Section 5.1(f)(II).
"Sub Option Conversion Price" is defined in Section 1.4.
"Sub Options" is defined in Section 1.2(ii).
"Sub Plan" is defined in Section 5.1(r)(I).
"Sub Preferred Stock " is defined in Section 5.1(b)(II).
"Sub Share Conversion Price" is defined in Section 1.3.
"Sub Shares" is defined in Section 1.2(i).
"Sub Subsidiaries" means all direct and indirect subsidiaries of Sub.
"Sub Surviving Corporation" is defined in Section 1.1.
"Sub 10-K" is defined in Section 5.1(f)(II).
"Sub 10-Q" is defined in Section 5.1(f)(II).
"Superior Proposal" is defined in Section 6.1(b)(2).
"Takeover Statutes" is defined in Section 6.1(f).
"Taxes" is defined in Section 5.1(j)(I).
"Termination Fee" is defined in Section 9.1(b).
"XLC Plan" is defined in Section 6.1(g)(iii).
"XLSource Transition Plan" means the plan Parent has previously
delivered to Purchaser regarding the pending transition of certain
business of XLSource, Inc.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto on the date
first hereinabove written.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Richard D. Sanford
----------------------------------
Title: Chairman and CEO
XLCONNECT SOLUTIONS, INC.
By: /s/ Richard D. Sanford
----------------------------------
Title: Chairman
XEROX CORPORATION
By: /s/ W. F. Buehler
----------------------------------
Title: Executive Vice President
TDC SUBSIDIARY CORPORATION
By: /s/ Charles P. Gilliam
----------------------------------
Title: President
TDC TWO SUBSIDIARY CORPORATION
By: /s/ Charles P. Gilliam
----------------------------------
Title: President
Exhibit 2.5
SECOND AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO ASSET PURCHASE AGREEMENT dated as of
February 6, 1998 is by and among GE Capital Information Technology
Solutions Acquisition Corp., a Delaware corporation ("Buyer"), The Future
Now, Inc., an Ohio corporation, XLSource, Inc., an Arkansas corporation, E-
C Computer Technical Services, Inc., a Texas corporation, RCK Computers,
Inc., a Texas corporation (The Future Now, Inc., XLSource, Inc., E-C
Computer Technical Services, Inc. and RCK Computers, Inc. are each a
"Seller" and, collectively, the "Sellers") and Intelligent Electronics,
Inc., a Pennsylvania corporation and, directly or indirectly, the sole
shareholder of Sellers ("Shareholder").
PRELIMINARY STATEMENT. The Buyer, the Sellers, and the
Shareholder have entered into an Asset Purchase Agreement dated July 1,
1997, as amended by the First Amendment to Asset Purchase Agreement dated
as of July 18, 1997 (as modified, amended or supplemented from time to
time, the "Agreement"). Any term used herein and not otherwise defined
herein shall have the meaning assigned to such term in the Agreement.
Since the Closing Date, XLConnect Services, Inc. has been merged
into XLConnect Systems, Inc. and XLConnect Systems, Inc. is the successor
thereto for all purposes of the Agreement.
Each of the parties hereto have agreed to amend the Agreement as
hereinafter set forth.
SECTION 1. Amendments to Agreement. The Agreement is, effective
as of the date hereof, hereby amended as follows:
(i) Section 3.01(c), is amended to read in full as follows:
(c) Post-Closing Adjustment to Closing Payment. The parties
hereto agree that, they have resolved all objections and disagreements
respecting determination of the Closing Date Balance Sheet and that based
on the unaudited combined statement of assets and liabilities of the
Business as of the Closing Date (the "Closing Date Balance Sheet"), Sellers
and Shareholder, jointly and severally, agree to repay to Buyer an amount
equal to $4,351,000 (the "Post-Closing Adjustment). The Post-Closing
Adjustment shall be made by Sellers and Shareholder by wire transfer to the
Buyer on the date of execution of this Second Amendment. The parties
acknowledge that the Closing Date Balance Sheet shall be final and binding
for purposes of determining the Purchase Price and the line items covered
thereby shall not be considered matters subject to or providing the basis
for indemnification pursuant to Section 8.03 of the Agreement except to the
extent otherwise provided in Section 5(A)(b) hereof.
(ii) Section 8.10(a), Collection of Receivables, is hereby
amended by amending the last two sentences thereof to read in full as
follows:
Buyer has assigned to Seller Receivables acquired by Buyer on the Closing
Date that remained uncollected on November 15, 1997 pursuant to that
certain Assignment Agreement dated as of December 12, 1997. XLSource
agrees to pay to Buyer an amount equal to $14,120,000 in consideration of
such assignment. Such amount shall be paid by XLSource on the date of
execution of this Second Amendment by wire transfer from the Escrow Account
of $13,822,309.63 (constituting the entire principal amount thereof
together with interest accrued thereon to and including February 5, 1998)
and wire transfer of the balance thereof ($297,690.37). Buyer acknowledges
and agrees that it shall have no other right or claim of any nature against
XLSource, the other Sellers or Shareholder in any manner arising out of or
based upon the Receivables except to the extent otherwise provided in
Section 5(A)(b) hereof.
SECTION 2. Reduction of Purchase Price. The parties hereto agree
that the payments to Buyer set forth in Section 1 of this Second Amendment
shall constitute a reduction in the Purchase Price equal to the aggregate
amount of such payments.
SECTION 3. Instructions to Escrow Agent. XLSource and Buyer
hereby jointly instruct the Escrow Agent to disburse to Buyer on or
promptly following the date of execution of this Second Amendment, the
entire amount held by the Escrow Agent in the XLSource Escrow Account
pursuant to the Escrow Agreement dated as of July 18, 1997 among XLSource,
Buyer and the Escrow Agent (the "Escrow Agreement"). After February 5,
1998, all interest accruing on the amounts held pursuant to the Escrow
Agreement shall be deemed income earned by and allocable to Buyer.
XLSource shall pay to Buyer by wire transfer on the date of execution of
this Second Amendment an amount equal to the amount of any such interest
that has been paid by the Escrow Agent to XLSource.
SECTION 4. Payment for Transition Services. Buyer agrees to pay
to XLSource, on the date of execution of this Second Amendment, $50,000 in
full payment for all transitional services provided by Sellers, Shareholder
and XLConnect to Buyer pursuant to the Transitional Services Agreement.
Buyer shall pay such amount by check payable to XLSource or at the option
of XLSource, XLSource may reduce the payment to Buyer pursuant to Section
1(i) of this Second Amendment by the amount of $50,000.
SECTION 5. Mutual Releases. Buyer hereby releases and
discharges each other party hereto and each such other party's
administrators, successors and assigns, and Sellers, Shareholders and
XLConnect hereby release and discharge Buyer and the GECITS Entities and
their administrators, successors and assigns, in each case, from all
actions, causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, covenants, contracts, controversies, agreements,
promises, damages, judgments, executions, claims and demands whatsoever, in
law or equity, which any such party may have against any other such party
arising out of or with respect to the Agreement and relating to a time on
or prior to the date hereof; provided, however, that such release shall not
apply to and (A) the Buyer does not make any such discharge or release (a)
with respect to amounts owed by Sellers, Shareholder or XLConnect to Buyer
(x) as facilities usage charges which are due to Buyer and unpaid on the
date hereof, (y) for services provided by Buyer or the GECITS Entities to
Sellers, Shareholder, XLConnect or Hewlett-Packard Company with respect to
the arrangements referred to as WCUP and (b) with respect to the inaccuracy
of incompleteness of any representation or warranty made by the Sellers or
the Shareholder and not known to Buyer on the date hereof, (B) Sellers and
Shareholder do not make any such discharge or release (a) with respect to
amounts payable by GECITS for a certain golf outing marketing event held at
the Oakmont Country Club, (b) with respect to amounts payable by GECITS for
services provided at GECITS' or an XLS Transferred Customers' request after
the Closing Date by XLConnect to such SLS Transferred Customers which
either were billed by GECITS or billed by XLConnect but paid to GECITS, (c)
with respect to the Assignment Agreement dated as of December 12, 1997 and
(d) any outstanding accounts receivable payable by any GECITS Entities for
services or products provided by Sellers or Shareholder prior to the date
hereof and (C) neither Buyer nor Sellers or Shareholder release the
collecting or receiving party in respect of claims based on any collection
of or receipt of payment on any Receivables or accounts receivable by the
wrong entity.
Notwithstanding the foregoing, except as specifically provided in this
Section 5, this Second Amendment shall not be construed to release any
party from its obligations under, or terminate the obligations of any party
to, the Agreement, including, without limitations the obligations of the
parties hereto with respect to the non-competition provisions of the
Agreement.
SECTION 6. Reference to and Effect on the Agreement. (a) On and
after the date hereof each reference in the Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import, and each reference
in the documents delivered in connection therewith, shall mean and be a
reference to the Agreement as amended hereby.
(b) Except as specifically provided in Section 4 hereof, the
execution, delivery and effectiveness of this Second Amendment shall not
operate as a waiver of any right, power or remedy of any party to the
Agreement, nor constitute a waiver of any provision of the Agreement, and,
except as specifically provided herein, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed.
SECTION 7. Governing Law. This Second Amendment shall be
governed by and construed in accordance with the laws of the Commonwealth
of Pennsylvania.
SECTION 8. Headings. Section headings in this Second Amendment
are included herein for convenience of reference only and shall not
constitute a part of this Second Amendment for any other purpose.
SECTION 9. Counterparts. This Second Amendment may be executed
in any number of counterparts, all of which taken together shall constitute
one and the same instrument, and any party hereto may execute this Second
Amendment by signing any such counterpart.
SECTION 10. Entire Agreement. The Agreement, as amended by this
Second Amendment, supersedes all prior agreements, arrangements and
understandings relating to the subject matter of this Second Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day and year first above written.
GE INFORMATION TECHNOLOGY SOLUTIONS ACQUISITION
CORP., as Buyer
By: /s/ Gerald A. Poch
-----------------------------------------
Name: Gerald A. Poch
Title: Chairman of the Board and President
THE FUTURE NOW, INC.,
as Seller
By: /s/ Eugene Marinelli, Jr.
-----------------------------------------
Name: Eugene Marinelli, Jr.
Title: Vice President
XLSOURCE, INC.,
as Seller
By: /s/ Eugene Marinelli, Jr.
-----------------------------------------
Name: Eugene Marinelli, Jr.
Title: Vice President
E-C COMPUTER TECHNICAL SERVICES, INC.,
as Seller
By: /s/ Eugene Marinelli, Jr.
-----------------------------------------
Name: Eugene Marinelli, Jr.
Title: Vice President
RCK COMPUTERS, INC.,
as Seller
By: /s/ Eugene Marinelli, Jr.
-----------------------------------------
Name: Eugene Marinelli, Jr.
Title: Vice President
INTELLIGENT ELECTRONICS, INC., as Shareholder
By: /s/ Eugene Marinelli, Jr.
-----------------------------------------
Name: Eugene Marinelli, Jr.
Title: Vice President
XLCONNECT SOLUTIONS, INC. and XLCONNECT SYSTEMS,
INC., each hereby agrees to Section 4 and Section 5
hereof.
XLCONNECT SOLUTIONS, INC.
By: /s/ Timothy Wallace
-------------------------
Name: Timothy Wallace
Title: President
XLCONNECT SYSTEMS, INC.
By: /s/ Timothy Wallace
-------------------------
Name: Timothy Wallace
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001018525
<NAME> XLCONNECT SOLUTIONS, INC.
Exhibit 27.1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,232
<SECURITIES> 0
<RECEIVABLES> 27,607
<ALLOWANCES> 1,154
<INVENTORY> 0
<CURRENT-ASSETS> 46,949
<PP&E> 16,442
<DEPRECIATION> 8,925
<TOTAL-ASSETS> 79,920
<CURRENT-LIABILITIES> 16,755
<BONDS> 0
0
0
<COMMON> 166
<OTHER-SE> 57,860
<TOTAL-LIABILITY-AND-EQUITY> 79,920
<SALES> 135,703
<TOTAL-REVENUES> 135,703
<CGS> 91,911
<TOTAL-COSTS> 91,911
<OTHER-EXPENSES> 35,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (375)
<INCOME-PRETAX> 10,387
<INCOME-TAX> 5,417
<INCOME-CONTINUING> 4,970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,970
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
