<PAGE>
[THE FUTURE NOW, INC. LOGO]
8044 MONTGOMERY ROAD
SUITE 601
CINCINNATI, OHIO 45236
August 7, 1995
Dear Shareholder:
You are cordially invited to attend a special meeting (the "Special
Meeting") of shareholders of The Future Now, Inc. ("TFN") to be held on
August 17, 1995, at 10:00 a.m. at The Harley Hotel, 8020 Montgomery Road,
Cincinnati, Ohio.
At the meeting, you will be asked to consider and vote on a proposed
merger of TFN with IE Ohio Acquisition Corporation, a corporation organized
under the laws of the State of Ohio ("Mergerco"). Mergerco is a wholly owned
subsidiary of Intelligent Electronics, Inc., a corporation organized under
the laws of the Commonwealth of Pennsylvania ("IE"). Under the terms of the
proposed merger, TFN will be the surviving corporation and will be a wholly
owned subsidiary of IE (the "Merger").
IE is a Pennsylvania corporation which provides computer technology
products and services. For its fiscal year ended January 28, 1995, IE's
revenues exceeded $3.2 billion. IE Common Stock is traded on the Nasdaq
National Market. The last reported sale price of IE Common Stock on August 4,
1995 as reported by Nasdaq was $13 per share.
In the Merger, each share of common stock of TFN ("TFN Common Stock")
issued and outstanding immediately prior to the effective time of the Merger
(other than shares held by IE, in the treasury of TFN or any subsidiary of
TFN or by dissenting shareholders) shall be converted into 0.6588 (the
"Conversion Number") fully paid and nonassessable shares of Common Stock, par
value $.01 per share, of IE ("IE Common Stock"), subject to adjustment as
described below, and cash in lieu of issuance of any fractional share.
If the average closing price of IE Common Stock as reported by The Nasdaq
Stock Market during the 20 trading days ending on the second trading day prior
to the Merger (the "Average Closing Price") is greater than $11.00 or is less
than $9.00, the Merger Agreement may be terminated by IE or TFN, respectively.
If IE elects to terminate the Merger Agreement because the Average Closing Price
is greater than $11.00, TFN has the right to override any such termination
election by agreeing that the Conversion Number will be changed to the quotient
that results from dividing $7.2468 ($11.00 times 0.6588) by the Average Closing
Price, which will result in a Conversion Number less than 0.6588. In such event,
TFN Shareholders would receive the equivalent in shares of IE Common Stock of
$7.2468 (valued at the Average Closing Price) for each share of TFN Common
Stock. It also is possible, although unlikely, that the Average Closing Price
would exceed $11 per share and (i) IE would exercise its termination right and
TFN would elect not to proceed with the transaction and therefore would remain
an independent company and TFN Shareholders would retain their shares of TFN
Common Stock, or (ii) IE would not elect to exercise its termination right, in
which case each share of TFN Common Stock would be converted into 0.6588 shares
of IE Common Stock having a value (based on the Average Closing Price) exceeding
$7.2468 per share of TFN Common Stock. In no event will the value of the IE
Common Stock received in the Merger (based on the Average Closing Price) be less
than $7.2468 per share of TFN Common Stock if the Average Closing Price exceeds
$11 per share of IE Common Stock and the Merger is consummated. As of August 4,
1995 the Average Closing Price would have been $13.5563.
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If TFN elects to terminate the Merger Agreement because the Average
Closing Price is less than $9.00, IE has the right to override any such
termination election by agreeing that the Conversion Number will be changed
to the quotient that results from dividing $5.9292 ($9.00 times 0.6588) by
the Average Closing Price, which will result in a Conversion Number greater
than 0.6588. In such event, TFN Shareholders would receive the equivalent in
shares of IE Common Stock of $5.9292 (valued at the Average Closing Price)
for each share of TFN Common Stock. It also is possible that the Average
Closing Price would be less than $9 per share and (i) TFN would exercise its
termination right and IE would elect not to proceed with the transaction and
TFN therefore would remain an independent company and TFN Shareholders would
retain their shares of TFN Common Stock, or (ii) TFN would not elect to
exercise its termination right, in which case each share of TFN Common Stock
would be converted into 0.6588 shares of IE Common Stock having a value
(based on the Average Closing Price) less than $5.9292 per share of TFN
Common Stock.
The effect of these alternatives is presented in the following table:
Average Conversion Number
Closing Price Party Action (Value Per TFN Share)
-------------------- -------------------- --------------------------
[S] [C] [C]
$9-11, inclusive None permitted 0.6588 (value between
$5.9292 and $7.2468)
over $11 None taken 0.6588 (value greater
by IE than $7.2468)
IE termination/ $7.2468 divided by
TFN override Average Closing Price
(value equals $7.2468)
IE termination/ Merger terminates
no TFN override
under $9 None taken 0.6588 (value below
by TFN $5.9292)
TFN termination/ $5.9292 divided by
IE override Average Closing Price
(value equals $5.9292)
TFN termination/ Merger terminates
no IE override
As discussed in the attached Proxy Statement/Prospectus, the TFN Board of
Directors believes that, unless circumstances change significantly from those in
place as of the date hereof, it would be in the best interests of TFN
Shareholders for the TFN Board of Directors to exercise its override right if
the Average Closing Price exceeds $11.00 and IE elects to terminate the Merger
Agreement. For additional information about the potential adjustments to the
Conversion Number, see "The Merger - Determination of the Conversion Number."
For additional information about the potential consequences of TFN continuing to
operate as an independent company, see "The Merger - Consequences to TFN if the
Merger Is Not Approved."
A Special Committee of the Board of Directors of TFN (the "Special
Committee") has considered the fairness of the terms and conditions of the
Merger. The Special Committee has unanimously recommended the proposed terms
of the Merger Agreement to your Board of Directors and your Board of
Directors has unanimously approved the Merger Agreement. Your Board of
Directors recommends that you vote FOR adoption of the Merger Agreement.
Approval of the proposal to adopt the Merger Agreement will also authorize
your Board of Directors to exercise its discretion whether to proceed with
the Merger in the event either (i) IE exercises its termination right if the
Average Closing Price is greater than $11.00 or (ii) TFN has the right to
exercise its termination right if the Average Closing Price is less than
$9.00.
The attached Proxy Statement/Prospectus is a proxy statement for the
Special Meeting and a prospectus for the shares of IE Common Stock (and
options and warrants to purchase IE Common Stock) to be issued in the Merger
to holders of TFN Common Stock (and TFN options and warrants).
2
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Please give these materials your careful attention, because the discussion
included therein is important to your decision on the matters being
presented. Whether or not you plan to attend the Special Meeting in person,
please promptly mark, sign and date the enclosed proxy and return it in the
enclosed envelope to ensure that your shares will be represented at the Special
Meeting. If you attend the Special Meeting in person, you may revoke your
proxy at the meeting by voting in person. IE beneficially owns 2,344,024
shares of TFN Common Stock, representing approximately 31% of the outstanding
shares of TFN Common Stock. IE intends to vote or cause to be voted such
shares in favor of adoption of the Merger Agreement. For purposes of one of
the levels of vote required under the Ohio Control Share Acquisition Act,
IE's shares of TFN Common Stock will not be counted in determining whether
the requisite percentage of TFN's shareholders adopt the Merger Agreement.
We look forward to seeing you at the Special Meeting.
Sincerely,
Terry L. Theye
Chairman of the Board
and Chief Executive Officer
3
<PAGE>
THE FUTURE NOW, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 17, 1995
To the Shareholders of The Future Now, Inc.:
A Special Meeting of the Shareholders of The Future Now, Inc. ("TFN") will
be held on August 17, 1995, at 10:00 a.m. at The Harley Hotel, 8020 Montgomery
Road, Cincinnati, Ohio for the following purposes:
1. To consider and vote upon a proposal to adopt an Agreement and Plan of
Merger (the "Merger Agreement"), which provides for the merger (the "Merger")
into TFN of IE Ohio Acquisition Corporation ("Mergerco"), a newly formed Ohio
corporation that is wholly owned by Intelligent Electronics, Inc. ("IE"), a
Pennsylvania corporation, on the terms and subject to the conditions set
forth in the Merger Agreement, a copy of which is attached as Annex A to the
accompanying Proxy Statement/Prospectus. Pursuant to the Merger Agreement:
(i) Mergerco would be merged with and into TFN, and (ii) each outstanding
share of common stock of TFN, no par value ("TFN Common Stock"), would be
converted into 0.6588 (the "Conversion Number") shares of Common Stock, par
value $.01 per share, of IE (the "IE Common Stock"), and cash would be paid
in lieu of any fractional share; provided, however, that the Merger Agreement
may be terminated if the Average Closing Price (as defined in the Merger
Agreement) of the IE Common Stock is less than $9.00 or more than $11.00, in
each case unless the Conversion Number is adjusted, all as more particularly
described in the Merger Agreement and in the accompanying Proxy
Statement/Prospectus. Approval of the proposal to adopt the Merger Agreement
will also authorize the Board of Directors of TFN to exercise its discretion
whether (i) to elect to accept the adjustment to the Conversion Number that
could be made if IE exercises its termination right because the Average
Closing Price of IE Common Stock is greater than $11.00 and (ii) to elect to
exercise TFN's termination right in the event the Average Closing Price of IE
Common Stock is less than $9.00. It is possible that the Conversion Number
will not be adjusted if the Average Closing Price is less than $9 or more
than $11 or that the Merger might not proceed under those circumstances, each
with differing consequences to TFN shareholders. For additional information,
see "The Merger -- Determination of the Conversion Number" in the
accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Shareholders of record at the close of business on August 7, 1995, are
entitled to notice of and to vote at the Special Meeting. See "The Special
Meeting" in the accompanying Proxy Statement/Prospectus.
Each shareholder is invited to attend the Special Meeting. Whether or not
you expect to attend the Special Meeting, please promptly mark, sign and date
the enclosed proxy and return it in the enclosed envelope. No postage is
required if mailed within the United States. Your proxy may be revoked at any
time before it is voted by filing with the Secretary of TFN a written
revocation of proxy bearing a later date, or by attending and voting in
person at the Special Meeting.
By Order of the Board of Directors,
Norma Skoog, Secretary
August 7, 1995
The affirmative votes of the holders of (i) a majority of the outstanding
shares of the TFN Common Stock, and (ii) a majority of the voting power of
the TFN Common Stock represented in person or by proxy at the Special Meeting
(excluding any shares owned by IE, executive officers of TFN and directors of
TFN who are also employees of TFN), are required for the approval of the
proposal to adopt the Merger Agreement.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, PLEASE
MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY PROMPTLY. YOU SHOULD NOT
SEND IN YOUR STOCK CERTIFICATES WHEN RETURNING YOUR PROXY. IF THE MERGER IS
CONSUMMATED, YOU WILL BE NOTIFIED AND PROVIDED WITH INSTRUCTIONS FOR EXCHANGE
OF YOUR CERTIFICATES.
<PAGE>
PROXY STATEMENT
OF
THE FUTURE NOW, INC.
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 17, 1995
------
PROSPECTUS OF
INTELLIGENT ELECTRONICS, INC.
COMMON STOCK
PAR VALUE $.01 PER SHARE
------
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") relates to
the proposed merger (the "Merger") of The Future Now, Inc. ("TFN") with IE
Ohio Acquisition Corporation, a corporation organized under the laws of the
State of Ohio ("Mergerco"). Mergerco is a wholly owned subsidiary of
Intelligent Electronics, Inc., a corporation organized under the laws of the
Commonwealth of Pennsylvania ("IE"). Upon completion of the Merger, TFN will
be the surviving corporation (the "Surviving Corporation") and will be a
wholly owned subsidiary of IE.
In the Merger, each share of Common Stock of TFN, no par value ("TFN
Common Stock"), issued and outstanding immediately prior to the effective
time of the Merger (other than shares held by IE, in the treasury of TFN or
any subsidiary of TFN or by dissenting shareholders) shall be converted into
the right to receive 0.6588 (the "Conversion Number") fully paid and
nonassessable shares of Common Stock, par value $.01 per share, of IE (the
"IE Common Stock"), subject to adjustment. Cash will be paid in lieu of the
issuance of any fractional share of IE Common Stock which holders of TFN
Common Stock would otherwise be entitled to receive in the Merger.
This Proxy Statement/Prospectus constitutes both the proxy statement of
TFN relating to the solicitation of proxies by TFN's Board of Directors for
use at the Special Meeting of Shareholders of TFN, and the prospectus of IE
with respect to the issuance of 3,832,794 shares of IE Common Stock and
options and warrants to purchase IE Common Stock pursuant to the Merger
Agreement, subject to increase or decrease in the event the Conversion Number
is adjusted pursuant to the exercise of certain termination override rights
set forth in the Merger Agreement. This Proxy Statement/Prospectus and the
enclosed form of proxy are first being sent to shareholders of TFN on or
about August 8, 1995.
See "Risk Factors" on page 14 for a discussion of certain factors that
should be considered by TFN Shareholders in deciding whether to vote in favor
of the Merger Agreement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------
The date of this Proxy Statement/Prospectus is August 7, 1995.
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is furnished to shareholders of TFN in
connection with the solicitation of proxies by the Board of Directors of TFN
(the "TFN Board") from holders of the outstanding shares of TFN Common Stock for
use at a special meeting of shareholders of TFN scheduled to be held on August
17, 1995, commencing at 10:00 a.m. at The Harley Hotel, 8020 Montgomery Road,
Cincinnati, Ohio, and at any adjournment or postponement thereof (the "Special
Meeting"). Only holders of TFN Common Stock (each, a "TFN Shareholder") at the
close of business on August 7, 1995 (the "Record Date"), are entitled to notice
of and to vote at the Special Meeting and any adjournment or postponement
thereof. On the Record Date, there were outstanding 7,578,566 shares of TFN
Common Stock, 2,344,024 of which (constituting approximately 31% of such
outstanding shares) were held beneficially by IE and its subsidiaries.
This Proxy Statement/Prospectus and a form of proxy for use at the Special
Meeting are first being mailed on or about August 8, 1995 to holders of record
on the Record Date of shares of TFN Common Stock.
At the Special Meeting, TFN Shareholders will be asked to consider and
vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of
April 28, 1995 (the "Merger Agreement"), by and among IE, Mergerco (a wholly
owned subsidiary of IE) and TFN. A copy of the Merger Agreement is attached
as Annex A to this Proxy Statement/Prospectus. The Merger Agreement provides
that (a) Mergerco will be merged with and into TFN (the "Merger"), with TFN
being the surviving corporation (the "Surviving Corporation"), all of the
stock of which will be owned by IE, and (b) each share of TFN Common Stock
outstanding immediately prior to the time the Merger becomes effective (the
"Effective Time") (other than shares which are (i) held by IE or in the
treasury of TFN or any subsidiary of TFN (collectively, the "Excluded
Shares") or (ii) Dissenting Shares (hereinafter defined), will be converted
into (x) a number of whole shares of IE Common Stock determined by
multiplying the number of shares of TFN Common Stock owned by such
shareholder immediately prior to the Effective Time by the Conversion Number,
and (y) cash in lieu of any fractional shares of IE Common Stock which they
would otherwise be entitled to receive, all as described below. In addition,
in the Merger, outstanding options and warrants to purchase shares of TFN
Common Stock will be converted into options and warrants to purchase shares
of IE Common Stock, as described below. The shares of IE Common Stock, and
cash in lieu of fractional shares of IE Common Stock, are sometimes
hereinafter referred to as the "Merger Consideration." It is possible that
the Conversion Number will not be adjusted if the Average Closing Price is
less than $9 or more than $11 or that the Merger might not proceed under
those circumstances, each with differing consequences to TFN shareholders.
For additional information, see "The Merger - Determination of the Conversion
Number."
If the average closing price of IE Common Stock as reported by The Nasdaq
Stock Market during the 20 trading days ending on the second trading day prior
to the Closing Date under the Merger Agreement (the "Average Closing Price") is
greater than $11.00 or is less than $9.00, the Merger Agreement may be
terminated by IE or TFN, respectively. If IE elects to terminate the Merger
Agreement because the Average Closing Price is greater than $11.00, TFN has the
right to override any such termination election by agreeing that the Conversion
Number will be changed to the quotient that results from dividing $7.2468 by the
Average Closing Price, resulting in a Conversion Number less than 0.6588 (the
"Alternative Consideration"). If TFN elects to terminate the Merger Agreement
because the Average Closing Price is less than $9.00, IE has the right to
override any such termination election by agreeing that the Conversion Number
will be changed to the quotient that results from dividing $5.9292 by the
Average Closing Price, resulting in a Conversion Number greater than 0.6588. See
"The Merger Agreement - Termination; Adjustment of Conversion Number." If these
termination provisions and termination override provisions are exercised, the
number of shares of IE Common Stock that holders of TFN Common Stock will
receive in the Merger could be more or less than the number of shares of IE
Common Stock such holders would receive absent such termination and termination
override provisions, but the value of such shares would be the equivalent in
shares of IE Common Stock (valued at the Average Closing Price) of at least
$5.9292 and up to $7.2468 for each share of TFN Common Stock. It is possible
that the Conversion Number will not be adjusted if the Average Closing Price is
less than $9 or more than $11 or that the Merger might not proceed under those
circumstances, each with differing consequences to TFN shareholders. For
additional information, see "The Merger - Determination of the Conversion
Number."
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Holders as of the Record Date of shares of TFN Common Stock (other than
holders of the Excluded Shares) have the right to dissent from the Merger and
(in the event that the Merger Agreement is adopted and the Merger is
consummated) demand in writing payment of the fair cash value of such shares
in compliance with and by following the procedures under Section 1701.85
("Section 1701.85") of the Ohio Revised Code (the "ORC"). All shares that are
subject to such a written demand for payment of the fair cash value that has
not been withdrawn or waived are sometimes referred to herein as the
"Dissenting Shares." IE intends to vote or cause to be voted FOR adoption of
the Merger Agreement all shares of TFN Common Stock beneficially owned by it
and therefore will not exercise or cause to be exercised any of its rights
under Section 1701.85.
It is estimated that approximately 3,448,516 shares of IE Common Stock
will be issued by IE in the Merger to persons other than subsidiaries of IE.
Such shares will represent approximately 10% of the issued and outstanding
shares of IE Common Stock immediately after the Merger. In addition, it is
estimated that currently outstanding options and warrants to purchase shares
of TFN Common Stock will be converted into options and warrants to purchase
approximately 384,278 shares of IE Common Stock in the Merger. IE Common
Stock is traded on the Nasdaq National Market under the symbol "INEL."
Approval of the proposal to adopt the Merger Agreement requires the
affirmative votes of the holders of (i) a majority of the outstanding shares
of TFN Common Stock, and (ii) a majority of the TFN Common Stock represented
in person or by proxy at the Special Meeting (excluding any shares owned by
IE, executive officers of TFN and directors of TFN who are also employees of
TFN) (the foregoing votes being collectively referred to herein as the
"Required Shareholder Vote"). Approval of the proposal to adopt the Merger
Agreement will also authorize the TFN Board to exercise its discretion
whether to proceed with the Merger in the event termination rights are
exercised or exercisable because the Average Closing Price of IE Common Stock
is less than $9.00 or is more than $11.00.
iii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
INTRODUCTION ......................................................................... ii
AVAILABLE INFORMATION ................................................................ 1
SUMMARY .............................................................................. 2
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION .................... 9
COMPARATIVE PER SHARE DATA ........................................................... 11
COMPARATIVE MARKET PRICE DATA ........................................................ 12
RISK FACTORS ......................................................................... 14
Dependence on Key Vendors ....................................................... 14
Industry Conditions ............................................................. 14
Operating Inefficiencies and Transformation Costs ............................... 14
Volatility of Common Stock Price ................................................ 14
Legal Proceedings ............................................................... 15
Continuation of Dividends ....................................................... 15
THE SPECIAL MEETING .................................................................. 16
General ......................................................................... 16
Voting at the Special Meeting ................................................... 16
Proxies ......................................................................... 18
THE MERGER ........................................................................... 18
Background, Recommendations of TFN's Board of Directors and Reasons for the
Merger ........................................................................ 18
Opinion of Financial Advisor .................................................... 23
Interests of Certain Persons in the Merger ...................................... 25
Determination of the Conversion Number .......................................... 28
Antitrust ....................................................................... 30
Federal Securities Law Matters .................................................. 30
Accounting Treatment ............................................................ 30
Listing on Nasdaq ............................................................... 30
Consequences to TFN if the Merger Is Not Approved ............................... 30
THE MERGER AGREEMENT ................................................................. 31
General ......................................................................... 31
Effective Time of Merger ........................................................ 31
Conversion of Stock ............................................................. 31
Payment for TFN Common Stock; Exchange of Stock Certificates .................... 32
Articles of Incorporation, Code of Regulations, Officers and Directors .......... 32
Conditions to the Merger ........................................................ 33
Certain Covenants ............................................................... 34
Termination; Adjustment of Conversion Number .................................... 35
Termination Fee ................................................................. 35
Certain Other Provisions of the Merger Agreement ................................ 36
PRO FORMA FINANCIAL INFORMATION ...................................................... 37
BUSINESS RELATIONSHIPS BETWEEN THE PARTIES ........................................... 42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ................................ 43
Tax Opinion ...................................................................... 44
Certain Consequences of Reorganization Status..................................... 44
Consequences of Receipt of Cash in Lieu of Fractional Shares ..................... 44
Cash Received by Holders of TFN Common Stock Who Dissent.......................... 45
RIGHTS OF DISSENTING SHAREHOLDERS .................................................... 45
COMPARISON OF RIGHTS OF HOLDERS OF TFN COMMON STOCK AND IE COMMON STOCK .............. 47
iv
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Page
--------
Introduction .................................................................... 47
Certain Voting Rights ........................................................... 47
Special Meetings of Shareholders; Shareholder Action by Written Consent ......... 48
Amendment of Corporate Governing Documents ...................................... 48
Special Shareholder Voting Requirements ......................................... 49
Board-Approved Preferred Stock .................................................. 49
Liability and Indemnification of Officers and Directors ......................... 49
Classification of Board of Directors ............................................ 51
Removal of Directors ............................................................ 51
Dissenters' Rights .............................................................. 51
Payment of Dividends ............................................................ 51
Repurchase of Shares ............................................................ 51
Tender Offer Statute ............................................................ 51
Anti-Takeover Statutes .......................................................... 52
Anti-Greenmail Statute .......................................................... 52
Anti-Takeover Effect of Pennsylvania Law and the IE Articles and the IE By-Laws . 52
CERTAIN INFORMATION CONCERNING INTELLIGENT ELECTRONICS ............................... 53
Business ........................................................................ 53
Introduction ............................................................... 53
General .................................................................... 53
Network Structure .......................................................... 54
Products ................................................................... 55
Competition ................................................................ 55
Trademarks and Service Marks ............................................... 56
Government Regulation ...................................................... 56
Employees .................................................................. 56
Property ................................................................... 56
Legal Proceedings .......................................................... 57
Management ...................................................................... 57
Directors and Executive Officers ........................................... 57
Executive Compensation ..................................................... 60
Certain Relationships and Related Transactions .................................. 62
Principal Shareholders and Holdings of Officers and Directors ................... 62
Description of Capital Stock...................................................... 63
CERTAIN INFORMATION CONCERNING THE FUTURE NOW ........................................ 64
History and Business ............................................................ 64
Preliminary Second Quarter Results................................................ 64
Microcomputer Marketplace ....................................................... 64
Business Strategy ............................................................... 65
Marketing and Customers ......................................................... 66
Products ........................................................................ 67
The Professional Services Organization .......................................... 68
Manufacturers and Suppliers ..................................................... 69
Competition ..................................................................... 70
Seasonality ..................................................................... 70
Employees ....................................................................... 70
Trademarks and Service Marks .................................................... 70
Properties ...................................................................... 71
Legal Proceedings ............................................................... 71
Security Ownership of Certain Beneficial Owners and Management of The Future Now 71
SUBMISSION OF SHAREHOLDER PROPOSALS .................................................. 72
LEGAL OPINIONS ....................................................................... 72
v
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Page
--------
EXPERTS .............................................................................. 72
DEFINITIONS .......................................................................... 72
MISCELLANEOUS ........................................................................ 75
INDEX TO FINANCIAL STATEMENTS ........................................................ F-1
MERGER AGREEMENT ..................................................................... A-1
OPINION OF THE ROBINSON-HUMPHREY COMPANY, INC. ....................................... B-1
PROCEDURE IN CASE OF DISSENTS ........................................................ C-1
ACQUIRING PERSON'S STATEMENT ......................................................... D-1
TAX OPINION OF ARNOLD & PORTER ....................................................... E-1
</TABLE>
vi
<PAGE>
No person is authorized to give any information or to make any
representations, other than those contained in this Proxy
Statement/Prospectus, in connection with the offering made hereby, and, if
given or made, such information or representations must not be relied on as
having been authorized. This Proxy Statement/Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy the securities to which
it relates in any jurisdiction in which, or to any person to whom, it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any offer or sale made hereunder shall, under
any circumstances, create any implication that there has been no change in
information set forth herein or in the affairs of TFN, IE or Mergerco or any
of their affiliates or subsidiaries from the date hereof.
AVAILABLE INFORMATION
IE has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with any
amendments, the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), of which this Proxy Statement/Prospectus
is a part, with respect to the IE Common Stock that may be issued pursuant to
the Merger. As permitted by the rules and regulations of the Commission, this
Proxy Statement/Prospectus omits certain information and exhibits contained
in the Registration Statement.
TFN and IE are subject to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith TFN and IE file periodic reports, proxy statements and
other information with the Commission. The Registration Statement and the
exhibits thereto, as well as such reports, proxy statements and other
information filed by TFN or IE with the Commission, can be inspected and
copied upon payment of the prescribed fee at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Chicago Regional Offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and New York Regional Offices at 7 World Trade Center, 13th Floor, New York,
New York 10048.
The IE Common Stock and the TFN Common Stock are traded on the Nasdaq
National Market. Reports and other information concerning IE and TFN are
available for inspection and copying at the offices of The Nasdaq Stock
Market ("Nasdaq") at 1735 K Street, N.W., Washington, D.C. 20006-1506.
Application will be made to list the additional shares of IE Common Stock to
be issued in connection with the Merger on the Nasdaq National Market.
If the Merger is consummated, the TFN Common Stock will be delisted from
Nasdaq and TFN will take steps to terminate the registration of the TFN
Common Stock under Section 12 of the Exchange Act. See "Comparative Market
Price Data."
1
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements (including the notes thereto)
appearing elsewhere in this Proxy Statement/Prospectus. TFN Shareholders are
urged to read this Proxy Statement/Prospectus and the Annexes hereto in their
entirety. For a list of defined terms used below, see "Definitions" commencing
on page 72.
THE MERGER
Terms of the Merger........... The Merger Agreement provides for the merger
of Mergerco into TFN, with TFN being the
Surviving Corporation. The Surviving
Corporation will be a wholly owned
subsidiary of IE.
At the Effective Time, (i) each outstanding
share of TFN Common Stock, other than the
Excluded Shares and Dissenting Shares, will,
by virtue of the Merger and without any
action on the part of the holder thereof, be
converted into 0.6588 shares of IE Common
Stock, unless adjusted, (ii) cash will be
paid in lieu of the issuance of any
fractional share of IE Common Stock which
holders of TFN Common Stock would otherwise
be entitled to receive in the Merger, and
(iii) outstanding options and warrants to
purchase shares of TFN Common Stock will be
converted into options and warrants to
purchase shares of IE Common Stock. The
potential for adjustment of the Conversion
Number is discussed under "The Merger -
Determination of the Conversion Number,"
which shareholders are urged to review
carefully.
Exchange of TFN Common Stock
Certificates for Merger
Consideration ............... In order to receive the Merger Consideration
following the Effective Time, each holder of
a certificate theretofore representing TFN
Common Stock will be required to surrender
his or her stock certificate, together with
a duly executed and properly completed
letter of transmittal and any other required
documents, to IE by following the procedures
described under "The Merger Agreement -
Payment for TFN Common Stock; Exchange of
Stock Certificates."
Each holder of TFN Common Stock (other than
holders of the Excluded Shares and
Dissenting Shares) will receive a number of
whole shares of IE Common Stock determined
by multiplying the number of shares of TFN
Common Stock owned by such shareholder at
the Effective Time by 0.6588, unless
adjusted as described in "The Merger -
Determination of the Conversion Number."
Such holders will be paid cash in lieu of
any fractional shares of IE Common Stock
which they would otherwise be entitled to
receive. See "The Merger Agreement - Payment
for TFN Common Stock; Exchange of Stock
Certificates."
No dividend or other distribution declared
or made on IE Common Stock shall be paid to
a TFN Shareholder until such shareholder's
certificate(s) representing TFN Common Stock
are surrendered in accordance with the
provisions of the Merger Agreement.
TFN SHAREHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
2
<PAGE>
PARTIES TO THE MERGER AGREEMENT
Intelligent Electronics....... IE provides information technology products,
services and solutions to network
integrators (the "Network"), and to large
and small corporate customers, educational
institutions and governmental agencies. As a
leading supplier of premium brand technology
products in the United States, IE provides
business solutions through innovative
product management, sales demand generation
programs and logistics services. As of April
29, 1995, the Network comprised more than
2,500 locations.
IE's revenues are derived principally from
the distribution of microcomputer systems,
workstations, networking and tele-
communications equipment and software. In
addition, in December 1994, IE acquired
certain assets of branch locations in five
major metropolitan areas from TFN (which
manages such locations for IE) to solidify
its position in strategic corporate markets.
These locations include the metropolitan
areas of Boston, New York City, Los Angeles,
San Francisco and Baltimore/Washington, D.C.
IE, a Pennsylvania corporation, maintains
its principal executive offices at 411
Eagleview Boulevard, Exton, Pennsylvania,
19341, and its telephone number is (610)
458-5500. See "Certain Information
Concerning Intelligent Electronics" and
"Certain Information Concerning The Future
Now." As used herein and unless otherwise
required by the context, "IE" shall mean
Intelligent Electronics, Inc. and its direct
and indirect subsidiaries.
The Future Now................ TFN, a computer sales and services company,
sells and installs microcomputers, UNIX
workstations, turnkey local and wide area
network systems, computer software and
peripheral products for business,
professional, educational and governmental
customers. TFN also offers a wide range of
customer support and consulting services
which generally carry higher gross margins
than product sales and are the principal
focus of TFN's marketing strategy. TFN
currently operates 19 sales offices in 13
states and manages branches in five major
metropolitan areas for IE. TFN does not
maintain any retail facilities.
IE beneficially owns approximately 31% of
the outstanding shares of TFN Common Stock.
If the Merger is consummated, TFN, as the
Surviving Corporation, will become a wholly
owned subsidiary of IE.
TFN, an Ohio corporation, maintains its
principal executive offices at 8044
Montgomery Road, Suite 601, Cincinnati, Ohio
45236 and its telephone number is (513)
792-4500. See "Certain Information
Concerning The Future Now" and "Certain
Information Concerning Intelligent
Electronics."
Mergerco...................... Mergerco was organized by IE in April 1995
under Ohio law in order to effect the Merger
and is a wholly owned subsidiary of IE.
3
<PAGE>
Mergerco has not engaged in any activities
other than those incident to its formation.
If the Merger is consummated, Mergerco will
be merged into TFN and TFN will be the
Surviving Corporation. Mergerco's principal
executive offices are located at 411
Eagleview Boulevard, Exton, Pennsylvania,
19341, and its telephone number is (610)
458-5500.
The Special Meeting........... The Special Meeting will be held on August 17,
1995, commencing at 10:00 a.m. at The Harley
Hotel, 8020 Montgomery Road, Cincinnati, Ohio.
Holders of record of shares of TFN Common
Stock at the close of business on the Record
Date are entitled to notice of and to vote at
the Special Meeting.
Each outstanding share of TFN Common Stock
entitles the holder thereof to one vote. On
the Record Date, 7,578,566 shares of TFN
Common Stock were outstanding.
Matters To Be Considered and
Required Vote................ Approval of the proposal to adopt the Merger
Agreement requires the affirmative votes of
the holders of (i) a majority of the
outstanding shares of TFN Common Stock, and
(ii) a majority of the TFN Common Stock
represented in person or by proxy at the
Special Meeting (excluding any shares owned
by IE, executive officers of TFN and
directors of TFN who are also employees of
TFN). Approval of the proposal to adopt the
Merger Agreement will also authorize the TFN
Board to exercise its discretion whether to
proceed with the Merger in the event either
(i) IE exercises its termination right if
the Average Closing Price is greater than
$11.00 or (ii) TFN has the right to exercise
its termination right if the Average Closing
Price is less than $9.00.
Abstentions and broker non-votes will have
the same effect as votes against approval of
the Merger. IE beneficially owns 2,344,024
shares of TFN Common Stock, constituting
approximately 31% of such outstanding
shares. IE intends to vote or cause to be
voted all such shares FOR adoption of the
Merger Agreement. See "The Special Meeting
-- Voting at the Special Meeting."
Recommendation of the TFN
Board........................ After considering all relevant information,
including the opinion of Robinson-Humphrey
that as of April 28, 1995, the Conversion
Number was fair from a financial point of
view to the shareholders of TFN, the TFN
Special Committee voted unanimously on April
28, 1995, to recommend to the TFN Board that
it approve the terms of the Merger. On April
28, 1995, following the favorable
recommendation of the TFN Special Committee,
the TFN Board unanimously approved the
Merger Agreement.
After considering all relevant information,
including the opinion of Robinson-Humphrey that
as of August 5, 1995, each of the Conversion
Number and the Alternative Consideration was
fair from a financial point of view to the
shareholders of TFN, the TFN Board on August 5,
1995 voted unanimously to recommend that the
TFN Shareholders adopt the Merger Agreement,
and on August 5, 1995, the TFN Board voted
unanimously in favor of calling the Special
Meeting to adopt the Merger Agreement.
4
<PAGE>
THE TFN BOARD UNANIMOUSLY RECOMMENDS THAT
TFN SHAREHOLDERS VOTE FOR ADOPTION OF THE
MERGER AGREEMENT.
For a discussion of the factors considered
by the TFN Board and the TFN Special
Committee in reaching their decisions, see
"The Merger -- Background, Recommendations
of TFN's Board of Directors and Reasons for
the Merger."
Opinion of TFN's Financial
Advisor...................... On April 28, 1995, Robinson-Humphrey
delivered to the TFN Board its opinion to
the effect that, as of that date and based
upon and subject to certain matters as
stated in its opinion, the Conversion Number
was fair from a financial point of view to
the shareholders of TFN. Subsequently,
Robinson-Humphrey delivered to the TFN Board
its opinion dated August 5, 1995 for
inclusion in this Proxy Statement/Prospectus.
The full text of the August 5, 1995
Robinson-Humphrey opinion setting forth the
assumptions made, matters considered and scope
of review undertaken in connection therewith
is attached as Annex B to this Proxy
Statement/Prospectus and should be read in its
entirety. See "The Merger -- Opinion of
Financial Advisor."
Purpose, Structure and Certain
Effects of the Merger........ The purpose of the Merger is for IE to
acquire the shares of TFN Common Stock that
it does not beneficially own so that TFN
will be a wholly owned subsidiary of IE. The
Merger is structured so as to give the TFN
Shareholders the opportunity to own, in a
tax-free exchange, a stock with greater
liquidity, as well as to share in the
prospects of the combined organization.
Certain Benefits of the Merger
for The Future Now........... The Special Committee and the TFN Board
identified a number of potential benefits of
the Merger to TFN Shareholders. The Special
Committee and the TFN Board believe these
benefits are likely to be achieved once the
Merger is consummated as the microcomputer
industry continues to consolidate and the
combined companies will be better able to
compete successfully in a competitive
marketplace. The combined companies are also
likely to be more financially secure than
TFN would have been as TFN's need for
financing will remain if the Merger is not
consummated. See "The Merger -- Background,
Recommendations of TFN's Board of Directors
and Reasons for the Merger." These benefits
include, among others:
-- The opportunity for TFN Shareholders to
participate, as holders of IE Common
Stock, in the potential for growth of the
combined companies and retain the
liquidity of holding shares of a public
company;
5
<PAGE>
-- The strength of the combined companies'
management and the operating and
financial efficiencies applicable to
TFN's operations expected to be achieved
by the Merger and the integration of the
two companies;
-- The possibility for TFN's shareholders to
receive cash dividends on the IE Common
Stock to be received in the Merger; IE
currently pays dividends on the IE Common
Stock at a quarterly rate of $.10 per
share; TFN does not currently pay any
dividend;
-- The terms and structure of the Merger,
including its structure as a tax-free
exchange; and
-- The elimination of the need for TFN, in
the absence of the Merger, to renegotiate
its Secured Credit Agreement or to obtain
new financing.
Interests of Certain Persons
in the Merger................ In considering the recommendation of the TFN
Board and the TFN Special Committee with
respect to the Merger Agreement, TFN's
shareholders should be aware that certain
members of the TFN Board and TFN's senior
management have certain interests in the
Merger that are in addition to the interests
of shareholders of TFN generally, and which
may be deemed to present them with potential
conflicts of interest in connection with the
Merger. The TFN Board and the TFN Special
Committee were aware of these interests and
considered them, among other matters, in
approving the Merger Agreement and the
transactions contemplated thereby.
Two executive officers of TFN, Terry L.
Theye, TFN's Chairman and Chief Executive
Officer, and Lewis E. Miller, TFN's
President and Chief Operating Officer, have
entered into employment agreements with IE
and TFN providing for their continued
employment following the Merger. Upon
completion of the Merger, Mr. Theye will
become an officer of IE. In addition, the
Merger will constitute a change in control
of TFN for purposes of the employment
agreements of certain of TFN's other
executive officers who are not directors of
TFN, entitling such executive officers to
severance payments. See "The Merger --
Interests of Certain Persons in the Merger."
Directors and executive officers of IE,
together with their affiliates, beneficially
owned 19.3% of the IE Common Stock as of
March 31, 1995. Directors and executive
officers of TFN, together with their
affiliates, beneficially owned 5.9% of the
TFN Common Stock as of June 30, 1995.
Rights of Dissenting
Shareholders................. Holders of record of shares of TFN Common
Stock who comply with the requirements of
Ohio law have the right to dissent from the
Merger and receive the fair cash value of
their shares pursuant to Section 1701.85 of
the ORC. See "Rights of Dissenting
Shareholders". IE intends to vote or cause
to be voted all such shares beneficially
owned by it FOR adoption of the Merger
Agreement and therefore will not exercise
any of its rights under Section 1701.85.
6
<PAGE>
Comparison of Shareholder
Rights....................... As a result of the Merger, TFN Common Stock,
which is issued by an Ohio corporation, will
be converted into IE Common Stock, which is
issued by a Pennsylvania corporation. There
are differences between the rights of TFN
Shareholders and the rights of IE
Shareholders. These differences result from
differences between Pennsylvania and Ohio
law and between the governing instruments of
TFN and IE, including differences in terms
of, and rights of holders with respect to,
TFN Common Stock and IE Common Stock. For a
summary of the material differences between
the rights of TFN Shareholders and IE
Shareholders, see "Comparison of Rights of
Holders of TFN Common Stock and IE Common
Stock".
Conditions to the Merger;
Termination of the Merger
Agreement.................... In addition to the adoption of the Merger
Agreement by the shareholders of TFN, the
consummation of the Merger is subject to the
satisfaction or waiver of certain other
conditions, including, among others,
effectiveness of the Registration Statement,
the absence of any injunction, order,
statute or regulation which prohibits
consummation of the Merger, and the number
of Dissenting Shares amounting to not more
than 10% of the outstanding shares of TFN
Common Stock. IE and TFN have filed the
requisite notices under the
Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and have been notified that early
termination of the waiting period has been
granted. In addition, the Merger Agreement
may be terminated in certain events. For a
description of such conditions and
termination events, see "The Merger
Agreement - Conditions to the Merger" and "-
Termination; Adjustment of Conversion
Number."
Termination Fee............... TFN has agreed to pay IE a fee equal to $1.5
million if, on or prior to September 30,
1995, TFN shall have consummated or entered
into an agreement providing for a business
combination (including by merger, sale of
assets or otherwise) of TFN with any person
or entity other than IE, and the Merger
Agreement is terminated as a result thereof.
See "The Merger Agreement - Termination
Fee."
Accounting Treatment of the
Merger....................... The Merger will be accounted for as a
purchase and, accordingly, the purchase
price will be allocated to assets and
liabilities based on estimated fair values
as of the date of the Merger. See "The
Merger - Accounting Treatment" and "Selected
Historical and Unaudited Pro Forma Financial
Information."
Certain Federal Income Tax
Considerations............... TFN has received an opinion of Arnold &
Porter that the Merger, with the TFN
Shareholders receiving IE Common Stock, will
be treated as a reorganization within the
meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
The opinion of Arnold & Porter relating to the
Merger is conditioned on certain facts,
representations and assumptions provided to
Arnold & Porter by TFN and IE and is subject
to certain qualifications and other matters
set forth therein. Such opinion, together with
the letters of facts, representations and
assumptions provided to Arnold & Porter by
TFN and IE, are attached as Annex E hereto.
7
<PAGE>
Provided the Merger qualifies as such a
reorganization, then for federal income tax
purposes: (i) no gain or loss would be
recognized by either TFN, Mergerco or IE as a
result of the Merger, and (ii) TFN's
shareholders would not recognize gain or loss
upon the receipt of IE Common Stock in exchange
for TFN Common Stock in the Merger, except that
gain or loss would be recognized on receipt of
any cash in lieu of fractional shares or
because of the exercise of dissenters' rights.
See "Certain Federal Income Tax Consequences of
the Merger".
Because of the complexities of the federal
income tax laws and because the tax
consequences may vary depending upon a holder's
individual circumstances or tax status, it is
recommended that each shareholder of TFN
consult his or her tax advisor concerning the
federal (and any applicable state, local or
other) tax consequences of the Merger.
8
<PAGE>
SELECTED HISTORICAL AND UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The following tables present selected historical financial information of
IE and TFN and unaudited selected pro forma combined financial information of
IE after giving effect to the Merger. The selected historical information for
IE as of the end of and for each of its last three fiscal years and for TFN
as of the end of and for each of its last three fiscal years has been derived
from historical consolidated financial statements and should be read in
conjunction with such statements and the related notes contained elsewhere in
this Proxy Statement/Prospectus. The selected historical information for IE
as of the end of and for the quarters ended April 29, 1995 and April 30, 1994
and for TFN as of the end of and for the quarters ended March 31, 1995 and
1994 has been derived from historical consolidated financial statements and
should be read in conjunction with such statements and the related notes
contained elsewhere in this Proxy Statement/Prospectus, and such information
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for such periods. The selected
historical information for IE as of the end of and for the transition period
ended February 1, 1992 and its fiscal years ended October 31, 1991 and 1990,
and for TFN as of the end of and for its fiscal years ended December 31, 1991
and 1990, has been derived from historical consolidated financial statements
not contained in this Proxy Statement/Prospectus.
The unaudited selected pro forma combined balance sheet data give effect
to the Merger as if it had been consummated as of April 29, 1995. The
unaudited selected pro forma combined statement of operations data for IE's
1994 fiscal year and the first quarter of fiscal 1995 give effect to the
Merger as if it had occurred at the beginning of each period presented. The
pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the financial position or operating results that
would have occurred or that will occur upon consummation of the Merger. See
"Pro Forma Financial Information."
INTELLIGENT ELECTRONICS
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Three Month
Transition
Three Months ended Year ended Period Year ended
------------------------ -------------------------------------- ended October 31,
April 29, April 30, January 28, January 29, January 30, February 1, ------------------------
1995 1994 1995 1994 1993 1992 1991 1990
---------- --------- ---------- ---------- ---------- -------- ---------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues ............. $827,439 $762,314 $3,208,083 $2,646,102 $2,016,686 $515,974 $1,753,574 $1,458,541
Income from continuing
operations .......... 4,890 12,793 8,060 41,117 22,134 9,625 38,529 29,250
Earnings per common
share from continuing
operations .......... $ 0.16 $ 0.36 $ 0.23 $ 1.13 $ 0.58 $ 0.25 $ 1.12 $ 1.04
Cash dividends declared
per share of common
stock ............... $ 0.10 $ 0.08 $ 0.38 $ 2.24 -- -- -- --
Balance Sheet Data (end
of period): .........
Total assets ......... $672,927 $646,186 $ 670,774 $ 577,011 $ 630,332 $670,415 $ 706,515 $ 442,043
Long-term debt ....... -- -- -- -- 97 29,690 29,756 29,496
Total shareholders'
equity .............. 170,040 229,593 167,484 218,850 280,527 289,279 274,477 119,552
</TABLE>
9
<PAGE>
THE FUTURE NOW
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At or For the Three
Months Ended March 31, At or For Year Ended December 31,
-------------------------- -----------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ----------- --------- --------- --------- ---------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ......................... 151,995 193,688 795,736 701,834 343,000 138,726 83,191
Income (Loss) From Operations ... 1,254 3,268 (41,408) 19,403 10,815 5,711 3,716
Net Income (Loss) (1) ........... $ (566) $ 1,024 $(44,988) $ 9,303 $ 5,709 $ 3,005 $1,626
========= ========== ========= ========= ========= ========== ==========
Earnings (Loss) Per Share ....... $ (.07) $ .14 $ (5.96) $ 1.40 $ 1.27 $ 1.01 $ .70
Cash dividends declared per share
of common stock ................. -- -- $ -- $ -- $ -- $ .40 $ .61
Balance Sheet Data (end of period):
Total Assets .................... $ 211,521 $280,285 $229,377 $290,559 $145,650 $ 52,954 $29,511
Total Debt (2) .................. $ 57,926 $ 77,310 $ 41,175 $ 75,987 $ 34,119 $ 9,812 $ 8,733
Total Shareholders' Equity ...... $ 32,793 $ 78,802 $ 33,289 $ 77,759 $ 42,838 $ 20,592 $ 5,598
</TABLE>
------
(1) TFN, with the consent of its shareholders, elected to be taxed as an S
Corporation under the provisions of Section 1362 of the Internal Revenue
Code until the date of the initial public offering (June 28, 1991). An S
Corporation's shareholders are personally liable to pay taxes on their
proportionate share of the corporation's Federal and state taxable
income. For purposes of this presentation, Federal and state income taxes
have been calculated at an effective rate of approximately 39% as if TFN
were a C Corporation under provisions of the Internal Revenue Code for
all periods prior to June 28, 1991.
(2) Total Long-Term Debt, including Current Portion, plus Short-Term Debt.
TFN's financial position and results of operations have been significantly
affected by the initial acquisition of the business and assets of its
predecessor in December 1988, subsequent acquisitions in May 1989
(Indianapolis); January 1990 (Louisville); September 1990 (Ft. Wayne);
November 1990 (a second Cincinnati operation); May 1991 (Dayton); July 1991
(a second Louisville operation); November 1991 (Cleveland, Lexington,
Moline/Davenport); December 1991 (Little Rock, Memphis); January 1992
(Milwaukee); July 1992 (Boston, Dallas, Los Angeles, Nashville, New York
City, Pittsburgh, San Francisco, St. Louis, Washington, D.C.); January 1993
(a second Dallas operation, Houston); August 1993 (two additional operations
in the Los Angeles area); September 1993 (complementary operations in
Cleveland, Dayton, Columbus, New York, Dallas and Pittsburgh; Atlanta,
Raleigh, Kansas City, Detroit); and TFN's initial public offering of common
shares in June 1991 and secondary offering in March 1993 (see Notes 4 and 5
of Notes to TFN's Consolidated Financial Statements) and by the restructuring
in 1994 discussed in Note 2 of Notes to TFN's Consolidated Financial
Statements; the goodwill impairment in 1994 discussed in Note 9 of Notes to
TFN's Consolidated Financial Statements; and the sale of five branches to IE
in December 1994 (see Note 3 of Notes to TFN's Consolidated Financial
Statements).
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended Three Months ended
January 28, April 29,
1995 1995
------------- ------------------
(in thousands, except per share data)
<S> <C> <C>
Statement of Operations Data:
Revenues ........................................ $3,497,763 $885,603
Income (loss) from operations ................... $ (10,363) $ 10,488
Net income (loss) per share ..................... $ (0.35) $ 0.13
Balance Sheet Data (end of period):
Total assets ....................................................... $848,850
Long-term debt ..................................................... $ 427
Total shareholders' equity ......................................... $216,164
</TABLE>
10
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are cash dividends declared, net income (loss) and book
value per share data of IE and TFN on an historical basis, and on a pro forma
per share basis for IE and an equivalent pro forma per share basis for TFN.
The IE pro forma combined data was derived by combining historical financial
information of IE and TFN after giving effect to the Merger under the
purchase method of accounting. The per share equivalent TFN pro forma data
was calculated by multiplying the IE pro forma combined data by the
Conversion Number.
The information set forth below should be read in conjunction with the
respective audited and unaudited financial statements of IE and TFN contained
elsewhere in this Proxy Statement/Prospectus.
COMPARATIVE PER SHARE DATA
IE (historical)
Book value per share:
At January 28, 1995 ............ $ 5.37
At April 29, 1995 .............. $ 5.44
Net income per share:
Year ended January 28, 1995 .... $ 0.23
Three months ended April 29,
1995 ........................ $ 0.16
Cash dividends per share:
Year ended January 28, 1995 .... $ 0.38
Three months ended April 29,
1995 ........................ $ 0.10
TFN (historical)
Book value per share:
At December 31, 1994 ........... $ 4.39
At March 31, 1995 .............. $ 4.33
Net loss per share:
Year ended December 31, 1994 ... $(5.96)
Three months ended March 31,
1995 ........................ $(0.07)
Cash dividends per share .... $ --
IE (pro forma unaudited) (1)
Book value per share at April 29,
1995 ........................... $ 6.23
Net income (loss) per share:
Year ended January 28, 1995 .... $(0.35)(2)
Three months ended April 29,
1995 ........................ $ 0.13 (3)
Cash dividends per share:
Year ended January 28, 1995 .... $ 0.38
Three months ended April 29,
1995 ........................ $ 0.10
Equivalent TFN (pro forma unaudited)(4)
Book value per share at April 29,
1995 ........................... $ 4.10
Net income (loss) per share:
Year ended January 28, 1995 .... $(0.23)(2)
Three months ended April 29,
1995 ........................ 0.09 (3)
Cash dividends per share:
Year ended January 28, 1995 .... $ 0.25
Three months ended April 29,
1995 ........................ 0.07
11
<PAGE>
------
(1) See "Pro Forma Financial Information."
(2) Includes TFN results of operations for the year ended December 31, 1994.
(3) Includes TFN results of operations for the three months ended March 31,
1995.
(4) Represents the pro forma equivalent of one share of TFN Common Stock
calculated by multiplying IE pro forma data by the Conversion Number of
0.6588. If the Average Closing Price of the IE Common Stock is greater
than $11.00, IE elects to terminate the Merger Agreement and TFN
overrides that termination election by agreeing that the Conversion
Number will be changed to the quotient that results from dividing $7.2468
by the Average Closing Price, the Conversion Number will be less than
0.6588.
COMPARATIVE MARKET PRICE DATA
The IE Common Stock is traded in the Nasdaq National Market under the
symbol "INEL." As of May 1, 1995, there were 860 shareholders of record of IE
Common Stock. The TFN Common Stock is traded in the Nasdaq National Market
under the symbol "FNOW". The number of record holders of TFN Common Stock at
May 1, 1995 was 212. The following table sets forth, for the periods
indicated, the high and low sales prices of the IE Common Stock and TFN
Common Stock, as reported by Nasdaq. IE's fiscal quarters during 1993 and
1994 ended on the Saturday closest to the end of April, July, October and
January (of the following year), and TFN's fiscal quarters end on the last
day of March, June, September and December.
IE
Common Stock
--------------------
High Low
1993 -------- --------
First Quarter ................... $15.38 $12.00
Second Quarter .................. 16.25 12.25
Third Quarter ................... 24.38 15.00
Fourth Quarter .................. 28.00 21.13
1994
First Quarter ................... 27.38 18.50
Second Quarter .................. 23.25 13.63
Third Quarter ................... 18.13 13.88
Fourth Quarter .................. 17.00 7.50
1995
First Quarter ................... 10.38 9.00
Second Quarter ................... 15.75 8.63
Third Quarter (through August 4,
1995).......................... 13.63 12.88
TFN
Common Stock
--------------------
High Low
-------- --------
1993
First Quarter .................. $15.25 $11.25
Second Quarter ................. 14.25 9.25
Third Quarter .................. 13.25 9.00
Fourth Quarter ................. 14.50 10.75
1994
First Quarter .................. 16.88 13.00
Second Quarter ................. 16.00 9.75
Third Quarter .................. 10.25 6.00
Fourth Quarter ................. 9.50 4.50
1995
First Quarter .................. 6.38 4.50
Second Quarter ................. 8.25 5.50
Third Quarter (through August 4,
1995) ........................ 7.50 6.88
12
<PAGE>
IE instituted a quarterly dividend of $0.08 per share in the second
quarter of fiscal 1993. On June 1, 1993, IE paid a one-time special cash
dividend of $2.00 per share. In the second quarter of fiscal 1994, the
quarterly dividend was increased to $0.10 per share. The payment and rate of
future dividends are subject to the discretion of IE's Board of Directors and
will depend upon IE's earnings, financial condition, capital requirements and
other factors. No dividends have been paid on TFN's Common Stock since TFN's
initial public offering of TFN Common Stock in 1991.
The following sets forth the last reported sale prices for a share of TFN
Common Stock (on a historical and equivalent per share basis) and for a share
of IE Common Stock (on a historical per share basis), each as reported by
Nasdaq, as of March 6, 1995, the last full business day preceding the day on
which IE and TFN first announced that IE and TFN had signed a letter of
intent for IE to acquire the outstanding stock of TFN, and as of April 28,
1995, the last full business day preceding the day on which IE and TFN first
announced that the Merger Agreement had been signed, and as of August 4, 1995.
TFN TFN IE
Common Stock Common Stock Common Stock
(Historical) (Equivalent)* (Historical)
-------------- -------------- --------------
March 6, 1995 ... $6.13 $6.59 $10.00
April 28, 1995 ... 5.50 6.34 9.63
August 4, 1995 ... 6.88 8.56 13.00
------
* The equivalent TFN Common Stock value is calculated by multiplying the
historical IE Common Stock price by the Conversion Number of 0.6588. In the
event the Conversion Number is adjusted as discussed below, the equivalent
TFN Common Stock value would be different than the values shown in the
table.
If the Average Closing Price of IE Common Stock is greater than $11.00 or
is less than $9.00, the Merger Agreement may be terminated by IE or TFN,
respectively. If IE elects to terminate the Merger Agreement because the
Average Closing Price is greater than $11.00, TFN has the right to override
any such termination election by agreeing that the Conversion Number will be
changed to the quotient that results from dividing $7.2468 by the Average
Closing Price. If TFN elects to terminate the Merger Agreement because the
Average Closing Price is less than $9.00, IE has the right to override any
such termination election by agreeing that the Conversion Number will be
changed to the quotient that results from dividing $5.9292 by the Average
Closing Price of IE Common Stock. It is possible that the Conversion Number
will not be adjusted if the Average Closing Price is less than $9 or more
than $11 or that the Merger might not proceed under those circumstances, each
with differing consequences to TFN shareholders. For additional information,
see "The Merger - Determination of the Conversion Number."
On August 4, 1995, the closing price per share of IE Common Stock as
reported by Nasdaq was $13, and the closing price per share of the TFN
Common Stock as reported by Nasdaq was $6 7/8 TFN Shareholders are urged to
obtain current market quotations for the IE Common Stock and the TFN Common
Stock.
13
<PAGE>
RISK FACTORS
TFN Shareholders should carefully consider the following factors regarding
an investment in IE Common Stock, in addition to the other information
contained in or incorporated by reference into this Proxy
Statement/Prospectus, in deciding whether to vote in favor of the Merger
Agreement.
DEPENDENCE ON KEY VENDORS
Products from four vendors comprised the following percentages of IE's
revenues during the three months ended April 29, 1995 and the years ended
January 28, 1995, January 29, 1994 and January 30, 1993:
<TABLE>
<CAPTION>
Year ended
Three Months Ended ----------------------------------------------------
April 29, January 28, January 29, January 30,
1995 1995 1994 1993
---------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
IBM 15% 15% 15% 18%
Compaq 23% 25% 25% 18%
Apple 10% 12% 18% 22%
Hewlett-Packard 25% 24% 22% 20%
</TABLE>
IE's agreements with these vendors generally are subject to termination by
the vendors without cause on varying notice periods and to periodic renewals
or re-authorization by the vendors. The termination or non-renewal of an
agreement with a major vendor could have a material adverse effect on IE.
INDUSTRY CONDITIONS
Competition in the microcomputer products industry is intense, principally
in the areas of price, breadth of product line, product availability and
technical support and service. IE and its Network compete with computer
aggregators, distributors and retailers in the sale of products.
Additionally, certain manufacturers have expanded their channels of
distribution, pricing and product positioning and compete with IE and its
Network. IE is also subject to competition from other aggregators in
recruiting and retaining Network members, as well as competition from
distributors in its efforts to sell products to the Network. Certain
competitors may have greater financial resources than IE.
Moreover, the microcomputer products industry periodically experiences
significant product supply shortages and customer order backlogs due to the
inability of certain manufacturers to supply certain products. By removing
the historical requirement that resellers purchase their products from one
source, certain vendors have initiated new channels of distribution that
increase competition for the available product supply and intensify
prevailing price competition.
As a result of the foregoing, as well as the microcomputer products
industry's rapid product improvement and technological change, short product
life cycles and resulting obsolescence risks, there can be no assurance that
IE will continue to compete successfully in the industry.
OPERATING INEFFICIENCIES AND TRANSFORMATION COSTS
During the fiscal year ended January 28, 1995, IE experienced operating
inefficiencies caused by systems stresses and outages, which negatively
impacted gross margin percent and selling, general and administrative
expenses, and commenced a project to transform IE to a process-driven model,
which also negatively impacted selling, general and administrative expenses.
IE expects that costs associated with the operating inefficiencies and the
transformation project will continue through the middle of its current fiscal
year and there can be no assurance that they will not continue thereafter.
See "Financial Information -- Management's Discussion and Analysis of Financial
Condition and Results of Operations of IE - Results of Continuing Operations."
VOLATILITY OF COMMON STOCK PRICE
There has been significant volatility in the market prices of securities
of companies in the microcomputer products industry, including the IE Common
Stock. See "Comparative Market Price Data." Various factors and events,
including those relating specifically to IE, its vendors or its competitors
and those relating generally to the industry, may have a significant impact
on the trading price of the IE Common Stock.
14
<PAGE>
LEGAL PROCEEDINGS
IE and certain of its directors and officers are defendants in several
purported class action lawsuits (which have been consolidated) and a
purported derivative lawsuit, filed in December 1994. These lawsuits allege
violations of certain disclosure and related provisions of the federal
securities laws and breach of fiduciary duties, including allegations
relating to IE's practices regarding vendor marketing funds, and seek damages
in unspecified amounts as well as other monetary and equitable relief. In
addition, IE is subject to a Securities and Exchange Commission
investigation. IE believes that all such allegations and lawsuits are without
merit and intends to defend against them vigorously. While management of IE,
based on its investigation of these matters and consultations with counsel,
believes resolution of these matters will not have a material adverse effect
on its financial position, there can be no assurances in such regard and the
ultimate outcome of these matters cannot presently be determined. As of the
date of this Proxy Statement/Prospectus, counsel is unable to render a legal
opinion as to the probable outcome of these matters.
CONTINUATION OF DIVIDENDS
Although IE instituted a quarterly dividend of $.08 per share during its
fiscal year ended January 29, 1994 and increased the dividend to $.10 per
share during its fiscal year ended January 28, 1995, there can be no
assurances that future dividends will be paid. The payment and rate of future
dividends are subject to the discretion of IE's Board of Directors and will
depend upon IE's earnings, financial condition, capital requirements and
other factors.
15
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus and the accompanying notice of the Special
Meeting and form of proxy are being furnished to all holders of record on the
Record Date of shares of TFN Common Stock in connection with the solicitation
of proxies by the TFN Board for use at the Special Meeting to be held on
August 17, 1995, commencing at 10:00 a.m. at The Harley Hotel, 8020 Montgomery
Road, Cincinnati, Ohio, and any adjournment or postponement thereof. These
proxy materials are being mailed to the TFN Shareholders on or about August 8,
1995.
At the Special Meeting, the TFN Shareholders will be asked to consider and
vote upon a proposal to adopt the Merger Agreement. Pursuant to the Merger
Agreement (i) Mergerco will be merged with and into TFN, with TFN being the
Surviving Corporation, all of the stock of which will be owned by IE, and (ii)
each share of TFN Common Stock outstanding immediately prior to the Effective
Time (other than the Excluded Shares and Dissenting Shares) will be converted
into the right to receive 0.6588 shares of IE Common Stock, subject to
adjustment. Approval of the proposal to adopt the Merger Agreement will also
authorize the TFN Board to exercise its discretion whether to proceed with the
Merger in the event that termination rights are exercised or exercisable because
the Average Closing Price is greater than $11.00 or less than $9.00. The full
text of the Merger Agreement is attached as Annex A hereto and is incorporated
herein in its entirety. See "The Merger -- Determination of the Conversion
Number" and "The Merger Agreement."
It is not anticipated that any matter other than the proposal to adopt the
Merger Agreement will be brought before the Special Meeting. If any other
matter is properly presented at the Special Meeting for consideration,
including, among other things, a motion to adjourn the Special Meeting to
another time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the enclosed form of
proxy card and acting thereunder will have discretion to vote on such matter
in accordance with their best judgment; provided, however, that no proxy that
directs the shares represented thereby to be voted against the proposal to
adopt the Merger Agreement will be voted in favor of any adjournment of the
Special Meeting for purposes other than the absence of a quorum.
VOTING AT THE SPECIAL MEETING
RECORD DATE. The close of business on August 7, 1995 has been fixed as the
Record Date for determining the TFN Shareholders entitled to notice of and to
vote at the Special Meeting. On the Record Date, there were 7,578,566 shares
of TFN Common Stock outstanding and entitled to vote, held by approximately
212 holders of record. TFN Shareholders may cast one vote per share, either
in person or by proxy, on each matter to be voted on at the Special Meeting.
REQUIRED SHAREHOLDER VOTE. The presence of a majority of the outstanding
shares of TFN Common Stock, represented in person or by proxy, is required
for a quorum at the Special Meeting. The affirmative votes of the holders of
a majority of the outstanding shares of TFN Common Stock are required to
approve the proposal to adopt the Merger Agreement. In addition, as discussed
under "Ohio Control Share Acquisition Act" below, the affirmative votes of
the holders of a majority of the TFN Common Stock represented in person or by
proxy at the Special Meeting (excluding any shares owned by IE, executive
officers of TFN and directors of TFN who are also employees of TFN), are
required to approve the proposal to adopt the Merger Agreement. Abstentions
and broker non-votes will have the same effect as votes against adoption of
the Merger Agreement. IE beneficially owns 2,344,024 shares of TFN Common
Stock, constituting approximately 31% of such outstanding shares. IE intends
to vote or cause to be voted all such shares FOR adoption of the Merger
Agreement. Approval of the proposal to adopt the Merger Agreement will also
authorize the TFN Board to exercise its discretion whether to proceed with
the Merger in the event either (i) IE exercises its termination right if the
Average Closing Price is greater than $11.00, or (ii) TFN has the right to
exercise its termination right if the Average Closing Price is less than
$9.00.
16
<PAGE>
Ohio Control Share Acquisition Act. Section 1701.831 of the ORC, the Ohio
Control Share Acquisition Act (the "Act"), provides that any "control share
acquisition" of an Ohio public corporation shall be made only with the prior
authorization of the shareholders of the corporation in accordance with the
provisions of the Act. A "control share acquisition" is defined under the Act to
mean the acquisition, directly or indirectly, by any person of shares of a
public corporation that, when added to all other shares of the corporation such
person owns, would entitle such person, directly or indirectly, to exercise
voting power in the election of directors within the following ranges: more than
20%, more than 33%, and a majority. Although the Act is not entirely clear in
the context of the Merger, IE and TFN are proceeding on the assumption that the
proposed acquisition by IE of TFN Common Stock through the Merger may be deemed
to be a "control share acquisition" under the Act.
The Act also requires that the acquiring person must deliver an acquiring
person statement to the Ohio public corporation. The Ohio public corporation
must then call a special meeting of its shareholders to vote upon the
proposed acquisition within 50 days after receipt of such acquiring person
statement, unless the acquiring person agrees to a later date. TFN received
an acquiring person statement from IE on May 3, 1995, a copy of which is
attached hereto as Annex D, and TFN's shareholders will have the opportunity
to vote upon IE's proposed acquisition at the Special Meeting.
The Act further specifies that the shareholders of the Ohio public
corporation must approve the proposed control share acquisition by certain
percentages at a special meeting of shareholders at which a quorum is
present. Accordingly, in order to comply with the Act, IE may only acquire
TFN Common Stock through the Merger upon the affirmative vote of (i) a
majority of the voting power of the TFN Common Stock that is represented in
person or by proxy at the Special Meeting, and (ii) a majority of the voting
power of the TFN Common Stock that is represented in person or by proxy at
the Special Meeting excluding those shares of TFN Common Stock deemed to be
"interested shares" for purposes of the Act.
"Interested shares" are defined under the Act to mean shares in respect of
which the voting power is controlled by any of the following persons: (1) an
acquiring person (in this case, IE); (2) any officer of TFN; and (3) any
employee who is also a director of TFN. "Interested shares" also include
shares of TFN Common Stock that are acquired by any person after the date of
the first public disclosure of the proposed Merger (in this case March 7,
1995) and the date of the Special Meeting, if either (i) the aggregate
consideration paid by such person, and any person acting in concert with him,
for such shares of TFN Common Stock exceeds $250,000, or (ii) the number of
shares acquired by such person, and any person acting in concert with him,
exceeds one-half of one percent of the outstanding shares of TFN Common
Stock. In order to determine whether any shares acquired after March 7, 1995
constitute "interested shares" pursuant to the preceding sentence, TFN will
examine its stock records as of March 7, 1995, as of the Record Date and as
of the last business day preceding the Special Meeting. If any record holder
(other than a broker, bank or other nominee) has increased his ownership
interest by more than one half of one percent of the outstanding TFN Common
Stock, or by a number of shares in excess of $250,000 divided by the average
closing price of a share of TFN Common Stock during the period from March 7
through the Record Date, such additional shares held by such holder will be
deemed "interested shares" upon receipt by TFN of a validly executed proxy
card from such a record holder. A record holder may rebut a presumption that
shares are "interested shares" by providing TFN with documentation
satisfactory to TFN's legal counsel establishing that such shares are not
"interested shares" within the definition of Section 1701.01(CC)(2) of the
ORC.
As of the Record Date, 137,875 shares of TFN Common Stock held by employee
directors and officers of TFN and 2,344,024 shares of TFN Common Stock held
by IE and its subsidiaries would be "interested shares" under the Act. Except
as set forth in the preceding paragraph, all other shares will be presumed to
be disinterested shares unless TFN acquires actual knowledge of facts that
evidence such shares must be deemed "interested shares."
17
<PAGE>
PROXIES
All shares of TFN Common Stock represented at the Special Meeting by
properly executed proxies received prior to or at the Special Meeting, unless
the proxies have previously been revoked, will be voted in accordance with
the instructions on such proxies. If no instructions are given, proxies will
be voted FOR adoption of the Merger Agreement. If any other matters are
properly presented to the Special Meeting for action, the persons named in
the enclosed form of proxy as acting thereunder will have discretion to vote
on such matters in accordance with their best judgment, except in the case of
shareholders' proxies which indicate a vote against the Merger. TFN does not
know of any matters other than adoption of the Merger Agreement and
procedural matters relating to the conduct of business at the Special Meeting
that will be presented at the Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by delivery
to the Secretary of TFN at 8044 Montgomery Road, Suite 601, Cincinnati, Ohio
45236, of a written notice of revocation bearing a later date than the proxy,
by duly executing and delivering to the Secretary a subsequent proxy relating
to the same shares, or by attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself
constitute revocation of a proxy).
Proxies are being solicited by and on behalf of the TFN Board. In addition
to solicitation by mail, proxies may be solicited by directors and authorized
officers and employees of TFN in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for out-of-pocket expenses in
connection with such solicitation. Arrangements will also be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
material to beneficial owners of shares of TFN Common Stock held of record by
such persons, and TFN may reimburse such custodians, nominees and fiduciaries
for reasonable expenses incurred in connection therewith.
All information in this Proxy Statement/Prospectus concerning IE and its
subsidiaries (other than TFN), Mergerco, and the IE Common Stock (other than
information provided in "The Merger -- Background, Recommendations of TFN's
Board of Directors and Reasons for the Merger" and "Certain Information
Concerning The Future Now") has been provided by IE and all information
concerning TFN and its subsidiaries and the TFN Common Stock, and all of the
information contained in "The Merger -- Background, Recommendations of TFN's
Board of Directors and Reasons for the Merger" and "Certain Information
Concerning The Future Now," has been provided by TFN.
The Merger constitutes a matter of great importance to TFN's shareholders.
Upon adoption of the Merger Agreement and consummation of the Merger, the
direct equity investment in TFN of TFN's Shareholders will cease, and such
shareholders (other than the holders of the Excluded Shares and Dissenting
Shares) will be entitled to receive the Merger Consideration. Accordingly,
TFN Shareholders are urged to read and carefully consider the information
presented in this Proxy Statement/Prospectus, including the information
discussed in "Risk Factors."
THE TFN BOARD UNANIMOUSLY RECOMMENDS THAT TFN SHAREHOLDERS VOTE FOR
ADOPTION OF THE MERGER AGREEMENT.
THE MERGER
This section of the Proxy Statement/Prospectus describes certain aspects
of the Merger. The following description does not purport to be complete and
is qualified in its entirety by reference to the Merger Agreement, which is
attached as Annex A to this Proxy Statement/Prospectus. All shareholders are
urged to read the Merger Agreement in its entirety.
BACKGROUND, RECOMMENDATIONS OF TFN'S BOARD OF DIRECTORS AND REASONS FOR THE
MERGER
During the period 1989 through 1993, TFN experienced increasing profitability
and completed 15 acquisitions, including the acquisition of nine sales locations
from IE in July 1992 in exchange for 31.1% of the then outstanding TFN Common
Stock. As a result of this rapid growth, TFN decided to concentrate in 1994 on
consolidating and integrating its operations.
In January 1994, TFN received an unsolicited contact from a representative
of another company in the computer reseller industry (the "Original
Interested Party") indicating an interest in acquiring or merging with TFN.
The Board of Directors determined that it was not an appropriate time to
pursue such a transaction and so advised the Original Interested Party.
18
<PAGE>
In May 1994, the Original Interested Party again contacted TFN concerning
a possible merger with or acquisition of TFN. Considering these inquiries and
TFN's prospects in light of the ongoing consolidation in the computer
reseller industry, the Board of Directors appointed a Special Committee
consisting of three outside directors of TFN, Dennis J. Sullivan, Dudley S.
Taft and William G. Kagler, to review TFN's options and alternatives in
connection with recent acquisition announcements and activities within the
industry. Pending a report from the Special Committee, the Board of Directors
reaffirmed its decision not to pursue any business combination transaction
and to respond negatively to any unsolicited inquiry or offer concerning the
possible sale of TFN.
The Special Committee retained the law firm of Graydon, Head & Ritchey, of
Cincinnati, Ohio, as special counsel to advise it as to legal matters, and
retained The Robinson-Humphrey Company, Inc. ("Robinson-Humphrey"), an
investment banking firm, to assist it in evaluating industry trends,
valuations and strategic alternatives for TFN. The Special Committee
generally invited other members of the TFN Board (except for Gregory A.
Pratt, who is also IE's President and an IE director), representatives from
Robinson-Humphrey, counsel to the Special Committee and senior management of
TFN to attend its meetings.
The Special Committee met three times in June 1994. It agreed its primary
objective was independently to evaluate and explore alternative courses of
action in determining the best interests of TFN and its shareholders
concerning situations involving a possible change in control or sale of TFN.
The Special Committee reviewed a report from Robinson-Humphrey evaluating
potential partners and identifying their strengths, weaknesses and possible
synergies. Robinson-Humphrey also discussed its preliminary estimates of the
range of values of the TFN Common Stock based upon then existing conditions.
The Special Committee also reviewed the various contracts between TFN and
IE and the possible effect such agreements could have on TFN's alternatives,
including any transaction between TFN and a third party. TFN has a number of
agreements with IE including two franchise agreements (the "Franchise
Agreements") each with ten year terms which expire in December 2000 and
September 2003, respectively, under which TFN purchases product. The
Franchise Agreements provide for the payment of a significant fee by TFN in
the event TFN terminates the Franchise Agreements under certain
circumstances. TFN is IE's largest customer, and TFN purchased approximately
85% of its total product purchases from IE in 1994 and the first quarter of
1995. See "Business Relationships Between the Parties."
During June 1994, IE indicated a preliminary interest in discussing a
business combination with TFN. Considering the financial performance of TFN,
information presented to the Special Committee, and the existing
relationships with IE, the Special Committee preliminarily recommended to the
Board in June 1994 that no change in TFN's strategy be made at that time but
that Mr. Theye be authorized to listen to any proposal from IE, the Original
Interested Party or any other interested party with respect to a business
combination transaction. The Board of Directors adopted the recommendations
of the Special Committee, but proposals were not received from IE, the
Original Interested Party or any other interested party.
The Special Committee completed its initial analysis in early July 1994.
Based on the information and analysis received by the Special Committee in
June, discussions with representatives from Robinson-Humphrey, the Special
Committee's consideration of industry trends and TFN's future prospects, the
Special Committee recommended to the Board that TFN not change its long-term
strategy and that it focus on continuing to improve TFN's performance. The
Special Committee also determined it would not meet again unless a specific
need arose.
In September 1994, in response to a further request from the Original
Interested Party to commence acquisition discussions, the Special Committee
considered whether changes in the industry or in the financial condition of
TFN would cause the Special Committee to change its recommendation. The
Special Committee considered that on July 7, 1994, TFN had announced a
definitive plan for a company-wide restructuring (the "Restructuring"). As
part of the Restructuring, TFN decided it would close and consolidate
duplicate facilities in certain geographic areas where TFN had made
acquisitions, close or consolidate its branch warehouses, centralize its
operations and reorganize its management structure to continue its emphasis
on higher margin professional services. These decisions were part of TFN's
strategy to reduce inventory risk, to concentrate more on higher margin
professional services, and to centralize operations and management to achieve
efficiencies. Changes associated with the Restructuring were primarily
responsible for TFN's reporting a loss for its second quarter of 1994 and for
the year as a whole. See "Certain Information Concerning The Future Now -
History and Business" and "- Competition;" and Note 2, "Restructuring Charge"
of the Notes to TFN's Consolidated Financial Statements included in this
Proxy Statement/Prospectus.
19
<PAGE>
In connection with the Restructuring, TFN failed to comply with certain
financial covenants required by its Secured Credit Agreement (the "Credit
Agreement"), dated as of September 9, 1993, by and among TFN, its subsidiaries
and PNC Bank, Ohio, National Association, as Agent, The First National Bank of
Chicago as Co-Agent and other participating banks (together, the "Lenders"). TFN
relies on the Credit Agreement to finance its principal working capital needs.
The Lenders and TFN subsequently entered into a series of amendments to the
Credit Agreement pursuant to which the Lenders have waived until August 21, 1995
any default or event of default which occurred as of June 30, September 30
and December 31, 1994 and March 31 and June 30, 1995, as a result of such
failure to comply. In connection with the Restructuring, TFN also failed to
comply with certain financial covenants required by one of its inventory finance
companies. This inventory finance company and TFN have entered into a series of
amendments which have waived until August 21, 1995 any default or event of
default which occurred as of June 30, September 30 and December 31, 1994 and
March 31 and June 30, 1995, as a result of such failure to comply. The last
such amendment with the Lenders and the inventory finance company, effective as
of July 28, 1995, waives such defaults until the earlier of August 21, 1995 or
ten business days after the termination of the transaction contemplated by the
Merger Agreement. If the Merger Agreement is terminated, TFN will have to seek a
further waiver or alternative financing.
In light of these circumstances, and the continued difficulties presented
by ongoing industry trends, the Special Committee decided in September 1994
that TFN needed at least six months to improve its operations and resolve its
financial needs for the longer term. Traditional sources of financing were
not available to TFN, and TFN's Lenders indicated to TFN that further waivers
of TFN's default under the Credit Agreement were conditioned on receiving
financial support from IE. The Special Committee determined that the most
viable alternative to accomplish these goals at that time was to seek
financial support from IE to restructure TFN's credit facilities. The Special
Committee also concluded in light of these factors that it was not an
appropriate time to change TFN's long term strategy concerning possible
business combinations. TFN informed the Other Interested Party that TFN had
not changed its position regarding a sale or change of control of TFN.
The Board of Directors of TFN held a special meeting on September 28, 1994
and considered a preliminary term sheet from IE (which had been provided at
the request of TFN) concerning additional financing in the form of
convertible subordinated debt to be provided by IE. Based in part on advice
of its advisors, the Board concluded that the terms proposed by IE were not
acceptable. The Board concluded that TFN should explore all other
alternatives, including possible business combination transactions, if IE did
not revise its financing terms. After IE declined to change the terms of the
proposed financing, management proceeded to investigate the alternatives,
including using a distributor other than IE or combining with another
reseller or distributor, and determined that viable alternatives were not
available.
Management also met with the Original Interested Party in October 1994
which indicated it was not interested in a business combination involving the
entire company because, in part, of IE's stock ownership position. However,
the Original Interested Party did express interest in purchasing the assets
of TFN's branch locations in five major metropolitan areas. The TFN Board
concluded such a sale would be beneficial as it would allow TFN to use the
cash received from the sale to pay down debt under its Credit Agreement and
would permit TFN to focus on its branch locations which were more central
geographically. TFN and the Original Interested Party proceeded to negotiate
the basic terms of such a transaction. In the course of these negotiations,
the TFN Board determined that due to the terms of the Franchise Agreements,
management should seek IE's consent to the sale.
IE did not consent to the sale of the five branches to the Original
Interested Party. However, IE proposed purchasing the five branches on terms
substantially similar to those proposed by the Original Interested Party
(except that all consideration would be paid at closing in IE's proposal
whereas $6 million would have been deferred in the Original Interested
Party's proposal). The proposed IE transaction also included a management
agreement under which TFN would manage the five branches for IE after the
sale for which TFN would receive compensation. On November 1, 1994, the Board
approved a letter of intent for the transaction with IE, and TFN and IE
completed the purchase and sale of the five branches on December 30, 1994.
20
<PAGE>
On January 31, 1995, the Special Committee reviewed TFN's short and long
term plans, in light of TFN's financial condition, continuing need to
refinance its Credit Agreement and future prospects, as well as recent
industry developments, including anticipated consolidation in the industry,
ongoing margin declines and rising interest rates. The Special Committee
concluded that remaining independent would no longer be likely to maximize
value for TFN's shareholders. The Special Committee determined that, in light
of current circumstances, it would seriously consider offers to engage in a
business combination transaction with TFN, including an offer from IE.
Over the following few weeks, Robinson-Humphrey again contacted potential
partners other than IE, including the Original Interested Party. Based on
such contacts, Robinson-Humphrey informed the Special Committee at a February
22, 1995 meeting that none of these entities exhibited serious interest in a
transaction at that time. The Special Committee concluded there were no
potential partners likely to proceed with a transaction and also concluded
that in light of the highly competitive nature of the industry and the
continuing increase in margin pressure, it was unlikely that there were other
viable candidates for such a transaction.
On March 1, 1995, IE and TFN discussed their interest in a strategic
business combination between the companies. The Board authorized the
commencement of negotiations with IE. On March 6, 1995, the Board approved
and adopted the terms of a letter of intent for IE to acquire the outstanding
shares of common stock of TFN based on an exchange ratio of 0.6588 shares of IE
Common Stock for each share of TFN's Common Stock, which exchange ratio was
determined by negotiations between TFN and IE. Robinson-Humphrey advised the
Special Committee and TFN Board throughout the negotiation process with
respect to elements of the negotiations between TFN and IE (including,
without limitation, the Average Closing Prices of IE Common Stock at which
the parties could terminate the transaction), but the final amount of the
consideration and the termination provisions were determined through arm's
length negotiations between TFN and IE and were not determined by
Robinson-Humphrey.
In March and April 1995, representatives of TFN and IE negotiated the
terms of a proposed Merger Agreement. On April 20, 1995, the Special
Committee met and reviewed the status of the negotiations and the draft
Merger Agreement with representatives from management and Robinson-Humphrey.
In addition, Robinson-Humphrey presented its preliminary analysis of the
fairness of the proposed Conversion Number. At its meeting on April 28, 1995,
the Special Committee reviewed the Merger Agreement, received
Robinson-Humphrey's opinion and concluded that the proposed Merger would be
in the best interests of TFN's shareholders and recommended approval to the
TFN Board. Accordingly, the TFN Board then met, accepted the Special
Committee's recommendations and unanimously voted to approve the Merger
Agreement, which was then executed on April 28, 1995. The execution of the
Merger Agreement by April 30, 1995 was a condition to the waiver by TFN's
Lenders until July 31, 1995 of TFN's default under the Credit Agreement.
In reaching its decision to pursue a merger transaction and ultimately to
approve the Merger Agreement, the TFN Board considered numerous factors
during the period commencing in January, 1994 and leading up to the April 28,
1995 TFN Board meeting. Throughout the course of its deliberations, the TFN
Board's primary consideration was to best serve the interests of the TFN
shareholders in view of TFN's overall business, prospects and financial
condition, changes and events in the computer industry, and general economic
and stock market conditions. The TFN Board analyzed the totality of the
circumstances and did not assign relative degrees of importance to any
specific factors considered.
The factors listed below were expressly considered by the TFN Board in its
meetings and, accordingly, impacted the TFN Board's decision to some extent.
Other factors may also have been considered in evaluating whether to proceed
with the Merger, but are not believed to have been significant to the TFN
Board's overall decision making process.
1. The Board's knowledge of the business, operations, properties,
assets, financial condition and operating results of TFN;
2. The Board's judgment as to TFN's uncertain future prospects which
the Board thought would be improved by the combination with IE;
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3. Information concerning the business, financial condition and
prospects of IE; as TFN's shareholders will receive IE Common Stock, the
Board believed that TFN's shareholders will have the opportunity to
participate in the potential for growth of the combined companies and
retain the liquidity of holding shares of a public company;
4. The legal advice provided by TFN's legal counsel and by the Special
Committee's special counsel concerning the terms of the Merger Agreement;
5. The strength of the combined companies' management and the
operating and financial efficiencies applicable to TFN's operations
expected to be achieved by the Merger and the integration of the two
companies;
6. The possibility for TFN's shareholders to receive cash dividends on
the IE Common Stock to be received in the Merger, which are currently
being paid at a quarterly rate of $.10 per share; TFN does not currently
pay any dividend;
7. Uncertainty as to TFN's ability, in the absence of the Merger, to
renegotiate the Credit Agreement or to obtain new financing;
8. The written fairness opinion rendered by Robinson-Humphrey dated as
of April 28, 1995;
9. The Board's judgment that a fixed exchange ratio, i.e. the
Conversion Number, with certain termination and related rights, provided
potentially greater benefits for TFN's shareholders than if a fixed per
share price were established at the time of the execution of the Letter of
Intent;
10. The TFN Board's determination and belief, based upon the analysis
and investigations of Robinson-Humphrey and TFN's management, that IE was
the only third party reasonably likely to proceed with a transaction with
TFN, that IE was the only viable prospect with whom TFN could so engage in
a business combination and that such prospects were substantially more
promising than if TFN would remain independent; and
11. Advice provided to the TFN Board by TFN's management that TFN's due
diligence of IE's business and legal affairs did not indicate that IE's
legal proceedings with IE's shareholders or the Securities and Exchange
Commission were likely to have a material adverse effect on IE's future
prospects.
The Board of Directors received a second written fairness opinion dated
August 5, 1995 from Robinson-Humphrey with respect to the Merger, which is
attached as Annex B to this Proxy Statement/Prospectus. See "- Opinion of
Financial Advisor."
Based on the foregoing, the Board of Directors concluded that the proposed
Merger is fair and would be in the best interests of TFN, TFN's shareholders
and other constituencies. ACCORDINGLY, THE TFN BOARD UNANIMOUSLY RECOMMENDS
THAT TFN SHAREHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
For information regarding interests of directors and executive officers of
TFN in the Merger and the stock ownership of TFN's directors and executive
officers, see "- Interests of Certain Persons in the Merger."
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OPINION OF FINANCIAL ADVISOR
Robinson-Humphrey has acted as financial advisor to the Board of Directors of
TFN in connection with the Merger and assisted the Board of Directors of TFN in
negotiations with respect to the Merger. Robinson-Humphrey is a nationally
recognized investment banking firm with extensive knowledge of the wholesale
microcomputer distribution industry (having been involved in 12 public and
private offerings and five merger and acquisition transactions in this industry
in the past nine years and in 120 public and private offerings and 30 merger and
acquisition transactions in the technology field generally in the past 15
years), and has extensive experience in evaluating transactions such as those
contemplated by the Merger Agreement. As part of its investment banking
business, Robinson-Humphrey is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. At
the meeting of the TFN Special Committee and the TFN Board held on April 28,
1995, Robinson-Humphrey orally and in writing advised the TFN Board that as of
such date, the Conversion Number was fair from a financial point of view to TFN
Shareholders. On August 5, 1995, Robinson-Humphrey delivered to the TFN Board
another written opinion that as of such date, each of the Conversion Number and
the Alternative Consideration was fair from a financial point of view to TFN
Shareholders. Robinson-Humphrey's April 28, 1995 opinion was substantially
similar (except that it did not address the fairness of the Alternative
Consideration) to the August 5, 1995 opinion, which is set forth as Annex B
hereto and which is incorporated by reference herein. In this regard, the
opinions, which were provided to the TFN Board in its evaluation of the Proposed
Transaction, are directed only to each of the Conversion Number and the
Alternative Consideration and do not constitute a recommendation to any TFN
Shareholder as to how such shareholder should vote at the Special Meeting or as
to any other matter.
In arriving at its opinion dated August 5, 1995, Robinson-Humphrey reviewed
certain publicly available financial and other information concerning TFN and
IE. Robinson-Humphrey also reviewed material prepared in connection with the
Merger, including, among other things, the following: the Merger Agreement;
this Proxy Statement/Prospectus and the Registration Statement of which it is
a part; stock ownership profiles of TFN and IE; trading histories, operating
results, and valuation multiples of TFN, IE and other companies that
Robinson-Humphrey deemed comparable to TFN and/or IE; and recent merger
transactions. Robinson-Humphrey also met with the management of each of IE
and TFN to discuss the foregoing as well as other matters Robinson-Humphrey
believed relevant to its inquiry, including current and future business
prospects of IE and TFN.
In arriving at such opinion, Robinson-Humphrey also took into account its
assessment of general economic, market and financial conditions and its
experience in similar transactions, as well as its experience in securities
valuation and its knowledge of the wholesale microcomputer distribution
industry generally.
In conducting its review and arriving at such opinion, Robinson-Humphrey
relied upon and assumed the accuracy and completeness of the financial and
other information used by it in arriving at its opinion and has not assumed
any responsibility for independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities,
contingent or otherwise, of TFN or IE nor has Robinson-Humphrey been furnished
with any such appraisals. With respect to the financial forecasts of TFN and IE,
Robinson-Humphrey assumed that they had been reasonably prepared by TFN and
IE on bases reflecting the best currently available estimates and judgments
of TFN's management and IE's management as to the future financial
performance of their respective companies. Robinson-Humphrey's opinion is
limited to the fairness, from a financial point of view, to the shareholders
of TFN of the Conversion Number and the Alternative Consideration.
In rendering such opinions with respect to the Conversion Number,
Robinson-Humphrey assumed that the Merger will be consummated on the terms
described in the Merger Agreement (including, without limitation, the
tax-free status of the Merger), without any waiver of any of the terms or
conditions by TFN. In rendering such opinion with respect to the Alternative
Consideration, Robinson-Humphrey assumed that the Merger will be consummated
on the terms described in the Merger Agreement (including, without
limitation, the tax-free status of the Merger), without any waiver of any of
the terms by TFN, except that the termination and override provisions of
Section 5.1(i) of the Merger Agreement shall become operative.
Robinson-Humphrey's opinions were necessarily based upon conditions as they
existed and could be evaluated on the dates of such opinions.
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In connection with rendering its fairness opinions to the TFN Board,
Robinson-Humphrey performed a variety of financial analyses. However, the
preparation of a fairness opinion involves determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances, and, therefore, such opinions
are not readily susceptible to summary description. Moreover, the analyses
performed by Robinson-Humphrey are not necessarily indicative of actual
values or actual future results that might be achieved, all of which may be
significantly more or less favorable than suggested by such analyses.
Additionally, Robinson-Humphrey's analyses are not and do not purport to be
appraisals or otherwise reflective of the prices at which businesses actually
could be sold. The foregoing is a summary of certain portions of
Robinson-Humphrey's opinion dated August 5, 1995 and is subject to, and
qualified in its entirety by, the full text thereof set forth in Annex B hereto.
THE FULL TEXT OF THE WRITTEN OPINION OF ROBINSON-HUMPHREY DATED AUGUST 5,
1995, WHICH SETS FORTH ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN BY ROBINSON-HUMPHREY, IS ATTACHED TO AND MADE PART OF THIS
PROXY STATEMENT/PROSPECTUS AS ANNEX B. TFN SHAREHOLDERS ARE URGED TO READ
SUCH OPINION CAREFULLY AND IN ITS ENTIRETY.
Valuation Methodologies. In connection with its opinion on the transaction
and delivery of that opinion to the TFN Board on April 28, 1995,
Robinson-Humphrey performed a number of detailed valuation analyses with
respect to TFN, which included principally the three following analyses: (i)
a comparable company trading and valuation analysis; (ii) an analysis of
comparable prices, premiums, and terms of recent transactions involving
distribution companies; and (iii) a discounted cash flow analysis. The
valuation methods discussed in this summary are substantially the same as
those Robinson-Humphrey used in connection with its written opinion dated
August 5, 1995.
Comparable Company Analysis. In performing its comparable company analysis
Robinson-Humphrey analyzed the trading of TFN Common Stock relating to a peer
group of 17 other publicly traded microcomputer resellers and distributors. The
information that was considered and compared included market price to latest
twelve months ("LTM") earnings, market price to estimated calendar 1995 earnings
and market price to estimated calendar 1996 earnings. The peer group multiples
for LTM, 1995 and 1996 earnings were approximately 9.4x, 8.9x, and 6.9x,
respectively. TFN's earnings multiples at a price of $6.59 (the Conversion
Number multiplied by the previous day closing price of IE Common Stock) for
those same time periods equal NMx (a negative multiple), 9.5x and 8.1x,
respectively. Overall, Robinson-Humphrey viewed the results of its comparable
company analysis as supporting its conclusion as to financial fariness as
expressed in its opinion.
Comparable Transaction Analysis. Robinson-Humphrey performed an analysis of
various multiples and premiums paid for selected distribution company
transactions in the most recent five years for which financial information was
available. The 11 comparable transactions considered yielded median firm value
(defined as market capitalization of equity plus debt minus cash) multiples to
LTM revenues, EBITDA (earnings before interest, tax, depreciation and
amortization), and operating income of .30x revenues, 7.9x EBITDA and 10.6x
operating income versus value multiples (assuming an implied merger price of
$6.59) for the Merger of .13x revenues, 12.8x EBITDA and 41.1x operating income.
The 11 comparable transactions also yielded LTM price to earnings and price to
book ratios of 15.1x earnings and 2.3x book value. Value multiples from the
Merger (assuming an implied merger price of $6.59) equal a negative price to
earnings ratio due to a net loss and 1.5x book value. For the purposes of this
analysis, EBITDA, operating income and net income measures for TFN have been
adjusted to remove the effect of certain non-recurring items (which constitute
the restructuring charge, the goodwill impairment charge and the gain on the
sale of the five branches to IE in December 1994). Median premiums paid over
stock prices prior to transaction announcements ranged from 33% to 50% for
comparable transactions versus no premium to 20% for selected time periods
examined for TFN's Common Stock. Of these valuation measures, Robinson-Humphrey
considered income related multiples to be more indicative of value than either
revenues or book value benchmarks which give no consideration to profit margins.
Overall, Robinson-Humphrey viewed the results of its comparable transaction
analysis as supporting its conclusion as to financial fairness as expressed in
its opinion.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
Robinson-Humphrey estimated the present value of the future stream of
after-tax cash flows that TFN could produce through 1999, under various
circumstances, assuming that TFN performed in accordance with earnings
projections of management for that time period. Robinson-Humphrey estimated
the terminal value for TFN at the end of the forecast period by applying
operating earnings multiples ranging from 4.0x to 6.0x and then discounting
the cash flow streams and terminal value using discount rates from 14% to
16%. These discount rates were chosen to reflect different assumptions
regarding the required rates of return of TFN and the inherent risk
surrounding long-term forecasts. This discounted cash flow analysis indicated
a midpoint equity value of approximately $4.50 per share. Overall,
Robinson-Humphrey viewed the results of its discounted cash flow analysis as
supporting its conclusion as to financial fairness as expressed in its opinion.
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No company or transaction used in the comparable transaction or comparable
company analyses is identical to TFN. Accordingly, an analysis of the
foregoing necessarily involves complex considerations and judgments, as well
as other factors that affect the transaction value or trading value of any
enterprise to which TFN is being compared. Furthermore, in arriving at its
opinions, Robinson-Humphrey did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as
to the significance and relevance of each analysis and factor. Accordingly,
Robinson-Humphrey believes that its analyses must be considered as a whole
and that considering any portions of such analyses and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying the opinions.
In connection with its opinion dated August 5, 1995, Robinson-Humphrey
confirmed the appropriateness of its reliance on the analyses used to render
its opinion as of April 28, 1995 by reviewing the assumptions on which such
analyses were based and the factors considered therewith.
As indicated above, Robinson-Humphrey's written opinion is dated August 5,
1995 and is based solely upon the information available to it and the
economic, market and other circumstances as they existed as of such date.
Events occurring after that date could materially affect the assumptions and
conclusions contained in Robinson-Humphrey's opinion. Robinson-Humphrey will
not undertake action to reaffirm or revise its opinion or otherwise comment
on any events occurring after the date hereof.
Compensation of Robinson-Humphrey. The TFN Board retained Robinson-Humphrey
pursuant to an agreement dated May 27, 1994 as amended as of December 21, 1994
and June 7, 1995. Robinson-Humphrey was chosen as TFN's financial advisor
because of its knowledge of TFN and the wholesale microcomputer distribution
industry. TFN did not consider or interview any other financial advisor
candidates to advise the TFN Board in connection with the proposed Merger.
Pursuant to such engagement, TFN paid Robinson-Humphrey a $50,000 retainer fee
and will pay to Robinson-Humphrey a fee equal to 0.875% of the principal amount
of total consideration paid up to $100 million plus 1.5% of the total
consideration paid over $100 million for TFN (as defined in the Merger
Agreement). Based on an approximate transaction size of $89 million (which
includes the market value of the outstanding TFN Common Stock, which will be
converted in the Merger, as well as the amount of TFN's bank debt to be repaid
in connection with the Merger), Robinson-Humphrey will be entitled to a fee at
closing of approximately $779,000. Of the total fee, $175,000 was due upon
delivery of the April 28, 1995 opinion to the TFN Board without regard to
whether TFN's shareholders adopt the Merger and $50,000 was paid as a retainer
as set forth above. The remainder of the fee is conditioned upon, and payable
at, the closing of the Merger. TFN has also agreed to indemnify and hold
harmless Robinson-Humphrey and its officers and employees against certain
liabilities in connection with its services under the engagement, except for
liabilities resulting from gross negligence of Robinson-Humphrey.
Robinson-Humphrey has performed various investment banking services for
TFN in the past and has received fees for rendering such service.
Additionally, in the past Robinson-Humphrey has performed various investment
banking services for IE and has received fees for rendering such services,
the most recent of which was a February 1991 offering of common stock for
which Robinson-Humphrey served as a co-manager. In the ordinary course of
business, Robinson-Humphrey and its affiliates may actively trade in the
equity securities of TFN and the equity securities of IE for its account and
the account of its customers and, therefore, may from time to time hold long
or short positions in such securities. During the period from April 28, 1995
to August 5, 1995, Robinson-Humphrey did not maintain any long, short or
derivative positions in shares of TFN Common Stock for its own account.
Except as set forth above, Robinson-Humphrey has not received any other fees
from TFN or IE in the last two years.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the TFN Board and the TFN Special
Committee with respect to the Merger Agreement, TFN's shareholders should be
aware that certain members of TFN's Board and senior management have certain
interests in the Merger that are in addition to the interests of shareholders
of TFN generally, and which may be deemed to present them with potential
conflicts of interest in connection with the Merger. The TFN Board and the
TFN Special Committee were aware of these interests and considered them,
among other matters, in approving the Merger Agreement and the transactions
contemplated thereby.
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Employment Agreements. After the Merger Agreement was executed, IE
negotiated and entered into employment agreements with Terry L. Theye, TFN's
Chairman of the Board and Chief Executive Officer, and Lewis E. Miller, TFN's
President and Chief Operating Officer, which also amend their existing
agreements with TFN. Prior to the execution of the Merger Agreement, the TFN
Board and Special Committee were informed negotiations had not then commenced
as to the terms of the new employment agreements. Under the new agreements,
which will be effective as of the Effective Time of the Merger, Messrs. Theye
and Miller have agreed that their employment agreements, as described below,
shall not terminate upon the occurrence of the Merger and that each of them
waives termination benefits resulting from the Merger to which he would
otherwise be entitled under the employment agreements. These agreements with
IE also provide that IE assume the obligations of the employment agreements
which will remain in effect through December 31, 1996. In the event the
Merger is not consummated, the agreement and amendment with IE will be of no
effect, and the employment agreements with TFN, as described below, will
remain in effect.
As part of the agreements with Messrs. Theye and Miller, IE has agreed
that as soon as practicable after the Merger it shall take such action as
necessary to (i) cause the restrictions on the 35,000 shares of restricted
TFN Common Stock Messrs. Theye and Miller were each granted under the terms
of the stock option and stock incentive plans of TFN, which shares shall be
converted to shares of IE Common Stock pursuant to the terms of the Merger,
to be accelerated and such shares shall then be fully vested in Messrs. Theye
and Miller; (ii) amend the options to purchase 160,000 and 95,000 shares of
TFN Common Stock which Messrs. Theye and Miller, respectively, were granted
under the terms of the stock option and stock incentive plans of TFN, which
options shall be converted to options to purchase shares of IE Common Stock
pursuant to the terms of the Merger, so that such options shall remain
outstanding and exercisable and continue to vest throughout the full term
thereof notwithstanding the termination of either of Mr. Theye's or Mr.
Miller's employment, provided Messrs. Theye and Miller waive the loss of
incentive stock option treatment, if any, applicable to such options; (iii)
recommend to the Compensation and Stock Option Committee of IE's Board of
Directors that Messrs. Theye and Miller be granted options to purchase
100,000 and 65,000 shares of IE Common Stock, respectively, under IE's 1995
Long-Term Incentive Plan, with an exercise price at the fair market value of
the IE Common Stock on the grant date; (iv) cause incentive compensation to
be paid to Messrs. Theye and Miller for the portion of 1995 which is prior to
Effective Time of the Merger; and (v) institute a new plan or formula for
incentive compensation for Messrs. Theye and Miller.
IE has also agreed that as soon as practicable after the Merger it shall
take such action as necessary to elect Mr. Theye as an executive officer of
IE. Additionally, IE has agreed that the new employment agreements with
Messrs. Theye and Miller shall not contain non-competition provisions which
were provided in the original employment agreements with TFN and that their
base salaries shall not be less than $343,700 and $245,100, respectively.
The initial terms of the existing agreements with TFN expire on December
31, 1996, and the officers agree to serve as full-time employees during such
term. These agreements provided for 1994 base salaries to Mr. Theye and Mr.
Miller of no less than $287,850 and $213,300, respectively, and provide that
salaries for 1995 and 1996 will at least equal 1994 salaries. The agreements
also provide for annual cash bonuses of up to 90% and 80%, respectively, of
base salary, based on the achievement of certain performance goals.
These agreements also provide for severance or termination payments if Mr.
Theye's or Mr. Miller's employment is terminated by TFN other than for cause, as
defined in the agreements. In such event, the terminated officer is entitled to
his then current annual base salary for the greater of either the remaining term
of the agreement or two years and a pro-rata portion of any bonus which would
have been paid for the year of termination. In addition, these agreements
provide that, to the extent permitted by law, upon such termination, all stock
options granted to the terminated officer prior to the date of termination will
become fully vested and exercisable immediately, and any shares of restricted
stock shall become fully vested. In the event of a change of control, as defined
in the agreements, or if such vesting is not permitted by law or otherwise, the
terminated officer shall receive cash equal to the excess of the then fair
market value of the TFN's Common Stock over the exercise price of any option or,
in the case of restricted stock, the then fair market value of the shares of
restricted stock. Under the terms of these agreements, the Merger would
constitute such a change of control and, as a result, the employment agreements
would terminate, entitling Messrs. Theye and Miller to the termination benefits
described above. See "Certain Information Concerning The Future Now -- Security
Ownership of Certain Beneficial Owners and Management of The Future Now."
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Severance Agreements. Mr. Mooney, TFN's Vice President, Treasurer and
Chief Financial Officer and Ms. Skoog, its Vice President, Secretary and
General Counsel also have employment agreements with TFN. Although the
compensation provisions of each are different from those of Mr. Theye and Mr.
Miller, the agreements are otherwise substantially similar. Under the terms
of these agreements, the Merger would constitute a change of control and, as
a result, the employment agreements will terminate, entitling Mr. Mooney and
Ms. Skoog to the termination benefits described above. As of the date of this
Proxy Statement/Prospectus, Mr. Mooney's base salary was $175,000 and Ms.
Skoog's was $149,000. Under the terms of their employment agreements, each of
them will be paid such salary for two years after their employment terminates
as a result of the Merger as well as a pro rata portion of any bonus paid to
Messrs. Theye and Miller for the portion of 1995 prior to the Effective Time.
Conversion of Options and Warrants. Pursuant to the Merger Agreement,
options or warrants to purchase shares of TFN Common Stock will be converted
in the Merger into options or warrants to purchase shares of IE Common Stock.
With respect to options to purchase IE Common Stock granted upon the Merger
in substitution for options to purchase TFN Common Stock held by directors of
TFN and those employees of TFN whose employment with TFN or IE is terminated
by IE or TFN within 180 days following the Closing Date, such options will
remain outstanding and exercisable and continue to vest throughout their full
term notwithstanding termination of the optionee's service as a director of,
or employment with, TFN or IE, subject to the waiver of incentive stock
option tax treatment by holders of incentive stock options. As of the date
hereof, directors and executive officers of TFN own options or warrants to
purchase a total of 395,100 shares of TFN Common Stock. Upon consummation of
the Merger, assuming that the Conversion Number remains at 0.6588 and is not
adjusted pursuant to the termination and termination override provisions
discussed under "The Merger Agreement - Termination; Adjustment of Conversion
Number," or for any other reason, such options and warrants will be converted
into options and warrants to purchase a total of 260,292 shares of IE Common
Stock.
Indemnification and Insurance. The Merger Agreement provides that for a
period of six years after the Effective Time, IE will indemnify the present
and former directors, officers, employees and agents of TFN to the extent
provided in TFN's Code of Regulations in effect on the date of the Merger
Agreement and IE has agreed not to amend, reduce or limit rights of indemnity
afforded to them or the ability of IE to indemnify them, subject to certain
exceptions. In addition, the Merger Agreement provides that for a period of
two years after the Effective Time, IE will use its best efforts to maintain
director and officer liability insurance coverage providing the present and
former directors and officers of TFN with coverage at least as favorable as,
at IE's option, either (i) the policies in effect immediately prior to the
Effective Time covering TFN's directors and officers or (ii) the policies
covering IE's directors and officers from time to time.
Benefit Plans of TFN. The Merger Agreement provides that for the remainder
of the calendar year in which the Merger occurs, officers and employees of
TFN and its subsidiaries who remain employees of the Surviving Corporation
and its subsidiaries following the Merger will continue to be provided with
employee benefits, including, without limitation, pension benefits, health
and welfare benefits, life insurance and vacation, which are no less
favorable in the aggregate than those which were provided to such officers
and employees prior to the Merger. In the Merger Agreement, IE agreed to, and
to cause its subsidiaries to, provide to officers and employees of TFN and
its subsidiaries who become regular (full time) employees of IE or any of its
subsidiaries (other than the Surviving Corporation and its subsidiaries)
within such calendar year employee benefits, including, without limitation,
pension benefits, health and welfare benefits, life insurance and vacation,
which are no less favorable in the aggregate to those provided from time to
time by IE and its subsidiaries to their similarly situated officers and
employees or, if IE has no other employees in similar positions, which are no
less favorable in the aggregate than those provided to such employees of TFN
prior to the Merger.
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DETERMINATION OF THE CONVERSION NUMBER
If the Average Closing Price of IE Common Stock is greater than $11.00 or is
less than $9.00, the Merger Agreement may be terminated by IE or TFN,
respectively. If IE elects to terminate the Merger Agreement because the Average
Closing Price is greater than $11.00, TFN has the right to override any such
termination election by agreeing that the Conversion Number will be changed to
the quotient that results from dividing $7.2468 by the Average Closing Price. It
also is possible that the Average Closing Price would exceed $11 per share and
(i) IE would exercise its termination rights and TFN would elect not to proceed
with the transaction and therefore would remain an independent company and TFN
Shareholders would retain their shares of TFN Common Stock, or (ii) IE would not
elect to exercise its termination rights, in which case each share of TFN Common
Stock would be converted into 0.6588 shares of IE Common Stock having a value
(based on the Average Closing Price) exceeding $7.2468 per share of TFN Common
Stock. In no event will the value of the IE Common Stock received in the Merger
(based on the Average Closing Price) be less than $7.2468 per share of TFN
Common Stock if the Average Closing Price exceeds $11 per share of IE Common
Stock and the Merger is consummated.
If TFN elects to terminate the Merger Agreement because the Average
Closing Price is less than $9.00, IE has the right to override any such
termination election by agreeing that the Conversion Number will be changed
to the quotient that results from dividing $5.9292 by the Average Closing
Price of IE Common Stock. It also is possible that the Average Closing Price
would be less than $9 per share and (i) TFN would exercise its termination
rights and IE would elect not to proceed with the transaction and TFN
therefore would remain an independent company and TFN Shareholders would
retain their shares of TFN Common Stock, or (ii) TFN would not elect to
exercise its termination rights, in which case each share of TFN Common Stock
would be converted into 0.6588 shares of IE Common Stock having a value
(based on the Average Closing Price) less than $5.9292 per share of TFN
common stock.
The effect of these alternatives is presented in the following table:
<TABLE>
<CAPTION>
Average Conversion Number
Closing Price Party Action (Value Per TFN Share)
-------------------- -------------------- --------------------------
<S> <C> <C>
$9-11, inclusive None permitted 0.6588 (value between $5.9292
and $7.2468)
over $11 None taken by IE 0.6588 (value greater than
$7.2468)
IE termination/ $7.2468 divided by
TFN override Average Closing Price
(value equals $7.2468)
IE termination/ Merger terminates
no TFN override
under $9 None taken 0.6588 (value below
by TFN $5.9292)
TFN termination/ $5.9292 divided by
IE override Average Closing Price
(value equals $5.9292)
TFN termination/ Merger terminates
no IE override
</TABLE>
For additional information about the potential consequences of TFN
continuing to operate as an independent company, see "The Merger -
Consequences to TFN if the Merger Is Not Approved."
If these termination provisions and termination override provisions are
exercised, the number of shares of IE Common Stock (based on the Average
Closing Price of such shares) that holders of TFN Common Stock will receive
in the Merger could be more or less than the number of shares of IE Common
Stock such holders would receive absent such termination and termination
override provisions and the pro forma financial information and comparative
per share data presented in this Proxy Statement/Prospectus would also be
affected.
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<PAGE>
For example, in the event TFN Shareholders adopt the Merger Agreement and
thereby authorize the TFN Board to exercise its discretion whether to proceed
with the Merger if the termination rights are exercised or exercisable, then if
the Average Closing Price is $12.00 and IE elects to terminate the Merger
Agreement, the TFN Board may elect not to override IE's termination of the
Merger Agreement. TFN would then remain an independent company and, among other
things, would have to renegotiate the Credit Agreement or obtain new financing.
See "The Merger - Consequences to TFN if the Merger Is Not Approved." In the
event the TFN Board elects to override IE's termination, the new Conversion
Number would be 0.6039, which is calculated by dividing $7.2468 by the Average
Closing Price of $12.00. TFN Shareholders would then receive 0.6039 shares of IE
Common Stock for each share of TFN Common Stock. This would have the effect of
maintaining the per share value of TFN Common Stock at the equivalent of $7.2468
in shares of IE Common Stock. If the Average Closing Price exceeds $11 per share
and IE does not elect to exercise its termination rights, each share of TFN
Common Stock would be converted into 0.6588 shares of IE Common Stock having a
value (based on the Average Closing Price) exceeding $7.2468 per share of TFN
Common Stock.
If, for example, however, the Average Closing Price is $8.00, TFN's Board
of Directors could elect to terminate the Merger Agreement. If IE did not
elect to override this termination, TFN would then remain an independent
company and, among other things, would have to renegotiate the Credit
Agreement or obtain new financing. See "The Merger - Consequences to TFN if
the Merger Is Not Approved." In the event IE elects to override TFN's
termination, the new Conversion Number would be 0.7412, which is calculated
by dividing $5.9292 by the Average Closing Price of $8.00. TFN Shareholders
would then receive 0.7412 shares of IE Common Stock for each share of TFN
Common Stock. This would have the effect of maintaining the per share value
of TFN Common Stock at the equivalent of $5.9292 in shares of IE Common
Stock. If the Average Closing Price is less than $9 per share and TFN does
not exercise its termination rights, each share of TFN Common Stock would be
converted into 0.6588 shares of IE Common Stock having a value (based on the
Average Closing Price) less than $5.9292 per share of TFN Common Stock. See
"- Background, Recommendations of TFN's Board of Directors and Reasons for the
Merger;" and "Financial Information - Management's Discussion and Analysis of
Financial Condition and Results of Operations of The Future Now."
As of the date of this Proxy Statement/Prospectus, the calculation of the
Average Closing Price would yield a price above $11.00 and IE would have the
right to terminate the Merger Agreement. In the event IE has, and exercises, its
right to terminate the Merger Agreement because the actual Average Closing Price
is above $11.00, the TFN Board would have the right to override the termination.
If the TFN Board exercises its right to override IE's termination of the Merger
Agreement, TFN shareholders would receive the equivalent of $7.2468 in shares of
IE Common Stock. If the TFN Board does not override IE's termination, the Merger
Agreement would terminate and TFN shareholders would continue to hold TFN Common
Stock. In deciding whether or not to exercise its right to override IE's
termination, the TFN Board will consider all circumstances it and its advisors
deem relevant in deciding whether to exercise its override right. The TFN Board
would also seek advice from its advisors, including Robinson-Humphrey, as well
as review and reconsider the factors it originally considered in determining to
proceed with the Merger. See "The Merger - Background, Recommendations of TFN's
Board of Directors and Reasons for the Merger." The TFN Board would also
consider the risks to TFN and its shareholders of remaining an independent
company. See "The Merger - Consequences to TFN if the Merger Is Not Approved."
The TFN Board believes that, unless circumstances change significantly
from those in place as of the date of this Proxy Statement/Prospectus, it
would be in the best interests of TFN shareholders for the TFN Board to
exercise its override right in such circumstances. The TFN Board bases this
belief on (i) the factors considered by it in its deliberations preceding its
determination to proceed with the Merger; (ii) the potential consequences of
TFN continuing to operate as an independent company; and (iii) the advice and
opinion of Robinson-Humphrey that a conversion number that results in TFN
shareholders receiving the equivalent of $7.2468 in IE Common Stock is, as of
the date of the opinion, fair from a financial point of view to TFN
shareholders. In this determination, the TFN Board will analyze the totality of
the circumstances and not assign relative degrees of importance to any specific
factor. See "The Merger - Background, Recommendations of TFN's Board of
Directors and Reasons for the Merger;" "The Merger - Consequences to TFN if the
Merger Is Not Approved;" and "The Merger - Opinion of Financial Advisor."
In the event, however, that the Average Closing Price is below $9.00, TFN
would have the right to terminate the Merger Agreement. If TFN has, and
exercises, its right to terminate the Merger Agreement because the actual
Average Closing Price is below $9.00, IE would have the right to override
TFN's termination. If IE exercised its right to override TFN's termination
of the Merger, TFN shareholders would receive the equivalent of $5.9292 in
shares of IE Common Stock. If IE does not override TFN's termination, the
Merger Agreement would terminate and TFN shareholders would continue to hold
TFN Common Stock. In deciding whether or not to exercise its right to terminate
the Merger Agreement, the TFN Board will consider all circumstances it and its
advisors deem relevant in deciding whether to exercise its termination right.
The TFN Board would also seek advice from its advisors, including Robinson-
Humphrey, as well as review and reconsider the factors it originally considered
in determining to proceed with the Merger. In such an evaluation, the TFN
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<PAGE>
Board would consider that the opinion of Robinson-Humphrey does not address
such a situation. See "The Merger -- Recommendations of TFN's Board of
Directors and Reasons for the Merger." The TFN Board would also consider the
risks to TFN and its shareholders of remaining an independent company. See
"The Merger -- Consequences to TFN if the Merger Is Not Approved." The TFN
Board expects that it would exercise TFN's right to terminate the Merger
Agreement if the Average Closing Price is less than $9.00 per share of IE
Common Stock unless (i) the TFN Board considered that there was a significant
risk that IE would not override TFN's termination or (ii) it considered that the
value of the .6588 shares of IE Common Stock that would be received by TFN
shareholders in the Merger was greater than the value of the TFN Common Stock
that would be retained by the TFN shareholders if the Merger Agreement was
terminated and TFN remained an independent company. In this determination, the
TFN Board will analyze the totality of the circumstances and not assign relative
degrees of importance to any specific factor. See "The Merger -- Background,
Recommendations of TFN's Board of Directors and Reasons for the Merger;" and
"The Merger -- Consequences to TFN if the Merger Is Not Approved.
ANTITRUST
The Merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the rules and
regulations thereunder, which provide that certain transactions may not be
consummated until required information and materials have been furnished to the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the Federal Trade Commission (the "FTC") and certain waiting periods have
expired or been terminated. On May 5, 1995, IE and TFN each filed the required
information and materials with the Antitrust Division and the FTC, and the
waiting period was terminated on May 12, 1995.
The expiration of the HSR Act waiting period does not preclude the
Antitrust Division or the FTC from challenging the Merger on antitrust
grounds. Accordingly, at any time before or after the Effective Time, either
the Antitrust Division or the FTC could take such action under the antitrust
laws as it deems necessary or desirable in the public interest, including
seeking to enjoin the Merger.
FEDERAL SECURITIES LAW MATTERS
The shares of IE Common Stock to be issued pursuant to the Merger
Agreement have been registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed to be an "Affiliate" (as such term is defined for purposes
of Rule 145 under the Securities Act) of TFN or IE at the time of the TFN
Special Meeting. Affiliates may not sell their shares of IE Common Stock
acquired in connection with the Merger except pursuant to (i) an effective
registration statement under the Securities Act covering the reoffer and
resale such shares, (ii) paragraph (d) of Rule 145 in the case of persons who
are Affiliates of TFN at the time of the Special Meeting, or (iii) any other
applicable exemption under the Securities Act (such as Rule 144 under the
Securities Act in the case of persons who are or become Affiliates of IE).
Persons who may be deemed Affiliates of IE or TFN generally include
individuals or entities that control, are controlled by, or are under common
control with, IE or TFN, respectively and may include certain officers and
directors, as well as principal shareholders of IE or TFN, respectively.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase in accordance with
generally accepted accounting principles and applicable accounting rules of
the Commission. Accordingly, the purchase price will be allocated to tangible
and intangible assets purchased, as well as the liabilities assumed, based on
their respective estimated fair values as of the date of the Merger. See "Pro
Forma Financial Information."
LISTING ON NASDAQ
IE has agreed to use its best efforts to cause the shares of IE Common
Stock issued pursuant to the Merger Agreement to be designated for inclusion
in the Nasdaq National Market. The obligations of the parties to the Merger
Agreement to consummate the Merger are subject to such designation. The
process of effecting such designation is primarily ministerial in nature. See
"The Merger Agreement - Conditions to the Merger."
CONSEQUENCES TO TFN IF THE MERGER IS NOT APPROVED
In the event the Merger is not approved by TFN Shareholders, TFN would
remain an independent company. TFN would continue to face the competitive
environment and its own uncertain future prospects described in the
"Background, Recommendations of TFN's Board of Directors and Reasons for the
Merger" section of this Proxy Statement/Prospectus. TFN would immediately
seek an additional extension of the current waiver under the Credit
Agreement. TFN would also promptly commence negotiations concerning alternate
financing with the current group of Lenders as well as additional potential
lenders. TFN believes it may be able to arrange at most a one year financing
and believes it will be difficult to arrange such financing on terms which
are as favorable as the ones under the Credit Agreement. TFN would also
review with its advisors the possibility of a business combination, merger or
acquisition with another party which TFN anticipates would be difficult for
the reasons outlined in the section referenced above.
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<PAGE>
THE MERGER AGREEMENT
GENERAL
The terms of the Merger are contained in the Merger Agreement, a copy of
which is attached as Annex A to this Proxy Statement/Prospectus and
incorporated herein by reference. Statements in this Proxy
Statement/Prospectus with respect to the terms of the Merger are qualified in
their entirety by reference to the Merger Agreement. TFN Shareholders are
urged to read the full text of the Merger Agreement. For a list of defined
terms used below, see "Definitions" commencing on page 72.
Under the Merger Agreement, if the Merger is approved by TFN Shareholders
and becomes effective, Mergerco will merge with and into TFN, and TFN, as the
Surviving Corporation in the Merger, will continue its corporate existence
under the laws of Ohio under the name "The Future Now, Inc." The Surviving
Corporation will be a wholly owned subsidiary of IE.
EFFECTIVE TIME OF MERGER
The Effective Time of the Merger will be at the time of filing of a
Certificate of Merger with the Secretary of State of the State of Ohio in
accordance with applicable Ohio law or at such other time as may be set
forth, by mutual agreement among IE, Mergerco and TFN, in the Certificate of
Merger. It is presently anticipated that the filing of the Certificate of
Merger will be made as soon as practicable after the conclusion of the
Special Meeting. Such filing will be made, however, only upon satisfaction or
waiver, where permissible, of the conditions set forth in the Merger
Agreement. See "The Merger Agreement - Conditions to the Merger."
CONVERSION OF STOCK
At the Effective Time, each outstanding share of TFN Common Stock (other
than Excluded Shares and Dissenting Shares) automatically will be converted
into the Merger Consideration. In the event that prior to the Effective Time
the outstanding shares of IE Common Stock shall have been increased,
decreased or changed into or exchanged for a different number or kind of
shares or securities by reorganization, recapitalization, reclassification,
stock dividend, stock split or other like changes in IE's capitalization, all
without IE receiving adequate consideration therefor, then an appropriate and
proportionate adjustment will be made in the Conversion Number and in the
number and kind of shares of IE Common Stock to be thereafter delivered
pursuant to the Merger Agreement.
As described in "-Termination; Adjustment of Conversion Number," IE has the
right to terminate the Merger Agreement if the Average Closing Price exceeds
$11.00. TFN, however, may override any such termination by agreeing to reduce
the Conversion Number to a number equal to $7.2468 divided by the Average
Closing Price. Such an adjustment to the Conversion Number would have the
effect of maintaining the per share value of TFN Common Stock at the
equivalent of $7.2468 in shares of IE Common Stock. Similarly, if the Average
Closing Price is less than $9.00 and TFN exercises its right to terminate the
Merger Agreement as a result thereof, IE may override such termination by
agreeing to raise the Conversion Number to a number equal to $5.9292 divided
by the Average Closing Price. Such an adjustment to the Conversion Number
would have the effect of maintaining the per share value of TFN Common Stock
at the equivalent of $5.9292 in shares of IE Common Stock. It is possible
that the Conversion Number will not be adjusted if the Average Closing Price
is less than $9 or more than $11 or that the Merger might not proceed under
those circumstances, each with differing consequences to TFN shareholders.
For additional information, see "The Merger - Determination of the Conversion
Number."
Holders of shares of TFN Common Stock have the right under Section 1701.84
of the ORC to dissent from the Merger and obtain an appraisal of the fair
value of such shares pursuant to Section 1701.85 of the ORC if the Merger is
consummated. See "Rights of Dissenting Shareholders."
At the Effective Time, each option and warrant granted by TFN to purchase
shares of TFN Common Stock, which is outstanding and unexercised immediately
prior thereto, will be converted into an option or warrant (as applicable) to
purchase shares of IE Common Stock on the same terms and conditions as are in
effect immediately prior to the Merger, except as described under "The Merger
- Interests of Certain Persons in the Merger - Conversion of Options and
Warrants."
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<PAGE>
PAYMENT FOR TFN COMMON STOCK; EXCHANGE OF STOCK CERTIFICATES
In order to receive the Merger Consideration, each holder of certificates
(each, a "Certificate") representing shares of TFN Common Stock prior to the
Effective Time will be required to surrender his or her Certificate or
Certificates, together with a duly executed and properly completed letter of
transmittal and any other required documents, to Mellon Bank, N.A., which has
been appointed by IE as its exchange agent for the Merger (the "Exchange
Agent"). The Exchange Agent will provide each holder of a Certificate with
the requisite forms of the letter of transmittal and other documents referred
to above, together with instructions for their use. Upon receipt of such
Certificate or Certificates, together with a duly executed and properly
completed letter of transmittal and any other required documents from a
holder of TFN Common Stock, the Exchange Agent will arrange for the issuance
and delivery to the person or persons entitled thereto of a certificate or
certificates representing that number of whole shares of IE Common Stock
equal to the Conversion Number multiplied by the number of shares of TFN
Common Stock represented by the surrendered Certificate or Certificates.
Shares of IE Common Stock will be issued only in whole shares. Former
holders of shares of TFN Common Stock will not be entitled to receive
fractions of shares of IE Common Stock ("Fractional Shares") but, instead,
will be entitled to receive promptly from the Exchange Agent a cash payment
in lieu of Fractional Shares in an amount equal to the Average Closing Price
multiplied by the Fractional Share in question.
No dividends or other distributions that are otherwise payable on the
shares of IE Common Stock issued in connection with the Merger will be paid
to the holder of any unsurrendered Certificate until such Certificate is
properly surrendered to the Exchange Agent. However, upon the proper
surrender of such Certificate to the Exchange Agent (i) there shall be paid
to the person in whose name the shares of IE Common Stock constituting Merger
Consideration are issued the amount of any dividends that shall have become
payable with respect to such shares of IE Common Stock between the Effective
Time of the Merger and the time of such surrender and (ii) at the appropriate
payment date or as soon thereafter as practicable, there shall be paid to
such person the amount of any dividends on such shares of IE Common Stock
that shall have a record or due date prior to such surrender and a payment
date after such surrender, subject to any applicable escheat laws or
unclaimed property laws. On proper surrender of a Certificate, no interest
shall be payable with respect to the payment of such dividends and no
interest shall be payable with respect to the amount of any cash payable in
lieu of a Fractional Share of IE Common Stock.
If the Merger Consideration is to be paid to a person other than the
registered holder of the Certificate or Certificates surrendered, it is a
condition of such issuance that the Certificate or Certificates so
surrendered be properly endorsed or otherwise be in proper form for transfer
and that the person requesting such payment or issuance either pay to the
Exchange Agent any transfer taxes required by reason of the issuance to a
person other than the registered owner of the Certificate or Certificates
surrendered, or shall establish to the satisfaction of IE that such tax has
been paid or is not applicable.
TFN SHAREHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED PROXY
CARD.
ARTICLES OF INCORPORATION, CODE OF REGULATIONS, OFFICERS AND DIRECTORS
The Merger Agreement provides that, at the Effective Time, the Articles of
Incorporation and Code of Regulations of TFN, each as in effect immediately
prior to the Effective Time, shall be the Articles of Incorporation and Code
of Regulations of the Surviving Corporation. The Merger Agreement also
provides that the directors of Mergerco at the Effective Time shall be the
directors of the Surviving Corporation and shall serve until their respective
successors are duly elected or appointed and qualify in the manner provided
in the Articles of Incorporation and Code of Regulations of the Surviving
Corporation. Pursuant to the Merger Agreement, prior to the Effective Time,
IE will designate the persons to serve as officers of the Surviving
Corporation until their respective successors are duly elected or appointed
and qualify in the manner provided in the Articles of Incorporation and Code
of Regulations of the Surviving Corporation.
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<PAGE>
CONDITIONS TO THE MERGER
The obligations of each of IE, Mergerco and TFN to consummate the Merger
are subject to fulfillment of the following conditions at or prior to the
Effective Time: (i) the Merger Agreement shall have been adopted by the
Required Shareholder Vote; (ii) the Registration Statement shall have become
effective under the Securities Act and no stop order suspending such
effectiveness shall have been issued and remain in effect; (iii) all filings
required to be made prior to the Effective Time shall have been made and all
authorizations, consents, orders or approvals of, and all expirations of
waiting periods imposed by, any governmental entity (collectively, the
"Consents") which are necessary for the consummation of the Merger shall have
been obtained or shall have occurred and shall remain in effect at the
Effective Time; (iv) no preliminary or permanent injunction or other order
shall have been issued by any court or governmental entity which prohibits
consummation of the Merger; (v) no statute, rule, regulation, executive
order, decree or order of any kind shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which
prohibits consummation of the Merger; (vi) the shares of IE Common Stock to
be issued pursuant to the Merger Agreement shall have been designated for
inclusion in the Nasdaq National Market; (vii) there shall not have been any
action taken, or any statute, rule, regulation, judgment, order or injunction
promulgated, enacted or entered by any state, federal or foreign government
or governmental entity or by any court, domestic or foreign, that would (x)
require the divestiture by IE, Mergerco or TFN or any of their respective
subsidiaries of all or any material portion of the business, assets or
property of any of them or impose any material limitation on the ability of
any of them to conduct their business and own such assets and properties or
(y) impose any limitations on the ability of IE or Mergerco effectively to
control in any material respect the business or operations of TFN or any of
TFN's subsidiaries; and (viii) IE shall have received all state securities
laws and "blue sky" permits and other authorizations necessary to consummate
the transactions contemplated by the Merger Agreement.
The obligation of TFN to effect the Merger is subject to satisfaction of
the following additional conditions at or prior to the Effective Time (each
of which may be waived by TFN): (i) IE and Mergerco shall have performed
their agreements contained in the Merger Agreement in all material respects;
(ii) the representations and warranties of IE and Mergerco set forth in the
Merger Agreement shall be true and correct in all material respects at and as
of the Effective Time as if made at and as of such date, unless stated in the
Merger Agreement to be true on and as of another date, in which case such
representation and warranty shall have been true in all material respects on
and as of such date; (iii) no change shall have occurred (and no condition,
event or development shall have occurred involving a prospective change) in
the Condition (as defined in the Merger Agreement) of IE which is or may be
materially adverse to such Condition; (iv) TFN shall have received the
opinion of Pepper, Hamilton & Scheetz concerning the matters identified in
the Merger Agreement; and (v) TFN shall have received from IE's independent
certified public accountants a "cold comfort" letter shortly prior to the
Effective Time with respect to certain financial information of IE in
substantially the form customarily issued by accountants in transactions
comparable to the Merger.
The obligations of IE and Mergerco to effect the Merger are subject to
satisfaction of the following additional conditions at or prior to the Effective
Time (each of which may be waived by IE and Mergerco): (i) TFN shall have
performed its agreements contained in the Merger Agreement in all material
respects; (ii) the representations and warranties of TFN shall be true and
correct in all material respects at and as of the Effective Time as if made at
and as of the Effective Time, unless stated in the Merger Agreement to be true
on and as of another date, in which event such representation and warranty shall
have been true in all material respects on and as of such date; (iii) no change
shall have occurred (and no condition, event or development shall have occurred
involving a prospective change) in the Condition of TFN or any of its
subsidiaries which is or is reasonably likely to be materially adverse to such
Condition; (iv) holders of not more than ten percent (10%) of the outstanding
shares of TFN Common Stock entitled to relief as dissenting shareholders under
the ORC shall have properly served a written demand upon TFN for the payment of
the fair cash value of their shares of TFN Common Stock; (v) the amount of TFN's
outstanding secured bank debt which IE may be required to discharge at the
Effective Time shall not exceed $55,000,000; (vi) IE's shareholders shall have
approved the Merger in the event that such approval is required under
Pennsylvania corporate law or requirements of the Nasdaq National Market by
virtue of the entry by IE into an agreement for a business combination with a
third party; (vii) neither Terry L. Theye nor Lewis E. Miller shall have
rescinded, terminated (other than on account of death or disability) or breached
any agreement he might reach with IE regarding his employment with IE or the
Surviving Corporation following the Merger; (viii) IE shall have received the
opinion of Norma Skoog, Esquire concerning the matters identified in the Merger
Agreement; and (ix) IE shall have received from TFN's independent certified
public accountants a "cold comfort" letter shortly prior to the Effective Time
with respect to certain financial information of TFN in substantially the form
customarily issued by accountants in transactions comparable to the Merger.
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<PAGE>
Additional conditions to the obligations of IE, Mergerco and TFN to
consummate the Merger and satisfied prior to the date hereof, include: (i)
delivery to TFN of an opinion from Arnold & Porter to the effect that the
Merger, when consummated in accordance with the terms of the Merger
Agreement, should constitute a reorganization within the meaning of Section
368(a)(1) of the Code and (ii) delivery to TFN of a fairness opinion, as of a
date not more than five days prior to the date this Proxy
Statement/Prospectus is mailed to TFN Shareholders, from Robinson-Humphrey.
The two conditions described in this paragraph have been satisfied.
CERTAIN COVENANTS
Covenants of TFN. In the Merger Agreement, TFN has agreed that, prior to
the Effective Time, unless IE otherwise agrees, or as otherwise contemplated
by the Merger Agreement, TFN and its subsidiaries will conduct their
respective operations only in the ordinary course of business consistent with
past practices and neither TFN nor any subsidiary thereof shall take certain
actions not in the ordinary course of business, that might impact on their
respective financial conditions or businesses. In addition, TFN has agreed
that neither it nor any of its subsidiaries nor any of the respective
officers, directors, employees, representatives, investment bankers,
attorneys, accountants and other agents and affiliates (collectively,
"Representatives") of TFN or any of its subsidiaries shall, prior to the
Effective Time: subject to fiduciary duties of its Board of Directors under
applicable law, directly or indirectly, take any action to encourage,
solicit, initiate, discuss or negotiate with, or furnish any information to,
or afford any access to the properties, books or records of TFN, to any
person other than IE and its Representatives in connection with any possible
or proposed merger, consolidation, business combination, liquidation,
reorganization, sale or other disposition of a material amount of assets,
acquisition of a material amount of assets or similar transaction involving
TFN.
Covenants of IE. In the Merger Agreement, IE agreed that promptly
following completion of the Merger (and no later than the day on which the
Effective Time occurs) it would either repay or purchase in full TFN's
outstanding secured bank debt, together with accrued interest thereon, unless
TFN's banks, at the request of IE, consent to the continuation of such debt
following completion of the Merger. Certain other covenants of IE are
described under "The Merger - Interests of Certain Persons in the Merger."
Covenants of TFN, IE and Mergerco. In the Merger Agreement, each of TFN
and IE agrees that, except as consented to by the other, prior to the
Effective Time, it will not declare, pay or make any dividend or other
distribution or payment with respect to, or split, redeem or reclassify, any
shares of capital stock; provided that the foregoing restriction will not
limit the ability of IE to pay a quarterly cash dividend of $0.10 on its
outstanding shares of common stock.
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<PAGE>
TERMINATION; ADJUSTMENT OF CONVERSION NUMBER
The Merger Agreement may be terminated notwithstanding the approval by TFN
Shareholders: (i) at any time prior to the Effective Time, by mutual consent of
each of the respective parties to the Merger Agreement; (ii) by either IE or TFN
if the Merger is not consummated on or before September 30, 1995 (or such later
date as the parties may agree to in writing); provided that such date shall be
extended to December 31, 1995 under limited circumstances; (iii) by IE or TFN if
there has been a breach of a representation, warranty or covenant of the other
party in the Merger Agreement or a failure of any condition to which the
obligations of such party are subject, except as provided in the Merger
Agreement; (iv) by TFN, if its shareholders do not adopt the Merger Agreement at
the Special Meeting or by IE if IE enters into a business combination agreement
with a third party which, under Pennsylvania corporate law or requirements of
the Nasdaq National Market, would require IE to obtain shareholder approval of
the Merger and the shareholders of IE do not approve the Merger at a
shareholders' meeting convened by IE; (v) by IE or TFN if any court of competent
jurisdiction in the United States or other United States governmental body shall
issue an order, decree or ruling or take any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree or ruling or other action shall have become final and unappealable; (vi)
by TFN in the event (1) of the acquisition, without the consent of TFN, by any
person of beneficial ownership of 50% or more of the outstanding shares of IE
Common Stock (as constituted prior to the Merger and computed on a fully diluted
basis), (2) the Board of Directors of IE, without the consent of TFN, accepts or
publicly recommends acceptance of an offer to acquire 50% or more of the
outstanding shares of IE Common Stock (as constituted prior to the Merger and
computed on a fully diluted basis) or of IE's consolidated assets or (3) IE,
without the consent of TFN, executes an agreement for any transaction involving
the issuance of a number of shares of IE Common Stock, or securities
exchangeable therefor, that would increase the total number of shares of IE
common stock issued and outstanding by at least 20% (as constituted prior to the
Merger and computed on a fully diluted basis); (vii) by IE, if on or prior to
September 30, 1995, TFN shall have consummated, or entered into an agreement
providing for, a merger of TFN with, sale of all or a substantial part of the
assets of TFN to (excluding sales of inventory in the ordinary course of
business), or any other business combination involving TFN with, any person or
entity, including any group of persons or entities; (viii) by IE, if the Average
Closing Price exceeds $11.00, subject, however, to the right of TFN to override
any such termination election by agreeing, by no later than 5:00 p.m. on the
trading date preceding the Closing Date, that the Conversion Number will be
changed to the quotient that results from dividing $7.2468 by the Average
Closing Price; (ix) by TFN, if the Average Closing Price is less than $9.00,
subject, however, to the right of IE to override any such termination election
by TFN by agreeing in writing, by no later than 5:00 p.m. on the trading date
preceding the Closing Date, that the Conversion Number will be changed to the
quotient that results from dividing $5.9292 by the Average Closing Price; or (x)
by IE, if TFN's secured bank lenders pursue legal remedies against TFN or any of
its subsidiaries on account of a default under TFN's loan agreements with such
banks. It is possible that the Conversion Number will not be adjusted if the
Average Closing Price is less than $9 or more than $11 and that the Merger will
not be terminated under those circumstances. See "The Merger - Determination of
the Conversion Number."
In the event that IE or TFN terminates the Merger Agreement on account of
an intentional or willful breach of a representation, warranty or covenant by
the other, then the terminating party shall have the right to pursue its
legal and equitable remedies for breach of contract. In the event that IE or
TFN terminates the Merger Agreement on account of a breach of a
representation, warranty or covenant of the other which is not intentional or
willful, then the terminating party shall have the right to recover its costs
and expenses incurred in connection with the transactions contemplated by the
Merger Agreement.
TERMINATION FEE
If on or prior to September 30, 1995, TFN shall have consummated, or
entered into an agreement providing for, a merger of TFN with, sale of all or
a substantial part of the assets of TFN to (excluding sales of inventory in
the ordinary course of business) or any other business combination involving
TFN with, any person or entity, including any group of persons or entities (a
"Company Combination Event"), and the Merger Agreement is terminated as a
result thereof, TFN shall be obligated to pay IE an amount equal to
$1,500,000 (the "Termination Fee"). If the Merger Agreement is terminated on
account of the occurrence of a Company Combination Event, then payment of the
Termination Fee shall be inclusive of all expenses incurred by IE and
Mergerco in connection with the Merger Agreement and shall be the exclusive
remedy of IE and Mergerco for any claim of liability against TFN arising out
of such termination or the breach of the Merger Agreement resulting from the
occurrence of a Company Combination Event. Subject to the foregoing, each
party to the Merger Agreement will pay all costs and expenses incurred by it
in connection with the transactions contemplated by the Merger Agreement,
except that IE and TFN will each bear one-half of all printing costs.
35
<PAGE>
CERTAIN OTHER PROVISIONS OF THE MERGER AGREEMENT
The Merger Agreement provides that any provision of the Merger Agreement may
be (i) waived by the party benefitted by the provision or by both parties by a
writing executed by an executive officer or (ii) amended or modified at any time
(including the structure of the transaction) by an agreement in writing between
the parties thereto approved by their respective Boards of Directors, except
that, after the vote by the TFN Shareholders at the Special Meeting, no such
amendment or modification which by law requires further approval by shareholders
may be made without further shareholder approval. Except as provided in the
preceding sentence, any such waiver, amendment or modification can be made after
the mailing of this Proxy Statement/Prospectus or approval of the Merger by
TFN's shareholders without resoliciting such approval. TFN would consider
whether to resolicit shareholder approval in light of the circumstances, but
would not be required to do so.
The Merger Agreement also provides that except to the extent legally
required for the discharge by the TFN board of directors of its fiduciary
duties, the TFN Board shall recommend that TFN Shareholders vote in favor of
the Merger Agreement and adoption of the Merger Agreement.
36
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited Pro Forma Combined Balance Sheet is based on the unaudited
historical Balance Sheets of IE as of April 29, 1995 and TFN as of March 31,
1995, and gives effect to the Merger as if it had occurred on April 29, 1995,
after giving effect to the pro forma adjustments described in the notes
thereto.
The unaudited Pro Forma Combined Statement of Operations for the year
ended January 28, 1995 is based on the audited historical Statements of
Operations for IE for the year ended January 28, 1995 and for TFN for the
year ended December 31, 1994, and gives effect to the Merger as if it had
occurred on January 30, 1994, after giving effect to the pro forma
adjustments described in the notes thereto.
The unaudited Pro Forma Combined Statement of Operations for the three
months ended April 29, 1995 is based on the unaudited historical Statements
of Operations for IE for the three months ended April 29, 1995 and for TFN
for the three months ended March 31, 1995, and gives effect to the Merger as
if it had occurred on January 29, 1995, after giving effect to the pro forma
adjustments described in the notes thereto. The pro forma financial
statements are presented for illustrative purposes only and are not
necessarily indicative of the results which would have occurred had the
Merger taken place on the dates indicated or which may occur in the future.
37
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
--------------------------
IE TFN Pro
April 29, March 31, Pro Forma Adjustments Forma
-------------------------- -----------
1995 1995 Debit Credit Combined
----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......... $ 69,299 $ -- $ -- $56,823a $ 12,476
Marketable securities available for
sale ............................ 8,851 -- 8,851
Accounts receivable, net ........... 94,120 116,636 106b 210,650
Inventory .......................... 340,757 43,699 384,456
Prepaid expenses and other current
assets .......................... 4,457 1,554 6,011
Deferred income taxes .............. 11,684 -- 1,575e 13,259
----------- ----------- -----------
Total current assets ............ 529,168 161,889 635,703
Property and equipment ............... 46,000 10,978 3,000c 53,978
Intangible assets, primarily goodwill,
net ................................ 73,629 32,200 64,901g 32,200g 138,530
Investments in affiliates ............ 15,662 -- 14,870d 792
Other assets ......................... 8,468 6,454 4,925e 19,847
----------- ----------- -----------
Total assets .................... $ 672,927 $211,521 $848,850
=========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt .................... $ -- $ 57,499 56,823a $ 676
Accounts payable ................... 465,174 100,956 106b 566,024
Accrued liabilities ................ 37,713 17,688 8,000c 63,401
----------- ----------- -----------
Total current liabilities ....... 502,887 176,143 630,101
----------- ----------- -----------
Long-term debt ....................... -- 427 427
Other liabilities .................... -- 2,158 2,158
Shareholders' equity:
Common stock ....................... 396 58,285 58,285f 396
Additional paid-in capital ......... 221,713 -- 221,713
Treasury stock ..................... (105,677) -- 46,124f (59,553)
Retained earnings (Accumulated
deficit) ........................ 53,508 (25,492) 25,492f 53,508
Unrealized holding gain on
securities and investments ...... 100 -- 100
----------- ----------- -----------
Total shareholders' equity ........... 170,040 32,793 216,164
----------- ----------- -----------
Total liabilities and shareholders'
equity .......................... $ 672,927 $211,521 $848,850
=========== =========== ===========
</TABLE>
See notes to pro forma combined financial statements.
38
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 28, 1995
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
-------------------------------
IE TFN
Year ended Year ended
January 28, December 31, Pro Forma Pro Forma
1995 1994 Adjustments Combined
------------- -------------- ------------- ------------
Debit
(Credit)
<S> <C> <C> <C> <C>
Revenues ................................... $3,208,083 $795,736 $ 506,056 h $3,497,763
Cost of goods sold ......................... 3,075,342 678,790 (506,056)h 3,248,076
------------- -------------- ------------
Gross profit ............................. 132,741 116,946 249,687
------------- -------------- ------------
Operating expenses:
Selling, general and administrative
expenses .............................. 96,193 115,869 212,062
Amortization of intangibles, primarily
goodwill .............................. 4,758 2,500 745 i 8,003
Restructuring ............................ -- 33,000 33,000
Goodwill impairment ...................... -- 6,985 6,985
Total operating expenses .............. 100,951 158,354 260,050
Income (loss) from operations .............. 31,790 (41,408) (10,363)
Other income (expense):
Investment and other income, net ......... 4,374 -- 3,693 j 681
Interest expense ......................... (1,238) (8,319) (6,762)j (2,795)
Gain on sale of branches to Intelligent
Electronics ........................... -- 2,472 2,472 k 0
------------- -------------- ------------
Income (loss) before provision (benefit) for
income taxes and equity in earnings (loss)
of affiliate ............................. 34,926 (47,255) (12,477)
Provision (benefit) for income taxes ....... 13,853 (2,267) (10,657)l 929
------------- -------------- ------------
Income (loss) before equity in earnings
(loss) of affiliate ...................... 21,073 (44,988) (13,406)
Equity in earnings (loss) of affiliate ..... (13,013) -- 13,013 m 0
------------- -------------- ------------
Net income (loss) .......................... $ 8,060 $ (44,988) $ (13,406)
============= ============== ============
Net income (loss) per share ................ $ 0.23 $ (0.35)
============= ============== ============
Weighted average number of common shares and
share equivalents outstanding:
Primary and fully diluted ................ 34,848 3,449 38,297
</TABLE>
See notes to pro forma combined financial statements.
39
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 29, 1995
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
--------------------------------
IE TFN
Three Months Three Months
ended ended
April 29, March 31, Pro Forma Pro Forma
1995 1995 Adjustments Combined
-------------- -------------- ------------- -----------
Debit
(Credit)
<S> <C> <C> <C>
Revenues ................................ $827,439 $151,995 $ 93,831 h $885,603
Cost of goods sold ...................... 789,764 125,024 (93,831)h 820,957
-------------- -------------- -----------
Gross profit .......................... 37,675 26,971 64,646
-------------- -------------- -----------
Operating expenses:
Selling, general and administrative
expenses ........................... 26,818 25,236 52,054
Amortization of intangibles, primarily
goodwill ........................... 1,293 481 330 i 2,104
-------------- -------------- -----------
Total operating expenses ........... 28,111 25,717 54,158
-------------- -------------- -----------
Income from operations .................. 9,564 1,254 10,488
Other income (expense):
Investment and other income, net ...... 498 -- 498 j 0
Interest expense ...................... (988) (1,770) (1,089)j (1,669)
Income (loss) before provision for income
taxes and equity in loss of affiliate . 9,074 (516) 8,819
Provision for income taxes .............. 3,938 50 163 l 4,151
-------------- -------------- -----------
Income (loss) before equity in loss of
affiliate ............................. 5,136 (566) 4,668
Equity in loss of affiliate ............. (246) -- 246 m 0
-------------- -------------- -----------
Net income (loss) ....................... $ 4,890 $ (566) $ 4,668
============== ============== ===========
Net income per share .................... $ 0.16 $ 0.13
============== ============== ===========
Weighted average number of common shares
and share equivalents outstanding:
Primary and fully diluted ............. 31,366 3,449 34,815
</TABLE>
See notes to pro forma combined financial statements.
40
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO PRO FORMA BALANCE SHEET
(a) Represents the repayment of TFN's Secured Credit Agreement with
certain banks.
(b) Represents the elimination of receivables due to TFN from IE at April
29, 1995.
(c) Reflects an adjustment to fair value for certain assets ($3,000) and
the accrual of transaction and integration-related costs attributable to the
Merger ($8,000).
(d) Represents the elimination of IE's investment in TFN.
(e) Reflects the purchase accounting recognition of a deferred tax asset
related to net operating losses incurred by TFN.
(f) Reflects the elimination of TFN's historical equity accounts and the
issuance of shares of IE Common Stock based on the Conversion Number of
0.6588 (3,448,516 shares valued at $13.375 per share based on IE's closing
market price on July 14, 1995). If the Average Closing Price of the IE Common
Stock is greater than $11.00, IE elects to terminate the Merger Agreement and
TFN overrides that termination election by agreeing that the Conversion
Number will be changed to the quotient that results from dividing $7.2468 by
the Average Closing Price, the Conversion Number will be less than 0.6588.
For example, if the Average Closing Price were $13.375 and such termination
and override rights were exercised, the Conversion Number would be 0.5418 and
2,836,075 shares of IE Common Stock would be issued.
(g) Reflects the elimination of TFN's historical goodwill and estimated
goodwill resulting from the Merger as follows (in thousands):
Purchase price .......................................... $46,124
Existing investment ..................................... 14,870
Adjustments and transaction and integration-related costs 11,000
----------
Total .................................................. 71,994
Less: ...................................................
Recognition of TFN NOL (e) ............................ (6,500)
Book value of TFN's tangible assets ................... (593)
----------
Goodwill ................................................ $64,901
==========
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(h) Represents the elimination of IE's sales to TFN.
(i) Reflects the amortization of goodwill resulting from the Merger over a
20-year period, offset by the elimination of TFN's historical goodwill
amortization.
(j) Represents the foregone investment income on invested funds (4.7% for
the year ended January 28, 1995 and the quarter ended April 29, 1995) and the
reduction in interest expense (8.6% for the year ended January 28, 1995 and
10.1% for the quarter ended April 29, 1995) due to the repayment of TFN's
Secured Credit Agreement, offset by additional interest expense for IE to
finance the repayment.
(k) Represents the elimination of TFN's reported profit resulting from the
sale of certain branch locations on December 30, 1994 to IE.
(l) Reflects the federal and state income tax effect (37% for the year
ended January 28, 1995 and 38% for the quarter ended April 29, 1995) relating
to the adjustments and the recognition of tax benefits relating to TFN's
loss.
(m) Represents the elimination of IE's equity interest in TFN's loss.
41
<PAGE>
BUSINESS RELATIONSHIPS BETWEEN THE PARTIES
TFN entered into a number of agreements with IE in connection with TFN's
acquisition of IE's Company Center Division ("CCD") in July 1992. Under the
terms of the merger agreement with CCD, IE acquired 1,638,377 shares of TFN
Common Stock, or approximately 31% of the then outstanding TFN Common Stock
plus a promissory note in the principal amount of $29,480,000. The amount of
consideration paid by TFN to IE to acquire CCD was based upon the relative
pro forma pre-tax earnings before interest, depreciation and amortization of
CCD and TFN for their fiscal years ended October 31, 1991 and December 31,
1991, respectively, and upon the relative net tangible book values of CCD and
TFN as of the closing date, and was the result of arms-length negotiations
between the parties. The stock received by IE is restricted and, in general,
is not available for public sale until registered. As part of the
acquisition, TFN and IE entered into a number of agreements described below.
With TFN's public offering in March, 1993 of additional shares of its Common
Stock, IE's ownership percentage decreased to approximately 24%. In October,
1993, TFN sold an additional 681,447 shares of its Common Stock to IE. The
price of these additional shares was based on the then market value of TFN's
Common Stock, as reported on the Nasdaq National Market. After this
transaction, IE owned approximately 31% of TFN's then outstanding Common
Stock. These shares are also restricted and, in general, are not available
for public sale until registered.
Warrant. To prevent dilution of IE's percentage ownership of TFN's Common
Stock, TFN granted to IE a Warrant to acquire up to 184,489 additional shares
of Common Stock in the event that any shares of TFN's Common Stock are issued
pursuant to the exercise of options or other warrants outstanding on or about
the date of the CCD acquisition. The per share price to be paid by IE to TFN
is payable in cash in an amount equal to the per share exercise price of such
warrants or options. To date, IE has purchased 24,200 shares of TFN Common
Stock under this Warrant.
Registration Rights Agreement. Under this Agreement, IE has the right to
make five demands that TFN register its shares of TFN Common Stock with the
Commission as well as certain rights to participate in any registration by
TFN of its Common Stock in connection with a sale to the public. TFN has
agreed to incur certain of the costs and expenses attributable to such
registration.
Standstill Agreement. Under this Agreement, IE has generally agreed that,
until July 2, 1997, it will not acquire, directly or indirectly, any Common
Stock of TFN if, immediately thereafter, the percentage of TFN's voting
securities then issued and outstanding and held by IE would be greater than
31.1%. Such an acquisition of additional shares is, however, permitted under
certain circumstances such as with the prior consent of TFN or pursuant to
the terms of the Warrant or in the event of a tender or exchange offer by a
third party to acquire in excess of 31.1% of TFN's voting securities or by IE
to acquire 100% of TFN's voting securities. The Standstill Agreement also
provides that IE or its affiliates may not dispose of its shares of TFN's
Common Stock unless the proposed transferee agrees to be bound by an
agreement containing terms similar to the Standstill Agreement, except for
(i) the private placement of such securities to a third party or the
distribution of such securities to IE's security holders, in each case only
if such security holders will not hold more than 19% of TFN's voting
securities; (ii) sales of TFN voting securities by IE covered by a
registration statement effective under the Securities Act; and (iii) sales of
TFN voting securities pursuant to Rule 144 or 144A under the Securities Act.
The TFN Board has approved the Merger and, therefore, the provisions of the
Standstill Agreement do not prohibit IE's acquisition of TFN Common Stock
pursuant to the terms of the Merger.
Designation Agreement. Under the Designation Agreement, IE may designate
one person to serve on the Board of Directors of TFN and any executive
committee of the Board. This right continues until the date on which IE has
ceased to be the beneficial owner of at least 10% of the issued and
outstanding shares of TFN Common Stock for a period of 30 consecutive days.
TFN has agreed to reimburse IE for the reasonable expenses incurred by its
designee in attending the meetings of the Board and its committees. Pursuant
to this agreement, IE initially designated James M. Ciccarelli, an IE
director. On August 6, 1992, TFN's Board of Directors expanded the size of
the board to eight and elected Mr. Ciccarelli to TFN's Board of Directors. In
early 1994, IE designated Gregory A. Pratt, IE's President and an IE
director, to succeed Mr. Ciccarelli and he was elected to TFN's Board of
Directors at its 1994 Annual Meeting. Mr. Pratt resigned from the Board in
October 1994. IE has not designated a successor to Mr. Pratt.
42
<PAGE>
Restriction Agreement. IE has pledged all of the shares of the TFN Common
Stock it owns and collaterally assigned the promissory note in the principal
amount of $29,480,000 made by TFN in favor of IE to IBM Credit Corporation
("IBM Credit") in order to secure certain indebtedness of IE and its
affiliates to IBM Credit. The promissory note was paid by TFN during 1992. In
connection with the foregoing pledge, IBM Credit entered into a Restriction
Agreement with TFN, as required by the terms of the Standstill Agreement
between TFN and IE, which places certain restrictions on IBM Credit's ability
to acquire additional shares of TFN's Common Stock and on IBM Credit's
ability to transfer shares held by IBM Credit and its affiliates. As a result
of IBM Credit's execution of the Restriction Agreement, IBM Credit may have
rights under the Registration Rights Agreement between TFN and IE with
respect to the pledged shares.
Franchise Agreements. TFN is a party to Franchise Agreements with IE.
Under the Franchise Agreements, TFN sells certain products approved for sale
by IE. Although such products may generally be acquired from a manufacturer
approved by IE, the Franchise Agreements require TFN to purchase certain
products only from IE. All of the Franchise Agreements have 10 year terms
expiring in December 2000 or September 2003, and are renewable by TFN for one
additional 10 year term upon certain conditions. IE may terminate the
Franchise Agreements immediately upon the occurrence of certain specified
events, including TFN's insolvency, failure to make timely payments or other
financial impairment, or upon 30 days' notice in the event of certain other
defaults by TFN. The Franchise Agreements provide that TFN has the right to
terminate the Franchise Agreements without cause upon 90 days' prior written
notice to IE. In the event of such a termination, TFN is obligated to make a
buy-out payment to IE equal to IE's gross profits (mark-ups of its costs from
manufacturers) realized from its sales of products to TFN during the 12-month
period immediately preceding termination. In no event will this buy-out
payment be less than $1,000,000. Under this formula, if TFN had exercised its
right to terminate the Franchise Agreements effective December 31, 1994, TFN
believes that the total buy-out payment to IE would have been approximately
$17 million. In the event of such a termination, TFN also has the right to
pay IE an additional sum of $500,000 to be released from all non-competition
covenants contained in the Franchise Agreements.
TFN is the largest customer of IE. Product purchases from IE amounted to
approximately $580 million in 1994. IE also serves as guarantor of up to
$20,000,000 of the amounts owed by TFN to an inventory finance company.
On December 30, 1994, TFN sold certain of its branch locations in five
major metropolitan areas to IE for approximately $34.2 million in cash
received on December 30, 1994 and $5.0 million received January 9, 1995. The
branch locations which were sold serve the Boston, New York City, Los
Angeles, San Francisco and Baltimore/Washington, D.C. metropolitan areas. The
applicable asset purchase agreements (the "Agreements") provided for IE's
purchase of all receivables arising from the operation of the branch
locations (subject to TFN's right to receive collections on such receivables
in excess of $23 million), approximately $6 million of inventories at the
branch locations and fixed assets at the branch locations. In addition, IE
assumed obligations to pay rentals under the leases of the branch locations
accruing following December 30, 1994. In connection with the acquisition, TFN
entered into a Management Agreement with IE pursuant to which TFN agreed to
manage the branch locations for IE, using TFN employees. Under the Management
Agreement, IE is responsible for paying direct expenses of the operation of
the branch locations and $20,000 per branch per month on account of certain
indirect expenses. The Management Agreement also provides for payment by IE
to TFN of incentive compensation upon the achievement by the branch locations
of certain earnings targets.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following represents the opinion of Arnold & Porter, counsel to TFN,
attached as Annex E to this Proxy/Prospectus, as to the material federal income
tax consequences of the Merger to TFN and its shareholders. This summary is not
intended to be a complete description of the federal income tax consequences of
the Merger. The federal income tax laws are complex, and each shareholder's
individual circumstances may affect the tax consequences to the shareholder or
may give rise to federal income tax issues that are not addressed herein. In
addition, no information is provided with respect to the tax consequences of the
Merger under applicable state, local and other tax laws. Consequently, each
shareholder is urged to consult a tax adviser regarding the tax consequences of
the Merger to such shareholder.
43
<PAGE>
TAX OPINION
TFN has received an opinion of Arnold & Porter that, subject to the
qualifications and other matters set forth therein, the Merger will be
treated as a reorganization within the meaning of Code Section 368(a), with
the material federal income tax consequences set forth below.
Arnold & Porter's opinion is based on laws, regulations, rulings and judicial
decisions as they now exist, none of which squarely addresses every precise
factual circumstance present in connection with the Merger but all of which,
taken together, in Arnold & Porter's opinion provide a sufficient legal basis
for its opinions described below. However, the possibility exists that Arnold &
Porter's opinion as to the proper application of the law to the facts of the
Merger would not be accepted by the Internal Revenue Service or would not
prevail in court. In addition, the authorities upon which Arnold & Porter has
relied are all subject to change and such change may be made with retroactive
effect. Arnold & Porter can give no assurance that, after any such change, its
opinion would not be different, and it has not undertaken any responsibility to
update or supplement its opinion.
Arnold & Porter's opinion is based on the understanding that the relevant
facts are, and will be at the Effective Time, as set forth in its opinion set
forth in Annex E. If this understanding is incorrect or incomplete in any
respect, Arnold & Porter's opinion could be affected. Arnold & Porter's opinion
is based on the facts set forth in its opinion. The understandings, assumptions
and representations relied upon by Arnold & Porter in rendering its opinion are
set forth in Annex E.
Consummation of the Merger is conditioned upon Arnold & Porter's opinion not
having been revoked as of the Effective Time.
CERTAIN CONSEQUENCES OF REORGANIZATION STATUS
Provided that the Merger qualifies as such a reorganization within the
meaning of Code Section 368(a), then, for federal income tax purposes: (i) no
gain or loss would be recognized by any of TFN, Mergerco or IE as a result of
the Merger; (ii) no gain or loss would be recognized by a holder of TFN
Common Stock upon the receipt of IE Common Stock in exchange for TFN Common
Stock in the Merger, except as discussed below with respect to cash received
in lieu of a fractional share interest in IE Common Stock; (iii) the
aggregate adjusted tax basis of the shares of IE Common Stock to be received
by a holder of TFN Common Stock in the Merger would be the same as the
aggregate adjusted tax basis in the shares of TFN Common Stock surrendered in
exchange therefor; and (iv) the holding period of the shares of IE Common
Stock to be received by the holders of TFN Common Stock in the Merger would
include the holding period of the shares of TFN Common Stock surrendered in
exchange therefor, provided that such shares of TFN Common Stock are held as
capital assets at the Effective Time.
CONSEQUENCES OF RECEIPT OF CASH IN LIEU OF FRACTIONAL SHARES
A holder of shares of TFN Common Stock who receives cash in the Merger in
lieu of a fractional share interest in IE Common Stock will be treated for
federal income tax purposes as having received cash in redemption of such
fractional share interest. The receipt of such cash generally should result
in capital gain or loss in an amount equal to the difference between the
amount of cash received and the portion of such shareholder's adjusted tax
basis in the shares of TFN Common Stock allocable to the fractional share
interest. Such capital gain or loss will be long-term capital gain or loss if
the holder holds the shares as capital assets and the holding period for the
fractional shares of IE Common Stock deemed to be received and then redeemed
is more than one year.
44
<PAGE>
CASH RECEIVED BY HOLDERS OF TFN COMMON STOCK WHO DISSENT
A holder of shares of TFN Common Stock who perfects dissenters' rights
under the laws of the State of Ohio and who receives cash payment of the fair
value of his shares of TFN Common Stock will be treated as having received
such payment in redemption of such shares. Such redemption will be subject to
the conditions and limitations of Code Section 302, including the attribution
rules of Code Section 318. In general, if the shares of TFN Common Stock are
held by the holder as a capital asset at the Effective Time, a dissenting
holder will recognize capital gain or loss measured by the difference between
the amount of cash received by such holder and the basis for such shares. If,
however, such holder owns, either actually or constructively, any other TFN
Common Stock or IE Common Stock, the payment made to such holder could be
treated as dividend income. In general, under the constructive ownership
rules of the Code, a holder may be considered to own stock that is owned, and
in some cases constructively owned, by certain related individuals or
entities, as well as stock that such holder (or related individuals or
entities) has the right to acquire by exercising an option or converting a
convertible security. Each holder of TFN Common Stock who contemplates
exercising his dissenters' rights should consult his own tax advisor as to
the possibility that the payment to him will be treated as dividend income.
RIGHTS OF DISSENTING SHAREHOLDERS
Section 1701.84 of the ORC provides that any holder of TFN Common Stock (a
"shareholder") who so desires is entitled to relief as a dissenting
shareholder ("Dissenting Shareholder") and as such may exercise dissenters'
rights with respect to the Merger.
The following is a summary of the principal steps a shareholder must take
to perfect dissenters' rights under Section 1701.85 of the ORC. This summary
does not purport to be complete and is qualified in its entirety by reference
to Section 1701.85, a copy of which is contained herein as Annex C. Any
shareholder contemplating the exercise of dissenters' rights is urged to
review carefully such provisions and to consult an attorney, since
dissenters' rights will be lost if the procedural requirements under Section
1701.85 are not fully and precisely satisfied. To perfect dissenters' rights
with respect to any shares of TFN Common Stock so that they become Dissenting
Shares as described in this Proxy Statement/Prospectus, a Dissenting
Shareholder must satisfy each of the following conditions:
1. No Vote in Favor of the Merger Agreement. TFN Common Stock
("Dissenter's Shares") held by the Dissenting Shareholder must not be voted
at the Special Meeting in favor of the Merger Agreement. This requirement
will be satisfied if a proxy is signed and returned with instructions to vote
against the Merger or to abstain from such vote, if no proxy is returned and
no vote is cast at the Special Meeting in favor of the Merger Agreement, or
if the Dissenting Shareholder revokes a proxy and thereafter abstains from
voting with respect to the Merger or votes against the Merger at the Special
Meeting. A vote in favor of the Merger Agreement at the Special Meeting
constitutes a waiver of dissenters' rights. A proxy that is returned signed
but on which no voting preference is indicated will be voted in favor of the
Merger Agreement and will constitute a waiver of dissenters' rights. A
Dissenting Shareholder may revoke his proxy at any time before its exercise
by filing with TFN an instrument revoking it or a duly executed proxy bearing
a later date, or by attending and giving notice of the revocation of the
proxy in open meeting (although attendance at the Special Meeting will not in
and of itself constitute revocation of a proxy).
2. Filing Written Demand. Not later than ten days after the taking of the
vote on the Merger, a Dissenting Shareholder must deliver to TFN a written
demand (the "Demand") for payment of the fair cash value of the Dissenter's
Shares. The Demand should be delivered to TFN at 8044 Montgomery Road, Suite
601, Cincinnati, Ohio 45236, Attention: Secretary. It is recommended,
although not required, that the Demand be sent by registered or certified
mail, return receipt requested. Voting against the Merger will not itself
constitute a Demand. TFN will not send any further notice to TFN Shareholders
as to the date on which such ten-day period expires.
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The Demand must identify the name and address of the holder of record of the
Dissenter's Shares, the number and class of Dissenter's Shares and the amount
claimed as the fair cash value thereof. A beneficial owner must, in all cases,
have the record holder submit the Demand in respect of the Dissenter's Shares.
The Demand must be signed by the shareholder of record (or by the duly
authorized representative of such shareholder) exactly as the shareholder's name
appears on the shareholder records of TFN. A Demand with respect to shares owned
jointly by more than one person must identify and be signed by all of the
holders of record. Any person signing a Demand on behalf of a partnership or
corporation or in any other representative capacity (such as an
attorney-in-fact, executor, administrator, trustee or guardian) must indicate
the nature of the representative capacity and, if requested, must furnish
written proof of his capacity and his authority to sign the demand.
Because only TFN Shareholders of record at the close of business on the
Record Date may exercise dissenters' rights, any person who beneficially owns
shares that are held of record by a broker, fiduciary, nominee, or other
holder and who wishes to exercise dissenters' rights must instruct the record
holder of the shares to satisfy the conditions outlined above. If a record
holder does not satisfy, in a timely manner, all of the conditions outlined
in this section, the dissenters' rights for all of the shares held by that
shareholder will be lost.
From the time the Demand is given until either the termination of the
rights and obligations arising from such Demand or the purchase of the
Dissenter's Shares related thereto by TFN, all rights accruing to the holder
of the Dissenter's Shares, including voting and dividend or distribution
rights, will be suspended. If any dividend or distribution is paid on TFN
Common Stock, during the suspension, an amount equal to the dividend or
distribution which would have been payable on the Dissenter's Shares, but for
such suspension, shall be paid to the holder of record of the Dissenter's
Shares as a credit upon the fair cash value of the Dissenter's Shares. If the
right to receive the fair cash value is terminated otherwise than by the
purchase of the Dissenter's Shares by TFN, all rights will be restored to the
Dissenting Shareholder and any distribution that would have been made to the
holder of record of the Dissenter's Shares, but for the suspension, will be
made at the time of the termination.
If TFN sends to a Dissenting Shareholder, at the address specified in the
Demand, a request for the certificates representing the Dissenting Shares,
the Dissenting Shareholder, within fifteen days from the date of sending such
request, shall deliver to TFN the certificates requested. TFN will then
endorse the certificates with a legend to the effect that a demand for the
fair cash value of such shares has been made, and return such endorsed
certificates to the Dissenting Shareholder. Failure on the part of the
Dissenting Shareholder to deliver such certificates terminates his rights as
a Dissenting Shareholder at the option of TFN, exercised by written notice to
the Dissenting Shareholder within twenty days after the lapse of the
fifteen-day period, unless a court, for good cause shown, otherwise directs.
3. Petitions to be Filed in Court. Within three months after the service
of the Demand, if TFN and the Dissenting Shareholder do not reach an
agreement on the fair cash value of the Dissenter's Shares, the Dissenting
Shareholder or TFN may file a complaint in the appropriate Court of Common
Pleas in Hamilton County, Ohio (the "Common Pleas Court"), or join or be
joined in an action similarly brought by another Dissenting Shareholder, for
a judicial determination of the fair cash value of the Dissenter's Shares.
TFN does not intend to file any complaint for a judicial determination of the
fair cash value of any Dissenter's Shares.
Upon motion of the complainant, the Common Pleas Court will hold a hearing to
determine whether the Dissenting Shareholder is entitled to be paid the fair
cash value of the Dissenter's Shares. If the Common Pleas Court finds that the
Dissenting Shareholder is so entitled, it may appoint one or more appraisers to
receive evidence and to recommend a decision on the amount of such value. The
Common Pleas Court is required to make a finding as to the fair cash value of
the Dissenter's Shares and to render a judgment against TFN for the payment
thereof, with interest at such rate and from such date as the Common Pleas Court
considers equitable. Costs of the proceedings, including reasonable compensation
to the appraiser or appraisers to be fixed by the Common Pleas Court, are to be
apportioned or assessed as the Common Pleas Court considers equitable. Payment
of the fair cash value of the Dissenter's Shares is required to be made within
30 days after the date of final determination of such value or the effective
time of the Merger, whichever is later, only upon surrender to TFN of the
certificates representing the Dissenter's Shares for which payment is made.
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Fair cash value is the amount which a willing seller, under no compulsion to
sell, would be willing to accept, and which a willing buyer, under no compulsion
to purchase, would be willing to pay, but in no event may the fair cash value
exceed the amount specified in the Demand. Because the Merger requires the
approval of the TFN Shareholders, the fair cash value is to be determined as of
the day prior to the day of the Special Meeting. In computing this value, any
appreciation or depreciation in the market value of the Dissenter's Shares
resulting from the Merger is excluded.
The dissenters' rights of any Dissenting Shareholder will terminate if,
among other things, (a) he has not complied with Section 1701.85 of the ORC
(unless the Board of Directors of TFN waives compliance), (b) the Merger is
abandoned or otherwise not carried out or such Dissenting Shareholder
withdraws his Demand with the consent of the Board of Directors of TFN, or
(c) no agreement has been reached between TFN and the Dissenting Shareholder
with respect to the fair cash value of the Dissenter's Shares and neither the
Dissenting Shareholder nor TFN shall have timely filed or joined in a
complaint in the Common Pleas Court. For a discussion of the tax consequences
to a shareholder exercising dissenters' rights; see "Certain Federal Income
Tax Consequences of the Merger".
If the holders of more than ten percent (10%) of the outstanding shares of
TFN Common Stock perfect their rights as Dissenting Shareholders, the IE has
the right to terminate the Merger Agreement.
BECAUSE A PROXY CARD WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL,
UNLESS REVOKED, BE VOTED IN FAVOR OF THE MERGER AGREEMENT, A TFN SHAREHOLDER
WHO WISHES TO EXERCISE HIS DISSENTERS' RIGHTS MUST EITHER NOT SIGN AND RETURN
HIS PROXY CARD OR, IF HE SIGNS AND RETURNS HIS PROXY CARD, VOTE AGAINST OR
ABSTAIN FROM VOTING ON THE MERGER.
COMPARISON OF RIGHTS OF HOLDERS OF TFN COMMON STOCK AND IE COMMON STOCK
INTRODUCTION
IE is incorporated under the laws of the Commonwealth of Pennsylvania, and
TFN is incorporated under the laws of the State of Ohio. TFN's shareholders,
whose rights as shareholders are currently governed by Ohio law and TFN's
Articles of Incorporation, as amended (the "TFN Articles"), and Code of
Regulations (the "TFN Regulations"), will, upon the exchange of their shares
of TFN Common Stock for shares of IE Common Stock pursuant to the Merger,
become shareholders of IE, and their rights as such will be governed by
Pennsylvania law, IE's Articles of Incorporation, as amended (the "IE
Articles"), and the By-Laws of IE (the "IE By-Laws"). Certain differences
between the rights of holders of IE Common Stock and the rights of holders of
TFN Common Stock resulting from such differences in governing law and
documents are summarized below.
The following is a summary of the material differences in the rights of
holders of IE Common Stock and the rights of holders of TFN Common Stock. The
following summary does not purport to be a complete statement of the rights
of IE shareholders under applicable Pennsylvania laws, the IE Articles and
the IE By-Laws as compared with the rights of TFN Shareholders under
applicable Ohio laws, the TFN Articles and the TFN Regulations, or a complete
description of the specific provisions referred to herein. Certain provisions
contained in the Pennsylvania laws may discourage certain transactions
involving an actual or threatened change in control of IE. To the extent any
of such provisions has such an effect, shareholders might be deprived of an
opportunity to sell their shares of IE Common Stock at a premium above the
market price.
CERTAIN VOTING RIGHTS
Pennsylvania law generally requires approval of any merger, consolidation
or sale of substantially all assets of a corporation at a meeting of
shareholders by a vote of a majority of the votes cast by all shareholders
entitled to vote thereon. While a certificate of incorporation of a
Pennsylvania corporation may provide for a greater vote, the IE Articles do
not so provide.
Under Ohio law, unless otherwise provided in the corporation's articles of
incorporation, mergers and other such matters require the approval of the
holders of shares entitling such holders to exercise at least two-thirds of the
voting power of the corporation. The articles of incorporation of an Ohio
corporation may provide for a greater or lesser vote or a vote by separate
classes of stock so long as the vote provided for is not less than a majority of
the voting power of the corporation. The TFN Articles provide for the approval
of such matters by the vote of the holders of a majority of the TFN Common
Stock.
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If a proposed amendment to the articles of incorporation of a Pennsylvania
corporation affects adversely the rights, preferences or powers of a class of
stock or group of shareholders (including a class or group without voting
rights) in certain specified matters, such amendment must also be approved by
a majority of the votes cast by holders of that class of stock or group of
shareholders. Unless otherwise provided by an Ohio corporation's articles of
incorporation, Ohio law requires that, among certain other amendments, an
amendment that would change the express terms of a class of shares without
voting rights in any substantially prejudicial manner must be approved by the
holders of two-thirds of such class. The TFN Articles provide for the
approval of such matters by the vote of the holders of a majority of the TFN
Common Stock.
Both Ohio law and Pennsylvania law permit mergers without approval by
shareholders under certain conditions. Under Pennsylvania law, approval is
not required by the shareholders of a corporation for a plan of merger which
does not alter the corporation's state of incorporation or any provision of
its articles of incorporation or affect its outstanding shares, whether or
not the corporation is the surviving corporation, if the plan of merger
provides that the shareholders will hold a majority of the votes entitled to
be cast in the election of directors, and each share held prior to the merger
is exchanged for an identical share in the surviving corporation after the
merger. Under Ohio law, approval is not required by the shareholders of the
surviving corporation if, among other things, no charter amendment is
involved and issuances of common stock and securities convertible into common
stock to shareholders of the non-surviving corporation pursuant to the merger
will result in an increase of the resulting shares possessing the voting
power of that corporation in the election of directors by any amount less
than 16 2/3%.
SPECIAL MEETINGS OF SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN CONSENT
Under Pennsylvania law, a special meeting of shareholders may be called by
the board of directors, any officer or other person as may be provided in the
by-laws. The IE By-laws provide that special meetings of shareholders may be
called by the President, the Board of Directors or by shareholders entitled
to cast at least 20% of the votes which all shareholders are entitled to cast
at the meeting. Under Pennsylvania law, shareholders must generally be given
at least 10 days prior written notice of any shareholders meeting for the
purpose of considering certain fundamental changes and at least five days
written notice prior to any shareholders meeting for any other purpose. The
provision that a special meeting of shareholders may be called upon the
request of shareholders entitled to cast at least 20% of the votes which all
shareholders are entitled to cast at such meeting is generally not applicable
to a corporation (a "registered corporation") having a class of securities
registered under the Exchange Act or subject to the reporting obligations of
Section 13 of the Exchange Act, including IE. A special meeting of a
registered corporation, including IE, may be called, however, by an
interested shareholder (i.e., the beneficial owner of at least 20% of a
corporation's outstanding voting shares) for the purpose of approving certain
identified business combinations.
Under Ohio law, a special meeting of shareholders may be called by the
chairman of the board of directors, the president, the directors by action of
a meeting, a majority of the directors acting without a meeting, persons
owning 25% of the outstanding shares entitled to vote at such meeting (or a
lesser or greater proportion as specified in the articles or regulations but
not greater than 50%) or the person or persons authorized to do so by the
articles of incorporation or the corporation's regulations. The TFN
Regulations does not authorize any additional specified persons to call a
meeting and allows shareholders holding at least 50% of all shares
outstanding to call a special meeting. The TFN Regulations further provides
that business transacted at any special meeting of shareholders shall be
confined to the purpose stated in the notice for such special meeting.
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AMENDMENT OF CORPORATE GOVERNING DOCUMENTS
Pennsylvania law allows amendments of articles of incorporation if either the
board of directors adopts a resolution setting forth the proposed amendment or
shareholders entitled to cast at least 10% of the votes that all shareholders
are entitled to cast thereon sign a petition setting forth the proposed
amendment, and the company's shareholders thereafter approve such proposed
amendment either at the next annual or special meeting called by the board for
the purpose of approval of such amendment by the shareholders. At any such
meeting, the proposed amendment generally must be approved by a majority of the
votes cast by all shareholders entitled to vote thereon. The provision that
amendments of the articles of incorporation may be proposed by shareholders
entitled to cast at least 10% of the votes that all shareholders are entitled to
cast thereon is generally not applicable to a registered corporation, including
IE.
Ohio law permits the adoption of amendments to articles of incorporation
if such amendments are approved at a meeting held for such purpose by the
holders of shares entitling them to exercise two-thirds of the voting power
of the corporation, or such lesser, but not less than a majority, or greater
vote as specified in the corporation's articles of incorporation. The TFN
Articles require a majority vote for amendment.
Under Pennsylvania law, the power to adopt, amend or repeal by-laws
resides with the shareholders entitled to vote thereon, and with the
directors if such power is conferred upon the board of directors by the
by-laws, subject to the power of the shareholders to change any such action
by the board of directors.
Under Ohio law, regulations may be adopted, amended or repealed only by
approval of the shareholders. They may be adopted or amended at a meeting of
shareholders by the affirmative vote of the holders of shares entitling them
to exercise a majority of the voting power on such proposal or by written
consent signed by holders of shares entitling them to exercise two-thirds of
the voting power on such proposed amendment (or such lesser, but not less
than a majority, or greater vote as specified in the regulations). The TFN
Regulations provide for a majority vote, or the written consent of all
holders of TFN Common Stock, to amend the TFN Regulations.
SPECIAL SHAREHOLDER VOTING REQUIREMENTS
Under the TFN Articles, TFN Shareholders must approve the issuance of TFN
Common Stock or other securities in connection with any of the following: (i)
the adoption of any stock option, stock award, or stock bonus plans or other
special remuneration plans for directors, officers or key employees; (ii)
actions resulting in a change in control of TFN; and (iii) the acquisition,
direct or indirect, of a business, a company, tangible or intangible assets
or property, or securities representing any such interests (a) from a
director, officer, or substantial security holder of TFN, including its
subsidiaries and affiliates, or from any company or party in which one of
such persons has a direct or indirect interest; or (b) where the present or
potential issue of TFN Common Stock of securities convertible into TFN Common
Stock could result in an increase in the outstanding shares of TFN Common
Stock of 25% or more.
Under the IE Articles and the IE By-laws, each of the foregoing specified
actions requires only the approval of IE's Board of Directors and does not
require shareholder approval except as otherwise required by Pennsylvania
law. Pennsylvania law does not require shareholder approval of any of the
foregoing specified actions other than certain actions which would result in
a change in control, as discussed under "Anti-Takeover Statutes" below.
BOARD-APPROVED PREFERRED STOCK
Both Pennsylvania law and Ohio law permit a corporation's articles of
incorporation or articles of incorporation, respectively, to allow the board of
directors to issue, without shareholder approval, a series of preferred stock
and to designate the powers, rights, preferences and privileges thereof and
restrictions thereon (except that Ohio law does not permit the board of
directors to fix the voting rights of any such series of preferred stock). The
TFN Articles do not authorize any preferred stock. The IE Articles authorize
preferred stock and grants power to the IE Board with respect to the issuance
and terms of one or more series of such stock. See "Certain Information
Concerning Intelligent Electronics - Description of Capital Stock."
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pennsylvania law and Ohio law have provisions and limitations regarding
directors' liability and regarding indemnification by a corporation of its
officers, directors and employees.
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A director of an Ohio corporation shall not be found to have violated his
fiduciary duties to the corporation or its shareholders unless there is proof
by clear and convincing evidence that the director has not acted in good
faith, in a manner he reasonably believes to be in or not opposed to the best
interests of the corporation, or with the care that an ordinarily prudent
person in a like position would use under similar circumstances. In addition,
under Ohio law a director is liable in damages for any action or failure to
act as a director only if it is proved by clear and convincing evidence that
such act or omission was undertaken either with deliberate intent to cause
injury to the corporation or with reckless disregard for the best interests
of the corporation, unless the corporation's articles or regulations make
this provision inapplicable by specific reference. The TFN Articles do not
make this provision inapplicable.
Ohio law limits a director's liability for breaches of the fiduciary
duties of care and loyalty. This standard does not apply, however, where the
director has acted either outside his capacity as a director or with respect
to certain dividends, distributions, purchases or redemptions of corporation
shares or loans, in the case of a corporation that does not have actively
traded shares, a change in control in which a majority of the shareholders
receive a greater consideration for their shares than other shareholders.
Ohio law further requires all expenses, including attorneys' fees, incurred
by a director in defending any action, suit or proceeding (other than one
asserting only liability for unlawful dividends, distributions or
redemptions) to be paid by the corporation as they are incurred in advance of
the final disposition of the action, suit or proceeding if it receives an
undertaking from or on behalf of the director in which he agrees to repay
such amounts if it is proved by clear and convincing evidence that his action
or failure to act involved an act or omission undertaken with deliberate
intent to cause injury to the corporation or undertaken with reckless
disregard for the best interests of the corporation and if the director
reasonably cooperates with the corporation concerning the action, suit or
proceeding. These provisions are automatically applicable to an Ohio
corporation unless the corporation opts out from its application. TFN has not
opted out.
The IE By-laws and the TFN Regulations require each company to indemnify
current and former directors and officers, and permit each company to
indemnify current and former employees and agents, to the fullest extent
permitted by applicable state law.
Under Pennsylvania law, a director, officer, employee or agent may, in
general, be indemnified by the corporation if he has acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. No
indemnification may be made under Pennsylvania law or the IE By-laws in any
case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.
Under Ohio law, a director, officer, employee or agent may, in general, be
indemnified by the corporation if he has acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. No indemnification may
be made under Ohio law or the TFN Regulations of any person from or for on
account of conduct which is finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct, or in violation of
applicable law.
Pennsylvania law permits a Pennsylvania corporation to include a provision
in its articles of incorporation, or a provision adopted by its shareholders
in its by-laws, which eliminates or limits the personal liability of a
director to the corporation or its shareholders for monetary damages for
breach of fiduciary duties as a director. However, no such provision may
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for
any breach or failure to perform which constitutes self-dealing, willful
misconduct or recklessness, (iii) pursuant to any criminal statute, or (iv)
for the payment of taxes. The IE By-laws include such a provision.
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CLASSIFICATION OF BOARD OF DIRECTORS
Both Pennsylvania law and Ohio law permit, but do not require, the adoption
of a "classified" board of directors with staggered terms under which a part of
the board of directors is elected each year. Under Pennsylvania law, the maximum
term of each class of directors is four years, while in Ohio, the maximum term
for each class is three years. IE's Board of Directors is classified into three
classes, with the members of each class standing for election each year on a
staggered basis for three-year terms. The TFN Board is not classified, and all
directors of TFN stand for election on an annual basis.
REMOVAL OF DIRECTORS
In general, under both Pennsylvania law and Ohio law, any or all of the
directors of a corporation may be removed by a vote of shareholders with or
without cause, except that Pennsylvania law authorizes removal by the
shareholders of a member of a classified board only for cause. Under
Pennsylvania law, the vote of a majority of the votes cast with regard to the
removal is required to remove a director, while under Ohio law, by the vote
of the holders of a majority of the TFN Common Stock is required to remove a
director. As IE's Board of Directors is classified, its directors may be
removed by the shareholders only for cause.
DISSENTERS' RIGHTS
Under Pennsylvania law, shareholders may perfect dissenters' rights with
regard to corporate actions involving certain mergers, consolidations, the
sale, lease or exchange of substantially all the assets of another
corporation (under limited circumstances); or the elimination of cumulative
voting. Under Ohio law, shareholders may only perfect appraisal rights with
respect to corporate actions involving mergers or consolidations. However,
under Pennsylvania law, dissenters' rights are generally denied when a
corporation's shares are listed on a national securities exchange or held of
record by more than 2,000 persons. Ohio law does not provide exclusions from
dissenters' rights similar to those described above with respect to
Pennsylvania law.
PAYMENT OF DIVIDENDS
Under Pennsylvania law a corporation has the power, subject to
restrictions in its by-laws, to make distributions to its shareholders unless
after giving effect thereto (i) the corporation would not be able to pay its
debts as they become due in the usual course of business or (ii) the
corporation's assets would be needed to satisfy superior preferential rights
if the corporation were dissolved at the time of such distribution.
Ohio law permits the payment of dividends out of paid-in, earned or other
surplus; provided, that if a dividend is paid out of capital surplus,
shareholders must be so notified.
REPURCHASE OF SHARES
Under Ohio law, a corporation by act of its directors may repurchase
shares only in certain specified instances, the most significant of which are
when the articles authorize the redemption of such shares, when the articles
in substance provide that the corporation shall have the right to repurchase,
and when authorized by the shareholders at a meeting called for such purpose
by the affirmative vote of the holders of two-thirds of the shares of each
class or, if the articles so provide, by a greater or lesser proportion but
not less than a majority. The TFN Articles provide for the approval of share
repurchases by the vote of the holders of a majority of the TFN Common Stock.
Ohio law permits the redemption of shares out of paid-in, earned or other
surplus.
Pennsylvania law vests discretion in the board of directors to authorize
the repurchase of shares, subject to the same limitations as with respect to
distributions to shareholders, as set forth above under "Payment of
Dividends."
TENDER OFFER STATUTE
The Ohio tender offer statute requires any person making a tender offer
for a corporation incorporated in Ohio to comply with certain filing,
disclosure and procedural requirements. Pennsylvania has no tender offer
statute.
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The Ohio tender offer statute imposes certain filing and disclosure
requirements. The disclosure requirements include a statement of any plans or
proposals that the offeror, upon gaining control, may have to liquidate the
subject company, sell its assets, effect a merger or consolidation of it,
establish, terminate, convert, or amend employee benefit plans, close any plant
or facility of the subject company or of any of its subsidiaries or affiliates,
change or reduce the work force of the subject company or any of its
subsidiaries or affiliates, or make any other major change in its business,
corporate structure, management personnel, or policies of employment.
Until the issue of constitutionality is decided by clearly controlling
appellate court decisions or clarifying legislation is adopted, the
enforceability of the Ohio statute as a protection against board-opposed
takeover attempts is uncertain.
ANTI-TAKEOVER STATUTES
Both Ohio and Pennsylvania have "anti-takeover" statutes which are
designed to encourage potential acquirors of publicly traded corporations
such as IE and TFN to obtain the consent and approval of the proposed
target's board of directors prior to commencing a tender offer for, or
otherwise acquiring a significant amount of, the target company's shares.
This encouragement is accomplished by prohibiting or restricting acquirors
from undertaking many post-acquisition financial restructuring alternatives.
In addition, Ohio has a "Control Share Acquisition" statute which requires
shareholder approval for the acquisition of voting power for certain ranges
of stock ownership. TFN is seeking such shareholder approval at the Special
Meeting with respect to the Merger. See "The Special Meeting -- Voting at the
Special Meeting -- Ohio Control Share Acquisition Act."
Pennsylvania law requires that mergers with or sales of assets to an
interested shareholder (which includes a shareholder who is a party to the
proposed transaction) be approved by a majority of voting shares outstanding
other than those held by the interested shareholder, unless the transaction
has been approved by a majority of the corporation's directors who are not
affiliated with the interested shareholder or the transaction results in the
payment to all other shareholders of an amount not less than the highest
amount paid for shares by the interested shareholder. In addition,
Pennsylvania law prohibits, subject to certain exceptions, a "business
combination" (defined to include certain mergers, sales of assets, sales of
5% or more of outstanding stock, loans, recapitalizations or liquidations or
dissolutions) between a registered corporation, such as IE, with a
shareholder or group of shareholders beneficially owning more than 20% of the
voting power of a public corporation (excluding certain shares) for a
five-year period following the date on which the holder became an interested
shareholder.
Pennsylvania law contains several other anti-takeover provisions that do
not apply to IE because the IE Articles have been amended to opt out of them.
ANTI-GREENMAIL STATUTE
"Greenmail" is the practice whereby a corporation purchases the shares of
a substantial minority shareholder at a premium to avoid the future potential
takeover of the corporation by that minority shareholder. Ohio law contains
an anti-greenmail statute which would cause the forfeiture of any premium
received by the minority shareholder. Ohio law permits a corporation to opt
out of the anti-greenmail statute, but TFN has not opted out.
ANTI-TAKEOVER EFFECT OF PENNSYLVANIA LAW AND THE IE ARTICLES AND THE IE
BY-LAWS
The differences between Pennsylvania law and Ohio law described above, and
the terms of the IE Articles and the IE By-Laws and the terms of the TFN
Articles and the TFN Regulations may make the acquisition of IE by a person
not approved by IE's Board of Directors more difficult than would be the case
in absence of such provisions. As a result, takeover bids, which could
involve the purchase of shares at a premium over market value, may be less
likely to occur.
52
<PAGE>
CERTAIN INFORMATION CONCERNING INTELLIGENT ELECTRONICS
BUSINESS
INTRODUCTION
IE provides information technology products, services and solutions to
network integrators (the "Network"), and to large and small corporate
customers, educational institutions and governmental agencies. IE was founded
in 1982 and is a Pennsylvania corporation. In March 1984, IE commenced the
wholesale distribution of microcomputers. IE provides business solutions
through innovative product management, sales demand generation programs and
logistics services. As of April 29, 1995, the Network comprised more than
2,500 locations.
GENERAL
IE's revenues are derived principally from the distribution of
microcomputer systems, workstations, networking and telecommunications
equipment and software. In addition, in December 1994, IE acquired certain
assets of branch locations in five major metropolitan cities from TFN to
solidify its position in strategic corporate markets. These locations include
Boston, New York City, Los Angeles, San Francisco and Baltimore/ Washington,
D.C.
IE provides distribution of microcomputers and related equipment to its
customers through a business-to-business approach. Additionally, IE provides
product selection, technical support, cost-efficient marketing programs and
promotions, configuration and marketing opportunities. In the ordinary course
of its business, IE seeks to price its products competitively in the
marketplace. Such efforts, which IE believes are generally used by other
companies in the industry, include regularly offering promotions and
providing favorable pricing to certain customers based on volume purchasing.
IE believes that it purchases the majority of the products distributed at the
lowest published prices available and believes that its financial strength
and purchasing power give it better access to constrained product lines. IE
consequently passes on to its customers a portion of the discount which it
receives from vendors. This pricing, together with IE's service offerings and
ready access to expansive product inventories, generally enables its
customers to purchase products from IE at better terms than they could obtain
directly from vendors and to effectively compete in the marketplace.
IE sells products and provides certain services to its Network members,
who are charged varying fees based on different levels of services which they
select. IE believes that its product pricing and its "services-for-fees"
approach enhance the competitiveness of its Network and provide for an
efficient allocation of support. In addition, IE provides and is continuing
to develop programs to enhance the competitiveness of its Network, such as
marketing assistance, programs designed to enhance channel sales, product
promotion, pre-shipment configuration, technical support and new product
evaluation. Programs designed for specific members of the Network include a
nationwide advanced systems program operated under the name "Intelligent
Systems Group", which targets end-users with a regional or national presence
and focuses primarily on high-end or technically advanced products, the ISG
National Service Network, which assists members of the Network in servicing
multi-location, regional or national accounts, the Minority Technical
Alliance, which assists certain Network members in obtaining business from
end-users seeking to purchase from minority-owned businesses and the Business
Technology Centers program, which assists Network members in positioning
themselves in the small business market.
IE also offers financing programs, under which, for a fee, it extends up
to thirty days credit to qualified end-users and certain Network members who
purchase selected products. Under one such program, IE, in partnership with
Network members, provides products and extends credit directly to end-users
who have been approved both by IE and the Network member. This program frees
up the existing credit line of the Network member. Also, certain members of
the Network are receiving credit in order to facilitate their ability to
purchase certain products from IE and to allow IE to compete with competitors
who offer such credit terms. As these programs become more established and
marketed, it is anticipated that they will facilitate incremental sales and
profits, contribute gross margin, increase selling, general and
administrative expenses, and increase accounts receivable. IE may outsource
some of the above financing programs which could slow the growth or reduce
the level of accounts receivable.
53
<PAGE>
IE is currently upgrading its management information systems, as part of a
project called IE 2000, including its financial accounting system, warehouse
management systems, order-entry and purchasing systems and on-line customer
access system. IE 2000 is designed to transform IE to a process-driven model
in order to facilitate continued growth and provide greater operating
efficiencies. IE's primary operations are Demand Generation (manages IE's
relationships with customers and vendors) and Demand Fulfillment (manages the
delivery of products). The upgrading of IE's processes and systems is
expected to be completed by the end of fiscal 1996 and to cost up to $40
million, including costs of approximately $14 million through April 29, 1995.
In addition to the Merger and the acquisitions referenced in Notes 2 and 3
of Notes to IE's Consolidated Financial Statements, IE periodically evaluates
potential acquisitions in the microcomputer products industry. The completion
of any such acquisition could involve the issuance of securities by IE,
including IE Common Stock, which could have the effect of diluting the
interests of IE's then-existing shareholders, or the incurrence of
indebtedness by IE. As of the date of this Proxy Statement/Prospectus, IE has
no definitive agreements or commitments for any material acquisition.
NETWORK STRUCTURE
Franchise Agreements. Certain of the relationships between IE and its
Network are governed by franchise agreements. The first franchise agreement
was signed in August 1984, and provided for the operation of a business
center pursuant to a system developed by IE under the tradename Todays
Computers Business Centers ("TCBC"). At October 31, 1988, there were 175
centers in operation under the TCBC name. In December 1988, IE acquired Entre
Computer Centers, Inc. ("Entre"), which consisted of 180 franchised customers
and company-owned centers. In August 1989, IE acquired Connecting Point of
America, Inc. ("CPA") which consisted of a network of 246 franchised
customers.
The franchise agreements provide for the operation of a business center
and the sale of microcomputer systems and related products and services as
well as other advanced technology products under IE's proprietary trademarks
"Todays Computers Business Centers" and "TCBC," or "Entre Computer Centers"
or "Connecting Point of America". These agreements generally have an initial
term of 10 years which may be renewed for an additional 10 years and provide
that the franchisee will have the right to operate a franchise at a specific
location. The franchisees generally sell products approved for sale which may
be purchased from IE. Some franchisees have agreed to purchase certain
manufacturers' products only from IE. IE may terminate the franchise
agreement, subject to termination requirements under state franchise laws,
either upon the occurrence of certain specified events or upon 30 days'
notice of certain defaults by the franchisee. Certain franchisees may
terminate the agreement with or without cause, at any time upon 60 days'
prior written notice to IE. Franchisees operating under TCBC or Entre marks
are subject to certain restrictions against competition following
termination.
IE also sells products to various members of the Network who do not sign
franchise agreements and, therefore, are not entitled to conduct business
under any of IE's trademarks but are permitted to purchase certain products
from IE at competitive prices and terms.
In addition, members of the Network can participate in various
supplemental programs offered by IE and obtain the right to use other
proprietary service marks of IE including "Intelligent Systems Group" or
"ISG," "Business Technology Centers" or "BTC," and "Minority Technical
Alliance" or "MTA."
During the fiscal years ended January 28, 1995, January 29, 1994 and
January 30, 1993 and the three months ended April 29, 1995, TFN accounted for
approximately 16%, 16%, 10% and 11%, respectively, of IE's revenues from
continuing operations. See Note 4 to IE's Consolidated Financial Statements
for the year ended January 28, 1995. IE is not dependent for a material part
of its business upon any other member of the Network, and the loss of any
other Network member would not have a material adverse effect on IE's
financial condition.
54
<PAGE>
PRODUCTS
IE currently markets technology products consisting of microcomputer
systems, workstations, networking and telecommunications equipment and
software. IE's product acquisition staff selects products on the basis of
overall quality, product image, technological capability, and business
applications, as well as the pricing, discount, marketing and rebate programs
offered by the manufacturer which enable IE, and in turn the Network, to
benefit from quantity purchasing economies. IE currently distributes products
of approximately 100 vendors, principally COMPAQ Computer Corporation
("COMPAQ"), Hewlett-Packard Company ("Hewlett-Packard"), Apple Computer, Inc.
("Apple"), International Business Machines Corporation ("IBM"), NEC
Technologies, Inc., Toshiba America Information Systems, Inc., Microsoft
Corporation, Epson America, Inc., Novell, Inc., Digital Equipment
Corporation, American Telephone and Telegraph Company and Lotus Development
Corporation.
In the past, certain vendors of IE required resellers to purchase products
from only one source. These vendors have changed their policy, allowing "open
sourcing," which permits resellers to purchase products from more than one
source. As a result of open sourcing, competitive pricing pressures
throughout the industry have intensified and customer loyalty has been
reduced. In response to open sourcing and to enhance other services, IE has
broadened the selection of computer technology products stocked in its
central warehouses. Products which IE added to its existing assortment
include advanced technology central processing units, an expanded offering of
peripheral devices and certain software. Inventory levels increased in
support of this enhanced product offering and higher sales volume. These
lines typically require expanded inventory levels and a longer sell through
cycle.
IE's agreements with its major vendors permit it to purchase products from
them for sale to Network members which are directly authorized by such
vendors to sell products. In some cases, specific products from the major
vendors may be sold to Network members which do not have specific
authorization from the vendors. The vendor agreements are subject to
termination by the vendors without cause on varying notice periods, and are
subject to periodic renewals or re-authorization by the vendors. The
termination or non-renewal of an agreement with a major vendor could have a
material adverse effect on IE.
Under the agreements with the vendors, products may be returned to vendors
at restocking fees ranging up to 5%. The agreements generally provide for
price adjustments for specified periods which protect IE in the event of
price reductions by the vendor. IE administers certain vendors' price
adjustment programs for the benefit of the Network. In 1994, IE instituted a
policy allowing members of the Network to return certain manufacturers'
products, without a restocking fee, within fifteen days of purchase. After
fifteen days, IE charges restocking fees ranging up to 10%. In addition, IE
has favorable volume purchase agreements with major industry distributors,
under which members of the Network may purchase items not supplied by IE
directly from the distributors at advantageous prices and terms.
Products from certain of these manufacturers comprised the following
percentages of IE's revenues during the three months ended April 29, 1995 and
the years ended January 28, 1995, January 29, 1994 and January 30, 1993:
<TABLE>
<CAPTION>
Three months ended Year ended
---------------------- ----------------------------------------------------
April 29, January 28, January 29, January 30,
1995 1995 1994 1993
---------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
IBM ................ 15% 15% 15% 18%
COMPAQ ............. 23% 25% 25% 18%
Apple .............. 10% 12% 18% 22%
Hewlett-Packard .... 25% 24% 22% 20%
</TABLE>
COMPETITION
Competition in the microcomputer products market is intense, principally
in the areas of price, breadth of product line, product availability and
technical support and service. IE and its Network compete with computer
aggregators, distributors and retailers in the sale of its products.
Additionally, several manufacturers have expanded their channels of
distribution, pricing and product positioning and compete with IE and its
55
<PAGE>
Network. IE believes that the pricing and product availability offered to it
by its vendors are at least as favorable as are offered to its competitors,
which enables IE and the Network to compete favorably with their competitors
in terms of pricing and product availability. In addition, IE develops
customized value-add programs for its Network, including programs to develop
channel markets, such as the market for advanced technology products, or to
target certain end-users seeking to purchase products from minority-owned
businesses, which enhance the competitiveness of the Network. IE also
provides technical support and service programs which it believes contribute
favorably to the competitiveness of the Network.
IE is also subject to competition from other aggregators in recruiting and
retaining Network members, as well as competition from distributors in its
efforts to sell products to the Network. IE believes that its pricing and
value-add programs and services allow it to compete effectively. Certain
competitors may have greater financial resources than IE.
TRADEMARKS AND SERVICE MARKS
The service marks "Todays Computers Business Centers," "TCBC," "Entre,"
"Entre Computer Center," "Connecting Point," "Intelligent Systems Group,"
"ISG," "BTC Business Technology Center," "Minority Business Alliance" and the
design of the Entre Computer Center logo are in use and (except for the logo)
are currently registered or are in the process of registration in the United
States Patent and Trademark Office by IE. Although the marks are not
otherwise registered with any states, IE claims common law rights to the
marks based on adoption and use. To IE's knowledge, there are no pending
interference, opposition or cancellation proceedings, or litigation,
threatened or claimed, with respect to the marks in any jurisdiction. IE
holds no patents. Management believes that IE's marks are valuable; however,
the loss of use of any of the marks would not have a material adverse effect
on IE's business.
GOVERNMENT REGULATION
IE is subject to Federal Trade Commission regulations governing disclosure
requirements in the sale of franchises. IE is also subject to a substantial
number of United States and state laws regulating franchise operations. For
the most part, such laws impose registration and disclosure requirements on
IE in the offer and sale of franchises and also regulate related
advertisements. In certain states, there are substantive laws or regulations
affecting the relationship between IE and the franchisees, especially in the
area of termination of the franchise agreement. IE believes it is currently
and has been in the past in substantial compliance with all such regulations.
EMPLOYEES
As of April 29, 1995, IE had 1,127 full-time employees. No employee is
represented by a labor union and IE believes that its employee relations are
good.
PROPERTY
IE currently distributes products from four leased facilities in the
United States. One distribution center is located in approximately 488,000
square feet of leased warehouse space in Memphis, Tennessee, under a lease
which expires in February 2005. The remaining distribution centers are
located in the Denver, Colorado area which total approximately 456,000 square
feet of space under leases expiring no later than December 1995.
IE leases approximately 31,000 square feet in Exton, Pennsylvania,
primarily for its principal executive offices, the occupancy of which
commenced in May 1989, for a term expiring in June 1997 and approximately
122,000 square feet in the Denver, Colorado area, primarily for its Demand
Generation offices, under a lease expiring in December 2001. In addition, IE
leases facilities for its branch locations in five major metropolitan cities
in the United States. IE believes that its facilities are adequate for its
present needs.
56
<PAGE>
LEGAL PROCEEDINGS
In December 1994, several purported class action lawsuits were filed in
the United States District Court for the Eastern District of Pennsylvania
(Civil Action Nos. 94-3753, 94-CV-7410, 94-CV-7388, and
94-CV-7405) against IE and certain directors and officers; these lawsuits
have been consolidated with a class action lawsuit filed several years ago
against IE, certain directors and officers, and IE's auditors (who are not
named in the most recent complaint) in the United States District Court for
the Eastern District of Pennsylvania (Civil Action No. 92-CV-1905). A
purported derivative lawsuit was also filed in December 1994 in the Court of
Common Pleas of Philadelphia County (No. 803) against IE and certain of its
directors and officers. These lawsuits allege violations of certain
disclosure and related provisions of the federal securities laws and breach
of fiduciary duties, including allegations relating to IE's practices
regarding vendor marketing funds, and seek damages in unspecified amounts as
well as other monetary and equitable relief. In addition, IE is subject to a
Securities and Exchange Commission investigation. IE believes that all such
allegations and lawsuits are without merit and intends to defend against them
vigorously. While management of IE, based on its investigation of these
matters and consultations with counsel, believes resolution of these matters
will not have a material adverse effect on IE's financial position, the
ultimate outcome of these matters cannot presently be determined.
In addition, IE is involved in various litigation and arbitration matters
in the ordinary course of business. IE believes that it has meritorious
defenses in and is vigorously defending against all such matters.
During fiscal 1994, based in part on the advice of legal counsel, IE
established a reserve of $9 million in respect of all litigation and
arbitration matters. Although the aggregate amount of the claims may exceed
the amount of the reserve, management believes that the resolution of these
matters will not have a material adverse effect on IE's financial position or
results of operations in any subsequent period.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of IE is classified into three classes as nearly
equal in number as possible, and the directors currently hold office for the
terms noted below. One class of directors is elected each year for a
three-year term. The classification of directors has the effect of making it
more difficult for a third party to change the composition of the Board of
Directors without the support of the incumbent Board. At least two annual
shareholder meetings, instead of one, will be required to effect a change in
control of the Board, unless holders of at least a majority of the IE Common
Stock entitled to vote in the election of directors remove directors for
cause. The Articles of Incorporation of IE do not provide for cumulative
voting in the election of directors.
Directors receive $500 for each Board meeting attended, and are also
reimbursed for expenses in attending Board meetings. There is no additional
compensation for participation in or attendance at Committee meetings.
Officers are elected at the first meeting of the Board of Directors held
after each annual meeting of shareholders.
57
<PAGE>
The directors and executive officers of IE are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------------- ----- --------------------------------------------------
<S> <C> <C>
Richard D. Sanford (a) 51 Chairman of the Board and Chief Executive Officer
Gregory A. Pratt (a) 46 President and Chief Operating Officer and Director
Robert P. May 45 Senior Vice President
Mark R. Briggs 38 Senior Vice President
Timothy D. Cook 34 Senior Vice President
Thomas J. Coffey 42 Vice President and Chief Financial Officer
Edward A. Meltzer 46 Vice President, Treasury and Financial Planning
Stephanie D. Cohen 33 Vice President, Secretary and Treasurer
Barry M. Abelson (b) 48 Director
James M. Ciccarelli (a) 42 Director
Christopher T.G. Fish (a) 52 Director
Roger J. Fritz (c) 66 Director
Arnold S. Hoffman (c) 59 Director
William E. Johnson (b) 53 Director
John A. Porter (c) 51 Director
William L. Rulon-Miller (b) 46 Director
Alex A.C. Wilson (c) 58 Director
</TABLE>
------
(a) Term expires at the 1996 annual meeting of shareholders.
(b) Term expires at the 1998 annual meeting of shareholders
(c) Term expires at the 1997 annual meeting of shareholders
Richard D. Sanford has been IE's Chairman and Chief Executive Officer
since he founded IE in May 1982. See "- Certain Relationships and Related
Transactions."
Gregory A. Pratt has been a director of IE since May 1994. Mr. Pratt
joined IE in March 1992 as Executive Vice President and was appointed to the
position of President and Chief Operating Officer shortly thereafter. Prior
to joining IE, Mr. Pratt served as President of Atari Computer Corporation
and Vice President of Finance and Chief Financial Officer of Atari
Corporation. He also served on the Board of Directors of Atari Corporation
and was a member of that Board's Executive Committee.
Robert P. May joined IE in November 1993 as Senior Vice President. Mr. May
also served as a director of IE from May 1994 to June 1995. Prior to joining
IE, Mr. May was a Senior Vice President of Federal Express Corporation and
was President of Federal Express' Business Logistics Services Division. In
his 20-year career with Federal Express, Mr. May served in a number of
executive operations and corporate management positions.
Mark R. Briggs joined IE as Vice President and Chief Financial Officer in
March 1990 and became Vice President and Chief Operating Officer, Franchise
Division (now Demand Generation) in December 1991. In February 1994, Mr.
Briggs was elected Senior Vice President of IE and Chief Executive Officer of
Demand Generation. Prior to joining IE, Mr. Briggs held various positions
with Ingram-Micro D, Inc. (a distributor of microcomputer products),
including Senior Vice President and Chief Financial Officer.
Timothy D. Cook joined IE as Senior Vice President -- Fulfillment in
October 1994. Prior to joining IE, Mr. Cook held various positions at IBM
since 1983, including Director of Brand Management and Site Services, and
Director of North American Fulfillment for the IBM PC Company.
Thomas J. Coffey joined IE in July 1995 and became Vice President and Chief
Financial Officer on August 1, 1995. For the 10 years prior to joining IE, Mr.
Coffey was an audit partner with KPMG Peat Marwick, independent public
accountants.
Edward A. Meltzer became Vice President, Treasury and Financial Planning on
August 1, 1995. Prior thereto, he served as Chief Financial Officer of IE since
March 1992 and held the positions of Treasurer from January 1989 to May 1993 and
Vice President of IE since August 1990. Mr. Meltzer served as Treasurer of Entre
from January 1987 until its acquisition by IE.
58
<PAGE>
Stephanie D. Cohen was elected Vice President, Secretary and Treasurer in
May 1993 and held the position of Vice President, Investor Relations of IE
from March 1991 to May 1993. Ms. Cohen joined IE in 1987 as Controller, and
served as Director, Investor Relations from March 1989 until March 1991.
Barry M. Abelson has been a director of IE since January 1989. In May 1992
he joined the law firm of Pepper, Hamilton & Scheetz, Philadelphia,
Pennsylvania, as a partner. Prior thereto, Mr. Abelson had been a partner of
the law firm of Braemer Abelson & Hitchner, Philadelphia, Pennsylvania (and
its predecessor firms). During fiscal year 1994, Pepper, Hamilton & Scheetz
provided legal services to the Company. See "- Certain Relationships and
Related Transactions." Mr. Abelson is also a member of the Board of Directors
of Covenant Bank for Savings.
James M. Ciccarelli was elected to IE's Board of Directors in August 1992.
Mr. Ciccarelli has been the Chairman of the Board of Wireless Telecom, Inc.
since November 1994. He was CEO and President of Wireless Telecom, Inc., a
former wholly-owned subsidiary of IE from October 1993 until it was sold in
November 1994. Mr. Ciccarelli served as a Vice President of IE from March
1990 to May 1993. From December 1991 through April 1993 he was President of
IE's Systems Group. Prior thereto, from January 1988 until January 1990, he
served in a number of executive positions in the operations and management of
Connecting Point of America, Inc., which IE acquired in August 1989.
Christopher T.G. Fish has been a director of IE since its incorporation in
1982. For more than five years, Mr. Fish has been a principal of Sprint
Investments, S.A., an investor company which is a holder of IE Common Stock.
Mr. Fish resides in the Channel Islands, U.K. and is a citizen of the United
Kingdom.
Roger J. Fritz has been a director of IE since its incorporation in 1982.
For more than five years, Mr. Fritz has been President of Organization
Development Consultants of Naperville, Illinois, an organizational
development/management consulting firm.
Arnold S. Hoffman has been a director of IE since August 1985. In January
1992, Mr. Hoffman became Managing Director of Legg Mason Wood Walker
Incorporated, an investment banking firm. Prior to that, since September
1990, Mr. Hoffman was Chairman of the Middle Market Group, L.P., an
investment banking firm. Mr. Hoffman is also a member of the Board of Directors
of Sun Distributors, L.P.
William E. Johnson has been a director of IE since November 1994. He has
been President of William E. Johnson Associates, a private investment
company, since 1993. From 1986 to 1992, Mr. Johnson served as Chairman and
CEO of Scientific Atlanta, a telecommunications company.
John A. Porter has been a director of IE since May 1994. Mr. Porter has
been Vice Chairman of LDDS/Metro Media Communications, the fourth largest
long distance 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 serves on the Board of Directors of Uniroyal Technology
Corporation.
William L. Rulon-Miller serves as Senior Vice President and Co-Director of
Investment Banking for Janney Montgomery Scott Inc., an investment banking
firm with which he has held several positions since 1979. Mr. Rulon-Miller
was a director of IE from April 1983 until December 1986, and was re-elected
to the Board in November 1987. Mr. Rulon-Miller is also a member of the Board
of Directors of Mothers Work, Inc.
Alex A.C. Wilson has been a director of IE since May 1994. Mr. Wilson has
served as Senior Vice President of SCI Systems, a worldwide contract
manufacturing company in the electronics industry, since November 1993, and
is General Manager for the European operations. Prior thereto, he worked for
IBM Corporation as Director of Manufacturing and Distribution. In his 27-year
career with IBM Corporation, Mr. Wilson worked in various capacities. Mr.
Wilson resides in Scotland and is a citizen of the United Kingdom.
59
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during the years ended January 28, 1995, January 29, 1994,
and January 30, 1993, to IE's Chief Executive Officer and each of IE's four
other most highly compensated executive officers based on salary and bonus
earned during fiscal year 1994 (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------ --------------
Securities All Other
Name and Principal Fiscal Underlying Compensation
Position Year Salary($) Bonus($) Options (#) ($)(1)
------------------- -------- ------------ --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard D. Sanford 1994 $ 850,000 $ 0 None $496,945
Chairman of the 1993 850,000 569,160 450,000 457,205
Board and Chief 1992 748,056 450,000 None 476,075
Executive Officer
Gregory A. Pratt 1994 500,000 30,000 None 3,178
President and Chief 1993 272,500 410,000 150,000 73,757
Operating Officer 1992 214,892(2) 0 450,000(3) 2,660
Mark R. Briggs 1994 325,000 38,500 50,000 3,792
Senior Vice 1993 210,000 221,900 10,000 4,513
President 1992 200,833 41,800 None 2,866
Robert P. May 1994 300,000 21,875 None 293,249
Senior Vice 1993 75,000(4) 187,500 100,000 5,480
President 1992
Edward A. Meltzer 1994 147,462 6,250 10,000 4,457
Vice President 1993 130,190 50,750 5,000 3,521
and Chief 1992 107,105 5,690 None 2,225
Financial Officer
</TABLE>
------
(1) Except as indicated below, the amount included in this column for fiscal
year 1994 represent the matching contributions under IE's 401(k) Plan and
Supplemental 401(k) Plan (Mr. Sanford, $4,620; Mr. Pratt, $3,178; Mr.
Briggs, $3,792; Mr. May, $2,423 and Mr. Meltzer, $4,457). IE is a party
to "split dollar" life insurance agreements with a trust established by
Mr. Sanford (of which Mr. Abelson, a member of the Board of Directors, is
the trustee) under which the trust pays the portion of the premiums
attributable to the death benefit under permanent life insurance policies
insuring the life of Mr. Sanford and owned by the trust, and IE pays the
balance of the premiums. Upon the termination of the agreements or Mr.
Sanford's death, all premiums previously advanced by IE under the
policies are required to be repaid by the trust. IE retains an interest
in the policies' cash values and excess death benefits to secure the
trust's repayment obligation. Included in the amounts shown for Mr.
Sanford in fiscal years 1992, 1993 and 1994 are amounts representing the
value of the premium payments by IE in such years, projected on an
actuarial basis assuming that Mr. Sanford retires at age 65 and the
agreements are then terminated. In addition, in fiscal year 1994, IE
entered into a deferred compensation agreement with Mr. Sanford which
provides for IE to credit $716,715 annually for Mr. Sanford's account for
five years commencing in fiscal year 1994, together with interest at an
annual rate of 7%, compounded annually. All credited amounts will be paid
to Mr. Sanford in five equal annual installments commencing in fiscal
year 1999. In the event of his death, disability, termination by IE
without cause or a change of control of IE, all amounts not yet credited
for future periods will be credited and all credited amounts will be paid
to Mr. Sanford. Included in the amount shown for Mr. May in fiscal year
1994 is $246,667 for a payment relating to a non-compete agreement and
$44,159 of relocation expenses.
(2) Mr. Pratt began his employment with IE on March 4, 1992.
(3) Of the 450,000 options identified above, 225,000 granted on March 4, 1992
were canceled in July 1992.
(4) Mr. May began his employment with IE on November 1, 1993.
60
<PAGE>
OPTION GRANTS DURING FISCAL YEAR 1994
The following table provides information related to options to purchase IE
Common Stock which were granted to the named executive officers during fiscal
year 1994.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term (1)
------------------------------------------------------------------------ --------------------------
Number of % of Total
Securities Under- Options Granted Exercise or
lying Options to Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date 5%($) 10%($)
------------------- ----------------- --------------- ------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Sanford -- -- -- -- -- --
Gregory A. Pratt .. -- -- -- -- -- --
Mark R. Briggs .... 50,000(2) 5.3% $24.00 February 25, 2004 $754,674 $1,912,491
Robert P. May ..... -- -- -- -- -- --
Edward A. Meltzer . 10,000(2) 1.1% 24.00 February 25, 2004 150,935 832,498
</TABLE>
------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation of the IE Common Stock over the term of the
options.
(2) The options become exercisable in five equal annual installments
beginning February 25, 1995.
On February 25, 1995, the Board of Directors of IE authorized the
repricing of all outstanding options with exercise prices in excess of $13.25
to $13.25 per share. As of that date, 2,067,370 options were repriced, of
which 345,158 were exercisable at January 28, 1995.
AGGREGATED OPTION EXERCISES DURING FISCAL YEAR 1994 AND OPTION VALUES AT
JANUARY 28, 1995
The following table provides information related to options to purchase IE
Common Stock which were exercised by the named executive officers during
fiscal year 1994 and the number and value of options held on January 28,
1995.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs Options/SARs
Value at FY-End (#) at FY-End ($)(2)
Shares Acquired Realized -------------------------------- --------------------------------
Name on Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
------------------- --------------- ------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Sanford -- -- 163,334 366,666 $96,250 $ 8,750
Gregory A. Pratt .. 30,000 $165,000 58,334 241,666 -- --
Mark R. Briggs .... 40,000 552,500 12,000 118,000 -- 97,500
Robert P. May ..... -- -- 20,000 80,000 -- --
Edward A. Meltzer .. -- -- 18,800 15,200 63,000 --
</TABLE>
------
(1) Represents the difference between the exercise price and the market value
on the date of exercise.
(2) Value based on the closing price of $9.75 per share on January 27, 1995.
61
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Barry M. Abelson is a partner in the law firm of Pepper, Hamilton &
Scheetz, which provided legal services to IE in fiscal year 1994. IE believes
that the fees charged by Pepper, Hamilton & Scheetz are comparable to those
charged by other law firms for comparable services.
During fiscal years 1992, 1993 and 1994, IE paid $45,000, $171,000 and
$189,000, respectively, to Mr. Sanford and his affiliates for the business
use by IE, its customers and suppliers (certain of which reimbursed IE) for
charter cruise services.
In March 1995, Mr. Sanford reimbursed IE for travel expenses previously
advanced on his behalf by IE. Of the amount reimbursed, which included
interest, approximately $61,000 related to expenses incurred in fiscal year
1993 and approximately $101,000 related to expenses incurred in fiscal year
1994.
IE believes that the terms of these transactions were no more or less
favorable to IE than could have been obtained from unaffiliated third
parties.
PRINCIPAL SHAREHOLDERS AND HOLDINGS OF OFFICERS AND DIRECTORS
The following table sets forth, as of March 31, 1995, the number and
percentage of shares of IE Common Stock which, according to information
supplied to IE, are beneficially owned by (i) each person who is the
beneficial owner of more than 5% of the IE Common Stock; (ii) each of the
directors of IE individually; (iii) IE's Chief Executive Officer and each of
IE's four other most highly compensated executive officers for fiscal year
1994; and (iv) all current directors and officers of IE as a group. Under
rules adopted by the Securities and Exchange Commission, a person is deemed
to be a beneficial owner of IE Common Stock with respect to which he has or
shares voting power (which includes the power to vote or to direct the voting
of the security), or investment power (which includes the power to dispose
of, or to direct the disposition of, the security). A person is also deemed
to be the beneficial owner of shares with respect to which he has the right
to obtain voting or investment power within 60 days, such as upon the
exercise of options or warrants.
<TABLE>
<CAPTION>
Percentage
of Shares
Amount and Nature Outstanding
of Beneficial (if 1% or
Name of Beneficial Owner Ownership(a) greater)
------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Richard D. Sanford .............................. 3,900,100(b) 12.4%
Christopher T.G. Fish ........................... 1,228,020(c) 3.9%
Arnold S. Hoffman ............................... 60,000 --
Roger J. Fritz .................................. 160,004 --
William L. Rulon-Miller ......................... 90,136 --
Barry M. Abelson ................................ 500,379(d) 1.6%
Michael R. Shabazian ............................ 100,000 --
James M. Ciccarelli ............................. 102,824 --
John A. Porter .................................. 30,000 --
Alex A.C. Wilson ................................ 10,000 --
Gregory A. Pratt ................................ 113,334 --
Robert P. May ................................... 24,000 --
William E. Johnson .............................. -- --
Mark R. Briggs .................................. 64,100 --
Edward A. Meltzer ............................... 25,200 --
Wellington Management Company ................... 1,940,490(e) 6.2%
Montag & Caldwell ............................... 3,837,884(f) 12.3%
All directors and officers as a group (17
persons) ....................................... 6,220,680 19.3%
</TABLE>
------
(a) Includes the following number of shares purchasable upon the exercise of
stock options: Mr. Sanford, 183,334; Mr. Fish, 80,000; Mr. Hoffman,
60,000; Mr. Fritz, 120,000; Mr. Rulon-Miller, 80,000; Mr. Abelson,
60,000; Mr. Shabazian, 100,000; Mr. Ciccarelli, 80,000; Mr. Porter,
10,000; Mr. Wilson, 10,000; Mr. Pratt, 113,334; Mr. May, 20,000; Mr.
Briggs, 64,000; Mr. Meltzer, 21,800; and all directors and officers as a
group, 1,069,668.
(b) Includes 205,007 shares held by two charities established by Mr. Sanford,
of which Mr. Sanford is a director or trustee. Mr. Sanford disclaims
beneficial ownership as to the shares held by the charities.
62
<PAGE>
(c) Includes 1,062,310 shares owned by Sprint Investments, S.A. The sole
shareholder of Sprint Investments, S.A. is a trust, the beneficiaries of
which are the wife and children of Mr. Fish. Also includes 71,710 shares
held in a trust (the beneficiary of which is a child of Mr. Sanford) of
which Mr. Fish and Mr. Abelson are co-trustees (as to which shares Mr.
Fish disclaims beneficial ownership) and 4,000 shares held as custodian
and in the name of Mr. Fish's daughter.
(d) Includes 71,710 shares held in a trust (the beneficiary of which is a
child of Mr. Sanford) of which Mr. Abelson and Mr. Fish are co-trustees;
128,262 shares held by Mr. Abelson as custodian for the benefit of two
children of Mr. Sanford; and 205,007 shares held by two charities
established by Mr. Sanford, of which Mr. Abelson is a director or
trustee. Mr. Abelson disclaims beneficial ownership as to the shares held
by the trust and charities and as custodian.
(e) The information with respect to Wellington Management Company was
reported on a Schedule 13-G filed by Wellington Management Company with
the Securities and Exchange Commission on February 3, 1995, a copy of
which was received by IE and relied upon in making this disclosure. The
address of Wellington Management Company is 75 State Street, Boston,
Massachusetts, 02109.
(f) The information with respect to Montag & Caldwell was reported on a
Schedule 13-G filed by Montag & Caldwell with the Securities and Exchange
Commission on January 10, 1995, a copy of which was received by IE and
relied upon in making this disclosure. The address of Montag & Caldwell
is 1100 Atlanta Financial Center, 3343 Peachtree Road, NE, Atlanta,
Georgia, 30326.
DESCRIPTION OF CAPITAL STOCK
IE's authorized capital stock consists of 100,000,000 shares of IE Common
Stock, $.01 par value, and 15,000,000 shares of Preferred Stock, $50.00 par
value. As of April 29, 1995, there were no shares of Preferred Stock
outstanding and there were 39,573,549 shares of IE Common Stock outstanding.
As of May 1, 1995 there were 860 holders of record of IE Common Stock.
Common Stock. Subject to the rights of holders of Preferred Stock which
may from time to time be issued, holders of IE Common Stock are entitled to
one vote per share held of record on matters acted upon at any shareholders'
meeting and to dividends when, as and if declared by the Board of Directors
of IE out of funds legally available therefor. There is no cumulative voting
for the election of directors. The holders of IE Common Stock have no
preemptive or conversion rights and are not subject to further calls or
assessments by IE. In the event of any liquidation, dissolution or winding up
of IE, each holder of IE Common Stock is entitled to share ratably in all
assets of IE remaining after the payment of liabilities and any preferential
payments to holders of Preferred Stock issued in the future. All shares of IE
Common Stock now outstanding and all shares to be outstanding upon the
completion of the Merger are and will be fully paid and non-assessable.
The transfer agent for the IE Common Stock is Chemical Mellon Shareholder
Services, 450 West 33rd Street, 15th Floor, New York, New York 10001.
Preferred Stock. The Board of Directors of IE, without action by the
holders of IE Common Stock, is authorized to establish and issue shares of
Preferred Stock in series and to fix, determine and vary the voting rights,
designations, preferences, qualifications, privileges, options, conversion
rights and other special rights of each series of Preferred Stock. Holders of
TFN Common Stock should recognize that classes of stock such as the Preferred
Stock may be used, in certain circumstances, to create voting impediments on
extraordinary corporate transactions or to frustrate persons seeking to
effect a merger or otherwise to gain control of the issuer thereof, and that
the Board of Directors, without approval of the holders of IE Common Stock,
can issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of IE Common Stock. IE has
no present plans to issue any shares of Preferred Stock.
63
<PAGE>
CERTAIN INFORMATION CONCERNING THE FUTURE NOW
HISTORY AND BUSINESS
TFN is one of the ten largest computer resellers in the United States as
measured by sales. TFN, a computer sales and services company, sells and
installs microcomputers, UNIX workstations, turnkey local and wide area
network systems, computer software and peripheral products for business,
professional, educational and governmental customers. TFN also offers a wide
range of sophisticated customer support and consulting services which carry
higher gross margins than product sales and are the principal focus of TFN's
marketing strategy. TFN currently operates 19 sales offices in 13 states and
manages five additional branches in five major metropolitan areas for IE. TFN
does not maintain any retail facilities.
TFN is the successor of a business originally formed in 1975 for the
purpose of distributing word processing equipment in Ohio and Kentucky. In
the 1980s, this predecessor business changed its focus to the microcomputer
industry. TFN was incorporated in Ohio in August 1988 by members of the
predecessor's management and other investors for the specific purpose of
acquiring the predecessor's business and assets. This acquisition was
completed in December 1988, and TFN began doing business as "The Future Now,
Inc." TFN has subsequently acquired 15 existing businesses, including the
Company Center Division ("CCD") of IE in 1992 and Direct Computer
Corporation, Premium Computer Corporate Center and Basicomputer Corporation
in 1993.
During 1994 TFN decided to forgo further acquisitions and concentrated on
consolidating and integrating its operations. Effective second quarter 1994,
TFN adopted a definitive plan for a company-wide restructuring, including the
closing of substantially all warehouses and the closing and consolidation of
duplicate facilities in areas where TFN had made acquisitions. Additionally,
effective December 30, 1994, TFN sold the assets of five of its branch
offices and three satellite sales offices to IE and entered into a management
agreement with IE under which TFN continues to manage these facilities.
PRELIMINARY SECOND QUARTER RESULTS
While final results of operations for TFN's second quarter 1995 are not yet
available, TFN management expects to report a net loss of $7 million to $11
million for the second quarter 1995 as price competition and product margin
pressure continue to adversely impact operations. Additionally, TFN incurred
inventory write downs and higher than anticipated interest expense as it carried
higher than expected inventory levels resulting in part from unanticipated
delays in implementing CustomerCare Direct (its direct shipment program) in all
sales offices.
MICROCOMPUTER MARKETPLACE
During the past ten years, rapid advances in computer technology have led
to the development of significantly more powerful microcomputers at
substantially lower prices. Additionally, the use of microcomputers has
become widespread throughout all employee levels and functional areas within
the workplace. Because of cost savings and enhanced flexibility, many
businesses have installed networks as a preferred alternative to more
expensive minicomputer or mainframe systems. Businesses are also using
networks to displace existing minicomputer and mainframe systems. Networks,
which are developed through the connection of a customer's multiple
microcomputers and peripheral products into integrated systems, allow end
users to share peripheral hardware and database resources, communicate
directly via electronic mail and access the business' central computers.
Originally, manufacturers sold their microcomputer products directly to
end users or through retail computer dealers. During the 1980s, sales through
retail dealers experienced rapid growth because retail outlets allowed the
consumer to examine and test a wide variety of products from a number of
hardware manufacturers. More recently, direct telemarketing and mail order
developed as alternative distribution channels. These distribution channels
benefited from heightened awareness on the part of the consumer, the
emergence of industry standards and increased commonality of components. As
microcomputer users became more computer literate, their dependence on local
dealers for basic information and demonstrations diminished.
64
<PAGE>
In response to general competitive pressures, as well as specific price
pressure from the direct telemarketing and mail order channels and direct
sales by manufacturers, the microcomputer dealer distribution channel is
currently undergoing additional market differentiation into dealers, such as
TFN, which emphasize advanced systems and support for business networks as
compared to computer "superstores" which offer retail purchasers a relatively
low cost, low service alternative.
TFN made a strategic decision in 1988 to narrow its market focus. TFN
closed its retail outlets, relocated its sales offices to corporate office
parks and developed a marketing strategy focused on business and
institutional customers. In 1993, TFN organized its professional and
technical services into its Professional Services Organization. This
marketing strategy was designed to make TFN a partner to its customers by
providing a full spectrum of professional services.
TFN believes that the market for professional services as well as for
microcomputer products will continue to grow. This anticipated growth should
come from the demand for current technology expertise in business,
professional firms and government. TFN's belief in this trend is based upon
its experience with its own customers as well as general industry studies.
TFN itself has not conducted any marketing studies. In addition, TFN believes
the computer reseller business is in a continuing period of consolidation and
realignment. Increased competition has made it more difficult for smaller
resellers who do not benefit from discounts from volume purchases and are not
capable of offering the range of sophisticated support services which
customers are increasingly demanding. This industry consolidation provided
TFN with opportunities through 1993 to make a series of acquisitions of other
resellers, primarily in the geographic areas in which it was doing business.
In 1994, TFN focused on integrating its prior acquisitions and emphasizing
sales of professional services rather than hardware.
BUSINESS STRATEGY
TFN's business strategy is to focus on the business, professional, and
governmental markets. TFN believes that the increasing complexity of
microcomputer systems, the widening usage of microcomputers in the workplace
and the trend toward use of networks will continue to cause business and
institutional customers to require significant levels of sophisticated
professional services such as those provided by TFN.
During 1994, TFN decided to concentrate on consolidating and integrating
its operations. Effective second quarter 1994, TFN adopted a definitive plan
for a company-wide restructuring, including the closing of substantially all
warehouses and the closing and consolidation of duplicate facilities in areas
where TFN had made acquisitions. TFN's primary strategy during 1994 was to
focus on internal growth and to increase its presence in its existing markets
through the expansion and upgrading of its Professional Services
Organization. Continued innovation in the development of professional
services and implementation of new marketing programs are also part of TFN's
strategy to generate internal growth.
Additionally, effective December 30, 1994, TFN sold the assets of five of
its branch sales offices to IE for approximately $39 million and entered into
a management agreement with IE under which TFN continues to manage these
facilities. TFN entered into this transaction to reduce its outstanding debt
and divest itself of the financial burdens of carrying these assets,
including inventory. Under the terms of this transaction, TFN continues to
manage these locations for IE in return for certain fixed management fees as
well as a share in the profits these locations generate. TFN retained its
employees at these locations. Under the management agreement with IE, TFN s
focus is to provide services and products to the customers of those branches.
In 1994, TFN also decided to centralize its purchasing, billing and credit
and collection functions to provide more efficient overall operations in its
business. By year end 1994, the majority of the credit and collection
functions was centralized in TFN's Cincinnati headquarters. Billing functions
are centralized at TFN's Denver facility in tandem with each branch's
conversion to CustomerCare Direct. During the first six months of 1995, TFN
continued its conversion to CustomerCare Direct. During 1994, TFN also
entered into an arrangement for a consulting firm to develop and manage the
software used by TFN in its internal management information systems.
65
<PAGE>
TFN believes that its principal competitive strengths include:
o A well-defined marketing strategy, supported by its Professional
Services Organization, which focuses on providing sophisticated
information technology services to its business, professional,
governmental and educational customers enabling them to obtain full
value from their information systems;
o A commitment to providing sophisticated professional services
nationwide through the employees in the Professional Services
Organization;
o TFN's alliances with industry leaders such as IE which allow TFN to offer
a full range of services to its customers;
o Volume purchasing power; and
o Authorizations to sell leading name-brand microcomputer and workstation
products and software from leading manufacturers including Apple,
COMPAQ, Dell, Hewlett-Packard, IBM, Digital, AT&T, Sun, Microsoft,
Lotus, Novell and Banyan.
MARKETING AND CUSTOMERS
TFN directs its marketing efforts towards medium-sized businesses, Fortune
1000 corporations, professional firms and governmental and educational
institutions. Some of TFN's customers do not have internal computer support
personnel. TFN believes that these customers increasingly rely on business
partners and suppliers to provide a complete solution to their information
technology needs, in addition to competitive pricing.
In addition, many of TFN's larger customers are outsourcing their
information technology needs. TFN believes this trend will continue as more
companies decide that it is more efficient and cost-effective to work with
experts, such as TFN, in information technology rather than developing and
maintaining their own expertise.
TFN's marketing does not target retail or individual customers and sales
to this market are not a significant part of its business. TFN currently does
not intend to establish any retail outlets.
No one customer accounted for more than 10% of TFN's total sales in 1994.
Accordingly, TFN does not believe that the loss of any single customer would
have a material adverse effect on its business.
Sales to targeted customers are generated primarily by TFN's marketing
representatives. As of April 28, 1995, TFN employed approximately 280
marketing representatives. These marketing representatives generally have
college degrees and three or more years of successful microcomputer sales
experience involving multi-product authorizations and are assigned to
accounts on the basis of skill, experience and prior results. Continued
growth and future success will depend in part on the TFN's ability to
attract, hire and retain highly skilled and motivated marketing personnel,
particularly in the Professional Services Organization. TFN believes
that it will be able to do so in part because of its compensation philosophy.
Compensation programs for marketing representatives include both salary and
commission. Commissions are based on a percentage of the gross profit
generated by the sale, thereby allowing the marketing representatives to
participate in TFN's gross profits. Under these compensation programs, the
commission rate is greater for the sale of professional services than
hardware which parallels TFN's marketing and business strategies.
TFN utilizes various forms of advertising and promotional activities,
including seminars, business forums and presentations, descriptive brochures,
direct mail pieces and newspaper advertisements. Advertising emphasizes
customer support services rather than product pricing. Marketing efforts are
also enhanced by TFN's association with major manufacturers and by customer
and manufacturer referrals.
66
<PAGE>
PRODUCTS
TFN markets microcomputer and workstation systems and related products and
services. The components of the microcomputer systems generally supplied
include a microprocessor-based central processing unit, peripheral devices
such as video displays, keyboards, additional storage units, printers and
software packages. TFN is an authorized dealer or a reseller at some or all
of its locations for the products of over 100 manufacturers, including:
AST Computer, Inc.
American Telephone & Telegraph Company
Apple Computer, Inc.
Banyan Systems, Inc.
Bay Networks, Inc.
3 Com Corporation
Compaq Computer Corporation
Dell Computer Corporation
Digital Equipment Corporation
Epson America, Inc.
Hayes Microcomputer Products, Inc.
Hewlett-Packard Company
International Business Machines Corporation
Lotus Development Corporation
Microsoft Corporation
NEC Information Systems, Inc.
Novell, Inc.
Oracle Corporation
Sun Microsystems Corporation
Tektronix, Inc.
Toshiba American Information Systems, Inc.
TFN continually evaluates new product lines and technological developments
in the microcomputer industry and seeks additional manufacturer and product
authorizations where appropriate.
For the three months ended March 31, 1995 and each of the years ended
December 31, 1994, 1993 and 1992, sales of microcomputers, peripheral
products, supplies and software accounted for approximately 92% of total
revenues. During these periods, the leading product lines, expressed as a
percentage of hardware sales, were as follows:
<TABLE>
<CAPTION>
Percentage of
Hardware Sales
--------------------------------------------------------
Three months ended
Manufacturer March 31, 1995 1994 1993 1992
---------------------------- ---------------------- -------- -------- --------
<S> <C> <C> <C> <C>
COMPAQ ..................... 25% 25% 25% 16%
IBM ........................ 19% 20 19 22
Hewlett-Packard ............ 15% 12 12 13
Apple ...................... 2% 3 5 8
All Other Manufacturers .... 39% 40 39 41
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>
The increases and decreases in percentages of total sales among these
major product lines resulted primarily from changes in product mix as a
result of acquisitions and changes in customer preferences.
TFN selects the products it sells on the basis of overall quality, product
image, technological capability, business applications and availability of
volume discounts. TFN continually monitors new products to keep current with
technological advances. The microcomputer market is characterized by various
hardware systems that utilize different and often incompatible standards for
hardware and software. As new or improved features are introduced by
manufacturers, the utility of particular products may change substantially.
Concern over these changes results in confusion by customers as to which
product is best suited to the customer's needs and a related volatility in
demand for products. TFN attempts to address this confusion and volatility by
presenting itself as "platform neutral" in its marketing and offering
hardware systems, software and support services that address virtually all
applicable industry standards. The majority of sales of hardware, software
and peripheral products is on a trade account basis. The customer is invoiced
at the time of delivery or shipment.
In 1993 and 1994, TFN offered FutureFile which is a catalogue or CD-ROM
based listing of manufacturers and products offered and supported by TFN.
FutureFile contains product information, including descriptions of equipment
compatibility and services descriptions. The manufacturers, products and
services listed in FutureFile represent those recommended by TFN. FutureFile
is updated frequently and provides a single resource a customer can use to
evaluate available products and services. In late 1994, TFN modified this
offering and renamed it Demand 95. Demand 95 includes only those leading
manufacturers of hardware and software upon which the Company intends to
focus during 1995.
67
<PAGE>
THE PROFESSIONAL SERVICES ORGANIZATION
The Professional Services Organization offers a wide range of professional
services including project and network management, consulting services,
enterprise design, training and technology deployment. For each of 1994, 1993
and 1992, revenue from professional services amounted to approximately 7.5%,
5% and 4%, respectively, of total revenue. Professional services, which carry
higher gross margins than product sales, are a principal focus of TFN s
marketing strategy and are considered critical to its success. The
Professional Services Organization currently includes the following four
groups.
Internetworking. The Internetworking group provides local, metropolitan,
wide and global area network services including needs analysis and design
services, systems integration and installation services, UNIX services,
enterprise consulting services and network management and support services.
This group is designed to meet the needs of organizations with multiple
network technologies which are looking to centralize and outsource their
overall network service needs and information technology management.
Each part of the Internetworking group designs custom solutions to meet
customers unique project requirements from the design stage to final
installation and debugging. This group also designs and implements disaster
recovery systems for customers.
Application Services Group. The Application Services Group offers
consulting and development services to assist customers in the use of current
technologies and application of those technologies to gain business process
efficiencies. These include groupware consulting services, application design
and development and advanced education services. This part of the
Professional Services Organization is designed to assist clients in the
design, customization and development of effective applications.
The Application Services Group also offers current high level training and
certification programs to support a wide range of network and desktop
operating systems.
Distributed Computing Group. The Distributed Computing Group assists the
client in overall resource management through planning and management
services, software resource management and centralized system administration
and management.
This group offers the Power By the Hour asset management program which
provides the end user appropriate computing technology to align with its
changing needs. Under this program, TFN provides a complete package to the
end user, thus relieving the client of the need to purchase and manage
computing assets. Under the Power By the Hour program, the Distributed
Computing Group will maintain, relocate and track the equipment, as well as
provide management reports to the client.
Technology Deployment and Service Group . The Technology Deployment and
Service Group provides maintenance, technical service and support. This group
offers various levels of maintenance service including warranty work, on site
maintenance arrangements, dedicated on site technical personnel and time and
materials maintenance contracts. This group also offers The FutureCare Help
Desk which provides technical assistance to clients including FutureCare 800
Support, a fee-based toll free telephone hotline. This group also provides on
site support through which it will establish, operate and maintain help desks
at a client's site. This group also will customize help desk management
software for clients.
This group also includes the warranty and repair services which TFN had
outsourced to Hewlett-Packard Corporation in 1993. Effective January 1, 1995,
Hewlett-Packard and TFN agreed to terminate that arrangement. As a result,
TFN again is a primary provider of warranty and repair services to its
clients through its own employees as well as through arrangements with
certain national temporary employee agencies.
Approximately 670 of TFN's employees are part of the Professional Services
Organization and customer service and support functions, reflecting TFN's
marketing strategy. The key Professional Services Organization personnel as
well as the other approximately 280 marketing representatives generally have
prior experience and specialized training.
68
<PAGE>
MANUFACTURERS AND SUPPLIERS
TFN purchases microcomputers and related products directly from certain
manufacturers and indirectly through IE, a distributor of such products and the
beneficial owner of 31.1% of TFN Common Stock. In general, TFN must be
authorized by a manufacturer to sell that manufacturer's products, whether the
products are purchased from IE or directly from the manufacturer. TFN has
entered into separate authorization agreements with its major manufacturers.
Typically, these agreements provide that TFN has been appointed, on a
non-exclusive basis, as an authorized dealer of specified products of the
manufacturer at specified locations. Most of the authorization agreements,
including those with Apple, COMPAQ, Hewlett-Packard and IBM provide that the
manufacturer may terminate the agreement with or without cause upon 30 to 90
days notice or immediately upon the occurrence of certain events.
TFN is the largest franchisee of IE, a leading national distributor of
microcomputers and related products and services. IE maintains a Network of
approximately 2,500 network integrators which provide products and services
to businesses in the United States. TFN's franchise agreements with IE have
10 year terms expiring in December 2000 or September 2003, and are renewable
by TFN for one additional 10 year term under certain conditions. IE may
terminate the franchise agreements upon the occurrence of certain events and
TFN may terminate the agreements without cause upon prior written notice to
IE. In the event of such a termination, TFN is obligated to make a buy-out
payment to IE equal to IE's gross profits realized from its sales of products
to TFN during the 12-month period immediately preceding termination. Under
this formula, if TFN had exercised its right to terminate the agreements
effective December 31, 1994, TFN believes the total buy-out payment to IE
would have been approximately $17 million. In the event of such a
termination, TFN also has the right to pay IE an additional sum of $500,000
to be released from all non-competition covenants contained in the franchise
agreements.
TFN purchases products from IE at a mark-up of IE's cost from
manufacturers. The amount of the mark-up depends upon TFN's volume of product
purchases from IE. TFN believes that it receives the lowest mark-up offered
by IE for the range of products and services purchased. During 1994, product
purchases from IE amounted to approximately 85% of TFN's total product
purchases.
To assure itself that its franchise relationship with IE is beneficial,
TFN periodically reviews the relative economic benefits and costs of this
relationship. TFN has periodically explored the advisability of purchasing
the products it procures through IE (primarily Apple, COMPAQ, Hewlett-Packard
and IBM) directly from these hardware manufacturers. To date, TFN's
management has determined that IE's terms on these products are favorable
enough to warrant continued purchases through IE. TFN also benefits from IE's
national presence in marketing. In addition to IE, other national companies
perform the services TFN obtains from IE. In the event TFN was unable to
continue its relationship with IE, it believes it could establish a similar
relationship with another company in a reasonable period of time. Because of
the competitive nature of the microcomputer distribution industry, TFN
believes it could ultimately obtain terms as beneficial as those currently
offered by IE.
In late 1992, TFN initiated a pilot program with IE designed to reduce
TFN's need to carry inventory of product available through IE. Under this
program, IE configures product sold by TFN and ships it directly to TFN's
customer, diminishing TFN's need to carry that inventory. This program also
decreases the time between order and delivery to the customer. TFN expanded
this program, called CustomerCare Direct, so that most of its sales offices
were on this system by year end 1994 and substantially all sales offices were
on this system by June, 1995. TFN utilized this program for approximately 50%
of its total sales in 1994. Although there have been difficulties in the
implementation of this program which continued throughout 1994 and delayed
this program's expansion to the entire company, TFN and IE believe these
difficulties can be resolved during 1995. As a result of these implementation
difficulties, TFN continued to incur certain additional inventory carrying,
configuration and shipping costs during 1994.
TFN's cost for products purchased from IE depends upon the success of IE's
negotiations with the product manufacturers. Certain of TFN's competitors,
depending upon size and volume of purchases, may be able to purchase products
directly from manufacturers at prices lower than those paid by TFN to IE and
may be able to reflect such lower costs in lower prices to their customers.
However, as described above, TFN's marketing strategy and its ability to
generate sales revenue, is not primarily price-oriented. TFN's ability to
obtain these products on a timely basis could also be affected by adverse
developments relating to IE.
69
<PAGE>
TFN's current arrangements with Apple, COMPAQ, Hewlett-Packard, IBM and
other major manufacturers generally provide protection to TFN against
declines in the dealer list price of microcomputers and related products in
TFN's inventory. These arrangements typically take the form of a cash payment
or a credit against purchases in an amount equal to the difference between
the price actually paid by TFN for its inventory of that manufacturer's
products and the new dealer list price. In addition, such arrangements
generally permit the return of inventory upon payment of a restocking fee.
Each of the foregoing arrangements may be discontinued or varied, at the
manufacturer's option, at any time.
TFN's manufacturers permit TFN to pass through to its customers all
warranties and return policies applicable to the manufacturer's products. TFN
is reimbursed by the manufacturers for warranty work done for its customers.
All service work after the expiration of the warranty period is at the
customer's expense. In late 1993 and early 1994, TFN entered an alliance with
the Hewlett-Packard Company called FutureConnection. Through this program,
Hewlett-Packard provided certain warranty and most out of warranty service
directly to TFN's customers. This program was discontinued in early 1995 as
TFN concluded it would be more advantageous for it and its customers for TFN
to again directly provide maintenance and repair services. TFN has
established its Technology Deployment and Service Group which provides
maintenance and repair services to customers.
Software and other related products are purchased from numerous industry
suppliers. As is customary in the industry, TFN does not have any long-term
agreements or commitments with these suppliers, because competitive sources
of supply are generally available for such products.
COMPETITION
The microcomputer market is highly competitive. TFN is in direct
competition with local, regional and national resellers of microcomputer
products and services as well as firms offering information technology
implementation consulting services. In addition, TFN faces competition from
microcomputer manufacturers that sell their products through direct sales
forces and from distributors that emphasize mail order and telemarketing. New
developments in distribution, such as the introduction of computer
superstores and increased direct sales by manufacturers to end users, have
also increased competition. Depending on the customer, the principal areas of
competition may include price, post-sales technical support and service,
availability of inventory, delivery of product and breadth of product line.
Some of TFN's competitors on the regional and national level have greater
financial and marketing resources than TFN. Although TFN believes its prices
and delivery terms are competitive, certain competitors offer more aggressive
hardware pricing to their customers.
Heightened price competition among hardware manufacturers has resulted in
declining gross margins for many microcomputer resellers including TFN. TFN
will continue to rely on its purchasing power and the sale of higher margin
services through its Professional Services Organization to combat these
competitive pressures.
SEASONALITY
Due primarily to the buying patterns of its commercial customers, TFN's
sales tend to be highest in the fourth quarter of the calendar year.
EMPLOYEES
On April 28, 1995, TFN had 1,476 employees. Among them are 279 marketing
representatives, 668 in the Professional Services Group, 57 in distribution
and 472 in management and administration. None of the employees is
represented by a union, and TFN considers employee relations to be excellent.
TRADEMARKS AND SERVICE MARKS
TFN has the following trademarks or service marks registered in either the
United States Patent and Trademark Office or in a state: "The Future Now,
Inc.;" "Future Connection" (application pending); "FutureFile" (application
pending); FutureCare (application pending); and "Power By the Hour"
(application pending). TFN holds no patents.
70
<PAGE>
The following trademarks or trade names are used in this Proxy
Statement/Prospectus to identify the entities claiming the marks and names of
their products: "Apple" for Apple Computer, Inc.; AT&T for AT&T Corp.; Banyan
for Banyan Systems Incorporated; "COMPAQ" for Compaq Computer Corporation;
Dell for Dell Computer Corporation, "Hewlett-Packard" for Hewlett-Packard
Company; "IBM" for International Business Machines Corporation; "Microsoft"
for Microsoft Corporation; "Novell" for Novell Inc.; "Sun" for Sun
Microsystems, Inc. and "Digital" for Digital Equipment Corporation.
PROPERTIES
It is TFN's policy to lease rather than own its sales and corporate
offices and to locate its sales offices in office park and corporate center
facilities. These leases provide for annual base rentals ranging from $59,105
to $418,400 during 1995 and their initial terms expire from May, 1995 through
December 31, 2003. In general, TFN's leases require it to pay annual base
rent in monthly installments and to pay its proportionate share of taxes,
common area expenses, insurance and related costs. See Note 10 of Notes to
Consolidated Financial Statements.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which TFN is a party or
of which any of its property is the subject.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE FUTURE
NOW
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the TFN Common Stock as of June 30, 1995 (except as
otherwise specified), by: (i) each person or entity known to TFN to be the
beneficial owner of more than 5% of the TFN Common Stock; (ii) each of TFN's
officers and directors; and (iii) all directors and officers as a group.
Except as otherwise indicated in the footnotes to the table, the individual
named has sole voting and investment power over the shares indicated.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
------------------------
Name Number Percent
---- ----------- ---------
<S> <C> <C>
Joseph Beech III(1) ............................... 24,750 *
James J. Dealy(1) ................................. 67,700 *
William G. Kagler(1) .............................. 10,500 *
Lewis E. Miller(1) ................................ 124,375 1.6
Timothy M. Mooney ................................. 6,000 *
Norma Skoog(1) .................................... 19,000 *
Dennis J. Sullivan, Jr.(1) ........................ 6,000 *
Dudley S. Taft(1) ................................. 30,335 *
Terry L. Theye(1) ................................. 174,500 2.2
All Officers and Directors As a Group(1) .......... 463,160 5.9
Brinson Partners, Inc.(2) ......................... 453,365 6.1
Cumberland Associates(2) .......................... 455,200 6.0
FMR Corp.(2) ...................................... 723,000 9.5
Intelligent Electronics, Inc. and its Affiliates(2) 2,344,024 31.0
President and Fellows of Harvard College(2) ....... 462,100 6.1
</TABLE>
------
*Less than 1%.
(1) Includes shares subject to currently exercisable options or warrants in
the following amounts: Mr. Beech, 8,000; Mr. Dealy, 28,100; Mr. Kagler,
7,000; Mr. Miller, 60,500; Mr. Mooney, 5,000; Ms. Skoog, 19,000; Mr.
Sullivan, 4,000; Mr. Taft, 8,000; and Mr. Theye, 101,500; and all
officers and directors as a group, 241,100.
(2) The beneficial ownership indicated for this shareholder is as of January
31, 1995. The business address of: Cumberland Associates is 1114 Avenue
of the Americas, New York, New York, 10036; Intelligent Electronics, Inc.
is 411 Eagleview Boulevard, Exton, Pennsylvania, 19341; FMR Corp. is 82
Devonshire Street, Boston, Massachusetts, 02109; President and Fellows of
Harvard College is c/o Harvard Management Company, Inc., 600 Atlantic
Avenue, Boston, Massachusetts, 02210; Brinson Partners, Inc. is 209 South
LaSalle, Chicago, Illinois, 60604.
71
<PAGE>
SUBMISSION OF SHAREHOLDER PROPOSALS
In the event the Merger is not consummated for any reason, TFN will hold
an annual meeting of its shareholders. In accordance with the rules of the
Commission, certain shareholder proposals that are received by the Secretary
of TFN at TFN's corporate headquarters a reasonable time before proxies are
solicited by the TFN Board for such meeting must be included in the proxy
statement and proxy relating to such meeting.
LEGAL OPINIONS
The validity of the shares of IE Common Stock to be issued in the Merger
will be passed upon for IE by Pepper, Hamilton & Scheetz, Philadelphia,
Pennsylvania. Barry M. Abelson, a director and a member of the Executive
Committee of the Board of Directors of IE, is a partner of Pepper, Hamilton &
Scheetz. Mr. Abelson owns 42,900 shares of IE Common Stock and options to
purchase an additional 40,000 shares.
EXPERTS
The consolidated financial statements as of January 28, 1995 and for each
of the three years in the period ended January 28, 1995 and the related
consolidated financial statement schedules of IE included in this Proxy
Statement/Prospectus and the financial statement schedule included in the
Registration Statement of which this Proxy Statement/Prospectus is a part
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, which is included herein (which report expresses an
unqualified opinion), and have been so included in reliance upon the report
of such firm given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements and schedule of TFN as of December 31,
1994 and 1993, and for each of the years in the three-year period ended December
31, 1994, have been included in this Proxy Statement/Prospectus in reliance upon
the report, appearing elsewhere herein, of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
DEFINITIONS
As used in this Proxy Statement/Prospectus, the following terms shall have
the meanings indicated:
"Act" means the Ohio Control Share Acquisition Act set forth in Section
1701.831 of the ORC.
"Affiliate" has the meaning set forth in Rule 145 under the Securities
Act.
"Alternative Consideration" means the Conversion Number equal to the quotient
that results from dividing $7.2468 by the Average Closing Price.
"Antitrust Division" means the Antitrust Division of the Department of
Justice.
"Average Closing Price" means the average closing price of IE Common Stock
as reported by Nasdaq during the 20 trading days ending on the second trading
day prior to the Merger.
"CCD" means IE's Company Center Division.
"Commission" means the Securities and Exchange Commission.
"Common Pleas Court" means the Court of Common Pleas in Hamilton County,
Ohio.
"Company Combination Event" means any event whereby TFN shall have
consummated, or entered into an agreement providing for, a merger of TFN
with, sale of all or a substantial part of the assets of TFN to (excluding
sales of inventory in the ordinary course of business) or any other business
combination involving TFN with, any person or entity, including any group of
persons or entities other than Mergerco or IE.
"Conversion Number" means 0.6588, subject to adjustment as discussed
elsewhere in this Proxy Statement/Prospectus.
"Conversion Shares" means the number of shares of IE Common Stock which,
immediately after the Effective Time, will be purchasable pursuant to
outstanding options and warrants to purchase IE Common Stock (which,
immediately prior to the Effective Time, represent options and warrants to
purchase TFN Common Stock), based on a Conversion Number of 0.6588.
72
<PAGE>
"Credit Agreement" means the Secured Credit Agreement, dated as of
September 9, 1993, by and among TFN, its subsidiaries and the Lenders.
"Demand" means a demand for payment of the fair cash value of the
Dissenter's Shares.
"Dissenting Shares" means shares of TFN Common Stock held on the Record
Date (other than Excluded Shares) whose holders dissent from the Merger and
(in the event that the Merger Agreement is adopted and the Merger is
consummated) demand in writing payment of the fair cash value of such shares
in compliance with and by following the procedures under Section 1701.85.
"Dissenting Shareholder" means any holder of TFN Common Stock who seeks
relief as a dissenting shareholder under Section 1701.85.
"Effective Time" means the time the Merger becomes effective.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Shares" means shares of TFN Common Stock which are held by IE or
Mergerco or a subsidiary of IE or in the treasury of TFN or any subsidiary of
TFN.
"FTC" means the Federal Trade Commission.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"IBM Credit" means IBM Credit Corporation.
"IE" means Intelligent Electronics, Inc., a corporation organized under
the laws of the Commonwealth of Pennsylvania.
"IE Articles" means IE's Articles of Incorporation, as amended.
"IE By-Laws" means the By-Laws of IE.
"IE Common Stock" means the shares of IE's Common Stock, par value $.01
per share.
"Interested shares" means (A) shares in respect of which the voting power
is controlled by any of the following persons: (i) an acquiring person (in
this case, IE); (ii) any officer of TFN; and (iii) any employee who is also a
director of TFN and (B) shares of TFN Common Stock that are acquired by any
person after the date of the first public disclosure of the proposed Merger
(in this case March 7, 1995) and the date of the Special Meeting, if either
(i) the aggregate consideration paid by such person, and any person acting in
concert with him, for such shares of TFN Common Stock exceeds $250,000, or
(ii) the number of shares acquired by such person, and any person acting in
concert with him, exceeds one-half of one percent of the outstanding shares
of TFN Common Stock.
"Lenders" means PNC Bank, Ohio, National Association, as Agent, The First
National Bank of Chicago as Co-Agent and other participating banks who are
parties to the Credit Agreement.
"Merger" means the merger of Mergerco into TFN whereby TFN will be the
surviving corporation and will be a wholly owned subsidiary of IE.
"Merger Agreement" means the Agreement and Plan of Merger, dated April 28,
1995, among IE, TFN and Mergerco. A copy of the Merger Agreement is attached
as Annex A to this Proxy Statement/Prospectus.
"Mergerco" means IE Ohio Acquisition Corporation, a newly formed Ohio
corporation and a wholly owned subsidiary of IE.
"Merger Consideration" means (a) the number of whole shares of IE Common
Stock determined by multiplying the number of shares of TFN Common Stock
(other than Excluded Shares and Dissenting Shares) owned by each TFN
Shareholder immediately prior to the Effective Time by the Conversion Number
and (b) cash in lieu of any fractional shares of IE Common Stock which each
TFN Shareholder would otherwise be entitled to receive.
"Nasdaq" means The Nasdaq Stock Market.
73
<PAGE>
"Network" means network integrators which purchase information technology
products, services and solutions from IE.
"ORC" means the Ohio Revised Code.
"Original Interested Party" means a company in the computer reseller
industry which, in January 1994, indicated an interest to acquire or merge
with TFN, which was rejected by the TFN Board.
"Proxy Statement/Prospectus" means this Proxy Statement/Prospectus
relating to the proposed Merger.
"Record Date" means August 7, 1995.
"Registration Statement" means the Registration Statement on Form S-4
together with any amendments, of which this Proxy Statement/Prospectus is a
part.
"Restructuring" means the definitive plan for company-wide restructuring
announced by TFN on July 7, 1994.
"Required Shareholder Vote" means the affirmative votes of the holders of
(i) a majority of the outstanding shares of TFN Common Stock, and (ii) a
majority of the TFN Common Stock represented in person or by proxy at the
Special Meeting (excluding any shares owned by IE, executive officers of TFN
and directors of TFN who are also employees of TFN) in favor of the proposal
to adopt the Merger Agreement.
"Robinson-Humphrey" means The Robinson-Humphrey Company, Inc.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Committee" means the special committee of the TFN Board
consisting of the following three outside directors of TFN: Dennis J.
Sullivan, Jr., Dudley S. Taft and William G. Kagler.
"Special Meeting" means the meeting of the shareholders of TFN to be held
on August 17, 1995, at 10:00 a.m. at The Harley Hotel, 8020 Montgomery Road,
Cincinnati, Ohio.
"Surviving Corporation" means TFN after the completion of the Merger,
which will thereafter be a wholly owned subsidiary of IE.
"Termination Fee" means an amount equal to $1,500,000 which TFN shall be
obligated to pay to IE if a Company Combination Event occurs on or prior to
September 30, 1995, and the Merger Agreement is terminated as a result
thereof.
"TFN" means The Future Now, Inc., a corporation organized under the laws
of the State of Ohio.
"TFN Articles" means TFN's Articles of Incorporation, as amended.
"TFN Board" means the Board of Directors of TFN.
"TFN Common Stock" means the shares of Common Stock, no par value, of TFN.
"TFN Regulations" means TFN's Code of Regulations.
"TFN Shareholder" means a holder of TFN Common Stock.
74
<PAGE>
MISCELLANEOUS
It is expected that representatives of Price Waterhouse LLP, IE's
independent public accountants, and KPMG Peat Marwick LLP, TFN's independent
public accountants, will be present at the Special Meeting to respond to
appropriate questions and to make a statement if they so desire.
TFN knows of no matters to be presented at the Special Meeting other than
the matters set forth in the attached Notice and this Proxy
Statement/Prospectus. However, if any other matters come before the Special
Meeting, it is intended that the holder of the proxies will vote thereon in
their discretion.
By Order of the Board of Directors
Norma Skoog, Secretary
8044 Montgomery Road
Suite 601
Cincinnati, Ohio 45236
August 7, 1995
75
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
Description In this Report
----------- --------------
<S> <C>
Intelligent Electronics, Inc.:
Report of Independent Accountants -- Price Waterhouse LLP ........................................... F-2
Consolidated Balance Sheet at January 28, 1995 and January 29, 1994 ................................. F-3
Consolidated Statement of Operations for the Years Ended January 28, 1995, January 29, 1994 and
January 30, 1993 ................................................................................... F-4
Consolidated Statement of Shareholders' Equity for the Years Ended January 28, 1995, January 29, 1994
and January 30, 1993 ............................................................................... F-5
Consolidated Statement of Cash Flows for the Years Ended January 28, 1995, January 29, 1994 and
January 30, 1993 ................................................................................... F-6
Notes to Consolidated Financial Statements .......................................................... F-7
Management's Discussion and Analysis of Financial Condition and Results of Operations for the Years
Ended January 28, 1995 and January 29, 1994 ........................................................ F-17
Schedule VIII -- Valuation and Qualifying Accounts and Reserves ..................................... F-20
Consolidated Balance Sheet at April 29, 1995 (unaudited) and January 28, 1995 ....................... F-21
Consolidated Statement of Operations for the Three Months Ended April 29, 1995 and April 30, 1994
(unaudited) ........................................................................................ F-22
Consolidated Statement of Cash Flows for the Three Months Ended April 29, 1995 and April 30, 1994
(unaudited) ........................................................................................ F-23
Notes to Consolidated Financial Statements .......................................................... F-24
Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three
Months Ended April 29, 1995 and April 30, 1994 ..................................................... F-26
The Future Now, Inc.:
Independent Auditors' Report -- KPMG Peat Marwick LLP ............................................... F-28
Consolidated Balance Sheets at December 31, 1994 and 1993 ........................................... F-29
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992 .......... F-30
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1993 and 1992.. F-31
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 .......... F-32
Notes to Consolidated Financial Statements for the Years Ended December 31, 1994, 1993 and 1992 ..... F-33
Management's Discussion and Analysis of Financial Condition and Results of Operations for the Years
Ended December 31, 1994 and 1993 ................................................................... F-47
Schedule II -- Valuation and Qualifying Accounts .................................................... F-51
Consolidated Balance Sheets for the Quarter Ended March 31, 1995 (unaudited) and December 31, 1994 .. F-52
Consolidated Statements of Operations for the Three Months Ended March 31, 1995 and 1994 (unaudited).. F-53
Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 1995 (unaudited). F-54
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1995 and 1994 (unaudited).. F-55
Notes to Consolidated Financial Statements for the Three Months Ended March 31, 1995 and 1994 ....... F-56
Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three
Months Ended March 31, 1995 and 1994. .............................................................. F-61
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Intelligent Electronics, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index and appearing on pages F-3 through F-16 and on page F-20
present fairly, in all material respects, the financial position of
Intelligent Electronics, Inc. and its subsidiaries at January 28, 1995 and
January 29, 1994 and the results of their operations and their cash flows for
each of the three years in the period ended January 28, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
April 12, 1995
F-2
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
January 28, January 29,
1995 1994
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (including repurchase agreements of
$14,381 in 1994) ............................................. $ 69,027 $122,249
Marketable securities available for sale ....................... 8,398 61,130
Accounts receivable (net of allowance for doubtful accounts of
$298 in 1995 and $398 in 1994) ............................... 77,890 9,524
Inventory ...................................................... 364,606 251,044
Prepaid expenses and other current assets ...................... 3,973 8,872
Deferred income taxes .......................................... 11,256 7,840
--------- --------
Total current assets ...................................... 535,150 460,659
Property and equipment, net ......................................... 36,463 11,371
Intangible assets, primarily goodwill (net of accumulated
amortization of $25,882 in 1995 and $21,124 in 1994) .............. 71,693 71,585
Investments in affiliates ........................................... 18,692 30,096
Other assets ........................................................ 8,776 3,300
--------- --------
Total assets .............................................. $ 670,774 $577,011
========= ========
Liabilities and Shareholders' Equity
Current liabilities: ................................................
Accounts payable ............................................... $ 467,109 $334,341
Accrued liabilities ............................................ 36,181 21,025
--------- --------
Total current liabilities ................................. 503,290 355,366
--------- --------
Other liabilities ................................................... -- 2,795
Commitments and contingencies (Notes 5, 6, 12 and 13) ............... -- --
Shareholders' equity:
Preferred stock $1.00 par value per share: Authorized 15,000,000
shares, none issued and outstanding .......................... -- --
Common stock $.01 par value per share:
Authorized 100,000,000 shares; issued: 39,519,949 in 1995 and
39,310,439 in 1994 ........................................ 395 393
Additional paid-in capital ..................................... 221,312 219,107
Treasury stock (8,326,200 shares in 1995 and 4,196,200 shares in
1994) ........................................................ (105,677) (57,181)
Unrealized loss on marketable securities and investments ....... (304) --
Retained earnings .............................................. 51,758 56,531
--------- --------
Total shareholders' equity ................................ 167,484 218,850
--------- --------
Total liabilities and shareholders' equity ................ $ 670,774 $577,011
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended
----------------------------------------------
January 28, January 29, January 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Revenues ............................................... $3,208,083 $2,646,102 $2,016,686
Cost of goods sold ..................................... 3,075,342 2,529,242 1,913,393
---------- ---------- ----------
Gross profit ........................................... 132,741 116,860 103,293
---------- ---------- ----------
Operating expenses:
Selling, general and administrative expenses ......... 96,193 52,477 53,047
Amortization of intangibles, primarily goodwill ...... 4,758 4,721 4,921
---------- ---------- ----------
Total operating expenses............................ 100,951 57,198 57,968
---------- ---------- ----------
Income from operations ................................. 31,790 59,662 45,325
Other income (expense):
Investment and other income, net ..................... 4,374 5,144 475
Interest expense ..................................... (1,238) (901) (7,420)
---------- ---------- ----------
Income from continuing operations before provision for
income taxes and equity in earnings (loss) of
affiliate ............................................ 34,926 63,905 38,380
Provision for income taxes ............................. 13,853 24,443 16,909
---------- ---------- ----------
Income from continuing operations before equity in
earnings (loss) of affiliate ......................... 21,073 39,462 21,471
Equity in earnings (loss) of affiliate (net of tax
expense/(benefit) of $(2,497), $981 and $365) ........ (13,013) 1,655 663
---------- ---------- ----------
Income from continuing operations ...................... 8,060 41,117 22,134
Discontinued operation:
Income (loss) from discontinued operation (net of tax
benefit of $1,076 and $6,964) ..................... -- (2,468) (20,160)
Gain on sale of BizMart (net of tax expense of $1,306) -- 4,276 --
---------- ---------- ----------
Income before extraordinary item ....................... 8,060 42,925 1,974
Extraordinary item:
Loss on early repayment of subordinated debt (net of
tax benefit of $1,799) ............................ -- -- (3,269)
---------- ---------- ----------
Net income (loss) ...................................... $ 8,060 $ 42,925 $ (1,295)
========== ========== ==========
Earnings (loss) per common share and share equivalents:
Continuing operations ................................ $ 0.23 $ 1.13 $ 0.58
Discontinued operation ............................... -- (0.07) (0.52)
Sale of BizMart ...................................... -- 0.12 --
Extraordinary item ................................... -- -- (0.09)
---------- ---------- ----------
Net income (loss) per share ....................... $ 0.23 $ 1.18 $ (0.03)
========== ========== ==========
Weighted average number of common shares and share
equivalents outstanding: ............................. 34,848 36,521 38,204
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
Unrealized
loss Total
Additional on marketable share-
Common paid-in Treasury securities and Retained holders'
stock capital stock investments earnings equity
-------- ------------ ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1992 $366 $193,307 $ 95,606 $289,279
Issuance of 40,000 shares on
exercise of warrants ...... 1 189 -- 190
Issuance of 328,860 shares
on exercise of options and
related tax benefit ....... 3 3,246 -- 3,249
Repurchase of 754,400 shares -- -- $ (10,896) -- (10,896)
Net loss ................... -- -- -- (1,295) (1,295)
---- -------- ---------- ---- -------- --------
Balance at January 30, 1993 370 196,742 (10,896) 94,311 280,527
Issuance of 120,000 shares
on exercise of warrants ... 1 569 -- -- 570
Issuance of 2,229,285 shares
on exercise of options and
related tax benefit ....... 22 21,796 -- -- 21,818
Repurchase of 3,441,800
shares .................... -- -- (46,285) -- (46,285)
Cash dividends ($2.24 per
share) .................... -- -- -- (80,705) (80,705)
Net income ................. -- -- -- 42,925 42,925
---- -------- ---------- ---- -------- --------
Balance at January 29, 1994 393 219,107 (57,181) 56,531 218,850
Issuance of 209,510 shares
on exercise of options and
related tax benefit ....... 2 2,205 -- -- 2,207
Repurchase of 4,130,000
shares .................... -- -- (48,496) -- (48,496)
Cash dividends ($0.38 per
share) .................... -- -- -- (12,833) (12,833)
Unrealized loss on
marketable securities and
investments ............... -- -- -- $(304) -- (304)
Net income ................. -- -- -- -- 8,060 8,060
---- -------- ---------- ---- -------- --------
Balance at January 28, 1995 $395 $221,312 $(105,677) $(304) $ 51,758 $167,484
==== ======== ========= ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended
----------------------------------------------
January 28, January 29, January 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ 8,060 $ 42,925 $ (1,295)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization ...................... 10,108 9,279 9,196
(Provision) benefit for deferred taxes ............. (6,206) (3,071) 1,146
Provision for losses on trade receivables .......... 336 375 381
Provision for write-down of inventory .............. 1,796 1,541 1,563
Provision for litigation and arbitration matters ... 9,000 -- --
Loss from discontinued operation ................... -- 2,468 20,160
Gain on sale of CCD ................................ -- -- (43)
Gain on sale of BizMart ............................ -- (4,276) --
Equity in (earnings) loss of affiliate ............. 15,510 (2,636) (1,028)
Extraordinary item, loss on early repayment of
subordinated debt ............................... -- -- 3,462
Changes in assets and liabilities excluding effects
of business acquisitions and sales:
Accounts receivable ................................ (46,027) (1,489) (4,057)
Inventory .......................................... (110,620) (57,047) (32,223)
Other current assets ............................... 2,159 (10,895) (1,454)
Accounts payable ................................... 132,964 30,204 42,020
Accrued liabilities ................................ 6,224 784 (6,758)
--------- --------- ---------
Net cash provided by operating activities .......... 23,304 8,162 31,070
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ................. (31,709) (154,400) --
Sales and maturities of marketable securities ...... 84,164 93,270 --
Acquisition of property and equipment, net ......... (28,001) (7,402) (4,571)
Purchase of net assets of franchised centers ....... (39,101) -- --
Proceeds from sale of BizMart ...................... -- 275,236 --
Proceeds from sale of CCD .......................... -- -- 2,340
Repayment of note receivable from affiliate ........ -- -- 27,850
Investments in and loans to affiliates ............. (2,162) (10,247) --
Other .............................................. (762) (804) (804)
--------- --------- ---------
Net cash provided by (used for) investing activities (17,571) 195,653 24,815
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of subordinated debt .................... -- (17,500) (12,500)
Common stock repurchased ........................... (48,496) (55,375) (1,806)
Cash dividends paid ................................ (12,523) (77,896) --
Proceeds from exercise of stock options ............ 2,207 21,818 3,249
Proceeds from exercise of warrants ................. -- 570 190
Reduction in capital lease obligations ............. (143) (119) (317)
--------- --------- ---------
Net cash used for financing activities ............. (58,955) (128,502) (11,184)
--------- --------- ---------
Net cash provided by (used for) continuing
operations ...................................... (53,222) 75,313 44,701
Cash used for discontinued operation ............... -- (5,562) (56,693)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . (53,222) 69,751 (11,992)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 122,249 52,498 64,490
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 69,027 $ 122,249 $ 52,498
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTELLIGENT ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE-RELATED DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
IE provides information technology products, services and solutions to its
network of more than 2,500 integrators ("Network"), and to large and small
corporate customers, educational institutions and governmental agencies. As a
leading supplier of premium brand technology products in the United States,
IE provides business solutions to its customers through innovative product
management, sales demand generation programs and logistics services. The
principal products sold by IE include microcomputer systems, workstations,
networking and telecommunications equipment and software. On March 4, 1993,
IE sold BizMart, Inc. ("BizMart") and accordingly, BizMart is treated as a
discontinued operation in the accompanying financial statements (See Note 3).
Unless otherwise indicated, amounts and disclosures referred to herein relate
to continuing operations.
Principles of Consolidation
The consolidated financial statements include the accounts of IE and its
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Definition of Fiscal Year
The fifty-two week periods ended January 28, 1995, January 29, 1994 and
January 30, 1993 are referred to herein as "fiscal 1994," "fiscal 1993" and
"fiscal 1992," respectively.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents comprise IE's cash balances and short-term
investments with an initial maturity of less than ninety days and include
money-market funds, commercial paper and repurchase agreements. Short-term
investments totaled $69,548 and $121,956 at January 28, 1995, and January 29,
1994, respectively. With respect to repurchase agreements, IE requires
specific assignment of securities as collateral for such investments, but
does not take possession of the collateral. The carrying amount of cash,
short-term investments and marketable securities approximates fair market
value due to the short-term maturity of these instruments.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS 115"), Accounting for Certain
Investments in Debt and Equity Securities, effective for fiscal years
beginning after December 15, 1993. FAS 115 requires certain investments in
debt and equity securities be classified into one of three categories:
held-to-maturity, available-for-sale, or trading. IE adopted FAS 115 on
January 30, 1994. Adoption of this statement did not have a material effect
on the financial position or results of operations of IE; however, certain
amounts in the January 29, 1994 Consolidated Balance Sheet have been
reclassified for comparative purposes.
Inventory
Inventory consists of microcomputers, related peripheral products and
software, and is valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are carried at cost. The cost of additions and
improvements is capitalized, while maintenance and repairs are charged to
operations when incurred. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets (three to ten years).
Leasehold improvements are amortized over the shorter of their useful lives
F-7
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
or the remaining lease term. Leases meeting the capitalization requirements of
FAS 13 are capitalized and depreciated over the lease term. Depreciation expense
totaled $5,351 ($1,154 included in cost of goods sold), $4,558 ($783 included in
cost of goods sold) and $3,680 for fiscal 1994, 1993 and 1992, respectively.
Accumulated depreciation totaled $14,791 at January 28, 1995 and $14,872 at
January 29, 1994.
IE 2000 is a project designed to transform IE to a process-driven model.
Certain costs associated with IE 2000, including purchased software, outside
consulting fees for custom software development and related incremental
internal costs are being capitalized and will be amortized over the estimated
useful life of the software. Approximately $8 million was capitalized
pursuant to IE 2000 at January 28, 1995. The project is expected to be
completed by the end of fiscal 1996.
Goodwill
Goodwill, resulting from acquisitions accounted for under the purchase
method, is amortized using the straight-line method generally over a 20-year
period.
Revenue Recognition
Revenue is recognized upon shipment of products or performance of
services. Revenue from the granting of individual franchises is recognized
when all significant obligations have been performed. Revenues and total
operating costs related to company-owned centers were $9,897 and $10,197,
respectively for fiscal 1994 (See Note 2), and $86,223 and $85,212,
respectively, for fiscal 1992 (See Note 4). Funds received from vendors for
marketing programs and product rebates are accounted for as revenue, a
reduction of selling, general and administrative expenses or product cost
according to the nature of the program.
Investment and Other Income
Investment income includes interest and dividend income and realized gains
and losses on marketable securities. Total interest and dividend income was
$4,062, $5,241 and $1,086 for fiscal 1994, fiscal 1993 and fiscal 1992,
respectively.
Income Taxes
IE accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("FAS 109"). Pursuant to FAS 109, deferred tax
assets and liabilities are recorded for temporary differences which enter
into the determination of taxable income in different periods for financial
reporting and income tax purposes.
Earnings (Loss) Per Share
Primary earnings (loss) per share is computed using the weighted average
number of common shares and dilutive common share equivalents outstanding
based on the average market price during the period. The amount of dilution
is computed by application of the treasury stock method. Fully diluted
earnings (loss) per share is computed in substantially the same manner, but
includes the dilutive effect of all issuable shares, based on the market
price at the end of the period, whether or not they are common share
equivalents. Treasury stock transactions are recorded on their trade date and
reduce weighted average shares outstanding from that date.
(2) ACQUISITIONS
On December 30, 1994, IE purchased certain assets of branch locations in five
major-metropolitan cities from TFN, an equity affiliate, member of the Network
and publicly traded company (See Note 4). The aggregate purchase price was
approximately $39,101 and was accounted for by the purchase method. The
aggregate purchase price was allocated to the assets and liabilities assumed
based on their estimated fair market values as follows:
F-8
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(2) ACQUISITIONS -- (Continued)
Accounts receivable ...... $23,000
Inventory ................ 4,936
Property and equipment ... 2,714
Goodwill ................. 8,838
Other assets ............. 13
Other current liabilities.. (400)
-------
Total purchase price ..... $39,101
=======
These locations are operated by TFN under a management agreement. The
acquisition of these locations had no material effect on the consolidated
results of operations in fiscal 1994.
(3) DISCONTINUED OPERATION AND SALE OF BIZMART
On June 19, 1991, IE acquired BizMart, a national chain of office products
supercenters, for an aggregate purchase price of $195,796 including transaction
costs. BizMart operations included the sale of traditional office products,
microcomputers and related equipment. IE accounted for the acquisition using the
purchase method. On March 4, 1993, IE sold BizMart to OfficeMax, Inc.
("OfficeMax") and received a cash payment totaling $275,236, including the
purchase price, as defined, of $269,770 and repayment of other amounts,
consisting principally of intercompany advances after November 28, 1992. The
aggregate sale proceeds less the carrying value of net assets sold and costs
related to the sale resulted in a gain before tax of $5,582. The effective tax
rate for the sale of BizMart varies from the effective tax rate for the
discontinued operation due to differences between the tax bases of assets sold
and their amounts for financial reporting purposes.
Results of BizMart's operations have been reported separately as a
discontinued operation in the accompanying Consolidated Statement of Operations.
BizMart's operating results excluded from continuing operations are summarized
as follows:
Fiscal Fiscal
1993 1992
----------- -----------
Net sales ....................... $60,193 $634,962
Costs and expenses .............. 63,737 662,086
------- --------
Loss before taxes ............... (3,544) (27,124)
Income tax benefit .............. (1,076) (6,964)
-------- --------
Loss from discontinued operation $ (2,468) $(20,160)
======== ========
BizMart was included in the consolidated federal and certain state income
tax returns of IE. For financial reporting purposes, income tax expense
(benefit) was provided on a separate return basis except that the benefit of
net operating losses was measured on a consolidated basis.
(4) SALE OF COMPANY CENTER DIVISION AND INVESTMENTS IN AFFILIATES
On May 15, 1992, IE sold certain assets of its Bellevue, WA center to Random
Access, Inc. ("RA"), a member of the Network and publicly traded company. The
consideration received consisted of $400 cash and 92,500 (as adjusted for a
reverse two-for-one stock split on June 28,1993) newly issued unregistered
shares representing approximately 1% of RA common stock. IE accounts for its
investment in RA common stock as available-for-sale in accordance with FAS 115,
and accordingly, the carrying value is recorded at fair market value with
changes in fair value recorded in shareholders' equity. At January 28, 1995, the
aggregate market value, based on RA's quoted market price, of IE's investment in
RA was approximately $278.
F-9
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(4) SALE OF COMPANY CENTER DIVISION AND INVESTMENTS IN AFFILIATES - (Continued)
On July 2, 1992, IE sold substantially all of the remaining operations of its
Company Center Division ("CCD") to TFN. The consideration received by IE
consisted of 1,638,377 newly issued unregistered shares of TFN Common Stock
valued at $16,589, or $10.12 per share, repayment of intercompany obligations
($27,850), warrants valued at $263 to purchase 184,498 shares of TFN Common
Stock at an average exercise price of $10.06 per share, and a cash payment of
$1,940.
The aggregate sale proceeds from the above transactions less the carrying
value of net assets sold and costs related to the sales resulted in a gain
before tax of $43. An incremental tax charge of approximately $1,700, arising
from differences between the tax bases of assets sold and their amounts for
financial reporting purposes, is included in IE's provision for income taxes for
fiscal 1992.
In March 1993, TFN completed a public offering which reduced IE's equity
interest in TFN to 24.3%. In October 1993, IE purchased an additional 681,447
newly issued unregistered shares of TFN Common Stock raising IE's equity
interest to 31.1%. IE accounts for its investment in TFN using the equity
method. At January 28, 1995, the carrying value of IE's investment in TFN was
approximately $17,852 and the aggregate market value, based on TFN's quoted
market price, was approximately $10,841, which management views as a temporary
decline in value.
Summarized financial information for TFN is as follows:
Fiscal Fiscal
1994 1993
----- ----
Current assets ......... $181,377 $223,850
Non-current assets ..... 48,000 66,709
Current liabilities .... 193,263 132,150
Non-current liabilities 2,825 80,649
Revenues ............... 795,736 701,834
Gross profit ........... 116,946 113,489
Net income (loss) ...... (44,988) 9,303
IE sells products to TFN pursuant to a franchise agreement which expires
in the year 2000. This agreement may be terminated by TFN upon 90 days notice
and payment of certain amounts. During fiscal 1994, 1993 and 1992, sales to
TFN approximated $506,000, $427,000 and $212,000, respectively, representing
approximately 16%, 16% and 10%, respectively, of IE's consolidated revenues
from continuing operations.
On March 6, 1995, IE signed a letter of intent to acquire all the
remaining shares of TFN Common Stock, in a stock-for-stock merger
transaction. Based on the exchange ratio set forth in the letter of intent,
TFN shareholders will receive .6588 shares of IE Common Stock in exchange for
each share of TFN Common Stock. The transaction is subject to the completion
of due diligence, the execution of a definitive agreement and other customary
conditions and approvals, including approval by TFN's shareholders.
(5) CREDIT FACILITIES
On April 18, 1989, IE issued to certain institutional investors Subordinated
Notes in the aggregate principal amount of $30,000 and used net proceeds
therefrom to reduce existing borrowings and for working capital purposes.
Interest on the Subordinated Notes was payable quarterly at 13.25% per annum. On
January 11, 1993 and February 24, 1993, IE prepaid principal of $12,500 and
$17,500, respectively, to retire the Subordinated Notes in full. Pursuant to
terms outlined in the Subordinated Notes Agreement, IE paid accrued interest
F-10
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(5) CREDIT FACILITIES -- (Continued)
and a prepayment premium totaling $4,454 in connection with the early repayment
of the Subordinated Notes. The prepayment premium, together with unamortized
deferred financing costs and loan discount are reflected as an extraordinary
item, net of the related tax benefit, in the Consolidated Statement of
Operations in fiscal 1992.
IE and its subsidiaries have agreements with various lenders and other
creditors to finance product purchases from vendors and for working capital
requirements. Amounts outstanding for inventory financing are included in
accounts payable on the Consolidated Balance Sheet. One such agreement with a
finance company provides a total credit line of $170,000 for both inventory
financing and general working capital requirements. Approximately, $106,800 and
$23,200 were available under this credit line at January 28, 1995 and January
29, 1994, respectively. In connection with these arrangements, such creditors
have a lien on all of IE's assets at January 28, 1995. In addition, certain of
these arrangements impose financial covenants relating to working capital, net
worth, current ratio, liabilities to net worth and earnings.
(6) LEASE OBLIGATIONS
IE has noncancelable operating leases for offices, warehouse facilities, and
equipment that expire over the next ten years. Most of the facilities' leases
include renewal options and certain of the equipment leases have purchase
options. Rent expense recorded for fiscal 1994, fiscal 1993 and fiscal 1992
amounted to $6,020, $3,836, and $3,947, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
Fiscal Year Amount
----------- ------
1995 ........ $ 6,258
1996 ........ 5,056
1997 ........ 4,450
1998 ........ 4,122
1999 ........ 4,122
Thereafter .. 12,979
IE is guarantor of certain real estate leases of BizMart. OfficeMax has
indemnified IE against potential losses which may result pursuant to such
guarantees.
(7) CAPITAL STOCK
On April 18, 1989, in connection with the issuance of the Subordinated Notes
(See Note 5), IE granted warrants for the purchase of 1,200,000 shares of IE
Common Stock at an exercise price of $4.75 per share, exercisable until April
30, 1995, subject to adjustment under certain circumstances. The value of these
warrants ($1,090) was credited to paid-in capital and was charged to interest
expense over the term of the loan. Shares of IE Common Stock have been issued
pursuant to the exercise of 120,000 warrants during fiscal 1993, 40,000 warrants
during fiscal 1992 and the remaining 1,040,000 warrants prior to fiscal 1992.
The Board of Directors of IE has authorized the repurchase of up to 13.6
million shares, in open-market transactions, of IE Common Stock. As of January
28, 1995, IE has repurchased approximately 8.3 million shares at a cost of
approximately $105,677.
F-11
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(7) CAPITAL STOCK -- (Continued)
Stock Options
IE has a non-qualified stock option plan for employees and directors which
permits the granting of options to purchase an aggregate of eight million
shares of IE Common Stock to employees and directors of IE. This plan is
intended to provide an incentive for employees to maximize their efforts and
enhance the success of IE. Options are generally granted at option prices
equivalent to fair market value on the date of grant. The options are
generally exercisable commencing one year after the date of grant in five
equal annual installments (unless otherwise provided in the grant) and expire
six to ten years after the date of grant, subject to earlier termination and
other rules relating to the cessation of employment.
Changes in stock options are summarized as follows:
Number of Option price
shares Range per share
------------- ---------------
Balance outstanding February 1, 1992 . 4,956,400 $ 1.25-$15.50
Granted ........................... 450,000 $10.25-$24.25
Exercised ......................... (278,860) $ 1.25-$11.50
Canceled .......................... (891,240) $ 2.85-$24.25
---------- -------------
Balance outstanding January 30, 1993 . 4,236,300 $ 1.56-$15.50
Granted ........................... 1,014,100 $15.00-$24.88
Exercised ......................... (1,977,160) $ 1.56-$15.50
Canceled .......................... (666,300) $ 5.81-$17.00
---------- -------------
Balance outstanding January 29, 1994.. 2,606,940 $ 2.85-$24.88
Granted ........................... 945,300 $13.25-$24.00
Exercised ......................... (208,070) $ 2.85-$15.50
Canceled .......................... (233,780) $ 7.63-$24.00
---------- -------------
Balance outstanding January 28, 1995 . 3,110,390 $ 5.75-$24.88
========== =============
As of January 28, 1995, there were 972,858 options exercisable under the
employee and director stock option plan at exercise prices ranging from $5.75
to $24.88 per share.
On February 25, 1995, the Board of Directors of IE authorized the
repricing of all outstanding options with exercise prices in excess of $13.25
per share to $13.25 per share. As of that date, 2,067,370 options were
repriced, of which 345,158 were exercisable at January 28, 1995.
IE also has a non-qualified stock option plan which permits the granting
of options to purchase an aggregate of two million shares of IE Common Stock
to franchisees of IE. This plan is intended to reward franchisees'
performance and commitment to IE. Options are generally granted at option
prices equivalent to fair market value on the date of grant. The options are
generally exercisable commencing one year after the date of the grant in five
equal annual installments. The options expire six years after the date of
grant, subject to earlier termination and other rules relating to default
under the terms of the franchise agreement. As of January 28, 1995, there
were 141,635 options outstanding under this plan. Of this amount, 81,915 were
exercisable at prices ranging from $5.81 to $14.75 per share.
IE granted 200,000 options (100,000 each in May 1990 and May 1989) to an
outside advisor to the Board of Directors of IE with the same general terms
and conditions as those in the non-qualified stock option plan for employees
and directors. At January 28, 1995, 100,000 of these options were
outstanding. In addition, 200,000 options were granted to an officer of
BizMart in connection with the June 1991 acquisition, of which 50,000 were
exercised on March 17, 1992 and 150,000 were exercised during fiscal 1993.
F-12
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(7) CAPITAL STOCK - (Continued)
As of January 28, 1995, shares of IE Common Stock are reserved for
issuance for the following purposes:
Shares
------
Exercise of employee and director stock options 4,088,650
Exercise of franchisee stock options ........... 1,933,435
Exercise of other stock options ................ 100,000
-----------
Total .......................................... 6,122,085
===========
In April 1995, IE's Board of Directors adopted the 1995 Long-Term
Incentive Plan, which was subsequently approved by shareholders at the Annual
Shareholders' Meeting held on June 8, 1995, permitting the grant of stock,
stock-related and performance-based awards to employees and directors of IE.
A total of 5 million shares of IE Common Stock have been reserved for grant
under the 1995 Long-Term Incentive Plan.
(8) INCOME TAXES
The provision for income taxes consists of the following:
Current Deferred Total
------- -------- -----
Fiscal 1994
Federal ........... $19,011 $ (5,923) $13,088
State ............. 1,109 (344) 765
------- -------- -------
Total .......... $20,120 $ (6,267) $13,853
======= ======== =======
Fiscal 1993
Federal ........... $24,900 $ (2,916) $21,984
State ............. 2,803 (344) 2,459
------- -------- -------
Total .......... $27,703 $ (3,260) $24,443
======= ======== =======
Fiscal 1992
Federal ........... $12,891 $ 3,191 $16,082
State ............. 813 14 827
------- -------- -------
Total ........... $13,704 $ 3,205 $16,909
======= ======== =======
Deferred income tax balances, and the deferred component of the provision
for income taxes, relate to the following cumulative temporary differences:
January 28, January 29,
1995 1994
------------- -------------
Inventory ........................... $ 2,107 $1,879
Accounts receivable reserves ........ 363 490
Acquisition and sale accruals ....... 2,457 3,378
Employee benefits ................... 851 834
Depreciation ........................ 592 537
Litigation and related contingencies 3,266 --
Other accruals ...................... 1,620 722
------- ------
Deferred tax asset ................. $11,256 $7,840
======= ======
Deferred gain on sale of CCD ........ $ -- $ 989
Equity in earnings of affiliate ..... -- 1,372
Other ............................... -- 429
------- ------
Non-current deferred tax liability . $ -- $2,790
======= ======
F-13
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(8) INCOME TAXES - (Continued)
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
Fiscal Fiscal Fiscal
1994 1993 1992
-------- -------- --------
Federal statutory rate .................... 35.0% 35.0% 34.0%
State income taxes, net of federal benefit 1.4 2.5 1.4
Amortization of intangibles ............... 4.9 2.7 4.6
Basis difference from sale of CCD ......... -- -- 4.6
Tax-exempt investment income .............. (2.0) (2.1) --
Other ..................................... 0.4 0.1 (0.5)
---- ---- ----
39.7% 38.2% 44.1%
==== ==== ====
(9) SUPPLEMENTAL CASH FLOW INFORMATION
IE's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows:
Fiscal Fiscal Fiscal
1994 1993 1992
--------- --------- --------
Details of acquisitions:
Fair value of assets acquired ........... $39,501 -- --
Liabilities assumed ..................... 400 -- --
Details of other investing activities:
Common stock and warrants received from
sale of CCD .......................... -- -- $17,146
Details of other financing activities:
Accrual for repurchase of IE Common Stock -- -- 9,090
Accrual of dividends declared ........... 3,119 $ 2,809 --
Cash paid during the year for:
Interest ................................ 1,518 767 10,099
Income taxes ............................ 19,865 22,833 11,559
(10) MAJOR SUPPLIERS
IE has authorized dealership or distributorship agreements with various
manufacturers. Products from certain of these manufacturers comprised the
following percentages of IE's revenues during fiscal 1994, fiscal 1993 and
fiscal 1992:
Fiscal Fiscal Fiscal
1994 1993 1992
---------- ---------- ----------
IBM Corp. .................. 15% 15% 18%
Compaq Computer Corp. ...... 25% 25% 18%
Apple Computer, Inc. ....... 12% 18% 22%
Hewlett-Packard Company .... 24% 22% 20%
(11) EMPLOYEE BENEFIT PLAN
IE has 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. Until February 1992, IE matched $0.50 for each dollar contributed
by participants subject to certain limitations. Employer matching contributions
were temporarily suspended during fiscal 1992 and were reinstated on February 1,
1993. IE's contributions under the Plan for fiscal 1994, fiscal 1993 and fiscal
1992 were $426, $313 and $162, respectively.
F-14
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(12) COMMITMENTS
IE and its subsidiaries have arrangements with five finance companies which
provide inventory financing facilities for its Network. IE monitors the
financial stability of the finance companies and requires payment within two
days of product shipment. If these arrangements are terminated, IE would have to
develop alternative financing arrangements. In conjunction with these
arrangements, IE has inventory repurchase agreements with the finance companies
that would require it to repurchase certain inventory which might be repossessed
from the Network by the finance companies. To date, such repurchases have been
insignificant.
On October 22, 1993, IE executed a $20 million guarantee to an inventory
finance company on behalf of TFN, which remained outstanding at January 28,
1995.
(13) CONTINGENCIES
In December 1994, several purported class action lawsuits were filed in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action Nos. 94-3753, 94-CV-7410, 94-CV-7388, and 94-CV-7405) against IE and
certain directors and officers; these lawsuits have been consolidated with a
class action lawsuit filed several years ago against IE, certain directors and
officers, and IE's auditors (who are not named in the most recent complaint) in
the United States District Court for the Eastern District of Pennsylvania (Civil
Action No. 92-CV-1905). A purported derivative lawsuit was also filed in
December 1994 in the Court of Common Pleas of Philadelphia County (No. 803)
against IE and certain of its directors and officers. These lawsuits allege
violations of certain disclosure and related provisions of the federal
securities laws and breach of fiduciary duties, including allegations relating
to IE's practices regarding vendor marketing funds, and seek damages in
unspecified amounts as well as other monetary and equitable relief. In addition,
IE is subject to a Securities and Exchange Commission investigation. IE believes
that all such allegations and lawsuits are without merit and intends to defend
against them vigorously. While management of IE, based on its investigation of
these matters and consultations with counsel, believes resolution of these
matters will not have a material adverse effect on IE's financial position, the
ultimate outcome of these matters cannot presently be determined.
In addition, IE is involved in various litigation and arbitration matters in
the ordinary course of business. IE believes that it has meritorious defenses in
and is vigorously defending against all such matters.
During fiscal 1994, based in part on the advice of legal counsel, IE
established a reserve of $9 million in respect of all litigation and arbitration
matters. Although the aggregate amount of the claims may exceed the amount of
the reserve, management believes that the resolution of these matters will not
have a material adverse effect on IE's financial position or results of
operations in any subsequent period.
F-15
<PAGE>
INTELLIGENT ELECTRONICS, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share-related data), (Continued)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for fiscal 1994 and fiscal 1993, is as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Fiscal 1994 Quarter Quarter Quarter Quarter Year
----------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $762,314 $793,274 $831,122 $821,373 $3,208,083
Gross profit .................... 35,467 37,974 25,314 33,986 132,741
Net income (loss) ............... 12,793 2,695 (3,020) (4,408) 8,060
Earnings (loss) per share ....... $ 0.36 $ 0.08 $ (0.09) $ (0.14) $ 0.23
Fiscal 1993
----------------
Revenues ........................ $616,948 $613,245 $675,902 $740,007 $2,646,102
Gross profit .................... 25,785 26,809 30,156 34,110 116,860
Loss from discontinued operation (2,468) -- -- -- (2,468)
Sale of BizMart ................. 6,298 -- -- (2,022) 4,276
Net income ...................... 12,151 9,194 10,851 10,729 42,925
Earnings (loss) per share: ......
Continuing operations ......... $ 0.23 $ 0.26 $ 0.30 $ 0.35 $ 1.13
Discontinued operation ........ (0.07) -- -- -- (0.07)
Sale of BizMart ............... 0.17 -- -- (0.05) 0.12
-------- -------- -------- -------- ----------
Net income .................... $ 0.33 $ 0.26 $ 0.30 $ 0.30 $ 1.18
======== ======== ======== ======== ==========
</TABLE>
The sum of the quarterly net earnings per share amounts does not equal the
annual amount reported, as per share amounts are computed independently for
each quarter and for the full year based on respective weighted average
common shares and share equivalents outstanding.
The results of operations for the third quarter of 1994 include a pre-tax
charge of $5 million relating to an inventory related write-off and
approximately $9 million of costs incurred in connection with the elimination
of certain peripheral ventures and the implementation of IE 2000. The results
of operations for the fourth quarter of 1994 include a pre-tax charge of $9
million to establish a reserve in respect of all litigation and arbitration
matters.
F-16
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
FISCAL 1994 COMPARED TO FISCAL 1993
Revenues for the year ended January 28, 1995 ("fiscal 1994") were $3.2
billion compared to $2.6 billion for the year ended January 29, 1994 ("fiscal
1993"), representing an increase of 21%. The addition of new network
integrators, continued demand from existing network integrators for premium
brand name and advanced technology products and industry growth were
primarily responsible for the increase in revenues. However, IE believes that
operating inefficiencies caused by systems stresses and outages, discussed
below, during the last half of fiscal 1994 caused a loss of potential sales.
Gross profit as a percentage of revenues decreased to 4.1% for fiscal 1994
compared to 4.4% for fiscal 1993. The decrease in gross margin percent is
primarily attributable to intensified competitive pricing pressures as
certain manufacturers expanded their distribution channels and the impact of
management information systems stresses and outages, offset in part as a
result of taking advantage of purchasing and early payment discount
opportunities and by the higher volume of revenues generated from higher
margin advanced technology products. The systems-related stresses and outages
were caused by the cumulative effect of operating out of multiple warehouses,
the addition of new vendors and SKU's and the expansion of on-line services
to IE's network integrators. This resulted in reduced customer service levels
and unfavorably impacted gross margins as IE reduced prices to customers,
incurred inventory losses, and incurred additional freight costs to expedite
shipments. Although IE does not expect the inventory-related losses to recur,
it believes that the other factors adversely impacting gross margins are
likely to continue for the foreseeable future.
Selling, general and administrative expenses increased to $96.2 million
(3.0% of revenues) for fiscal 1994 from $52.5 million (2.0% of revenues) for
fiscal 1993. The increase was primarily due to costs to service the higher
volume of revenues and to support new programs, vendors and SKU's; systems
stresses and outages and related inefficiencies; a $9 million reserve for
litigation and arbitration matters; and approximately $9 million of costs
incurred in connection with the elimination of certain peripheral ventures
noted below and the implementation of IE 2000, including costs associated
with personnel reductions, closing and consolidating facilities, relocating
personnel and consultant fees. IE 2000 is a project designed to transform IE
to a process-driven model. IE expects future annualized cost savings of
approximately $10 million as a result of IE 2000 together with the
elimination of certain peripheral ventures. IE expects costs associated with
the transformation project and operating inefficiencies to continue through
the middle of fiscal 1995.
During fiscal 1994, IE closed its cable television programming operation,
discontinued its direct fulfillment agreement with a third-party and sold
substantially all of its wireless telecommunications operation. In fiscal
1994 and fiscal 1993, revenues from these eliminated peripheral ventures were
less than 1% of consolidated revenues and operating losses were $4.3 million
and $1.3 million, respectively. These eliminations were substantially
completed in the fourth quarter of fiscal 1994.
Investment and other income decreased from fiscal 1993 to fiscal 1994
primarily due to less investable cash as a result of the use of IE's
available cash for payment of cash dividends and repurchases of IE Common
Stock. Interest expense increased as IE used its available inventory
financing arrangements to finance inventory purchases.
During fiscal 1994, TFN announced the implementation of a company-wide
restructuring, which included the closing and consolidation of duplicate
facilities. For fiscal 1994, IE recognized an after-tax loss of $13 million
as its equity in TFN's net loss compared to after-tax income of $1.7 million
for fiscal 1993 (See Note 4 to the consolidated financial statements).
F-17
<PAGE>
IE's effective tax rate increased to 39.7% for fiscal 1994 compared to
38.2% for fiscal 1993. The impact of non-deductible goodwill amortization on
lower pre-tax earnings, partially offset by a reduction in IE's effective
state tax rate, was primarily responsible for this increase.
IE does not expect significant revenue growth in fiscal 1995 as it
continues to concentrate on increasing product margins and upgrading systems.
Gross profit and selling, general and administrative expenses are expected to
increase both in amount and as a percentage of revenues if IE's proposed
acquisition of TFN is completed (See Note 4).
FISCAL 1993 COMPARED TO FISCAL 1992
Revenues increased 31% to $2.6 billion in fiscal 1993 from $2 billion for
the year ended January 30, 1993 ("fiscal 1992"). The increase was due
primarily to the addition of new network members and increased revenues from
existing members led by continued strong demand for premium computers and
peripherals, despite the inability of certain manufacturers to supply certain
products, offset in part by the sale of the Company Center Division ("CCD")
in May and July 1992 (See Note 4).
Gross profit as a percentage of revenues for fiscal 1993 was 4.4% compared
to 5.1% for fiscal 1992. This decline was primarily attributable to the sale
of CCD which realized higher gross margins than IE realizes on wholesale
revenues and continued competitive pressures throughout the microcomputer
industry. IE reported fourth quarter gross margin percent of 4.6% as gross
margin percent increased throughout fiscal 1993 as a result of taking
advantage of purchasing opportunities and the introduction of new services
and programs.
Selling, general and administrative expenses decreased and as a percentage
of revenues declined from 2.6% in fiscal 1992 to 2.0% in fiscal 1993. The
elimination of costs related to CCD (which had proportionately higher
operating costs than those associated with wholesale operations) in July 1992
accounted for most of the reduction, offset by cost increases to service the
larger network, higher volume of revenues and new programs. These increases
were at a lower rate than the growth in revenues causing the decline in
selling, general and administrative expenses as a percentage of revenues.
Amortization of intangibles decreased in fiscal 1993 compared to fiscal
1992 due to the elimination of goodwill included in CCD's net assets sold to
TFN.
Investment and other income was $5.1 million in fiscal 1993 compared to
$0.5 million in fiscal 1992. This increase was due primarily to income earned
on investing the proceeds from the sale of BizMart. Interest expense
decreased primarily as a result of the early repayment of the Subordinated
Notes in January and February 1993 and the reduced use of inventory
financing.
IE's equity interest in earnings of its affiliate increased to $1.7
million from $0.7 million. This increase was due to the inclusion of the
Company's equity in TFN's earnings for a full year and increased earnings by
TFN in fiscal 1993.
The effective tax rate for fiscal 1993 was 38.2% compared to 44.1% in
fiscal 1992. Higher pre-tax earnings and tax-exempt investment income in
fiscal 1993 and the impact of the incremental tax charge related to the sale
of CCD in fiscal 1992, offset by a rise in IE's effective state tax rate,
were primarily responsible for the decrease.
Income from continuing operations for fiscal 1993 was $41.1 million
compared to $22.1 million for fiscal 1992 due to the factors described above.
RESULTS OF DISCONTINUED OPERATION AND SALE OF BIZMART
As discussed more fully in Note 3 to the consolidated financial
statements, on June 19, 1991, IE acquired BizMart, a national chain of office
products supercenters, which operated in a separate industry segment from the
Company's other subsidiaries. On March 4, 1993, IE completed the sale of
BizMart to OfficeMax, Inc. Accordingly, results of BizMart's operations are
classified as a discontinued operation.
F-18
<PAGE>
During fiscal 1993, BizMart operations resulted in pre-tax losses totaling
$3.5 million compared to pre-tax losses of $27.1 million in fiscal 1992.
Contributing to such losses were adjustments to the carrying value of certain
assets, including inventory repurchased from franchisees.
LIQUIDITY AND CAPITAL RESOURCES
IE has financed its growth to date from stock offerings, bank and
subordinated borrowings, inventory financing and internally generated funds.
The principal uses of its cash have been to fund its accounts receivable and
inventory, make acquisitions, repurchase IE Common Stock and pay cash
dividends.
During fiscal 1994, cash generated from operating activities totaled $23.3
million compared to $8.2 million in fiscal 1993. At January 28, 1995, IE had
cash and cash equivalents of $69.0 million ($122.2 million at January 29,
1994) and marketable securities available for sale totaling $8.4 million
($61.1 million at January 29, 1994). Working capital totaled $31.9 million at
January 28, 1995 compared to $105.3 million at January 29, 1994. This
decrease is primarily a result of IE Common Stock repurchases and dividends
during the year. New financing programs offered by IE and its expanded
selection and higher levels of inventory have increased working capital
requirements. During fiscal 1994, days sales in accounts receivable averaged
4.5 days (1.9 days in fiscal 1993) and inventory turnover averaged 8.4 times
(11.8 times in fiscal 1993). The increase in accounts receivable from January
29, 1994 to January 28, 1995 is due primarily to the acquisition of certain
branch locations from TFN and the extension of credit to IE's Network and
end-users. IE expects accounts receivable to increase as IE continues to
extend credit to its network and end-users. IE may outsource some of its
financing programs which could slow the growth or reduce the level of
accounts receivable. IE also has a $170 million financing agreement with a
finance company. At January 28, 1995, IE had $106.8 million available from
this facility. On October 22, 1993, IE executed a $20 million guarantee to an
inventory finance company on behalf of TFN. This guarantee remained in place
at January 28, 1995.
On January 27, 1995, the Board of Directors declared a cash dividend of
$0.10 per share to shareholders of record on February 15, 1995, which was
paid on March 1, 1995. During fiscal 1994, IE declared cash dividends
totaling $0.38 per share.
The Board of Directors has authorized the repurchase, in open-market
transactions, of up to 13.6 million shares of IE Common Stock. As of January
28, 1995, IE had repurchased approximately 8.3 million shares at a cost of
approximately $105.7 million, of which approximately 4.1 million shares were
repurchased at a cost of approximately $48.5 million during fiscal 1994.
IE's transformation project, IE 2000, is expected to be completed by the
end of fiscal 1996 and is estimated to cost approximately $40 million,
primarily due to upgrades in its management information systems, including
costs of approximately $8 million through January 28, 1995.
Based on IE's current level of operations and capital expenditure
requirements, management believes that IE's cash and marketable securities,
internally generated funds and available financing arrangements and
opportunities will be sufficient to meet IE's cash requirements for the
current fiscal year and at least through the end of fiscal 1996.
INFLATION AND SEASONALITY
IE believes that inflation has not had a material impact on its operations
or liquidity to date. IE's financial performance does not exhibit significant
seasonality, although certain computer product lines follow a seasonal
pattern with peaks occurring near the end of the calendar year.
F-19
<PAGE>
SCHEDULE VIII
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JANUARY 30, 1993, JANUARY 29, 1994 AND JANUARY 28, 1995
<TABLE>
<CAPTION>
Additions
----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions/ end
Description of period expenses accounts write-offs of period
-------------------------------- ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended January 30, 1993 .. $602,000 $381,000 -- ($750,000) $233,000
======== ======== ========= ========= ========
Year ended January 29, 1994 .. $233,000 $375,000 -- ($210,000) $398,000
======== ======== ========= ========= ========
Year ended January 28, 1995 .. $398,000 $336,000 -- ($436,000) $298,000
======== ======== ========= ========= ========
</TABLE>
F-20
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
April 29, January 28,
1995 1995
----------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................... $ 69,299 $ 69,027
Marketable securities available for sale ................ 8,851 8,398
Accounts receivable, net ................................ 94,120 77,890
Inventory ............................................... 340,757 364,606
Prepaid expenses and other current assets ............... 4,457 3,973
Deferred income taxes ................................... 11,684 11,256
--------- ---------
Total current assets ................................... 529,168 535,150
Property and equipment .................................... 46,000 36,463
Intangible assets, primarily goodwill, net ................ 73,629 71,693
Investments in affiliates ................................. 15,662 18,692
Other assets .............................................. 8,468 8,776
--------- ---------
Total assets ........................................... $ 672,927 $ 670,774
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ........................................ $ 465,174 $ 467,109
Accrued liabilities ..................................... 37,713 36,181
--------- ---------
Total current liabilities .............................. 502,887 503,290
--------- ---------
Commitments and contingencies ............................. -- --
Shareholders' equity:
Common stock $.01 par value per share:
Authorized 100,000,000 shares, issued and outstanding:
39,573,549 and 39,519,949 shares .................... 396 395
Additional paid-in capital .............................. 221,713 221,312
Treasury stock .......................................... (105,677) (105,677)
Retained earnings ....................................... 53,508 51,758
Unrealized holding gain (loss) on securities and
investments .......................................... 100 (304)
--------- ---------
Total shareholders' equity ............................. 170,040 167,484
--------- ---------
Total liabilities and shareholders' equity ............ $ 672,927 $ 670,774
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
--------------------------
April 29, April 30,
1995 1994
----------- -----------
<S> <C> <C>
Revenues ................................................................ $827,439 $762,314
Cost of goods sold ...................................................... 789,764 726,847
-------- --------
Gross profit .......................................................... 37,675 35,467
-------- --------
Operating expenses:
Selling, general and administrative expenses .......................... 26,818 15,248
Amortization of intangibles, primarily goodwill ....................... 1,293 1,180
-------- --------
Total operating expenses ............................................. 28,111 16,428
-------- --------
Income from operations .................................................. 9,564 19,039
Other income (expense):
Investment and other income, net ...................................... 498 1,096
Interest expense ...................................................... (988) (164)
-------- --------
Income before provision for income taxes and equity in earnings (loss) of
affiliate ............................................................. 9,074 19,971
Provision for income taxes .............................................. 3,938 7,572
-------- --------
Income before equity in earnings (loss) of affiliate .................... 5,136 12,399
Equity in earnings (loss) of affiliate (net of tax expense of $0 and
$232) ................................................................. (246) 394
-------- --------
Net income .............................................................. $ 4,890 $ 12,793
======== ========
Income per common share ................................................. $ 0.16 $ 0.36
======== ========
Dividends declared per share ............................................ $ 0.10 $ 0.08
======== ========
Weighted average number of common shares and share equivalents
outstanding: .......................................................... 31,366 36,034
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
--------------------------
April 29, April 30,
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 4,890 $ 12,793
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization ....................... 3,254 2,223
Provision for deferred taxes ........................ (428) 796
Provision for losses on trade receivables ........... 228 27
Provision for write-down of inventory ............... 486 88
Equity in (earnings) loss of affiliate .............. 246 (626)
Changes in assets and liabilities:
Accounts receivable ............................... (16,458) (12,856)
Inventory ......................................... 23,363 (55,444)
Other current assets .............................. (194) (3,176)
Accounts payable .................................. (1,935) 51,901
Accrued liabilities ............................... 1,511 6,183
-------- --------
Net cash provided by operating activities .............. 14,963 1,909
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ..................... -- (18,669)
Sales and maturities of marketable securities .......... -- 35,000
Acquisitions of property and equipment, net of disposals (11,499) (2,670)
Other .................................................. (475) --
-------- --------
Net cash provided by (used for) investing activities ... (11,974) 13,661
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid .................................... (3,119) (2,809)
Proceeds from exercise of stock options ................ 402 632
Reduction in capital lease obligations ................. -- (36)
-------- --------
Net cash used for financing activities ................. (2,717) (2,213)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 272 13,357
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 69,027 122,249
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 69,299 $135,606
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
INTELLIGENT ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statement information included herein is unaudited
but, in the opinion of management, reflects all adjustments necessary for a fair
statement of the results for the interim periods presented. Such adjustments are
of a normal, recurring nature. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
IE's Annual Report on Form 10-K for the year ended January 28, 1995.
(2) INVESTMENTS IN AFFILIATES
IE has an investment in TFN, a member of the Network and publicly traded
company, which is accounted for by the equity method. For the quarter ended
April 29, 1995, IE recognized a loss of $246 as its proportionate share of TFN's
net loss. As of April 29, 1995, the carrying value of the TFN Common Stock was
approximately $14,870 and the aggregate market price, based on TFN's quoted
market price, was approximately $12,892, which management views as a temporary
decline in value.
On April 28, 1995, IE executed an Agreement and Plan of Merger (the
"Agreement") to acquire all of the remaining shares of TFN, in a stock-for-stock
merger transaction. The Agreement provides for the conversion of each
outstanding share of TFN Common Stock (other than shares held by dissenting
shareholders, shares held by TFN or any of its subsidiaries and shares held by
IE or any of its subsidiaries) into 0.6588 shares of IE Common Stock. The
conversion number is subject to a possible adjustment based on the market price
of IE Common Stock. The transaction is subject to the satisfaction of customary
closing conditions, including registration of the shares of IE Common Stock to
be issued in the merger with the Securities and Exchange Commission and receipt
of third party and governmental approvals, including approval of the merger by
shareholders of TFN.
Summarized financial information for TFN for the quarters ended March 31,
1995 and 1994, is as follows:
March 31, March 31,
1995 1994
----------- -----------
Revenues ......... $151,995 $193,688
Gross profit ..... 26,971 29,002
Net income (loss) (566) 1,024
IE also has an investment in Random Access, Inc. ("RA"), a network member
and publicly-traded company. IE accounts for this investment as
available-for-sale in accordance with FAS 115, and accordingly, the carrying
value of the RA common stock is recorded at fair market value with changes in
fair value recorded in shareholders' equity. At April 29, 1995, the aggregate
market value of IE's investment, based on RA's quoted market price of $2.56
per share, was approximately $237. In May 1995, RA announced that it was
being acquired by an unrelated third party for $3.50 per share. In June 1995,
RA announced a reduction in the acquisition price to $3.25 per share. The
original cost of IE's investment in RA was $3.18 per share.
(3) COMMON STOCK DIVIDENDS
On April 27, 1995, the Board of Directors declared a $0.10 per share cash
dividend to shareholders of record on May 15, 1995, which was paid on June 1,
1995.
On March 1, 1995, IE paid the $0.10 per share cash dividend which was
declared on January 27, 1995.
On May 4, 1994, the Board of Directors declared an $0.08 per share cash
dividend to shareholders of record on May 18, 1994, which was paid on June 1,
1994.
On March 1, 1994, IE paid the $0.08 per share cash dividend which was
declared on February 1, 1994.
F-24
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share-related data)
(unaudited), (Continued)
(4) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three-month periods ended April 29, 1995 and April
30, 1994 included interest of $889 and $377, respectively, and income taxes of
$19 and $1,810, respectively.
In February 1994, IE entered into a capital lease obligation for computer
equipment totaling $181.
(5) CONTINGENCIES
In December 1994, several purported class action lawsuits were filed in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action Nos. 94-3753, 94-CV-7410, 94-CV-7388 and 94-CV-7405) against IE and
certain directors and officers; these lawsuits have been consolidated with a
class action lawsuit filed several years ago against IE, certain directors and
officers, and IE's auditors (who are not named in the most recent complaint) in
the United States District Court for the Eastern District of Pennsylvania (Civil
Action No. 92-CV-1905). A purported derivative lawsuit was also filed in
December 1994 in the Court of Common Pleas of Philadelphia County (No. 803)
against IE and certain of its directors and officers. These lawsuits allege
violations of certain disclosure and related provisions of the federal
securities laws and breach of fiduciary duties, including allegations relating
to the Company's practices regarding vendor marketing funds, and seek damages in
unspecified amounts as well as other monetary and equitable relief. In addition,
IE is subject to a Securities and Exchange Commission investigation. IE believes
that all such allegations and lawsuits are without merit and intends to defend
against them vigorously. While management of IE, based on its investigation of
these matters and consultations with counsel, believes resolution of these
matters will not have a material adverse effect on IE's financial position, the
ultimate outcome of these matters cannot presently be determined.
In addition, IE is involved in various litigation and arbitration matters in
the ordinary course of business. IE believes that it has meritorious defenses in
and is vigorously defending against all such matters.
During fiscal 1994, based in part of the advice of legal counsel, IE
established a reserve of $9 million in respect of all litigation and arbitration
matters. Although the aggregate amount of the claims may exceed the amount of
the reserve, management believes that the resolution of these matters will not
have a material adverse effect on IE's financial position or results of
operations in any subsequent period.
F-25
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 29, 1995 COMPARED TO QUARTER ENDED APRIL 30, 1994
Revenues increased 9% to $827.4 million for the quarter ended April 29,
1995 compared to $762.3 million for the quarter ended April 30, 1994. The
increase was due primarily to the addition of new members to the network,
revenues generated by IE's branch locations, which were acquired in December
1994, and industry growth.
Gross profit as a percentage of revenues for the quarter ended April 29,
1995 was 4.6% compared to 4.7% for the quarter ended April 30, 1994. The
decrease in gross margin percent was due primarily to intensified competitive
pricing pressures as certain manufacturers expanded their distribution
channels, and was offset in part by higher gross margins realized by IE's
branch locations. Competitive pressures and their impact on margins are
expected to continue in the future.
During fiscal year 1994 IE experienced system stresses and outages which
adversely impacted gross margin. Management has taken and continues to take
actions including consolidating warehouses and upgrading existing and
implementing new management information systems and believes these actions
will mitigate the system stresses and outages and their impact on gross
margin by the end of fiscal 1995.
Selling, general and administrative expenses increased from $15.2 million
for the quarter ended April 30, 1994 to $26.8 million for the quarter ended
April 29, 1995. Costs increased as a result of IE's acquisition of the branch
locations, servicing the higher volume of revenues and larger network,
supporting new programs, vendors and SKU's, certain operating inefficiencies
and costs associated with IE 2000 (a project designed to transform IE to a
process-driven operating model). IE expects recurring costs associated with
IE 2000 and operating inefficiencies through the middle of fiscal 1995.
Investment and other income declined for the quarter ended April 29, 1995
when compared to the quarter ended April 30, 1994. This decline can be
primarily attributable to the use of available cash during fiscal 1994 for
the payment of cash dividends, share repurchases, the acquisition of certain
assets of branch locations from TFN and capital expenditures. Interest
expense increased for the quarter ended April 29, 1995 as IE used its
available financing arrangements for working capital needs.
IE's effective tax rate increased from 37.9% for the quarter ended April
30, 1994 to 43.4% for the quarter ended April 29, 1995. Factors primarily
responsible for this increase during the quarter ended April 29, 1995 were
the effect of non-deductible goodwill amortization on lower pre-tax earnings,
decreased tax-exempt investment income and a change in IE's effective state
tax rate.
Net income decreased to $4.9 million for the quarter ended April 29, 1995
compared to $12.8 million for the quarter ended April 30, 1994, for the
reasons outlined above.
As it is upgrading its management information systems, IE is putting more
focus on growing revenues, which could increase pressures on gross margins.
Gross profit and selling, general and administrative expenses are expected to
increase both in amount and as a percentage of revenues as a result of IE's
branch locations and if the proposed acquisition of TFN is completed.
LIQUIDITY AND CAPITAL RESOURCES
IE has financed its growth to date from stock offerings, bank and
subordinated borrowings, inventory financing and internally generated funds.
The principal uses of its cash have been to fund its accounts receivable and
inventory, make acquisitions, repurchase common stock and pay cash dividends.
F-26
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Continued
During the quarter ended April 29, 1995, IE's operating activities
generated $15.0 million in cash. At April 29, 1995 IE had cash, cash
equivalents and marketable securities totaling $78.2 million ($77.4 million
at January 28, 1995). Working capital totaled $26.3 million at April 29, 1995
compared to $31.9 million at January 28, 1995. The increase in accounts
receivable from January 28, 1995 is primarily due to higher receivables from
certain finance companies and from IE's branch locations. IE expects accounts
receivable to continue to increase as it extends credit to its network and
end-users. IE may outsource some of its financing programs which could slow
the growth or reduce the level of accounts receivable. IE has a $170 million
financing agreement with a finance company. At April 29, 1995, IE had
approximately $83.8 million available from this facility. IE's $20 million
guarantee to an inventory finance company on behalf of TFN remained in place
at April 29, 1995.
During the quarter ended April 29, 1995, IE paid the quarterly cash
dividend of $0.10 per share which was declared on January 27, 1995. On April
27, 1995, IE's Board of Directors declared a dividend of $0.10 per share to
shareholders of record on May 15, 1995, which was paid on June 1, 1995.
The Board of Directors has authorized the repurchase, in open-market
transactions, of up to 13.6 million shares of IE Common Stock. As of April
29, 1995, IE had repurchased approximately 8.3 million shares at a cost of
approximately $105.7 million.
IE's transformation project, IE 2000, is expected to be completed by the
end of fiscal 1996 and is estimated to cost up to $40 million, primarily due
to upgrades in its management information systems, including costs of
approximately $14 million through April 29, 1995.
Based on IE's current level of operations, capital expenditure
requirements and the anticipated cash needs for the repayment of TFN's bank
debt and the integration of TFN's operations following its acquisition by IE,
management believes that IE's cash and marketable securities,
internally-generated funds, and available financing arrangements and
opportunities will be sufficient to meet IE's cash requirements for the
current fiscal year and at least through the end of fiscal 1996.
INFLATION AND SEASONALITY
IE believes that inflation has not had a material impact on its operations
or liquidity to date. IE's financial performance does not exhibit significant
seasonality, although certain computer product lines have displayed a
seasonal pattern with peaks occurring near the end of the calendar year.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
THE FUTURE NOW, INC.:
We have audited the accompanying consolidated balance sheets of The Future
Now, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1994. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as of and for each of the years
in the three-year period ended December 31, 1994. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Future Now, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Cincinnati, Ohio
March 23, 1995
F-28
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Receivables:
Trade ..................................................... $ 98,451,119 $157,690,943
Due from Intelligent Electronics, Inc. .................... 19,579,190 1,708,122
Other ..................................................... 19,143,376 8,476,452
------------ ------------
137,173,685 167,875,517
Allowance ................................................. (1,437,412) (1,117,941)
------------ ------------
135,736,273 166,757,576
Inventories .................................................. 44,075,416 54,649,992
Prepayments and Other ........................................ 1,565,688 2,442,331
------------ ------------
Total Current Assets ................................. 181,377,377 223,849,899
------------ ------------
Property and Equipment ......................................... 14,884,796 11,282,958
Accumulated Depreciation ..................................... (3,849,482) (3,130,581)
------------ ------------
Property and Equipment, Net .......................... 11,035,314 8,152,377
------------ ------------
Intangible Assets, Net ......................................... 32,681,359 48,950,786
Long-Term Receivable, Net of Current Portion ................... -- 8,169,314
Other Assets ................................................... 4,283,055 1,436,351
------------ ------------
Total Assets ................................................... $229,377,105 $290,558,727
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-Term Debt .............................................. $ 39,927,060 $ --
Current Portion of Long-Term Debt ............................ 687,964 588,897
Accounts Payable (net of receivable from Intelligent
Electronics, Inc. for returned product of $6.3 million and
$3.6 million as of December 31, 1994 and 1993,
respectively) ............................................. 129,893,674 113,143,956
Accrued Expenses ............................................. 20,964,525 17,756,615
Deferred Income and Other .................................... 1,789,909 660,968
------------ ------------
Total Current Liabilities ............................ 193,263,132 132,150,436
------------ ------------
Long-Term Liabilities
Long-Term Debt ............................................... 560,275 75,397,856
Deferred Income Taxes ........................................ -- 5,251,187
Other ........................................................ 2,264,284 --
------------ ------------
Total Long-Term Liabilities .......................... 2,824,559 80,649,043
------------ ------------
Shareholders' Equity
Common Stock-no par value-20,000,000 shares authorized;
7,578,566 shares issued and outstanding in 1994 and
7,473,666 shares in 1993 .................................. 58,215,267 57,697,549
Retained Earnings (Accumulated Deficit) ...................... (24,925,853) 20,061,699
------------ ------------
Total Shareholders' Equity ........................... 33,289,414 77,759,248
------------ ------------
Total Liabilities and Shareholders' Equity ..................... $229,377,105 $290,558,727
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
--------------- -------------- --------------
<S> <C> <C> <C>
Revenue
Sales-Equipment and Supplies ................ $682,637,970 $599,151,597 $283,201,725
Sales-Software .............................. 53,683,668 45,653,742 33,201,185
Services Income ............................. 59,414,683 34,470,370 14,899,885
Repair Services ............................. -- 22,558,519 11,696,835
------------ ------------ ------------
795,736,321 701,834,228 342,999,630
------------ ------------ ------------
Cost of Sales
Equipment and Supplies (including
approximately $548.1 million, $388.1
million and $172.9 million purchased from
Intelligent Electronics, Inc. in 1994,
1993 and 1992, respectively) ............. 626,447,257 541,253,012 249,260,398
Other (including approximately $28.9 million,
$20.4 million and $9.1 million purchased
from Intelligent Electronics, Inc. in
1994, 1993 and 1992, respectively) ....... 52,343,241 47,092,571 33,805,654
------------ ------------ ------------
678,790,498 588,345,583 283,066,052
------------ ------------ ------------
Gross Profit ................................ 116,945,823 113,488,645 59,933,578
------------ ------------ ------------
Operating Expenses
Selling ..................................... 34,117,129 32,050,079 19,365,927
Service ..................................... 39,454,411 30,919,338 13,371,262
Warehouse ................................... 2,481,685 2,063,706 1,545,001
General and Administrative .................. 42,316,030 29,052,686 14,836,472
Restructuring ............................... 33,000,000 -- --
Goodwill Impairment ......................... 6,984,642 -- --
------------ ------------ ------------
158,353,897 94,085,809 49,118,662
------------ ------------ ------------
Income (Loss) From Operations ............... (41,408,074) 19,402,836 10,814,916
Other Income (Expense):
Interest .................................... (8,319,160) (3,554,255) (1,505,330)
Gain on Sale of Branches to Intelligent
Electronics, Inc. ........................ 2,472,271 -- --
------------ ------------ ------------
(5,846,889) (3,554,255) (1,505,330)
------------ ------------ ------------
Income (Loss) Before Income Taxes (Benefit) . (47,254,963) 15,848,581 9,309,586
Income Taxes (Benefit) ........................ (2,267,411) 6,546,000 3,601,000
------------ ------------ ------------
Net Income (Loss) ........................... $(44,987,552) $ 9,302,581 $ 5,708,586
============ ============ ============
Weighted Average Shares Outstanding ........... 7,548,721 6,649,391 4,497,205
============ ============ ============
Earnings (Loss) Per Share ..................... $ (5.96) $ 1.40 $ 1.27
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-30
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
---------------------------- (Accumulated
Shares Amount Deficit)
----------- ------------- -------------
<S> <C> <C> <C>
Balance--December 31, 1991 ....................... 3,614,717 $15,541,857 $ 5,050,532
Acquisition of Businesses:
Company Center Division of Intelligent
Electronics, Inc. ......................... 1,638,377 16,383,770 --
Evergreen Systems, Inc. ..................... 15,000 153,750 --
Net Income ..................................... -- -- 5,708,586
----------- ----------- ------------
Balance--December 31, 1992 ....................... 5,268,094 32,079,377 10,759,118
Public Offering ................................ 1,467,500 16,698,649 --
Private Offering to Intelligent Electronics,
Inc. ........................................ 681,447 8,748,076 --
Restricted Stock, Net of Unearned Compensation . 35,000 56,875 --
Exercise of Warrants ........................... 21,625 114,572 --
Net Income ..................................... -- -- 9,302,581
----------- ----------- ------------
Balance--December 31, 1993 ....................... 7,473,666 57,697,549 20,061,699
Restricted Stock, Net of Unearned Compensation . 40,000 222,639 --
Exercise of Warrants:
Intelligent Electronics, Inc. ............... 24,200 99,468 --
Other ....................................... 41,200 203,041 --
Treasury Stock ................................. (500) (7,430) --
Net Loss ....................................... -- -- (44,987,552)
----------- ----------- ------------
Balance--December 31, 1994 ....................... 7,578,566 $58,215,267 $(24,925,853)
========== =========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-31
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Receipts from Customers ........................... $ 853,034,759 $ 626,911,397 $ 294,722,915
Payments to Suppliers and Employees ............... (843,516,984) (635,614,811) (293,179,366)
Income Taxes Refunded (Paid) ...................... 1,577,271 (1,413,885) (2,819,608)
Interest Paid ..................................... (7,255,553) (3,439,030) (1,166,950)
------------- ------------- -------------
Net Cash Provided (Used) by Operating
Activities ........................... 3,839,493 (13,556,329) (2,443,009)
------------- ------------- -------------
Cash Flows from Investing Activities
Acquisitions of Businesses, Net of Cash Acquired .. (636,999) (31,574,500) (21,576,078)
Purchases of Property and Equipment ............... (3,253,618) (3,978,426) (968,610)
Sales of Property and Equipment ................... 405,800 120,393 44,016
Proceeds from Sale of Branches to Intelligent
Electronics, Inc. .............................. 34,161,696 -- --
------------- ------------- -------------
Net Cash Provided (Used) by Investing
Activities ........................... 30,676,879 (35,432,533) (22,500,672)
--------------- --------------- ---------------
Cash Flows from Financing Activities
Stock Offerings, Net of Expenses .................. -- 25,446,725 --
Borrowings (Repayments), Net ...................... (34,811,451) 23,427,565 24,046,467
Proceeds from Exercise of Stock Options and
Warrants ....................................... 295,079 114,572 --
------------- ------------- -------------
Net Cash Provided (Used) by Financing
Activities ........................... (34,516,372) 48,988,862 24,046,467
------------- ------------- -------------
Net Decrease in Cash ................................ -- -- (897,214)
Cash -- beginning of year ......................... -- -- 897,214
------------- ------------- -------------
Cash -- end of year ............................... $ -- $ -- $ --
============= ============= =============
Reconciliation of Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities
Net Income (Loss) ................................. $ (44,987,552) $ 9,302,581 $ 5,708,586
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (Used) by Operating Activities:
Restructuring ................................ 33,000,000 -- --
Goodwill Impairment .......................... 6,984,642 -- --
Depreciation and Amortization ................ 4,529,767 4,361,708 2,235,219
Deferred Income Taxes ........................ (3,651,411) 6,946,000 2,089,000
Provision for Loss on Inventories ............ 2,500,000 -- --
Provision for Loss on Receivables ............ 2,219,184 801,516 270,831
Gain on Sale of Branches to Intelligent
Electronics, Inc. ......................... (2,472,271) -- --
Changes in Assets and Liabilities (Net of
Effects of Acquisitions, Restructuring and
Sale of Branches to Intelligent Electronics,
Inc.):
Decrease (Increase) in:
Receivables ............................... 18,836,598 (41,379,969) (17,266,792)
Inventories ............................... (21,644,690) (19,142,716) (10,815,846)
Prepayments and Other ..................... (579,207) 377,782 (762,576)
Other Assets .............................. 197,890 (803,917) (1,169,212)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses ..... 7,561,822 26,143,806 17,756,432
Deferred Income and Other ................. 1,344,721 (163,120) (488,651)
------------- ------------- -------------
Net Cash Provided (Used) by Operating Activities .... $ 3,839,493 $ (13,556,329) $ (2,443,009)
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-32
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT TRANSACTIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Significant transactions affecting TFN and its consolidated financial
statements include the following:
o Execution in March 1995 of a letter of intent for TFN to merge with IE
(a related party, see Note 13).
o Sale in 1994 of certain branch assets to IE and recognition of gain on
sale (see Note 3).
o Restructuring (see Note 2) and write-off of impaired goodwill in 1994
(see Note 9).
o Acquisitions in 1993 and 1992 (see Note 5).
The significant accounting policies and practices followed by TFN are as
follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of TFN and its subsidiaries, all of which are wholly-owned. All
material intercompany transactions and balances have been eliminated from the
consolidated financial statements.
Description of Business--TFN sells, installs and services microcomputers,
UNIX workstations, turnkey local and wide area network systems, computer
software and peripheral products for business, professional, educational and
governmental customers. TFN also offers a wide range of sophisticated
customer support and consulting services. TFN currently operates 19 branch
sales offices in 13 states with corporate headquarters in Cincinnati, Ohio.
TFN also manages five branch offices and two satellite offices in six other
states under a management agreement with IE. TFN does not maintain any retail
facilities.
Inventories--Inventories are stated at the lower of cost or market value.
Cost is determined on a first-in, first-out (FIFO) basis.
Allowances for normal obsolescence of inventories are provided based upon
management's analysis of inventory category and aging and assessment of
product obsolescence in the marketplace. Allowance for restructured inventory
was provided based upon management's analysis of inventory aging and category
and considered the anticipated bulk disposal of such inventories.
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.
Intangible Assets--Intangible assets, composed principally of goodwill,
are stated at amortized cost. Goodwill, which represents the excess of
purchase price over fair value of net assets acquired, is amortized on a
straight-line basis over the expected periods to be benefited, generally 20
years. TFN assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
The amount of goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting TFN's
average cost of funds.
Noncompete Agreements--Material noncompete agreements entered into by TFN
in connection with business acquisitions are included in Other Assets, are
stated at amortized cost and are amortized on a straight-line basis over the
terms of the noncompete agreements (3 to 5 years). For the years ended
December 31, 1993 and 1992, amortization of such noncompete agreements
amounted to $462,000 and $580,000, respectively. As of December 31, 1993, all
noncompete agreements had been fully amortized.
Revenue Recognition--Revenue from product sales is recognized at the time
of shipment to the customer. Revenue associated with maintenance service
contracts is recorded ratably over the service period of the contract. Costs
of maintenance service contracts are recorded when incurred. Rental income is
recognized as it is earned. Revenue from professional service contracts is
recognized as services are provided to the customer on a
percentage-of-completion basis.
F-33
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1--Significant Transactions and Summary of Significant Accounting
Policies - (Continued)
Return Policy--Company policy specifies that returns from customers are
authorized for items that have been misshipped or are defective upon arrival
at customer site. Return authorizations must be requested by the client
within 30 days of the invoice date. Defective products are repaired or
replaced at TFN's option. Credit is issued after TFN has received and
reviewed the returned product.
Manufacturers' Incentive Programs--TFN receives manufacturer incentive
funds to perform certain training, advertising and other market development
activities. Revenue associated with these funds is recorded as a reduction of
general and administrative expenses.
Income Taxes--Prior to 1992, income taxes were recognized during the year
in which transactions entered into the determination of financial statement
income, with deferred taxes being provided for timing differences.
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," was issued by the Financial Accounting Standards Board
("FASB") in February 1992. SFAS No. 109 requires an asset and liability
approach for financial accounting and reporting of income taxes. Under the
asset and liability method, a deferred income tax liability or asset is
recognized for the estimated future tax effects attributable to temporary
differences and carryforwards. Under SFAS No. 109, the measurement of current
and deferred tax liabilities is based on provisions of the enacted tax law.
TFN elected to adopt SFAS No. 109 in 1992 and has reported the cumulative
effect, which was not material, of the change in method of accounting for
income taxes as of the beginning of 1992 in the provision for income taxes in
the consolidated statement of operations for the year ended December 31,
1992.
Earnings (Loss) Per Share--Earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of common stock and
common stock equivalents outstanding during each period.
Reclassifications--Certain amounts in the 1993 and 1992 consolidated
financial statements have been reclassified to conform to the 1994
presentation.
NOTE 2--RESTRUCTURING CHARGE
Effective second quarter 1994, TFN adopted a definitive plan for a
company-wide restructuring, including the closing and consolidation of
duplicate facilities in areas where TFN has made acquisitions. TFN will close
or consolidate its 23 branch warehouses by June 30, 1995 as the CustomerCare
Direct program, which decreases TFN's need to maintain inventory, is fully
implemented. Under the CustomerCare Direct program, IE configures product
sold by TFN and ships it directly to TFN's clients, thereby eliminating TFN's
need to carry that inventory. In connection with the restructuring, TFN
consolidated or closed offices in six geographic areas, including the
consolidation of TFN's three Southern California offices into one operation,
and its two facilities into one in each of the New York, Northeast Ohio and
Dallas markets. TFN took these actions to integrate and consolidate the 15
companies it has acquired over the past five years. As a part of this
restructuring, TFN will centralize certain of its operations and has
reorganized management to continue its emphasis on higher margin professional
services. Professional services will continue to be the principal focus of
TFN's strategy.
The restructuring resulted in a charge of $33.0 million against second
quarter results. During 1994, TFN closed or consolidated 13 branch warehouses
in various geographic locations and utilized the restructuring reserves in
the following amounts:
F-34
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2--Restructuring Charge - (Continued)
<TABLE>
<CAPTION>
Utilized to
Reclass- Offset
ification Expenses
to Other in Payment of
Reserve Balance Statement Other Reserve
June 30, Sheet of Restructur- December
1994 Accounts Operations ing Costs Transfers 31, 1994
---------- ----------- ------------- ------------- ----------- ----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Provision for loss on disposition of
inventory ......................... $14.5 (7.5) (3.5) -- 2.7 6.2
Closure of warehouse facilities .... 7.6 -- (.9) -- (2.7) 4.0
Goodwill related to closed
locations ......................... 5.0 (5.0) -- -- -- --
Personnel separation costs ......... 3.1 -- (1.1) (.6) -- 1.4
Other .............................. 2.8 (.6) -- (1.0) -- 1.2
----- ----- ---- ---- ---- ----
Total ............................ $33.0 (13.1) (5.5) (1.6) -- 12.8
===== ===== ==== ==== ==== ====
</TABLE>
The restructuring charge related to the provision for loss on disposition
of inventory represents anticipated losses on the sale of inventory after the
branches' closure date and restocking fees associated with TFN's return of
inventory to its vendors. Reserves reclassified to other balance sheet
accounts of $7.5 million were principally comprised of the following:
o $2.8 million transferred to reduce the carrying value of assets received
in exchange for certain of the Company's inventories.
o $4.1 million transferred to reduce property and equipment in conjunction
with the reclassification of its demonstration and trial assets.
Inventory reserves of $2.8 million were utilized to offset costs related
to the bulk disposal of inventories. In addition, reserves of $0.7 million
were utilized to offset restocking fees related to the bulk return of
inventories to certain of TFN's vendors.
Reserves of $2.7 million principally related to future minimum lease
payments for the five branches sold to IE (see Note 3) were transferred to
the reserve for inventories. As further discussed in Note 3, IE assumed all
future lease obligations related to these branches. Management determined
that the reclassification was necessary based on the amount and age of the
remaining inventories subject to TFN's restructuring actions.
The restructuring charge related to the closure of warehouse facilities
includes $5.5 million of future minimum lease payments, net of $1.4 million
of estimated sublease revenue, from each warehouse closure date through the
remaining lease period. The charge for closure of warehouse facilities also
includes $2.1 million for anticipated costs for the disposal of warehouse
equipment and other warehouse assets. Reserves of $0.9 million were utilized
principally to offset costs related to minimum lease payments, net of
sublease receipts, from each warehouse closure date through December 31,
1994.
The restructuring charge related to goodwill resulted from the write-off
of the net unamortized balance of goodwill associated with the closure of
branch locations in four markets which TFN no longer intends to serve.
The restructuring charge related to personnel separation costs principally
consists of severance costs associated with terminated warehouse and
administrative personnel. At the beginning of the restructuring, TFN intended
to reduce its workforce on a company-wide basis by approximately 190
employees, or 14% of the total. Reserves of $1.1 million were utilized
principally to offset personnel separation and other transition costs
associated with terminated warehouse and administrative employees.
Approximately 120 warehouse and administrative employees have been terminated
as of December 31, 1994. Reserves of $0.6 million were utilized to offset
other personnel separation costs that would not have been incurred by TFN
absent its restructuring actions.
F-35
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2--Restructuring Charge - (Continued)
The restructuring charge of other costs principally relates to expenses
that have no future economic benefit to TFN. Reserves of $0.6 million were
utilized to write-off deferred loan fees existing as of June 30, 1994 as the
restructuring actions required TFN to renegotiate its long-term credit
facility. Reserves of $1.0 million were utilized to offset other
restructuring charges, including professional fees and other expenses that
would not have been incurred by TFN absent its restructuring actions.
In total, the restructuring charge of $33.0 million includes $22.4 million
of non-cash write downs of recorded assets and $10.6 million of cash which
will be funded through normal operations for each of the years as follows:
Cash
Outflow
Year Ended December 31, (in millions)
----------------------- -------------
1994 (actual) $ 3.5
1995 4.8
1996 .7
1997 .4
Thereafter 1.2
-----
$10.6
=====
In addition, TFN expects future operating costs to be incurred related to
the restructuring that are not included in the restructuring charge. These
costs include anticipated enhancements to the management information system
of $1.6 million and bank charges of $0.5 million.
The 1994 charges against the restructuring reserve represent $3.5 million
of cash outflow and $16.7 million of non-cash charges. At December 31, 1994,
$3.5 million of the projected total cash requirement had been paid by TFN,
with $4.4 million remaining as a current accrued expense, $2.3 million as a
non-current accrued expense and $0.4 million in inventory reserves for
restocking fee payments. Other reductions in operating expenses of
approximately $800,000 related to reductions in personnel, lease and
amortization expenses and are reflected in the results of operations for
1994.
Management believes that the restructuring actions being taken will
enhance TFN's ability to compete effectively through the professional
services oriented business strategy. However, competition in this industry is
significant and is dependent upon a number of factors which may be beyond
TFN's control, such as general economic conditions, hardware and software
margins, demand for professional services and various other industry
pressures. A significant deterioration in anticipated levels of business or a
significant decline in margin could require TFN to make additional
adjustments to its expense structure, including additional restructuring
actions.
NOTE 3-SALE OF BRANCHES TO INTELLIGENT ELECTRONICS, INC.
On December 30, 1994, TFN sold certain assets of five branch locations to IE
for approximately $34.2 million in cash received on December 30, 1994 and $5.0
million received January 9, 1995 (see Note 6). The cash was used to reduce the
Company's debt. The five branch locations serve the Boston, New York City,
Orange County, San Francisco and Baltimore/Washington, D.C. metropolitan areas.
A gain on the sale of these branches of approximately $2.5 million was
recognized in the Consolidated Statement of Operations for the year ended
December 31, 1994.
The Asset Purchase Agreements ("Agreements") provided for IE's purchase of
$23.0 million of receivables, $5.0 million of inventory, and $3.0 million of
fixed assets. IE assumed the future lease obligations for each branch location.
TFN wrote-off $4.4 million of goodwill associated with these branches and
adjusted certain other assets and liabilities by approximately $1.5 million as a
result of the sale of the branches. The Agreements provide that title to all
trade receivables of the branches sold, in the aggregate
F-36
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3-Sale of Branches to Intelligent Electronics, Inc. - (Continued)
amount of $34.1 million, shall transfer to IE at December 30, 1994. The
Agreements further provide that IE must remit to TFN all cash receipts on such
receivables in excess of the first $23.0 million collected. Accordingly, at
December 31, 1994 TFN has recorded a receivable due from IE in the amount of
$11.1 million for the trade receivables in excess of $23.0 million. Any losses
due to uncollectibility of such trade receivables will be borne by TFN and have
been considered in establishing the allowance for receivables at December 31,
1994.
The transaction also includes a Management Agreement which provides for TFN
to manage these facilities for IE and retain its employees at these locations.
All direct expenses of these branches will be paid by IE and certain indirect
costs will be reimbursed each month by IE in the amount of $20,000 per branch.
Additionally, the Management Agreement contains an incentive compensation
arrangement whereby IE shall pay incentive compensation to TFN based upon the
future operating results of the branches.
The following table sets forth for the periods indicated the revenue and
income from operations of the branches sold reflected in TFN's Consolidated
Statements of Operations (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31, Six Months Ended
------------------------ December 31,
1994 1993 (1) 1992 (2)
---------- ---------- ----------------
<S> <C> <C> <C>
Revenue ............................................. $184,554 $167,943 $49,130
Income from Operations Before Allocation of Corporate
Overhead ........................................... 992(3) 2,132 880
</TABLE>
------
(1) The Orange County location was acquired August 1993 (see Note 5).
(2) The Boston, New York City, Washington, D.C. and San Francisco locations
were acquired July 1992 from IE (see Note 5).
(3) Excludes goodwill impairment related to New York branch (see Note 9).
NOTE 4--COMMON STOCK TRANSACTIONS
On June 12, 1992, TFN's shareholders approved an increase in the authorized
shares of common stock from 5,000,000 to 20,000,000.
In March 1993, TFN sold 1,467,500 shares of its common stock, at $12.375 per
share, in a public offering. Net proceeds from the sale after underwriting
discount and offering expenses of $1.5 million ($.996 per share) were $16.7
million ($11.379 per share). The proceeds from the offering were applied to the
indebtedness under TFN's Secured Credit Agreement.
In October 1993, TFN sold 681,447 shares of its common stock, at $12.8375 per
share, to IE resulting in proceeds to TFN of $8.7 million. IE is TFN's largest
shareholder, having acquired 31.1% (1,638,377 shares) of TFN's total outstanding
stock in July 1992 in exchange for IE's computer reselling operation. With TFN's
public offering in March 1993, IE's ownership percentage decreased to 24.3%. IE
increased its ownership percentage to 31.1% with the October 1993 purchase. IE
is also TFN's largest vendor (see Note 13).
NOTE 5--ACQUISITIONS
Following is a summary of TFN's business acquisitions made since January
1, 1992. See Note 13 for discussion of the related party relationship created
by the acquisition of the Company Center Division ("CCD") of IE.
F-37
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5--Acquisitions - (Continued)
<TABLE>
<CAPTION>
Company/Location Date of Acquisition Consideration Paid
--------------------------------- ----------------------- -----------------------------------
<S> <C> <C>
Basicomputer Corporation September 1993 $12.0 million in cash
Akron, Ohio
Atlanta, Georgia
Columbus, Ohio
Dayton, Ohio
Detroit, Michigan
Kansas City, Kansas
White Plains, New York
Pittsburgh, Pennsylvania
Raleigh, North Carolina
Dallas, Texas
Premium Computer Corporate August 1993 $1.0 million in cash plus up to
Center $1.5 million in contingent
Colton, California payments
Irvine, California
Direct Computer Corporation January 1993 $1.1 million in cash
Direct Technology Corporation
Dallas and Houston, Texas
CCD July 1992 $16.4 million in TFN Common
Boston, Massachusetts Stock
Dallas, Texas
Los Angeles, California
Nashville, Tennessee
New York, New York
Pittsburgh, Pennsylvania
St. Louis, Missouri
San Francisco, California
Washington, D.C.
Evergreen Systems, Inc. January 1992 $0.8 million in cash and
Milwaukee, Wisconsin $0.2 million in TFN Common
Stock
</TABLE>
Consideration paid includes cash paid and stock issued to the owners of
the businesses acquired. TFN also assumed current and long-term liabilities
totalling $0.8 million in 1994, $56.6 million in 1993 and $22.8 million in
1992 in connection with these acquisitions. Consideration paid does not
include cash used in 1992, and classified as an investing activity in TFN's
consolidated statement of cash flows, of $15.5 million expended to retire
CCD's obligations to IE, principally for product inventory. The "investing"
portion of these payments represents the amount paid to IE in excess of what
could be financed through TFN's inventory financing.
The acquisitions have been accounted for as purchases and, accordingly,
the results of operations of the companies have been included in TFN's
consolidated financial statements since the dates of acquisition. TFN
recorded cost in excess of net assets acquired of $1.4 million, $29.1 million
and $17.9 million in connection with these acquisitions during 1994, 1993 and
1992, respectively, which is being amortized on a straight-line basis over 20
years. Certain of the purchase agreements provide for additional payments for
noncompete agreements totalling $1.0 million, of which $0.5 million was paid
in 1994 and $0.5 million is to be paid in 1995.
F-38
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5--Acquisitions - (Continued)
The following unaudited pro forma financial information presents the
combined results of operations of TFN and the businesses acquired in 1993 and
1992 as though these acquisitions had actually been made as of the beginning
of 1993 and as of the beginning of 1992, after giving effect to certain
adjustments, including certain adjustments of assets of businesses acquired
to fair values and liabilities to settlement amounts, elimination of
duplicate facilities and functions, amortization of goodwill, additional
interest expense, reductions in the cost of sales actually achieved as a
result of TFN's increased purchasing levels, and related income tax effects.
No adjustments have been made to reflect reductions in any other expenses or
from any other economies of scale which may have resulted from the
combinations had they taken place at the beginning of each of the respective
years. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the companies constituted
a single entity during such periods.
Years Ended
December 31,
------------------------
1993 1992
---------- ----------
(in thousands, except per
share data)
Revenue ........... $852,171 $656,645
Net Income ........ 9,200 9,066
Earnings Per Share $ 1.23 $ 1.21
Pro forma financial information for the year ended December 31, 1994 is
not presented because the acquired entities are included in the historical
financial statements of TFN for the entire period.
NOTE 6--RECEIVABLES
Receivables due from IE consist of the following:
December 31, December 31,
1994 1993
-------------- --------------
Sale of Branches to IE (see Note 3):
Inventory ..................... $ 4,981,704 $ --
Receivables ................... 11,142,629 --
Rebates and Price Protection ....... 3,454,857 1,708,122
----------- ----------
$19,579,190 $1,708,122
=========== ==========
At December 31, 1993, a receivable of $11.0 million was due from the
Hewlett-Packard Company; $2.8 million of such receivable was included in
Other Receivables and $8.2 million was shown as Long-Term Receivable on the
Consolidated Balance Sheet. This receivable arose from the sale by TFN in
late 1993 of TFN's service contract base and repair parts inventory in
connection with an alliance formed by TFN with the Hewlett-Packard Company to
provide hardware repair services to TFN's clients. At December 31, 1994, $4.9
million remained of the total of such receivable which is included in Other
Receivables. Effective January 1, 1995, TFN negotiated the return of the
service contract base and repair services from Hewlett-Packard. Also, at
December 31, 1994, Other Receivables include $6.0 million due from an
insurance carrier principally related to a fire at one of TFN's warehouses.
No individual customer accounted for more than 10% of TFN's sales during
1994, 1993 or 1992.
F-39
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7--INVENTORIES
Inventories consist of items held for resale and for rental and are
composed of the following:
December 31, December 31,
1994 1993
-------------- --------------
Equipment Held for Resale $50,161,456 $57,280,865
Rental Equipment ......... 1,424,357 3,858,601
----------- -----------
51,585,813 61,139,466
Allowance ................ (7,510,397) (6,489,474)
----------- -----------
Total .................. $44,075,416 $54,649,992
=========== ===========
NOTE 8--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------------- -------------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Office Equipment ......... $11,847,996 $2,614,874 $ 9,303,580 $2,330,200
Computer Software ......... 1,686,228 687,971 908,040 400,621
Equipment Under Capital
Leases ................. 1,023,775 380,483 814,826 258,772
Vehicles and Other ....... 326,797 166,154 256,512 140,988
----------- ----------- ----------- ----------
$14,884,796 $3,849,482 $11,282,958 $3,130,581
=========== ========== =========== ==========
</TABLE>
NOTE 9--INTANGIBLE ASSETS AND GOODWILL IMPAIRMENT
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------------- -------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Goodwill ..... $36,414,933 $3,733,574 $51,785,397 $2,842,178
Organization
Costs ...... -- -- 328,779 321,212
----------- ---------- ----------- ----------
$36,414,933 $3,733,574 $52,114,176 $3,163,390
=========== ========== =========== ==========
</TABLE>
During 1994, the unamortized balance of goodwill decreased $15.4 million
due primarily to the write-off of impaired goodwill and the sale of five
branches to IE. During 1993, goodwill increased $29.1 million due to the
acquisitions discussed in Note 5. Amortization of goodwill and organization
costs totalled $2.5 million for 1994, $2.0 million for 1993 and $0.7 million
for 1992.
TFN determined in the second quarter of 1994 that the New York branch's
undiscounted future operating cash flows as adjusted for expected savings
from TFN's restructuring actions would not support future recovery of the
recorded unamortized goodwill balance of $7.0 million at June 30, 1994. This
forecast indicated that cumulative negative results of operations and use of
operating cash over the remaining 18 year life is expected to approximate
$11.5 million and $2.6 million, respectively. These losses and use of cash
principally result from the extremely competitive environment resulting in
lower margins and the increased operating costs associated with this location
as compared to other locations of TFN. Accordingly, TFN expensed its
remaining unamortized goodwill balance for this branch in the second quarter
of 1994.
F-40
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10--DEBT AND LEASE OBLIGATIONS
December 31, December 31,
1994 1993
-------------- --------------
Secured Credit Agreement ........ $ -- $74,649,213
Obligations Under Capital Leases 478,215 469,217
Other ........................... 770,024 868,323
---------- -----------
1,248,239 75,986,753
Less Current Portion ............ 687,964 588,897
---------- -----------
$ 560,275 $75,397,856
========== ===========
As of December 31, 1994, TFN was party to a Secured Credit Agreement
("Agreement") with certain banks. This revolving credit facility permits
borrowing of up to $85.0 million with interest rates varying based on the
prime rate (8.50% at December 31, 1994) offered by the agent plus 1 1/4 % and
is payable in full in September 1996. Advances against this Agreement are
based on TFN's trade receivables and are subject to eligibility requirements
contained within the Agreement. The outstanding balance on this Agreement as
of December 31, 1994 was $39.9 million with an eligibility of $67.4 million.
Collateral pledged for this Agreement includes all of TFN's assets with the
exception of inventory, which is pledged as security to the third party
inventory finance companies. The provisions of the facility contain various
restrictive covenants with respect to the maintenance of minimum tangible net
worth, restrictions on fixed asset additions, restrictions on fixed charges,
maintenance of a minimum current ratio, and restrictions on certain
additional indebtedness. As a result of the restructuring charge during the
second quarter of 1994, TFN failed to comply with several of the financial
covenants required under the Agreement.
Effective July 8, 1994, an initial amendment to the Agreement waived until
September 30, 1994 any default which occurred on June 30, 1994 as a result of
TFN's failure to comply with these covenants. Subsequent amendments extended
the waiver until July 31, 1995. TFN must complete its merger with IE, secure
new financing, or obtain a further waiver of these covenants prior to July
31, 1995. TFN expects that there will no longer be a need for this financing
when the merger with IE described in Note 13 is consummated.
The maximum level of borrowing under this Agreement was reduced from $85.0
million to $70.0 million effective January 1, 1995 as specified under a
waiver of financial covenants and as a result of the sale of certain assets
to IE (see Note 3).
During the year ended December 31, 1994, the outstanding borrowings under
the Agreement ranged from $39.9 million to $93.7 million and averaged $78.9
million. Borrowings vary based on seasonal needs and typically are higher
during TFN's first quarter due to increased levels of accounts receivable
resulting from the seasonally higher sales activity of the previous fourth
quarter.
As of December 31, 1993, the Agreement permitted borrowing of up to $85.0
million ($95.0 million from January 19, 1994 to March 31, 1994) with interest
rates varying based on the prime rate offered by the agent bank up to a
maximum of prime (6% at December 31, 1993) plus 1 1/4 %.
During the year ended December 31, 1993, TFN was party to two separate
Secured Credit Agreements with certain banks. The first Secured Credit
Agreement allowed for borrowings up to $50.0 million through September 8,
1993 and the second Secured Credit Agreement allowed for borrowings up to
$85.0 million from September 9, 1993 forward. During 1993, outstanding
borrowings under these Secured Credit Agreements ranged from $23.3 million to
$83.9 million and averaged $48.9 million. The average balance outstanding
under the second Secured Credit Agreement increased substantially after
September 9, 1993 due to the acquisition of Basicomputer Corporation.
F-41
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 10--Debt and Lease Obligations - (Continued)
Aggregate payments of long-term debt, excluding capital lease obligations,
after December 31, 1994 are as follows:
Year Ending:
December 31, 1995 .......... $429,121
December 31, 1996 .......... 249,593
December 31, 1997 .......... 18,146
December 31, 1998 .......... 20,047
December 31, 1999 and
thereafter ............... 53,117
TFN has agreements with third parties principally to finance certain of
its inventory purchases from IE as of December 31, 1994 and 1993. Under these
credit agreements, TFN may purchase up to $105.0 million and $95.0 million,
respectively, of inventories with extended payment terms. Such agreements
generally are secured by inventories and, in certain instances, the proceeds
related thereto, and may be terminated immediately upon default by TFN or
otherwise within 60 to 90 days by either the third party or TFN. Further, to
maintain this level of third party inventory financing, IE guarantees up to
$20.0 million on one of these agreements. One of these agreements contains
various restrictive covenants with respect to the maintenance of a minimum
level of tangible net worth and subordinated debt, maintenance of a minimum
current ratio, maintenance of a minimum ratio of debt to tangible net worth
and a prohibition against the payment of dividends. TFN failed to comply with
certain of these covenants as of June 30, 1994, September 30, 1994 and
December 31, 1994. TFN has obtained amendments to the agreement waiving the
attainment of the financial objectives until July 31, 1995. TFN must complete
its merger with IE, renegotiate and reset these covenants or obtain a further
waiver of these covenants prior to July 31, 1995. As of December 31, 1993,
all such covenants were met. The amounts outstanding under these agreements
are included in accounts payable and totalled $88.9 million and $69.6 million
as of December 31, 1994 and 1993, respectively. If principal payments on
these payables are made on a timely basis, no interest accrues. Interest
payments to these third party finance companies were $1.1 million, $0.1
million and $0.1 million, respectively, for the years 1994, 1993 and 1992.
TFN leases office space and equipment under operating leases and certain
other equipment under capital leases. Future minimum payments under
noncancelable leases with initial or remaining terms in excess of one year as
of December 31, 1994 are as follows:
Capital Operating
Leases Leases
---------- -------------
Year Ending:
December 31, 1995 ..................... $284,334 $ 8,777,237
December 31, 1996 ..................... 120,114 8,554,289
December 31, 1997 ..................... 92,958 6,276,887
December 31, 1998 ..................... 12,777 2,562,344
December 31, 1999 ..................... 8,113 2,336,254
Thereafter ............................ -- 4,718,928
-------- -----------
Total Minimum Lease Payments ............... 518,296 $33,225,939
===========
Less Amount Representing Interest .......... 40,081
--------
Present Value of Net Minimum Lease Payments $478,215
========
Rent expense totalled $6,703,000 in 1994, $4,630,000 in 1993 and
$2,654,000 in 1992.
NOTE 11--INCOME TAXES
As discussed in Note 1, TFN adopted SFAS No. 109 as of January 1, 1992.
The cumulative effect of this change in accounting for income taxes is not
material and is included in the provision for income taxes for the year ended
December 31, 1992.
F-42
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11--Income Taxes - (Continued)
Income taxes for the years ended December 31 consist of the following:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- ------------
<S> <C> <C> <C>
Current:
Federal (Benefit)............................... $ 984,000 $(1,100,000) $ 924,000
State and Local ................................ 400,000 700,000 588,000
Deferred (Benefit) .................................. (3,651,411) 6,946,000 2,089,000
----------- ----------- ----------
$(2,267,411) $ 6,546,000 $3,601,000
=========== =========== ==========
</TABLE>
A reconciliation of TFN's effective income tax rate and the statutory
federal income tax rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. Federal Tax Rate .................... (35%) 34% 34%
Valuation Allowance ................................ 14 -- --
Goodwill Write-off ................................. 12 -- --
Amortization of Intangibles ........................ 2 3 2
State and Local Income Taxes, Net of Federal Benefit 1 5 5
Other, Net ......................................... 1 (1) (2)
----- ----- -----
(5%) 41% 39%
===== ===== =====
</TABLE>
Deferred tax expense for the years ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------- -------------
<S> <C> <C> <C>
Charge in lieu of taxes resulting from the
initial recognition of acquired tax benefits
that are allocated to reduce goodwill related
to the acquired entities ...................... $ -- $3,935,000 $1,943,000
Other ........................................... (3,651,411) 3,011,000 146,000
----------- ---------- ----------
$(3,651,411) $6,946,000 $2,089,000
=========== ========== ==========
</TABLE>
As of December 31, 1994 and 1993, the total of all deferred tax
liabilities, consisting principally of acquisition related intangibles and
property and equipment, approximated $8.8 million and $5.3 million,
respectively. The total of all deferred tax assets, consisting principally of
inventory valuation reserves, allowance for doubtful accounts, accruals and
net operating loss carryforwards, approximated $15.3 million and $1.6
million, respectively. As of December 31, 1994, a valuation allowance has
been provided for the entire net deferred tax asset of $6.5 million.
Management has determined that sufficient evidence does not currently exist
to support a more likely than not criterion that sufficient taxable income is
expected to be available in future years or through carryback to realize the
tax benefit.
At December 31, 1994, TFN has net operating loss carryforwards for Federal
income tax purposes of approximately $11.0 million which are available to
offset future Federal taxable income, if any, through 2009.
NOTE 12--DEFERRED COMPENSATION PLAN, STOCK WARRANTS AND STOCK OPTION PLANS
TFN has a 401(k) plan for all employees meeting minimum age and service
requirements. Employees may elect to defer a portion of their salaries, subject
to percentage and dollar limits. TFN has agreed to contribute 20% of the first
5% of compensation deferred by the employee, subject to a limit of 1% of
eligible employee compensation. Additional contributions may be made at the
discretion of the Board of Directors. Employees' rights to employer
contributions vest ratably over a five-year period. Employer contributions to
this plan totalled $266,000 in 1994, $305,000 in 1993 and $140,000 in 1992.
TFN has two stock option plans, a 1991 and a 1994 Plan, which provide for
options to be granted to full time management of TFN. The 1991 Plan, as amended,
provides for the granting of options to purchase 510,000 shares of TFN Common
Stock and the 1994 Plan provides for the granting of options to purchase
F-43
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12--Deferred Compensation Plan, Stock Warrants and Stock Option Plans
- (Continued)
750,000 shares of TFN Common Stock. Both plans provide for the purchase of
common stock at the market value at date of grant. All options become
exercisable in increments of 20% on the first anniversary date of the date of
the grant and 80% in equal installments beginning six months after the first
anniversary date of the original date of grant. At December 31, 1994, options
for 222,000 shares were exercisable.
Changes in options outstanding under the two plans are as follows:
Number Exercise
of Shares Price
----------- --------------
Outstanding, December 31, 1991 175,000 $10.50
Granted ....................... 155,000 10.75 to 11.88
Exercised ..................... -- --
Cancelled ..................... -- --
-------
Outstanding, December 31, 1992 330,000 10.50 to 11.88
Granted ....................... 174,000 9.75 to 11.75
Exercised ..................... (3,900) 10.50 to 11.88
Cancelled ..................... (20,400) 9.75 to 11.88
-------
Outstanding, December 31, 1993 479,700 9.75 to 11.88
Granted ....................... 197,000 8.50 to 12.25
Exercised ..................... -- --
Cancelled ..................... (21,200) 9.75 to 11.50
-------
Outstanding, December 31, 1994 655,500 8.50 to 12.25
=======
Included in the 1994 grant of 197,000 shares are 40,000 restricted shares
and included in the 1993 grant of 174,000 options are 35,000 restricted
shares which were granted to certain employees. The market value of shares
awarded of $490,000 in 1994 and $341,000 in 1993 has been recorded net of
unearned compensation as a component of shareholders' equity. Unearned
compensation is being amortized to expense over the three year vesting
period.
Effective June 1991, TFN adopted The Future Now, Inc. 1991 Director Stock
Option Plan (the "1991 Director Plan"). The maximum number of common shares
reserved for issuance pursuant to grants under the 1991 Director Plan is
50,000 shares. The 1991 Director Plan provides that options may be granted to
non-employee directors for the purchase of common stock at the market price
at date of grant. All options are immediately exercisable. As of December 31,
1994, 8,000 options had been exercised and 5,000 options had lapsed. Options
granted under the 1991 Director Plan are as follows:
1994 1993 1992
-------- ----------------- -------
Number of options granted... 5,000 8,000 8,000
Exercise price ............ $12.25 $10.00 to $12.375 $11.88
Warrants to purchase 184,498 shares of TFN Common Stock were issued to IE
in connection with TFN's purchase of CCD from IE on July 2, 1992 (see Note
13). The exercise price is equal to the exercise price of all other options
and warrants outstanding on July 2, 1992. These warrants become exercisable
as the options and warrants which were outstanding as of the acquisition date
are exercised. In 1994, warrants were exercised by IE to purchase 24,200
shares of TFN Common Stock at an aggregate price of $99,000. No warrants had
been exercised as of December 31, 1993.
As of January 1, 1992, 1991 and 1990, TFN issued warrants to purchase
18,375, 13,125 and 11,725 shares, respectively, of TFN Common Stock to
certain individuals who were officers and/or directors during the years for
F-44
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12--Deferred Compensation Plan, Stock Warrants and Stock Option Plans
- (Continued)
which the warrants were issued. These warrants had exercise prices of $5.67,
$2.40, and $0.86 per share. The $5.67 and $2.40 warrants were exercised in 1994,
and the $0.86 warrants were exercised in 1993. In addition, on November 30,
1990, TFN issued warrants to purchase 17,500 shares of common stock to a related
entity, of which warrants to purchase 2,100 shares of common stock were
subsequently transferred to a shareholder and director for investment banking
services rendered during 1990 and one-half of the remaining 15,400 shares were
transferred to each of its two principals in November 1993. Warrants to purchase
7,700 shares were exercised in 1994. These warrants have an exercise price of
$5.72 per share. The remaining warrants to purchase 9,800 shares expire on
November 15, 1995.
NOTE 13--SUBSEQUENT EVENTS AND OTHER RELATED PARTY TRANSACTIONS
On March 6, 1995, TFN and IE signed a letter of intent for IE to acquire
the outstanding stock of TFN. The acquisition will be a stock-for-stock,
tax-free transaction. Based on the exchange ratio set forth in the letter of
intent, TFN's shareholders will receive .6588 shares of IE Common Stock in
exchange for each share of TFN Common Stock. The transaction is subject to
the completion of due diligence, the execution of a definitive agreement and
other customary conditions and approvals, including approval by TFN's
shareholders.
On December 30, 1994, TFN sold certain assets of five branch locations to
IE (see Note 3).
On July 2, 1992, in connection with the acquisition of CCD from IE, TFN
issued 1,638,377 shares, or 31.1% of TFN's total outstanding stock, to IE. On
that date, IE became a principal shareholder and, therefore, a related party.
TFN is a party to franchise agreements with IE. Among other terms, these
franchise agreements provide that TFN will purchase certain products,
including IBM, Apple, Compaq and Hewlett- Packard, only from IE. These
franchise agreements expire in either December 2000 or September 2003 and are
renewable by TFN for an additional 10-year term under certain conditions.
These agreements may be terminated by the franchisor upon the occurrence of
certain events, including loss of certain vendor authorizations, financial
impairment and failure to maintain operating standards. Upon termination, TFN
would be bound by a noncompete agreement that states that TFN would not
engage in a competing business with the franchisor for a six-month term,
subject to certain product exclusions and the buyout provision noted in the
following paragraph.
TFN has the right to terminate the franchise agreements upon 90 days
written notice and the payment of a termination fee equivalent to the markup
on products purchased from the franchisor during the preceding twelve-month
period. This fee shall not be less than $1.0 million, and would have been
approximately $17.0 million as of December 31, 1994 ($10.5 million as of
December 31, 1993). An additional payment of $0.5 million is required to
release TFN from its noncompete clause in the franchise agreements. Payments
by TFN during the years ended December 31, 1994, 1993 and the six months
ended December 31, 1992 for purchases from IE aggregated approximately $580.0
million, $442.0 million and $114.0 million, respectively. In management's
opinion, these franchise agreements permit TFN to more effectively manage its
product inventories and receive certain other benefits. IE also serves as
guarantor of up to $20.0 million of amounts owed by TFN to an inventory
finance company (see Note 10).
IE has the right to designate, so long as it beneficially owns at least
10% of the outstanding shares of TFN Common Stock, one person to serve on the
Board of Directors of TFN (and any Executive Committee of TFN). Since August
1994, IE has not designated a person to serve on the Board of Directors.
TFN uses the services of a professional services firm in which a director
is a principal. Fees paid to the related party's firm were $105,000 in 1994
and $25,000 in 1993. In addition, TFN uses the services of a law firm in
which a director is a partner and paid such firm $220,000 in 1992.
F-45
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION
The following are the non cash investing and financing activities for the
years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------------ -------------- --------------
<S> <C> <C> <C>
Fair Value of Assets of Companies Acquired $1,436,999 $ 88,188,100 $ 60,875,795
Cash Paid and Stock Issued ................ (636,999) (31,574,500) (38,113,598)
---------- ------------ ------------
Liabilities Assumed ...................... $ 800,000 $ 56,613,600 $ 22,762,197
========== ============ ============
</TABLE>
In 1993, in connection with the alliance formed by TFN with the
Hewlett-Packard Company, TFN recorded current and long-term receivables
aggregating approximately $11.0 million, and transferred service parts
inventory and deferred service income and certain other assets and
liabilities with a net carrying value of approximately $11.0 million to the
Hewlett-Packard Company (see Note 6).
In 1994, in connection with the sale of branches to IE, TFN recorded
receivables due from IE in exchange for TFN's trade receivables and
inventories in the amount of $11.1 million and $5.0 million, respectively.
NOTE 15--CONTINGENCIES
TFN 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.
Various suits and claims arising in the ordinary course of business are
pending against TFN. In the opinion of management, these suits and claims are
not reasonably likely to have a material adverse effect on the financial
condition or results of operations of TFN. However, management cannot predict
the outcome of these suits and claims and any adverse findings may affect the
results of operations in future reporting periods.
F-46
<PAGE>
THE FUTURE NOW, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTRUCTURING CHARGE AND GOODWILL IMPAIRMENT
Charges for restructuring of $33.0 million and goodwill impairment of $7.0
million significantly impacted results of operations for the year ended
December 31, 1994. See Notes 2 and 9 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Results of operations for the year ended December 31, 1994 were
significantly impacted by the acquisition in September 1993 of Basicomputer
Corporation and by the restructuring charge and goodwill impairment discussed
above. Results of operations for periods beginning January 1, 1995 will be
significantly impacted by the sale of branches to IE. Further, TFN signed a
letter of intent on March 6, 1995 to merge with IE. See Notes 3 and 13 of
Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Revenue increased $93.9 million, or 13.4%, in 1994 as compared with 1993,
which principally resulted from acquisitions during 1993 that were included
for a full year in 1994. In general, growth was generated by an increase in
volume, which more than offset a general decline in the prices of TFN's
products, and its growth in the professional services business.
Equipment and supplies revenue as a percentage of total revenue increased
to 85.8% in 1994 as compared with 85.4% in 1993. Software revenue as a
percentage of total revenue increased to 6.7% in 1994 as compared with 6.5%
in 1993. Because the gross margins generally are smaller on sales of
equipment, supplies and software than are margins on sales of professional
services, management generally views increases in the percentage of total
revenue generated by these products to be unfavorable.
Services income increased to 7.5% of total revenue during 1994 as compared
with 4.9% (excluding repair services) during 1993. "Services income" is
defined by TFN as revenue derived from: (i) commissions earned on the sale of
maintenance contracts; (ii) product installation; (iii) systems networking;
(iv) training; and (v) product rental. TFN emphasized the marketing of
professional services beginning in early 1993 and believes that its marketing
efforts are resulting in the growth in professional services revenue.
Due to margin pressures associated with repair services, in late 1993 TFN
formed an alliance with the Hewlett-Packard Company wherein the
Hewlett-Packard Company provided hardware repair service for TFN's clients in
1994. Accordingly, TFN had no repair services revenue in 1994. Effective
January 1, 1995, TFN terminated its arrangement with the Hewlett-Packard
Company and began providing hardware repair services for its clients. TFN
formed the Service Group section of the Technology Deployment and Service
Group to provide such services. The Service Group is operating under a newly
formed management team and has purchased software to assist in the management
of the repair services business. Arrangements have been made with a parts
supplier to provide the repair parts used in the repair service work, thereby
eliminating the need for TFN to carry parts inventory.
Gross profit as a percentage of total revenue decreased to 14.7% for 1994
as compared with 16.2% for 1993. TFN's gross margin decline resulted
primarily from a decline in margin on equipment and supplies in 1994 compared
with 1993 in response to competitive pressures as well as specific price
pressures as a result of various sales channels available today. In addition,
charges of $3.0 million were recorded by TFN in the second quarter of 1994 to
increase the inventory obsolescence allowance and record the sale of obsolete
inventory from certain branches that were closed in the second quarter.
Selling expenses as a percentage of total revenue decreased to 4.3% for
1994 as compared with 4.6% for 1993. This decrease in percentage of total
revenue is due to the realization of planned volume increases without a
corresponding increase in staffing.
F-47
<PAGE>
Service expenses as a percentage of total revenue increased to 5.0% in
1994 as compared with 4.4% in 1993. The increase resulted from the continued
implementation of planned staff increases in order to focus on the increased
demand for professional services in the business, professional, governmental
and educational markets.
General and administrative expenses increased as a percentage of total
revenue to 5.3% during 1994 as compared with 4.1% during 1993. Marketing
rebates, which are reported as reductions in general and administrative
expenses, totalled 1.1% of revenue in 1994 as compared with 1.3% for 1993. In
general, levels of marketing rebates are declining and will continue to be
affected by the nature and timing of vendor programs and by TFN's effective
utilization of such programs. General and administrative expenses before
reduction for marketing rebates were 6.4% of revenue in 1994 and 5.4% in
1993. General and administrative expenses in 1994 include $1.0 million for
certain promotional activities designed to enhance TFN's relations with its
various constituencies. As a result of the acquisitions in late 1993 and
overall growth of the business, TFN incurred certain additional general and
administrative expenses in the following categories: administrative salaries,
$3.2 million; employee benefits, $2.1 million; property taxes, $1.6 million;
travel, $1.0 million; and professional fees, $0.7 million. The costs
associated with administrative salaries and employee benefits are expected to
be reduced as TFN centralizes its billing, purchasing and credit and
collections functions. Additionally, charges totalling $1.0 million were
recorded by TFN to increase the allowance for receivables for locations
closed during the second quarter of 1994.
Interest expense more than doubled in 1994 to $8.3 million from $3.6
million in 1993. The increase resulted from increased debt required by TFN to
finance growth from its acquisitions and increased level of operations. TFN
incurred interest of $1.1 million on floorplanned inventory purchases in 1994
compared with such interest of $0.1 million incurred in 1993. Further, rising
interest rates throughout 1994 caused interest expense to increase over 1993.
YEAR ENDED DECEMBER 31, 1993 COMPARED WITH YEAR ENDED DECEMBER 31, 1992
Revenue increased $358.8 million, or 104.6%, in 1993 as compared with
1992. Sales growth in locations owned by TFN for all of 1993 and 1992 was 18%
with remaining growth due to acquisitions in 1993 and 1992. The internal
growth was generated by an increase in volume, which more than offset a
general decline in the prices of TFN's products.
Equipment and supplies revenue as a percentage of total revenue increased
to 85.4% in 1993 as compared with 82.6% in 1992. This increase was
principally due to the addition of the companies acquired in 1992 and in
1993, which proportionately sold more equipment than software and services,
as compared with locations operated by TFN during both years. For locations
operated by TFN in both years, sales of equipment and supplies decreased
slightly to 81.1% of total revenue in 1993 from 81.3% of total revenue in
1992. Because the gross margins generally are smaller on sales of equipment
and supplies than are margins on sales of services, management generally
views increases in the percentage of total revenue generated by these
products to be unfavorable.
Software revenue as a percentage of total revenue decreased to 6.5% in
1993 as compared with 9.7% in 1992. The decrease was due principally to the
percentage decline in software sales in locations operated by TFN during both
years. Software sales as a percentage of total revenue in locations acquired
in 1992 and 1993 increased to 3.3% in 1993 from 2.3% in 1992.
Services income and repair services revenue together increased to 8.1% of
total revenue during 1993 as compared with 7.8% during 1992. "Services" were
defined by TFN as revenue derived from: (i) maintenance contracts; (ii)
product installation; (iii) systems networking; (iv) training; (v) product
rental; and (vi) commissions from manufacturers for sales to certain schools,
hospitals and governmental agencies. The increase in the percent of services
revenue to total revenue in 1993 compared with 1992 was due to an increase in
such percentage in branches owned by TFN in both 1993 and 1992. The
acquisitions in late 1992 and in 1993 derive a proportionately smaller
percentage of their total revenue from services and the percentage of
services revenue to their total revenue remained constant in 1993 and 1992.
In late 1993, TFN formed an alliance with the Hewlett-Packard Company wherein
the Hewlett-Packard Company provided certain hardware repair service for
TFN's clients in 1994.
F-48
<PAGE>
Gross profit as a percentage of total revenue decreased to 16.2% for 1993
as compared with 17.5% for 1992. TFN's gross margin decline resulted
primarily from a decline in margin on equipment and supplies in 1993 compared
with 1992.
Selling expenses as a percentage of total revenue decreased to 4.6% for
1993 as compared with 5.6% for 1992. This decrease in percentage of total
revenue is due to the realization of planned volume increases without a
corresponding increase in staffing.
Service expenses as a percentage of total revenue increased to 4.4% in
1993 as compared with 3.9% in 1992. The increase resulted principally from a
significant investment made by TFN to build its Professional Services
Organization.
General and administrative expenses decreased slightly as a percentage of
total revenue to 4.1% during 1993 as compared with 4.3% during 1992.
Efficiencies achieved by TFN in its administrative functions were principally
responsible for the overall decrease. This decrease was partially offset by
the decline in marketing rebates. Marketing rebates, which are reported as
reductions in general and administrative expenses, totaled 1.3% of revenue in
1993 as compared with 1.6% for 1992. Levels of marketing rebates will
continue to be affected by the nature and timing of vendor programs and by
TFN's effective utilization of such programs.
Interest expense more than doubled in 1993 to $3.6 million from $1.5
million in 1992. The increase resulted principally from increased debt
required by TFN to finance its acquisitions in 1992 and 1993.
LIQUIDITY AND CAPITAL RESOURCES
TFN's liquidity and capital resources have been significantly impacted by
acquisitions for the periods presented, particularly the acquisitions in
August 1993 of Premium Computer Corporate Center and in September 1993 of
Basicomputer Corporation.
TFN's financing is provided through a Secured Credit Agreement
("Agreement") with certain banks and other financing agreements with third
parties to finance the Company's inventories. As of December 31, 1994, the
Agreement permits borrowing of up to $85.0 million payable in full in
September 1996 with interest rates varying based on the prime rate offered by
the agent bank plus 1 1/4 %. The provisions of the Agreement contain various
restrictive covenants with respect to the attainment of various financial
objectives. As a result of the restructuring charge, TFN failed to comply
with certain of these covenants as of June 30, 1994, September 30, 1994 and
December 31, 1994. Effective July 8, 1994, an initial amendment to the
Agreement waived TFN's requirement to achieve these covenants through
September 30, 1994. Subsequent amendments extended the waiver until July 31,
1995. TFN must complete its merger with IE, secure new financing, or obtain a
further waiver of these covenants prior to July 31, 1995. TFN expects that
there will no longer be a need for this financing when the merger with IE is
consummated. If the merger is not consummated, TFN must renegotiate its
current financing or obtain new financing. The maximum level of borrowing
under this Agreement was reduced from $85.0 million ($95.0 million from
January 19, 1994 through March 31, 1994) to $70.0 million effective January
1, 1995 as specified under a waiver of financial covenants and as a result of
the sale of certain branch assets to IE. See Note 3 of Notes to Consolidated
Financial Statements.
During the year ended December 31, 1994, the borrowings under the
Agreement ranged from $39.9 million to $93.7 million and averaged $78.9
million outstanding. Borrowings vary based on seasonal needs and typically
are higher during TFN's first quarter due to increased levels of accounts
receivable resulting from the seasonally higher sales activity of the
previous fourth quarter. Advances against this Agreement are based on TFN's
trade receivables and are subject to eligibility requirements contained
within the Agreement.
In order to reduce its outstanding debt and increase liquidity, TFN sold
certain assets to IE which provided $34.2 million in proceeds in December
1994 and an additional $5.0 million in proceeds in January 1995. The proceeds
were used primarily to reduce borrowings under TFN's Agreement. See Note 3 of
Notes to Consolidated Financial Statements.
F-49
<PAGE>
TFN has taken additional steps to increase liquidity by use of IE's
CustomerCare Direct program. Under this program, TFN's need to carry
inventory is significantly reduced as product is shipped directly from IE's
warehouse to the customer's location, thereby eliminating TFN's need to
warehouse such product.
TFN's inventories are financed, in part, by secured credit agreements with
third parties. Such agreements entitle TFN to finance up to $105.0 million of
inventories as of December 31, 1994 on an interest free basis, for periods
ranging from 30 to 45 days. Further, to maintain this level of third party
inventory financing, IE guarantees up to $20.0 million on one of these
agreements. The amounts outstanding under these agreements totalled $88.9
million and $69.6 million as of December 31, 1994 and 1993, respectively. One
of these agreements contains restrictive covenants with respect to the
attainment of various financial objectives. TFN failed to comply with certain
of these covenants as of June 30, 1994, September 30, 1994, and December 31,
1994. TFN has obtained amendments to the agreement waiving the attainment of
the financial objectives until July 31, 1995. TFN must renegotiate and reset
these covenants or obtain a further waiver of these covenants prior to July
31, 1995. Management believes it can successfully renegotiate these covenants
or obtain further waivers by July 31, 1995, if necessary.
During the year ended December 31, 1993, TFN was party to two separate
Secured Credit Agreements with certain banks. The first Secured Credit
Agreement allowed for borrowings up to $50.0 million through September 8,
1993 and the second Secured Credit Agreement allowed for borrowings up to
$85.0 million from September 9, 1993 forward. During 1993, outstanding
borrowings under these Secured Credit Agreements ranged from $23.3 million to
$83.9 million and averaged $48.9 million. The average balance outstanding
under the second Secured Credit Agreement increased substantially after
September 9, 1993 due to the acquisition of Basicomputer Corporation.
In March 1993, TFN received net proceeds of $16.7 million from its public
offering of 1,467,500 common shares. The proceeds were applied to
indebtedness under TFN's Secured Credit Agreement. In October 1993, TFN sold
681,447 of its common shares to IE at $12.8375 per share. Proceeds to TFN
were $8.7 million and were applied to indebtedness under TFN's Secured Credit
Agreement.
Capital expenditures totalled $3.3 million and $4.0 million, respectively,
for the years 1994 and 1993. Capital expenditures are limited by the Secured
Credit Agreement to $4.0 million per year for the years 1994, 1995 and 1996.
F-50
<PAGE>
THE FUTURE NOW, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Period Expenses Accounts Deductions End of Period
-------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1992
Allowance for Doubtful
Accounts .................. $ 285,000 $ 270,831 $ 175,524(1) $ 19,216(3) $ 712,139
Inventory Valuation Reserve .. 996,433 49,575 1,452,871(1) 678,755(4) 1,820,124
---------- -------------- ---------- ---------- ----------
$1,281,433 $ 320,406 $1,628,395 $ 697,971 $2,532,263
========== ============== ========== ========== ==========
Year Ended December 31, 1993
Allowance for Doubtful
Accounts .................. $ 712,139 $ 801,516 $ 978,735(2) $ 1,374,449(3) $1,117,941
Inventory Valuation Reserve .. 1,820,124 214,654 4,454,696(1) -- 6,489,474
---------- -------------- ---------- ----------- ----------
$2,532,263 $ 1,016,170 $5,433,431 $ 1,374,449 $7,607,415
========== ============== ========== =========== ==========
Year Ended December 31, 1994
Allowance for Doubtful
Accounts .................. $1,117,941 $ 2,219,184 $ -- $ 1,899,713(3) $1,437,412
Inventory Valuation Reserve .. 6,489,474 19,730,044(5) -- 18,709,121(6) 7,510,397
---------- -------------- ---------- ----------- ----------
$7,607,415 $ 21,949,228 $ -- $20,608,834 $8,947,809
========== ============== ========== =========== ==========
</TABLE>
------
(1) Valuation included in assets acquired in business acquisitions.
(2) Valuation included in assets acquired in business acquisitions and
amounts established in connection with the Company's transfer of certain
assets and liabilities to the Hewlett-Packard Company.
(3) Accounts written off.
(4) Specific inventory items written off or sold.
(5) Includes restructuring reserve of $17.2 million established in second
quarter of 1994.
(6) Includes transfers of reserves from restructuring to other Balance Sheet
accounts of $7.5 million.
F-51
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets
Receivables:
Trade ..................................................... $ 92,132,737 $ 98,451,119
Due from Intelligent Electronics, Inc. .................... 10,606,075 19,579,190
Other ..................................................... 15,342,687 19,143,376
------------ ------------
118,081,499 137,173,685
Allowance ................................................. (1,445,588) (1,437,412)
------------ ------------
116,635,911 135,736,273
Inventories .................................................. 43,698,556 44,075,416
Prepayments and Other ........................................ 1,554,683 1,565,688
------------ ------------
Total Current Assets ................................. 161,889,150 181,377,377
------------ ------------
Property and Equipment ......................................... 15,686,536 14,884,796
Accumulated Depreciation ..................................... (4,708,654) (3,849,482)
------------ ------------
Property and Equipment, Net .......................... 10,977,882 11,035,314
------------ ------------
Intangible Assets, Net ......................................... 32,199,801 32,681,359
Other Assets ................................................... 6,454,208 4,283,055
------------ ------------
Total Assets ................................................... $211,521,041 $229,377,105
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-Term Debt .............................................. $ 56,823,177 $ 39,927,060
Current Portion of Long-Term Debt ............................ 675,510 687,964
Accounts Payable (net of receivable from Intelligent
Electronics, Inc. for returned product of $5.3 million and
$6.3 million as of March 31, 1995 and December 31, 1994,
respectively) ............................................. 100,955,657 129,893,674
Accrued Expenses ............................................. 15,656,951 20,964,525
Deferred Income and Other .................................... 2,031,711 1,789,909
------------ ------------
Total Current Liabilities ............................ 176,143,006 193,263,132
------------ ------------
Long-Term Liabilities
Long-Term Debt ............................................... 427,352 560,275
Other ........................................................ 2,157,830 2,264,284
------------ ------------
Total Long-Term Liabilities .......................... 2,585,182 2,824,559
------------ ------------
Shareholders' Equity
Common Stock-no par value-20,000,000 shares authorized;
7,578,566 shares issued and outstanding in 1995 and 1994 .. 58,284,537 58,215,267
Accumulated Deficit .......................................... (25,491,684) (24,925,853)
------------ ------------
Total Shareholders' Equity ........................... 32,792,853 33,289,414
------------ ------------
Total Liabilities and Shareholders' Equity ..................... $211,521,041 $229,377,105
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-52
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Revenue
Sales-Equipment and Supplies ................................ $124,894,076 $167,805,823
Sales-Software .............................................. 11,596,612 14,118,751
Professional Services ....................................... 15,503,993 11,763,020
------------ ------------
151,994,681 193,687,594
------------ ------------
Cost of Sales
Equipment and Supplies (including purchases from Intelligent
Electronics, Inc. of approximately $100.0 million and
$120.4 million in the three months ended March 31, 1995
and 1994, respectively) .................................. 114,048,938 151,396,647
Other (including purchases from Intelligent Electronics, Inc.
of approximately $5.3 million and $6.3 million in the
three months ended March 31, 1995 and 1994, respectively) 10,974,539 13,289,321
------------ ------------
125,023,477 164,685,968
------------ ------------
Gross Profit ................................................ 26,971,204 29,001,626
------------ ------------
Operating Expenses
Selling ..................................................... 5,412,727 8,342,481
Professional Services ....................................... 10,422,637 7,086,609
Warehouse ................................................... 516,727 874,388
General and Administrative .................................. 9,364,674 9,430,318
------------ ------------
25,716,765 25,733,796
------------ ------------
Income from Operations ...................................... 1,254,439 3,267,830
Interest Expense .............................................. (1,770,270) (1,501,031)
------------ ------------
Income (Loss) Before Income Taxes .......................... (515,831) 1,766,799
Income Taxes .................................................. 50,000 743,000
------------ ------------
Net Income (Loss) .......................................... $ (565,831) $ 1,023,799
============ ============
Weighted Average Shares Outstanding ........................... 7,578,566 7,554,367
============ ============
Earnings (Loss) Per Share ..................................... $ (.07) $ .14
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-53
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
----------------------------- (Accumulated
Share Amount Deficit)
----------- -------------- --------------
<S> <C> <C> <C>
Balance -- December 31, 1993 ....... 7,473,666 $57,697,549 $ 20,061,699
Restricted Stock Compensation
Earned ........................ 40,000 222,639 --
Exercise of Warrants:
Intelligent Electronics, Inc. . 24,200 99,468 --
Other ......................... 41,200 203,041 --
Treasury Stock ................... (500) (7,430) --
Net Loss ......................... -- -- (44,987,552)
--------- ----------- -------------
Balance -- December 31, 1994 ....... 7,578,566 58,215,267 (24,925,853)
Restricted Stock Compensation
Earned ........................ -- 69,270 --
Net Loss ......................... -- -- (565,831)
--------- ----------- -------------
Balance -- March 31, 1995 .......... 7,578,566 $58,284,537 $ (25,491,684)
========= =========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-54
<PAGE>
THE FUTURE NOW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
<TABLE>
<CAPTION>
1995 1994
-------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities
Receipts from Customers ..................................... $ 153,564,601 $ 215,840,823
Payments to Suppliers and Employees ......................... (172,130,219) (214,363,110)
Income Taxes Paid ........................................... (81,522) (149,367)
Interest Paid ............................................... (2,278,313) (1,355,617)
------------- -------------
Net Cash Used by Operating Activities .................... (20,925,453) (27,271)
------------- -------------
Cash Flows from Investing Activities
Acquisition of Businesses, Net of Cash Acquired ............ -- (641,181)
Purchases of Property and Equipment, Net .................... (806,991) (654,851)
Proceeds from Sale of Branches to Intelligent Electronics,
Inc. ..................................................... 4,981,704 --
------------- -------------
Net Cash Provided (Used) by Investing Activities ......... 4,174,713 (1,296,032)
------------- -------------
Cash Flows from Financing Activities
Borrowings, Net ............................................. 16,750,740 1,323,303
------------- -------------
Net Cash Provided by Financing Activities ................. 16,750,740 1,323,303
------------- -------------
Net Increase in Cash .......................................... -- --
Cash -- beginning of period ................................. -- --
------------- -------------
Cash -- end of period ....................................... $ -- $ --
============= =============
Reconciliation of Net Income (Loss) to Net Cash Used by
Operating Activities
Net Income (Loss) ........................................... $ (565,831) $ 1,023,799
Adjustments to Reconcile Net Income (Loss) to Net Cash Used
by Operating Activities:
Depreciation and Amortization ............................ 1,345,981 1,170,090
Provision for Loss on Accounts Receivable ................ 202,106 --
Changes in Operating Assets and Liabilities (Net of
Effects of Acquisitions and Proceeds from Sale of
Branches to Intelligent Electronics, Inc.):
Decrease (Increase) in:
Receivables ......................................... 13,916,552 19,322,301
Inventories ......................................... 376,860 (8,448,984)
Prepayments and Other ............................... 80,275 82,951
Other Assets ........................................ (2,171,153) 36,926
Increase (Decrease) in:
Accounts Payable and Accrued Expenses ............... (34,352,045) (13,680,886)
Deferred Income and Other ........................... 241,802 466,532
------------- -------------
Net Cash Used by Operating Activities ....................... $ (20,925,453) $ (27,271)
============= ==============
Supplemental Schedule of Non-Cash Investing and Financing
Activities
Fair Value of Assets of Companies Acquired .................. $ -- $ 641,181
Cash Paid ................................................... -- (641,181)
------------- -------------
Liabilities Assumed ......................................... $ -- $ --
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-55
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of TFN include
all adjustments, which are of a normal recurring nature, necessary to present
fairly the Company's results of operations, financial position and cash flows.
As permitted by the rules and regulations of the Securities and Exchange
Commission, the consolidated financial statements do not include all of the
accounting information normally included with financial statements prepared in
accordance with generally accepted accounting principles. Accordingly, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1994 included in TFN's Annual Report on Form 10-K. Results for the three
months ended March 31, 1995 are not necessarily indicative of the results for
any other interim period or for the year as a whole.
NOTE 2 -- SIGNIFICANT TRANSACTIONS
Significant transactions affecting TFN and its consolidated financial
statements include the following:
o Signing on April 28, 1995 of an Agreement and Plan of Merger between
TFN and IE (a related party) whereby IE will acquire the outstanding
stock of TFN (see Note 8);
o Sale on December 30, 1994 of certain branch assets to IE (see Note 3);
and
o Restructuring in 1994 (see Note 4).
NOTE 3 -- SALE OF BRANCHES TO INTELLIGENT ELECTRONICS, INC.
On December 30, 1994, TFN sold certain assets of five branch locations to IE
for approximately $34.2 million in cash received on December 30, 1994 and $5.0
million received January 9, 1995. The cash was used to reduce TFN's debt. The
five branch locations serve the Boston, New York City, Orange County, San
Francisco and Baltimore/Washington, D.C. metropolitan areas. The Boston, New
York City, Washington, D.C. and San Francisco locations were acquired from IE in
July 1992.
The transaction includes a Management Agreement which provides for TFN to
manage these facilities for IE and retain its employees at these locations. All
direct expenses of these branches are paid by IE and certain indirect costs are
reimbursed each month by IE in the amount of $20,000 per branch ($100,000 per
month in total). Additionally, the Management Agreement contains an incentive
compensation arrangement whereby IE shall pay incentive compensation to TFN
based upon the operating results of the branches. During the three months ended
March 31, 1995, no incentive compensation was earned by TFN.
The following table sets forth the revenue and income from operations of the
branches sold reflected in TFN's Consolidated Statement of Operations for the
three months ended March 31, 1994 (in thousands):
Revenue ............................................. $43,807
Income from Operations Before Allocation of Corporate
Overhead ........................................... 215
NOTE 4 -- RESTRUCTURING CHARGE
Effective second quarter 1994, TFN adopted a definitive plan for a
company-wide restructuring, including the closing and consolidation of duplicate
facilities in areas where TFN has made acquisitions. TFN will close or
consolidate all of its branch warehouses, other than its Akron, Ohio facility,
by June 30, 1995 as the CustomerCare Direct program, which decreases the
Company's need to maintain inventory, is fully implemented. Under the
CustomerCare Direct program, IE configures product sold by TFN and ships it
directly to TFN's clients, thereby eliminating TFN's need to carry that
inventory. In connection with the restructuring, TFN consolidated or closed
offices in six geographic areas, including the consolidation of TFN's three
Southern California offices into one operation, and its two facilities into one
in each of the New York, Northeast Ohio and Dallas markets. TFN took these
actions to integrate and consolidate the 15 companies it has acquired over the
F-56
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4 -- Restructuring Charge - (Continued)
past six years. As a part of this restructuring, TFN is centralizing certain of
its operations and has reorganized management to continue its emphasis on higher
margin professional services. Professional services will continue to be the
principal focus of TFN's strategy.
The restructuring resulted in a one-time charge of $33.0 million against 1994
second quarter results. During the first quarter of 1995, TFN consolidated one
branch warehouse, began the consolidation process in four other branch
warehouses and utilized the restructuring reserves in the following amounts:
<TABLE>
<CAPTION>
Reclass- Utilized to
ification Offset
to Other Expenses in Payment of
Reserve Balance Statement Other Reserve
December Sheet of Restructur- March 31,
31, 1994 Accounts Operations ing Costs Transfers 1995
---------- ----------- ------------- ------------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Provision for loss on disposition of
inventory ......................... $ 6.2 (.9) (1.0) -- -- $4.3
Closure of warehouse facilities .... 4.0 -- (.3) -- .3 4.0
Personnel separation costs ......... 1.4 -- (.4) (.1) -- .9
Other .............................. 1.2 -- -- (.2) (.3) .7
----- ---- ----- ---- ---- ----
Total ............................ $12.8 (.9) (1.7) (.3) -- $9.9
===== ==== ===== ==== ==== ====
</TABLE>
Inventory reserves of $0.9 million reclassified to other balance sheet
accounts were principally transferred to reduce the carrying value of assets
received in exchange for certain of TFN's inventories.
Inventory reserves of $1.0 million were utilized to offset costs related
to the bulk disposal of inventories.
Reserves for closure of warehouse facilities of $0.3 million were utilized
principally to offset costs related to minimum lease payments, net of
sublease receipts, from each warehouse closure date. Reserves of $0.3 million
related to other costs were transferred to the reserve for warehouse
facilities based upon management's estimation of levels of reserves needed to
complete the closure of warehouse facilities and the determination that fewer
reserves were needed for other restructuring costs.
Reserves for personnel separation costs of $0.4 million were utilized
principally to offset personnel separation and other transition costs
associated with terminated warehouse and administrative employees.
Approximately 30 warehouse and administrative employees have been terminated
during the three months ended March 31, 1995. Reserves of $0.1 million were
utilized to offset other personnel separation costs that would not have been
incurred by TFN absent its restructuring actions.
Reserves for other costs of $0.2 million were utilized to offset other
restructuring charges that would not have been incurred by TFN absent its
restructuring actions.
In addition, TFN expects future operating costs to be incurred related to
the restructuring that are not included in the restructuring charge. These
costs include anticipated enhancements to the management information system
of $1.6 million.
Management believes that the restructuring actions being taken will
enhance TFN's ability to compete effectively through its professional
services oriented business strategy. However, competition in this industry is
significant and is dependent upon a number of factors which may be beyond
TFN's control, such as general economic conditions, hardware and software
margins, demand for professional services and various other industry
pressures. A significant deterioration in anticipated levels of business or a
significant decline in margin could require TFN to make additional
adjustments to its expense structure, including additional restructuring
actions.
F-57
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5 -- INVENTORIES
Inventories consist of items held for resale and for rental and are composed
of the following:
March 31, December 31,
1995 1994
-------------- --------------
Equipment Held for Resale....... $47,938,266 $50,161,456
Rental Equipment .............. 1,232,376 1,424,357
----------- -----------
Sub-Total ................ 49,170,642 51,585,813
Allowance ..................... (5,472,086) (7,510,397)
----------- -----------
Total ............... $43,698,556 $44,075,416
=========== ===========
NOTE 6 -- DEBT AND FINANCING AGREEMENTS
As of March 31, 1995, TFN was party to a Secured Credit Agreement
("Agreement") with certain banks. This revolving credit facility permits
borrowing of up to $70.0 million with interest rates varying based on the prime
rate (9.0% at March 31, 1995) offered by the agent plus 1 1/4 % and is payable
in full in September 1996. Advances against this Agreement are based on TFN's
trade receivables and are subject to eligibility requirements contained within
the Agreement. The outstanding balance on this Agreement as of March 31, 1995
was $56.8 million with an eligibility of $65.3 million. Collateral pledged for
this Agreement includes all of TFN's assets with the exception of inventory,
which is pledged as security to the third party inventory finance companies. The
provisions of the facility contain various restrictive covenants with respect to
the maintenance of minimum tangible net worth, restrictions on fixed asset
additions, restrictions on fixed charges, maintenance of a minimum current
ratio, and restrictions on certain additional indebtedness. As a result of the
restructuring charge during the second quarter of 1994, TFN failed to comply
with several of the financial covenants required under the Agreement.
Effective July 8, 1994, an initial amendment to the Agreement waived until
September 30, 1994 any default which occurred on June 30, 1994 as a result of
TFN's failure to comply with these covenants. TFN also failed to comply with
certain of these covenants as of September 30, 1994, December 31, 1994 and March
31, 1995. Subsequent amendments extended the waiver until July 31, 1995. TFN
must complete its merger with IE, secure new financing, or obtain a further
waiver of these covenants prior to July 31, 1995. TFN expects that there will no
longer be a need for this financing when the merger with IE described in Note 8
is consummated.
TFN has agreements with third parties principally to finance certain of its
inventory purchases from IE as of March 31, 1995. Under these credit agreements,
as of March 31, 1995, TFN may purchase up to $105.0 million of inventories with
extended payment terms. Such agreements generally are secured by inventories
and, in certain instances, the proceeds related thereto, and may be terminated
immediately upon default by TFN or otherwise within 60 to 90 days by either the
third party or TFN. Further, to maintain this level of third party inventory
financing, IE guarantees up to $20.0 million on one of these agreements. One of
these agreements contains various restrictive covenants with respect to the
maintenance of a minimum level of tangible net worth and subordinated debt,
maintenance of a minimum current ratio, maintenance of a minimum ratio of debt
to tangible net worth and a prohibition against the payment of dividends. TFN
failed to comply with certain of these covenants as of June 30, 1994, September
30, 1994, December 31, 1994 and March 31, 1995. TFN has obtained amendments to
the agreement waiving the attainment of the financial objectives until July 31,
1995. TFN must complete its merger with IE, renegotiate and reset these
covenants or obtain a further waiver of these covenants prior to July 31, 1995.
The amounts outstanding under these agreements are included in accounts payable
and totaled $69.7 million as of March 31, 1995. If principal payments on these
payables are made on a timely basis, no interest accrues. Interest incurred
relating to these third party finance companies was $861,000 and $68,000 for the
three months ended March 31, 1995 and 1994, respectively.
F-58
<PAGE>
THE FUTURE NOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 -- INCOME TAXES
The provision for income taxes for the three months ended March 31, 1995
consists primarily of state and local income tax. TFN has remaining net
operating losses approximating $12.0 million at March 31, 1995 for which no
financial statement benefit has been recognized and which are available to
offset future Federal taxable income, if any, through 2009.
NOTE 8 -- SUBSEQUENT EVENT AND OTHER RELATED PARTY TRANSACTIONS
TFN's largest shareholder (with approximately 31.1% of the outstanding stock)
is IE.
On April 28, 1995, TFN and IE signed an Agreement and Plan of Merger
("Agreement") whereby IE will acquire the outstanding stock of TFN. The
acquisition will be a stock-for-stock, tax- free transaction. Based on the
exchange ratio set forth in the Agreement, TFN's shareholders will receive .6588
shares of IE Common Stock in exchange for each share of TFN Common Stock. The
Agreement may, however, be terminated by IE if the average closing price
(defined as the average of the closing price per share of IE's common stock, as
reported by The Nasdaq Stock Market, for the 20 trading days ending on the
second trading day prior to the closing date) of IE Common Stock exceeds $11.00.
If IE elects to terminate the Agreement under this provision, TFN has the right
to override any such termination election by agreeing the conversion number of
.6588 will be changed to the quotient that results from dividing $7.2468 by the
average closing price of IE Common Stock. The Agreement may also be terminated
by TFN if the average closing price of IE Common Stock is less than $9.00. If
TFN elects to terminate the Agreement under this provision, IE has the right to
override any such termination election by agreeing the conversion number of
.6588 will be changed to the quotient that results from dividing $5.9292 by the
average closing price of IE Common Stock.
The transaction is subject to the satisfaction of customary closing
conditions, including registration of the shares of IE Common Stock to be issued
in the acquisition with the Securities and Exchange Commission and receipt of
third party and governmental approvals, including approval of the acquisition by
shareholders of TFN.
On December 30, 1994, TFN sold certain assets of five branch locations to IE
(see Note 3).
Receivables from IE are composed of the following:
March 31, December 31,
1995 1994
-------------- --------------
From Sale of Branches to IE: ......
Inventory .................... $ -- $ 4,981,704
Receivables .................. 5,690,955 11,142,629
From Operations of Branches for IE 106,545 --
Rebates, Price Protection and Other 4,808,575 3,454,857
----------- -----------
Total ................... $10,606,075 $19,579,190
=========== ===========
Under its Management Agreement with IE, TFN is reimbursed for certain
indirect costs of managing the five branches for IE at a rate of $20,000 per
month per branch. In the three months ended March 31, 1995, TFN earned
$300,000 which is recorded as a reduction in general and administrative
expenses.
Payments by TFN for purchases of inventory from IE for the three months
ended March 31, 1995 and 1994 aggregated approximately $115.0 million and
$144.8 million, respectively.
IE serves as guarantor of up to $20.0 million of amounts owed by TFN to an
inventory finance company (see Note 6).
TFN uses the services of a law firm and of another professional services
firm, in each of which a director is a principal. Fees paid to these firms
for the three months ended March 31, 1995 and 1994 were not material to the
Consolidated Financial Statements.
F-59
<PAGE>
THE FUTURE NOW, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND SIGNIFICANT TRANSACTIONS
Results of operations for the three months ended March 31, 1995 and for
all future periods are significantly impacted by the sale on December 30,
1994 of five of TFN's branches to IE. Further, TFN signed an Agreement and
Plan of Merger on April 28, 1995 to merge with IE. See Notes 3 and 8 of Notes
to Consolidated Financial Statements.
THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1994
Revenue decreased $41.7 million, or 21.5%, during the first quarter of
1995 as compared with the first quarter of 1994. The decrease in revenues is
due primarily to the sale of five of TFN's branches to IE. If revenues for
1994 are adjusted for the revenues of these five branches (see Note 3 of
Notes to Consolidated Financial Statements), revenue increased $2.1 million,
or 1.4%, during the first quarter of 1995 as compared with the first quarter
of 1994. This increase is the result of an increase of $6.0 million in
professional services revenue, offset by a decrease of $3.9 million in
equipment, supplies and software revenue.
Equipment and supplies revenue as a percentage of total revenue decreased
to 82.2% in the first quarter of 1995 as compared with 86.6% in the first
quarter of 1994. Software revenue as a percentage of total revenue increased
to 7.6% in the first quarter of 1995 as compared with 7.3% in the first three
months of 1994. Because the gross margins generally are lower on sales of
equipment, supplies and software than are margins on sales of professional
services, management generally views decreases in the percentage of total
revenue generated by these products to be favorable.
Professional services revenue increased to 10.2% of total revenue for the
first quarter of 1995 from 6.1% in the first quarter of 1994. "Professional
services" is defined by TFN as revenue derived from: (i) commissions earned
on the sale of maintenance contracts in 1994 and from maintenance contracts
in 1995; (ii) product installation; (iii) systems design, integration and
networking; (iv) repair services in 1995; (v) training; and (vi) product
rental.
In late 1993, TFN formed an alliance with the Hewlett-Packard Company
wherein the Hewlett-Packard Company provided hardware repair services for
TFN's clients. Accordingly, TFN had no repair services revenue in the first
quarter of 1994. Effective January 1, 1995, TFN terminated its arrangement
with the Hewlett-Packard Company and began providing hardware repair services
for its clients. TFN formed the Service Group section of the Technology
Deployment and Service Group to provide such services. The Service Group is
operating under a newly formed management team and has purchased software to
assist in the management of the repair services business. Arrangements have
been made with a parts supplier to provide the repair parts used in the
repair service work, thereby eliminating the need for TFN to carry parts
inventory. Revenue earned in the three months ended March 31, 1995 from
repair services approximated $1,300,000.
Gross profit as a percentage of total revenue increased to 17.7% in the
first quarter of 1995 as compared with 15.0% for the first quarter of 1994.
TFN's gross profit margin increase resulted primarily from a larger
percentage of total revenues derived from professional services in the first
quarter 1995 as compared to the first quarter 1994.
Selling expenses as a percentage of total revenue decreased to 3.6% for
the first quarter of 1995 as compared with 4.3% for the first quarter of
1994. This decrease in percentage of total revenue is due to the realization
of the planned volume increases without a corresponding increase in staffing.
Professional services expenses as a percentage of total revenue increased
to 6.9% in the first quarter of 1995 as compared with 3.7% for the first
quarter of 1994. Included in professional services expenses in the first
F-60
<PAGE>
quarter of 1995 are approximately $800,000 of start-up costs for the Service
Group. The increase also resulted from the addition of technical personnel to
the Service Group and from other staff hired to focus on the increased demand
for professional services in the business, professional, governmental and
educational markets.
General and administrative expenses increased as a percentage of total
revenue to 6.2% in the first quarter of 1995 as compared with 4.9% during the
first quarter of 1994. Marketing rebates, which are reported as reductions in
general and administrative expenses, totaled 1.1% of revenue in the first
quarter of 1995 as compared with 1.2% for the first quarter of 1994. In
general, levels of marketing rebates are declining and will continue to be
affected by the nature and timing of vendor programs and by TFN's effective
utilization of such programs. General and administrative expenses before
reduction for marketing rebates were 7.3% of revenue in the first quarter of
1995 and 6.1% in the first quarter of 1994. The increase resulted primarily
from expenses of managing the five branch locations for IE, primarily
executive and administrative salaries and related benefits, and computer
expense. Partial reimbursement by IE of these expenses is included as a
reduction in general and administrative expenses ($300,000 for the three
months ended March 31, 1995).
Interest expense increased in the first quarter of 1995 to $1.8 million
from $1.5 million in the first quarter of 1994. The increase resulted
principally from interest incurred on floorplanned inventory and interest
rate increases. TFN incurred interest of $861,000 on floorplanned inventory
purchases in the first quarter of 1995 compared with such interest of $68,000
in the first quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
Certain of TFN's financing is provided through a Secured Credit Agreement
("Agreement") with certain banks and other financing agreements with third
parties to finance TFN's inventories. As of March 31, 1995, the Agreement
permits borrowing of up to $70.0 million payable in full in September 1996
with interest rates varying based on the prime rate offered by the agent bank
plus 1 1/4 %. The provisions of the Agreement contain various restrictive
covenants with respect to the attainment of various financial objectives. As
a result of the restructuring charge, TFN failed to comply with certain of
these covenants as of June 30, 1994, September 30, 1994, December 31, 1994
and March 31, 1995. Effective July 8, 1994, an initial amendment to the
Agreement waived TFN's requirement to achieve these covenants through
September 30, 1994. Subsequent amendments extended the waiver until July 31,
1995. TFN must complete its merger with IE, secure new financing, or obtain a
further waiver of these covenants prior to July 31, 1995. TFN expects that
there will no longer be a need for this financing when the merger with IE is
consummated. If the merger is not consummated, TFN must renegotiate its
current financing or obtain new financing. The maximum level of borrowing
under this Agreement was reduced from $85.0 million ($95.0 million from
January 19, 1994 through March 31, 1994) to $70.0 million effective January
1, 1995 as specified under a waiver of financial covenants and as a result of
the sale of certain branch assets to IE. Advances against this Agreement are
based on TFN's trade receivables and are subject to eligibility requirements
contained within the Agreement.
During the three months ended March 31, 1995, the borrowings under the
Agreement ranged from $39.3 million to $56.8 million and averaged $49.5
million outstanding. The balance outstanding under the Agreement at May 12,
1995 was $57.1 million.
In order to reduce its outstanding debt and increase liquidity, TFN sold
certain assets to IE which provided $34.2 million in proceeds in December
1994 and an additional $5.0 million in proceeds in January 1995. The proceeds
were used primarily to reduce borrowings under the Company's Agreement.
TFN has taken additional steps to increase liquidity by use of IE's
CustomerCare Direct program. Under this program, TFN's need to carry
inventory is significantly reduced as product is shipped directly from IE's
warehouse to the customer's location, thereby eliminating TFN's need to
warehouse such product.
TFN's inventories are financed, in part, by secured credit agreements with
third parties. Such agreements entitle TFN to finance up to $105.0 million of
inventories as of March 31, 1995 on an interest free basis, for periods
ranging from 30 to 45 days. Further, to maintain this level of third party
inventory financing, IE guarantees up to $20.0 million on one of these
agreements. The amounts outstanding under these agreements totaled $69.7
million as of March 31, 1995. One of these agreements contains restrictive
F-61
<PAGE>
covenants with respect to the attainment of various financial objectives. TFN
failed to comply with certain of these covenants as of June 30, 1994, September
30, 1994, December 31, 1994 and March 31, 1995. TFN has obtained amendments to
the agreement waiving the attainment of the financial objectives until July 31,
1995. TFN must renegotiate and reset these covenants or obtain a further waiver
of these covenants prior to July 31, 1995. Management believes it can
successfully renegotiate these covenants or obtain further waivers by July 31,
1995, if necessary.
Net cash used by operating activities in the first quarter of 1995 were
significantly impacted by the payment of payables related to the five
branches sold to IE on December 30, 1994.
Capital expenditures totaled $0.8 million and $0.7 million for the three
months ending March 31, 1995 and 1994, respectively. Capital expenditures are
limited by the Secured Credit Agreement to $4.0 million per year for the
years 1995 and 1996.
F-62
<PAGE>
ANNEX A
MERGER AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Agreement and Plan of Merger by and among Intelligent Electronics, Inc. and IE Ohio Acquisition
Corporation and The Future Now, Inc. dated as of April 28, 1995 ................................. A-2
Schedule 4.2(h) -- Opinion of Norma Skoog, Esquire ............................................... A-35
Schedule 4.3(e) -- Opinion of Pepper, Hamilton & Scheetz ......................................... A-37
Amendment No. 1 to Agreement and Plan of Merger dated as of July 6, 1995 ......................... A-39
</TABLE>
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
By and Among
INTELLIGENT ELECTRONICS, INC.
and
IE OHIO ACQUISITION CORPORATION
and
THE FUTURE NOW, INC.
Dated as of April 28, 1995
A-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
ARTICLE 1
THE MERGER AND RELATED MATTERS .................................. A- 5
1.1. The Merger ........................................................... A- 5
1.2. Conversion of Stock .................................................. A- 5
1.3. Dissenting Shareholders .............................................. A- 6
1.4. Exchange Procedures .................................................. A- 6
1.5. Options and Warrants ................................................. A- 8
1.6. Certificate of Incorporation of the Surviving Corporation ............ A- 8
1.7. Code of Regulations of the Surviving Corporation ..................... A- 8
1.8. Directors and Officers of the Surviving Corporation .................. A- 9
1.9. Closing .............................................................. A- 9
ARTICLE 2
REPRESENTATIONS AND WARRANTIES .................................. A- 9
2.1. Representations and Warranties of the Company ........................ A- 9
2.2. Representations and Warranties of Parent and Sub ..................... A-17
ARTICLE 3
COVENANTS ....................................................... A-22
3.1. Acquisition Proposals ................................................ A-22
3.2. Employee Benefits .................................................... A-22
3.3. Access and Information ............................................... A-22
3.4. Certain Filings, Consents and Arrangements ........................... A-23
3.5. Indemnification and Insurance ........................................ A-23
3.6. Publicity ............................................................ A-24
3.7. Proxy; Registration Statement ........................................ A-24
3.8. Shareholders' Meeting ................................................ A-24
3.9. Antitakeover Statutes ................................................ A-24
3.10. Listing ............................................................. A-25
3.11. Restriction on Dividends, Splits, Etc ............................... A-25
3.12. Conduct of the Business of the Company Pending the Closing Date ..... A-25
3.13. Best Efforts ........................................................ A-26
3.14. Notice of Default ................................................... A-26
3.15. Treatment of Certain Debt ........................................... A-26
3.16. Tax Status .......................................................... A-26
ARTICLE 4
CONDITIONS PRECEDENT TO MERGER .................................. A-27
4.1. Conditions Precedent to Obligations of Parent, Sub and the Company ... A-27
4.2. Conditions Precedent to Obligations of Parent and Sub ................ A-28
4.3. Conditions Precedent to the Obligations of the Company ............... A-28
ARTICLE 5
TERMINATION AND ABANDONMENT ..................................... A-29
5.1. Termination .......................................................... A-29
5.2. Effect of Termination ................................................ A-31
5.3. Expenses ............................................................. A-31
5.4. Basic Fee ............................................................ A-31
A-3
<PAGE>
Page
--------
ARTICLE 6
MISCELLANEOUS ................................................... A-31
6.1. Knowledge ............................................................ A-31
6.2. Survival ............................................................. A-32
6.3. Waiver ............................................................... A-32
6.4. Notices .............................................................. A-32
6.5. Entire Agreement; Etc. ............................................... A-33
6.6. Assignment ........................................................... A-33
6.7. Headings ............................................................. A-33
6.8. Counterparts ......................................................... A-33
6.9. Applicable Law ....................................................... A-33
6.10. Severability ........................................................ A-33
SCHEDULES AND EXHIBITS
1. Exhibit A -- Company Disclosure Schedule. (Not included)
2. Exhibit B -- Parent Disclosure Schedule. (Not included)
3. Schedule 4.2(h) -- Opinion of Norma Skoog, Esquire.
4. Schedule 4.3(e) -- Opinion of Pepper, Hamilton & Scheetz.
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 28, 1995 ("Agreement"), by
and among INTELLIGENT ELECTRONICS, INC., a Pennsylvania corporation
("Parent"), IE OHIO ACQUISITION CORPORATION, an Ohio corporation ("Sub") and
a wholly-owned subsidiary of Parent, and THE FUTURE NOW, INC., an Ohio
corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have approved the acquisition of the Company by Parent, subject to the terms
and conditions of this Agreement;
WHEREAS, to complete such acquisition, the respective Boards of Directors
of Parent, Sub and the Company have approved the merger of Sub into the
Company (the "Merger") pursuant to and subject to the terms and conditions of
this Agreement;
WHEREAS, the parties intend that the Merger qualify as a reorganization
pursuant to Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code");
NOW THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, representations, warranties and agreements herein
contained, the parties, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
THE MERGER AND RELATED MATTERS
1.1. The Merger.
(a) Subject to the terms and conditions of this Agreement, at the time
of the Closing (as defined in Section 1.9 hereof), a certificate of merger
(the "Ohio Certificate of Merger") shall be duly prepared, executed and
acknowledged by Sub and the Company in accordance with the Ohio General
Corporation Law (the "OGCL") and shall be filed on the Closing Date (as
defined in Section 1.9 hereof). The Merger shall become effective upon the
filing of the Ohio Certificate of Merger with the Secretary of State of
the State of Ohio in accordance with the provisions and requirements of
the OGCL, or at such other time as may be set forth, by mutual agreement
of the parties, in the Ohio Certificate of Merger. The date and time when
the Merger shall become effective is hereinafter referred to as the
"Effective Time."
(b) At the Effective Time, Sub shall be merged with and into the
Company and the separate corporate existence of Sub shall cease, and the
Company shall continue as the surviving corporation under the laws of the
State of Ohio under the name of The Future Now, Inc. (the "Surviving
Corporation").
(c) From and after the Effective Time, the Merger shall have the
effects set forth in Section 1701.82 of the OGCL.
1.2. Conversion of Stock.
(a) At the Effective Time, each share of Common Stock, no par value, of
the Company (the "Company Common Stock") then issued and outstanding
(other than (i) any shares of Company Common Stock which are held by any
subsidiary of the Company or in the treasury of the Company, or which are
held, directly or indirectly, by Parent or any subsidiary of Parent
(including Sub), all of which shall be canceled and none of which shall
receive any payment with respect thereto, and (ii) shares of Company
Common Stock held by Dissenting Shareholders, as defined in Section 1.3
hereof) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and represent the Per Share
Merger Consideration (as defined in paragraph (b) below); and each issued
and outstanding share of common stock of Sub shall be converted into and
represent an issued and outstanding share of common stock of the Surviving
Corporation.
(b) As used herein, the term "Per Share Merger Consideration" shall
mean .6588 (the "Conversion Number") shares of common stock, par value
$.01 per share, of Parent (the "Parent Stock"). In the event that prior to
the Effective Time the outstanding shares of Parent Stock shall have been
increased, decreased or changed into or exchanged for a different number or
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kind of shares or securities by reorganization, recapitalization,
reclassification, stock dividend, stock split or other like changes in
Parent's capitalization, all without Parent receiving adequate consideration
therefor, then an appropriate and proportionate adjustment shall be made in
the Conversion Number and in the number and kind of shares of Parent Stock to
be thereafter delivered pursuant to this Agreement.
(c) Notwithstanding the foregoing, no fractional shares of Parent Stock
shall be issued to holders of Company Common Stock. In lieu thereof, each
holder of shares of Company Common Stock who would otherwise have been
entitled to receive a fraction of a share of Parent Stock (after taking
into account all certificates delivered by such holder at any one time)
shall receive an amount in cash equal to such fraction of a share of
Parent Stock, multiplied by the Average Closing Price of a share of Parent
Stock. "Average Closing Price of a share of Parent Stock" means the
average of the closing price per share of Parent Stock, as reported by The
Nasdaq Stock Market (as reported by The Wall Street Journal or, if not
reported thereby, by another authoritative source), for the 20 trading
days ending on the second trading day prior to the Closing Date.
(d) The shares of the Parent Stock issued and outstanding immediately
prior to the Effective Time shall remain outstanding and unchanged after
the Merger.
1.3. Dissenting Shareholders. Notwithstanding anything in this Agreement
to the contrary but only to the extent required by Section 1701.85 of the
OGCL, shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time and are held by holders who comply
with all the provisions of Ohio law concerning the right of holders of
Company Common Stock to dissent from the Merger and require appraisal of
their shares of Company Common Stock ("Dissenting Shareholders") shall not be
converted into the Per Share Merger Consideration but shall become the right
to receive such consideration as may be determined to be due such Dissenting
Shareholders pursuant to Ohio law; provided, however, that shares of Company
Common Stock outstanding immediately prior to the Effective Time and held by
a Dissenting Shareholder who shall, after the Effective Time, withdraw his or
her demand for appraisal or lose his or her right of appraisal, in either
case pursuant to the OGCL, shall thereupon be deemed to have been converted,
as of the Effective Time, into the Per Share Merger Consideration, without
interest. The Company shall give Parent and Sub (i) prompt notice of any
written demands for appraisal, withdrawals of demands for appraisal and any
other related instruments received by the Company, and (ii) the opportunity
to direct all negotiations and proceedings with respect to demands for
appraisal under Ohio law. Except with the prior written consent of Parent,
the Company will not voluntarily make any payment with respect to any demands
for appraisal and will not settle or offer to settle any demand.
1.4. Exchange Procedures.
(a) At and after the Effective Time, each certificate or certificates
previously representing shares of Company Common Stock, taking into
account all certificates of a holder of Company Common Stock delivered by
such holder at any one time (taken together, a "Certificate"), shall
represent (i) the number of whole shares of Parent Stock and (ii) the
right to receive cash in lieu of fractional shares into which such Company
Common Stock has been converted pursuant to Section 1.2 hereof.
Certificates previously representing shares of Company Common Stock shall
be exchanged for certificates representing whole shares of Parent Stock
and cash in lieu of fractional shares issued in consideration therefor
upon the surrender of such Certificates in accordance with this Section
1.4 without any interest thereon.
(b) As of the Effective Time, for the benefit of the holders of shares
of Company Common Stock, Parent shall deposit, or shall cause to be
deposited, with an exchange agent (the "Exchange Agent"), for exchange in
accordance with this Section 1.4, certificates representing the shares of
Parent Stock and the Company shall deposit, or shall cause to be deposited
with the Exchange Agent, cash in lieu of fractional shares (such cash and
certificates for shares of Parent Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issued pursuant to Section 1.2 and to be paid pursuant to
this Section 1.4 in exchange for outstanding shares of Company Common
Stock. The Exchange Agent shall be Mellon Securities Transfer Services, or
such other bank, trust company or financial institution as is mutually
agreeable to Parent and the Company.
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(c) Promptly after the Effective Time, Parent shall cause the Exchange
Agent to mail to each holder of record of a Certificate or Certificates
the following: (i) a letter of transmittal specifying that delivery shall
be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent, which shall
be in a form and contain any other provisions as Parent and the Company
may reasonably agree; and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing
shares of Parent Stock and cash in lieu of fractional shares. Upon the
proper surrender of a Certificate to the Exchange Agent, together with a
properly completed and duly executed letter of transmittal, the holder of
such Certificate shall be entitled to receive in exchange therefor (x) a
certificate representing that number of whole shares of Parent Stock and
(y) a check representing the amount of cash in lieu of any fractional
shares and unpaid dividends and distributions, if any, which such holder
has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of Section 1.2, and the Certificate so
surrendered shall forthwith be canceled. No interest will be paid or
accrued on the cash in lieu of fractional shares and unpaid dividends and
distributions, if any, payable to holders of Certificates. In the event of
a transfer of ownership of any shares of the Company Common Stock not
registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Stock, together with a
check for the cash to be paid in lieu of fractional shares, may be issued
to the transferee if the Certificate representing such Company Common
Stock is presented to the Exchange Agent, accompanied by documents
sufficient (1) to evidence and effect such transfer and (2) to evidence
that all applicable stock transfer taxes have been paid.
(d) Until surrendered in accordance with the provisions of this Section
1.4, each Certificate shall, subject to this paragraph (d), be deemed for
all purposes to evidence ownership of the number of shares of Parent Stock
into which the shares of Company Common Stock represented by such
Certificate have been changed or converted. Whenever a dividend or other
distribution is declared by Parent on the Parent Stock, the record date
for which is at or after the Effective Time, the declaration shall include
dividends or other distributions on all shares issuable pursuant to this
Agreement; provided that no dividend or other distribution declared or
made on the Parent Stock shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Stock represented thereby
until the holder of such Certificate shall duly surrender such Certificate
in accordance with this Section 1.4. Following such surrender of any such
Certificate, there shall be paid to the holder of the certificates
representing whole shares of Parent Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of
dividends or other distributions having a record date after the Effective
Time theretofore payable with respect to such whole shares of Parent Stock
and not yet paid and (ii) at the appropriate payment date, the amount of
dividends or other distributions having (x) a record date after the
Effective Time but prior to surrender and (y) a payment date subsequent to
surrender payable with respect to such whole shares of Parent Stock.
(e) From and after the Effective Time, there shall be no transfers on
the stock transfer records of the Company of any shares of the Company
Common Stock that were outstanding immediately prior to the Effective
Time. If after the Effective Time Certificates are presented to Parent,
they shall be canceled and exchanged for the shares of Parent Stock and
cash in lieu of fractional shares, if any, deliverable in respect thereof
pursuant to this Agreement in accordance with the procedures set forth in
this Section 1.4.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any Parent Stock) that remains unclaimed by the
shareholders of the Company for one year after the Effective Time shall be
distributed and repaid to Parent. Any shareholders of the Company who have
not theretofore complied with this Section 1.4 shall thereafter look only
to Parent for payment of their shares of Parent Stock, cash in lieu of
fractional shares and any unpaid dividends and distributions on Parent
Stock deliverable in respect of each share of Company Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. If outstanding certificates for shares of
Company Common Stock are not surrendered or the payment for them not
claimed prior to the date on which such payments would otherwise escheat
to or become the property of any governmental unit or agency, the
unclaimed items shall, to the extent permitted by abandoned property and
any other applicable law, become the property of Parent (and to the extent
not in its possession shall be paid over to it), free and clear of all
claims or interest of any person previously entitled to such claims, except
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<PAGE>
that any cash in lieu of fractional shares shall become the property of the
Surviving Corporation. Notwithstanding the foregoing, none of Parent, the
Exchange Agent or any other person shall be liable to any former holder of
Company Common Stock for any amount delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(g) In the event any Certificate 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 and, if required
by Parent, the posting by such person of a bond in such amount as Parent
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed Certificate the shares of Parent Stock and
cash in lieu of fractional shares deliverable (and unpaid dividends and
distributions) in respect thereof pursuant to this Agreement.
1.5. Options and Warrants. At the Effective Time, each option and warrant
granted by the Company to purchase shares of Company Common Stock, which is
outstanding and unexercised immediately prior thereto, shall be converted
into an option or warrant (as applicable) to purchase shares of Parent Stock
on the same terms and conditions as are in effect immediately prior to the
Merger as adjusted as set forth below. Each such option and warrant that is
converted shall be converted into an option or warrant (as applicable) to
purchase such number of shares of Parent Stock at such exercise price as is
determined as provided below (and otherwise having the same duration and
other terms as the original option or warrant, including any terms in the
original option or warrant regarding acceleration; provided that, with
respect to the directors of the Company and with respect to those employees
of the Company whose employment with the Company or Parent is terminated by
Parent or the Company within 180 days following the Closing Date (such
directors and employees being herein referred to as "Subject Persons"), such
options shall remain outstanding and exercisable and continue to vest
throughout the full term thereof notwithstanding termination of the
optionee's service as a director of, or employment with, the Company or
Parent, but only on the condition that any such director or employee who
holds "incentive stock options" (as defined in Section 422 of the Code)
waives the loss of incentive stock option treatment with respect to such
options):
(a) the number of shares of Parent Stock to be subject to the new
option or warrant shall be equal to the product of (i) the number of
shares of the Company Common Stock subject to the original option or
warrant and (ii) the Conversion Number (after giving effect to any
increase or decrease thereto pursuant to Section 1.2(b) hereof), the
product being rounded, if necessary, up or down, to the nearest whole
share;
(b) the exercise price per share of Parent Stock under the new option
or warrant shall be equal to (i) the exercise price per share of the
Company Common Stock under the original option or warrant divided by (ii)
the Conversion Number (after giving effect to any increase or decrease
thereto pursuant to Section 1.2(b) hereof), rounded, if necessary, up or
down, to the nearest cent;
(c) any reference in the original option or warrant to the Company
shall refer instead to Parent in the new option or warrant.
The adjustment provided herein with respect to options which are incentive
stock options shall be effected in a manner consistent with Section 424(a) of
the Code, except for options held by Subject Persons who have waived the loss
of incentive stock option treatment with respect to such options. Immediately
after the Effective Time, Parent shall file a registration statement or a
post-effective amendment to the Registration Statement (as defined in Section
2.1(d) or to any other registration statement registering the issuance of
shares of Parent Common Stock upon exercise of the stock options or warrants
issued or granted pursuant to this Section 1.5.
1.6. Certificate of Incorporation of the Surviving Corporation. The
Certificate of Incorporation of the Company shall be the Certificate of
Incorporation of the Surviving Corporation.
1.7. Code of Regulations of the Surviving Corporation. The Code of
Regulations of the Company, as in effect immediately prior to the Effective
Time, shall be the Code of Regulations of the Surviving Corporation until
thereafter amended as provided by law.
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1.8. Directors and Officers of the Surviving Corporation. At the Effective
Time, the directors of Sub shall be the directors of the Surviving
Corporation, each of such directors to hold office, subject to the applicable
provisions of the Certificate of Incorporation and Code of Regulations of the
Surviving Corporation, until the next annual stockholders' meeting of the
Surviving Corporation and until their respective successors shall be duly
elected or appointed and qualified. At the Effective Time, the persons
specified by Parent to the Company at or prior to the Effective Time shall,
subject to the applicable provisions of the Certificate of Incorporation and
Code of Regulations of the Surviving Corporation, be the officers of the
Surviving Corporation until their respective successors shall be duly elected
or appointed and qualified.
1.9. Closing. The closing of the Merger (the "Closing") shall take place
at the offices of Pepper, Hamilton & Scheetz, 3000 Two Logan Square,
Philadelphia, Pennsylvania, at 10:00 A.M., local time, on the day which is
the third business day after the day on which the last of the conditions set
forth in Section 4.1(a) and 4.1(b) hereof is fulfilled or waived (subject to
applicable law), or at such other time and place and on such other date as
Parent and the Company shall mutually agree (the "Closing Date").
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties of the Company. The Company hereby
represents and warrants to and for the benefit of Parent and Sub all of the
following except as and to the extent expressly disclosed on the schedule
(the "Company Disclosure Schedule") attached hereto as Exhibit A, with
reference to the corresponding paragraph of this Section 2.1 to which each
disclosure relates:
(a) Due Organization, Good Standing and Corporate Power. Each of the
Company and its subsidiaries is a corporation validly existing and in good
standing under the laws of the jurisdiction of its incorporation and each
such corporation has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Each of the Company and its subsidiaries is duly qualified or
licensed to do business and is in good standing in each jurisdiction in
which the property owned, leased or operated by it or the nature of the
business conducted by its makes such qualification necessary, except in
such jurisdictions where the failure to be so qualified or licensed and in
good standing would not have a material adverse effect on the business,
results of operations or financial condition (the "Condition") of the
Company and its subsidiaries taken as a whole. As used herein, the term
"subsidiary" shall mean, with respect to any entity or person, any
corporation, association, joint venture, partnership or other business
entity (whether now existing or hereafter organized) of which at least a
majority of the voting stock or other ownership interests having ordinary
voting power for the election of directors (or the equivalent) is, at the
time as of which any determination is being made, owned or controlled by
such entity or person or one or more subsidiaries of such entity or person
or by such entity or person and one or more subsidiaries of such entity or
person. The Company Disclosure Schedule accurately identifies each of the
jurisdictions in which the Company and its subsidiaries have been
incorporated and each of the jurisdictions in which the Company and its
subsidiaries have registered or qualified to do business as foreign
corporations.
(b) Authorization and Validity of Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance by the
Company of this Agreement, and the consummation by it of the transactions
contemplated hereby, have been duly authorized and approved by its Board
of Directors, and no other corporate action on the part of the Company is
necessary to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
(other than the approval of the Merger by the holders of the outstanding
shares of Company Common Stock pursuant to the OGCL). This Agreement has
been duly executed and delivered by the Company and, subject to the
approval of the Merger by the holders of the outstanding shares of Company
Common Stock pursuant to the OGCL, constitutes the valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except that such enforcement may be limited by applicable
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally, and general equitable principles. The execution and delivery of
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this Agreement and the consummation of all transactions contemplated
hereby or taken in furtherance hereof shall in no way be construed to have
violated the Standstill Agreement dated as of July 2, 1992 (the
"Standstill Agreement") between Parent and the Company.
(c) Capitalization.
(i) The authorized capital stock of the Company consists of
20,000,000 shares of Company Common Stock. As of the date of this
Agreement, (1) 7,578,566 shares of Company Common Stock are issued and
outstanding, (2) 573,500 shares of Company Common Stock are reserved
for issuance upon the exercise of outstanding options granted by the
Company under the stock option plans identified in the Company
Disclosure Schedule, and (3) 159,161 shares of Company Common Stock
have been reserved for issuance pursuant to outstanding warrants of the
Company. The Company Disclosure Schedule accurately sets forth the
names of each person holding, as of the date hereof, an option, warrant
or other right to acquire shares of Company Common Stock, the number of
shares of Company Common Stock issuable upon the exercise of each such
option, warrant or other right to acquire shares of Company Common
Stock, the exercise prices thereof and the expiration dates thereof.
All issued and outstanding shares of Company Common 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 set forth in this Section 2.1(c) or the Company
Disclosure Schedule, there are no shares of capital stock of the
Company authorized, issued or outstanding, and there are not as of the
date hereof, and at the Effective Time there will not be, any
outstanding or authorized options, warrants, rights, subscriptions,
claims of any character, agreements, obligations, convertible or
exchangeable securities, or other commitments, contingent or otherwise,
relating to the Company Common Stock or any other shares of capital
stock of the Company, pursuant to which the Company is or may become
obligated to issue shares of Company Common Stock, any other shares of
its capital stock or any securities convertible into, exchangeable for,
or evidencing the right to subscribe for, any shares of the capital
stock of the Company. All of the shares of Company Common Stock have
the same voting and other rights, except as provided in the OGCL.
(ii) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable, are not subject to, nor were they
issued in violation of, any preemptive rights, and are owned, directly
or indirectly, by the Company, free and clear of all liens,
encumbrances, options or claims whatsoever. No shares of capital stock
of any of the Company's subsidiaries are reserved for issuance and
there are no outstanding or authorized options, warrants, rights,
subscriptions, claims of any character, agreements, obligations,
convertible or exchangeable securities, or other commitments,
contingent or otherwise, relating to the capital stock of any
subsidiary of the Company, pursuant to which such subsidiary is or may
become obligated to issue any shares of capital stock of such
subsidiary or any securities convertible into, exchangeable for, or
evidencing the right to subscribe for, any shares of such subsidiary.
There are no restrictions of any kind which prevent the payment of
dividends by any of the Company's subsidiaries. Except for the
Company's subsidiaries set forth in the Company Disclosure Schedule,
the Company does not own, directly or indirectly, any capital stock or
other equity interest in any person or entity or have any direct or
indirect equity or ownership interest in any person or entity, and
neither the Company nor any of its subsidiaries is subject to any
obligation or requirement to provide funds for or to make any
investment (in the form of a loan, capital contribution or otherwise)
to or in any person or entity.
(d) Consents and Approvals; No Violations. Assuming (i) the filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), are made and the waiting period thereunder has
been terminated or has expired, (ii) the filing of the Ohio Certificate of
Merger and other appropriate merger documents, if any, as required by the
laws of the State of Ohio are made, (iii) the requirements of the federal
securities laws relating to (A) the registration of Parent Stock issuable
in the Merger at the Effective Time pursuant to a registration statement
on Form S-4 (the "Registration Statement") to be filed by Parent with the
Securities and Exchange Commission (the "Commission") and applicable state
securities laws, and (B) the submission of the Merger to, and the
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solicitation of proxies from, the Company's shareholders, are complied
with, (iv) approval of the Merger by the holders of the Company Common
Stock is received in compliance with the OGCL and (v) the requirements and
conditions of this Agreement are met, the execution and delivery of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby will not: (1) violate any provision of
the Articles of Incorporation, By-Laws or Code of Regulations of the
Company or of any of its subsidiaries; (2) violate in any material respect
any statute, ordinance, rule, regulation, order or decree of any court or
of any governmental or regulatory body, agency or authority applicable to
the Company or any of its subsidiaries or by which any of their respective
properties or assets may be bound; (3) require any filing with, or permit,
consent or approval of, or the giving of any notice to, any governmental
or regulatory body, agency or authority; or (4) result in a material
violation, termination or breach of, conflict with, constitute (with or
without the giving of notice or lapse of time or both) a default (or give
rise to any right of termination, cancellation, payment or acceleration)
under, result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any of
its subsidiaries under, result in the forfeiture of any rights,
entitlements or privileges under, create any right or entitlement
(including, without limitation, to employment or compensation) not
expressly provided for herein, or require the consent or approval of any
party under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, franchise, permit, agreement, lease,
franchise agreement or other instrument or obligation to which the Company
or any of its subsidiaries is a party, or by which it or any of their
respective properties or assets may be bound, except for such violations,
filings, consents, approvals, notices, terminations, breaches, conflicts,
defaults, liens, security interests, charges, encumbrances, forfeitures,
rights and entitlements that would not, individually or in the aggregate,
have a material adverse effect on the Condition of the Company. Without
limiting the generality of the foregoing, the conversion of options and
warrants pursuant to Section 1.5 hereof will not require the consent or
approval of any of the holders of such options or warrants, and all
notices required by the terms of the options and warrants to be given
thereunder in connection with the Merger will have been given no later
than the times required thereunder.
(e) Certain Information. When the Registration Statement to be filed by
Parent pursuant to Section 3.7 hereof or any post-effective amendment
thereto shall become effective, and at all times subsequent to such
effectiveness up to and including the time of the Company Meeting (as
defined in Section 3.8), such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein
furnished by the Company relating to the Company or its subsidiaries,
shall comply in all material respects with the provisions of all
applicable securities laws. The Proxy Statement (as defined in Section
3.7) will comply in all material respects with the provisions of all
applicable securities laws. If at any time prior to the time of the
Company Meeting any event occurs which should be described in the Proxy
Statement or any supplement or amendment thereto, the Company will file
and disseminate, as required, a supplement or amendment which complies in
all material respects with the provisions of all applicable securities
laws. Prior to its filing with the Commission, the Proxy Statement and
each amendment or supplement thereto shall be delivered to Parent and its
counsel. The Proxy Statement will not, at the time it is mailed and at the
Closing Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. Any written information supplied or
to be supplied by the Company specifically for inclusion in the
Registration Statement will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made not misleading. Notwithstanding the foregoing, the Company
makes no representation or warranty with respect to any information with
respect to Parent, Sub or their respective officers, directors or
affiliates provided to the Company by Parent in writing for inclusion in
the Proxy Statement or in any supplements or amendments thereto.
(f) Company Reports and Financial Statements. Since January 1, 1992,
the Company has filed all forms, reports and documents with the Commission
required to be filed by it pursuant to the federal securities laws and the
Commission rules and regulations thereunder (the "Company Commission
Filings"), and all such forms, reports and documents filed with the
Commission have complied in all material respects with all applicable
requirements of the federal securities laws and the Commission rules and
regulations promulgated thereunder. The Company has heretofore made
available to Parent true and complete copies of all forms, reports,
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documents, amendments thereto and other filings filed by the Company with the
Commission since January 1, 1992 and prior to the date hereof (such forms,
reports, documents and other filings, together with any amendments thereto,
are sometimes collectively referred to herein as the "Company Commission
Filings"). As of their respective dates, the Company Commission Filings did
not contain any 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. Each of the balance sheets as of the end of the fiscal years
ended December 31, 1992, December 31, 1993 and December 31, 1994, and the
quarters ended within such fiscal years, and the statements of income,
statements of shareholders' equity (if presented) and statements of cash
flows for the fiscal years ended December 31, 1992, December 31, 1993 and
December 31, 1994 and the quarters ended within such fiscal years included in
the Company Commission Filings, were prepared in accordance with generally
accepted accounting principles consistently applied and fairly present the
consolidated financial position of the Company as of the dates thereof and
the results of its operations, shareholders' equity and cash flows for the
periods then ended.
(g) Absence of Undisclosed Liabilities. Except as set forth in the
audited balance sheet of the Company as of December 31, 1994 or the notes
thereto (the "Audited Balance Sheet") or in the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries has any material
outstanding claims against it, liabilities or indebtedness, contingent or
otherwise, other than liabilities incurred subsequent to December 31, 1994
in the ordinary course of business, consistent with past practices.
(h) Accounts Receivable. The accounts receivable of the Company as
reflected in the Audited Balance Sheet are, to the extent uncollected on
the date of this Agreement, valid and existing and, to the Company's
Knowledge (as defined in Section 6.1), fully collectible through the use
of ordinary collection procedures (except for reserves set forth in such
financial statements, which reserves were established in accordance with
generally accepted accounting principles ("GAAP") and in an amount
consistent with the Company's historical accounting policies), represent
monies due for goods sold and delivered or services rendered (except as
set forth in the Audited Balance Sheet), and are subject to no refunds,
discounts, rebates or other adjustments (except discounts for prompt
payment given in the ordinary course of business) and, to the Company's
Knowledge, are not subject to any defenses, rights of setoff, assignments,
restrictions, encumbrances or conditions enforceable by third parties on
or affecting any thereof. None of the Company's accounts receivable is
subject to any factoring agreement.
(i) Inventories. The inventories reflected in the Audited Balance Sheet
were, and those reflected on the books of the Company since the date
thereof have been, determined and valued in accordance with GAAP applied
on a consistent basis as reflected in the Audited Balance Sheet, subject
to inventory and obsolescence reserves established in accordance with GAAP
applied on a consistent basis as reflected in the Audited Balance Sheet.
In all material respects, the inventories of the Company consist of items
which are good and merchantable, and are of a quality and quantity
presently usable or salable in the ordinary course of business, subject to
inventory and obsolescence reserves established in accordance with GAAP
applied on a consistent basis.
(j) Title to Properties; Encumbrances. The Company and each of its
subsidiaries has good, valid and marketable title to (i) all its material
tangible properties and assets (real and personal), including, without
limitation, tangible properties and assets reflected in the Audited
Balance Sheet, except as indicated in the notes thereto and except for
tangible properties and assets reflected in such balance sheet which have
been sold or otherwise disposed of in the ordinary course of business
consistent with past practices, and (ii) all the material tangible
properties and assets purchased by the Company and any of its subsidiaries
since December 31, 1994, except for such properties and assets which have
been sold or otherwise disposed of in the ordinary course of business
consistent with past practices; in each case subject to no encumbrance,
lien, charge or other restriction of any kind or character, except for (1)
liens reflected in the Audited Balance Sheet, (2) liens consisting of
zoning or planning restrictions, easements, permits and other restrictions
or limitations on the use of real property or irregularities in title
thereto which do not materially detract from the value of, or impair the
use of, such property by the Company or any of its subsidiaries in the
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operation of its respective business and (3) liens for current taxes,
assessments or governmental charges or levies on property not yet due and
delinquent. The Company and each of its subsidiaries are in material
compliance with all leases of real property leased by any of them, and have
no Knowledge of any material default by the landlords under any such leases.
In all material respects, the buildings and improvements owned or leased by
the Company and its subsidiaries, and the operation and maintenance thereof,
do not contravene any zoning or building law or ordinance or violate any
restrictive covenant or any provision of federal, state or local law. The
Company Disclosure Schedule hereto contains an accurate list and summary
description of all real estate owned or leased by the Company or any of its
subsidiaries. The Company has no Knowledge of any pending or threatened
condemnation, eminent domain or similar proceeding with respect to any real
property owned or leased by the Company or any of its subsidiaries.
(k) Absence of Certain Changes and Events. Since December 31, 1994: (i)
there has not been any material adverse change in the Condition of the
Company and its subsidiaries, taken as a whole; (ii) the businesses of the
Company and each of its subsidiaries have been conducted in the ordinary
course consistent with past practices; (iii) neither the Company nor any
of its subsidiaries has incurred any material liabilities (direct,
contingent or otherwise) or engaged in any material transaction or entered
into any material agreement except in the ordinary course of business
consistent with past practice; (iv) the Company and its subsidiaries have
not increased the compensation of any officer or granted any general
salary or benefits increase to their employees except in the ordinary
course of business consistent with past practice; (v) neither the Company
nor any of its subsidiaries has taken any action referred to in Sections
3.12(a), 3.12(b)(i), (iii), (iv), (v), (vi), (vii) or (to the extent it
relates to the foregoing) (viii) or 3.12(c) hereof; (vi) the Company has
not issued or sold any capital stock or other securities of any kind,
except for the issuance of shares of Company Common Stock upon the
exercise of options granted by the Company under one or more of the stock
option plans identified in the Company Disclosure Schedule and except for
the issuance of shares of Company Common Stock upon the exercise of
warrants granted by the Company under one or more of the warrant
agreements identified in the Company Disclosure Schedule, in either case
in amounts not exceeding those set forth in the Company Disclosure
Schedule; (vii) the Company has not declared, paid or set aside for
payment any dividend or other distribution (payable in cash, securities or
other property) in respect of its capital stock or other securities; and
(viii) the Company has not split, combined, reclassified, redeemed,
purchased or otherwise acquired any capital stock or other securities of
the Company. Since December 31, 1994, no options or warrants have been
granted by the Company covering shares of Company Common Stock and having
a per share exercise price below the fair market value of the Company
Common Stock on the date of grant.
(l) Minute Books. In all material respects, the minute books of the
Company and its subsidiaries, as previously made available to Parent and
its representatives, contain accurate records of all corporate actions of
the shareholders and Boards of Directors of the Company and its
subsidiaries.
(m) Compliance with Laws; Permits. The Company and its subsidiaries are
in compliance in all material respects with all applicable laws,
regulations, orders, judgments and decrees (whether domestic or foreign),
and have all material franchises, licenses, permits and certificates and
other authorizations from federal, state, local and foreign governments
and governmental agencies that are necessary for the conduct of their
business except where such failure to comply or to obtain such
authorization does not have, and is not reasonably likely to have, a
material adverse effect on the Condition of the Company.
(n) Environmental Liability. There is no legal, administrative,
arbitral or other proceeding, claim, action, cause of action or
governmental investigation of any nature seeking to impose, or that is
reasonably likely to result in the imposition, on the Company or any of
its subsidiaries of any liability arising under any local, state or
federal environmental statute, regulation or ordinance, including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, pending or, to the Knowledge of the
Company, threatened against the Company or any of its subsidiaries, which
would be required to be disclosed pursuant to Item 103 or 303 of
Regulation S-K (17 CFR 229); to the Knowledge of the Company and except as
set forth in the Company Disclosure Schedule, there is no reasonable basis
for any such proceeding, claim, action or governmental investigation that
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would impose any such liability; and neither the Company nor any of its
subsidiaries is subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(o) Material Contracts. The Company Disclosure Schedule contains a list
of (i) any material agreement, arrangement or commitment of the Company or
any of its subsidiaries, whether or not made in the ordinary course of
business, or any agreement of the Company or any of its subsidiaries
restricting its business activities, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by the Company or any
of its subsidiaries, other than instruments relating to transactions
entered into in the ordinary course of business and other than any covered
by the preceding clause (i), (iii) any agreement, arrangement or
commitment of the Company or any of its subsidiaries relating to the
employment, election, retention in office or severance of any present or
former director or officer, (iv) any written employment or severance
agreement between the Company or any of its subsidiaries and any employee
thereof and (v) any agreement, arrangement or commitment involving
payments by the Company or any of its subsidiaries in excess of $500,000
(collectively, the "Contracts").
All such Contracts are valid, enforceable in accordance with their
terms and in full force and effect and neither the Company nor any of its
subsidiaries is in default thereunder in any material respect, except as
set forth in the Company Disclosure Schedule. Except as set forth in the
Company Disclosure Schedule, neither this Agreement nor the consummation
of the Merger will authorize, entitle or permit any party to any of the
Contracts to terminate, cancel, amend or renegotiate any such Contract or
will adversely affect any of the Contracts in any material manner. Neither
the Company nor any subsidiary has received notice that any party to any
such Contract intends to cancel, terminate, amend or renegotiate such
Contract.
(p) Litigation. Set forth in the Company Disclosure Schedule is an
accurate and complete list, as of the date of this Agreement, of each
action, suit, proceeding at law or in equity, or any arbitration or any
administrative or other proceeding by or before (or, to the Knowledge of
the Company, any investigation by) any governmental or other
instrumentality or agency (each, a "Proceeding") against or affecting the
Company or any of its subsidiaries, or any of their properties or rights.
There is no Proceeding pending, or, to the Knowledge of the Company,
threatened, against or affecting the Company or any of its subsidiaries,
or any of their properties or rights, except for such Proceedings that do
not have and are not reasonably likely to have, individually or in the
aggregate, a material adverse effect on the Condition of the Company.
There are no such suits, actions, claims, proceedings or investigations
pending or, to the Knowledge of the Company, threatened, seeking to
prevent or challenging the transactions contemplated by this Agreement.
Neither the Company nor any of its subsidiaries is subject to any
judgment, order or decree entered in any lawsuit or proceeding, that has
had or could reasonably be expected to have a material adverse effect on
the Condition of the Company.
(q) Employee Benefit Plans.
(i) List of Plans. Set forth in the Company Disclosure Schedule is
an accurate and complete list of all material Benefit Plans
established, maintained or contributed to by the Company or any of its
subsidiaries in which any employees of the Company or any of its
subsidiaries currently participates. As used herein, the term "Benefit
Plans" means all employee benefit plans within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), as well as all plans, programs and arrangements providing
profit sharing, retirement, pension, savings, thrift, deferred
compensation, stock option, stock purchase, group insurance, accident,
sickness, medical, dental, disability, and all vacation pay, severance
pay, incentive compensation, bonus and other employee benefits or
fringe benefits (including health, life insurance and other benefit
plans maintained for retirees), whether or not such plans, programs and
arrangements constitute "employee benefit plans" within the meaning of
Section 3(3) of ERISA, and whether or not pursuant to any collective
bargaining arrangements, whether or not any such Benefit Plans are
otherwise exempt from the provisions of ERISA, and whether or not any
such Benefit Plans are considered material and listed in the Company
Disclosure Schedule.
(ii) Status of Plans. Neither the Company nor any of its
subsidiaries maintains or contributes to any Benefit Plan subject to
ERISA which is not in material compliance with ERISA and, to the
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extent applicable, the Code. No liability under Title IV of ERISA has
been incurred by the Company or any trade or business (whether or not
incorporated) which, together with the Company, is treated as a single
employer under Section 414 of the Code (an "ERISA Affiliate") that has
not been satisfied in full, and no condition exists that presents a
material risk to the Company or an ERISA Affiliate of incurring a
liability under such Title. None of the Benefit Plans is subject to
Title IV of ERISA.
(iii) Contributions. Full payment has been made of all material
amounts which the Company or any of its subsidiaries is required, under
applicable law or under any Benefit Plan or any agreement relating to
any Benefit Plan to which the Company or any of its subsidiaries is a
party, to have paid as contributions thereto as of the last day of the
most recent fiscal year of such Benefit Plan ended prior to the date
hereof. The Company has made adequate provision for reserves in
accordance with GAAP to meet contributions that have not been made
because they are not yet due under the terms of any Benefit Plan or
related agreements. The Benefit Plan documents made available to Parent
accurately reflect the level of benefits provided thereunder in all
material respects and such benefits have not been increased subsequent
to the date as of which documents have been provided except as may be
effected to satisfy any applicable requirements under the Code or ERISA
and as disclosed on the Company Disclosure Schedule.
(iv) Tax Qualification. The Company has applied to the Internal
Revenue Service ("IRS") for a determination letter for each Benefit
Plan intended to be qualified under Section 401(a) of the Code and
intends to make any changes requested by the IRS in order to obtain a
favorable determination.
(v) Transactions. Neither the Company nor any of its subsidiaries
nor any of their respective directors, officers or employees to the
extent they or any of them are fiduciaries under Title I of ERISA has
engaged in any transaction with respect to the Benefit Plans which
would, if not corrected, subject it to a material tax, penalty or
liability for prohibited transactions under ERISA or the Code or would
result in any material claim being made under or by or on behalf of any
such Plans by any party with standing to make such claim.
(vi) Documents. The Company has made available to Parent true and
complete copies of (1) all Benefit Plans as in effect or a description
thereof if no written plan document exists, together with all
amendments thereto which have been adopted and which will become
effective at a later date, as well as the latest IRS determination
letter obtained with respect to any such Benefit Plan qualified under
Section 401 or 501 of the Code and (2) the most recently filed Form
5500 for each Benefit Plan required to file such form.
(r) Employment Relations and Agreements. (i) Each of the Company and
its subsidiaries is in compliance in all material respects with all
federal, state or other applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and
hours, and has not and is not engaged in any unfair labor practice; (ii)
no unfair labor practice complaint against the Company or any of its
subsidiaries is pending before the National Labor Relations Board; (iii)
there is no labor strike, dispute, slowdown or stoppage actually pending
or threatened against or involving the Company or any of its subsidiaries;
(iv) no representation question exists respecting the employees of the
Company or any of its subsidiaries; (v) no grievance which might have a
material adverse effect on the Condition of the Company or any of its
subsidiaries or the conduct of their respective businesses exists, no
arbitration proceeding arising out of or under any collective bargaining
agreement is pending and no claim therefor has been asserted; (vi) no
collective bargaining agreement is currently being negotiated by the
Company or any of its subsidiaries; (vii) neither the Company nor any of
its subsidiaries has experienced any material labor difficulty since
January 1, 1993; and (viii) no "plant closing" or "mass layoff" within the
meaning of the Worker Adjustment and Retraining Notification Act has
occurred with respect to the Company or any of its subsidiaries. There has
not been, and to the Knowledge of the Company, there will not be, any
change in relations with employees of the Company or any of its
subsidiaries as a result of the transactions contemplated by this
Agreement which could have a material adverse effect on the Condition of
the Company or any of its subsidiaries. Except as disclosed in the Company
Disclosure Schedule, there exist no employment, consulting, severance or
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indemnification agreements between the Company and any director, officer,
employee or agent of the Company or any agreement that would give any
person or entity the right to receive any payment from the Company as a
result of the Merger.
(s) Relations with Certain Vendors. The Company and its subsidiaries
have maintained and have good working relationships with their respective
vendors and suppliers, as a group, and neither the Company nor any of its
subsidiaries has any disputes with their respective vendors which,
individually or in the aggregate, have or are reasonably likely to have a
material adverse effect on the Condition of the Company.
(t) Taxes and Audits. All federal tax returns, reports, statements,
estimates, declarations and forms (collectively, the "Company Federal
Returns") and all state and local tax returns, reports, statements,
estimates, declarations and forms (collectively, the "Company State and
Local Returns") required to be filed by the Company on or prior to the
Closing Date have been or will be filed (or extensions for such filings
will have been obtained) with the appropriate governmental agencies in all
jurisdictions in which such Company Federal Returns and Company State and
Local Returns are required to be filed. All of the Company Federal Returns
are or will be, when filed, true, correct and complete in all material
respects and all amounts shown as owing on any Company Federal Returns
have been or will be paid or accrued. All of the Company State and Local
Returns are or will be, when filed, true, correct and complete in all
material respects, and all amounts shown as owing thereon have been or
will be paid or accrued. To the Company's Knowledge, there is no action,
suit, proceeding, investigation, audit, claim or assessment pending or
proposed with respect to any Company Federal Return or Company State and
Local Return, except as disclosed in the Company Disclosure Schedule.
All federal, state or local income, profits, franchise, sales, use,
occupation, property, business and occupation, labor and industry, excise
or other taxes (including interest and penalties) payable by the Company
for the period extending up to the Closing Date, relating to or chargeable
against the Company or its assets, properties, revenues or income, or for
which an assessment or demand has been made, have been or will be fully
paid or accrued in accordance with GAAP. All business and occupation,
payroll and other employment-related tax deposits for the period extending
up to the Closing Date and payable by the Company have been or will be
fully paid or accrued in accordance with GAAP.
(u) Intellectual Properties. The Company and its subsidiaries own or
have the right to use all domestic and foreign patents, patent
applications, patent licenses, software licenses, know-how licenses, trade
names, trademarks, copyrights, unpatented inventions, service marks,
trademark registrations and applications, service mark registrations and
applications, copyright registrations and applications (collectively the
"Intellectual Property") necessary to the operation of its business. The
Company Disclosure Schedule attached hereto contains an accurate and
complete list of all Intellectual Property which is of importance to the
operation of the business of the Company and its subsidiaries (other than
commonly available software used by the Company or its subsidiaries
pursuant to a valid license). The Company Disclosure Schedule lists all
material notices or claims currently pending or received by the Company or
any of its subsidiaries during the past two years which claim
infringement, contributory infringement, inducement to infringe,
misappropriation or breach by the Company or any of its subsidiaries of
any domestic or foreign patents, patent applications, patent licenses and
know-how licenses, trade names, trademark registrations and applications,
service marks, copyrights, copyright registrations or applications, trade
secrets or other confidential proprietary information. To the Knowledge of
the Company, no basis exists upon which a material claim (a "Company
Infringement Claim") may be asserted against the Company or any of its
subsidiaries, for infringement, contributory infringement, inducement to
infringe, misappropriation or breach of any domestic or foreign patents,
patent applications, patent licenses, know-how licenses, trade names,
trademark registrations and applications, common law trademarks, service
marks, copyrights, copyright registrations or applications, trade secrets
or other confidential proprietary information. To the Knowledge of the
Company, no person or entity is infringing the Intellectual Property.
(v) Insurance. The Company Disclosure Schedule sets forth a list of all
policies or binders of fire, liability, product liability, worker's
compensation, vehicular or other insurance held by or on behalf of the
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Company or any of its subsidiaries (specifying for each such insurance
policy the insurer, the policy number or covering note number with respect
to binders, and each pending claim thereunder of more than $25,000 and
setting forth the aggregate amounts paid out under each such policy
through the date hereof). Such policies and binders are valid, in full
force and effect and in the Company's reasonable belief sufficient to
protect the Company and its subsidiaries against all insured hazards.
(w) Transactions with Management. There are no transactions which the
Company would be required to disclose pursuant to 17 C.F.R. Section
229.404, which are not contained in the Company Commission Filings. In
addition, and without limiting the generality of the foregoing, to the
Knowledge of the Company, no director, officer or shareholder beneficially
owning 5% or more of the total number of issued and outstanding shares of
Common Stock: (i) has any contractual relationship with the Company, other
than employment contracts and contracts made on an arm's-length basis in
the ordinary course of business; (ii) has any direct or indirect interest
in any right, property or asset which is used by the Company or any of its
subsidiaries in the conduct of its or their business; (iii) owns any
securities of, or has any material direct or indirect interest in, any
entity which does business with the Company or any of its subsidiaries; or
(iv) is a party to any agreement, arrangement or commitment or is a party
to any pending action or proceeding which could interfere with the
performance of such person's duties to the Company.
(x) Fairness Opinion. The Company has received an opinion dated April
28, 1995 (the "Fairness Opinion") from The Robinson-Humphrey Company, Inc.
to the effect that the Conversion Number is fair to the Company's
shareholders from a financial point of view.
(y) Broker's or Finder's Fee. Except for The Robinson-Humphrey Company,
Inc. (whose fees and expenses will be paid by the Company), no agent,
broker, person or firm acting on behalf of the Company is, or will be,
entitled to any commission or broker's or finder's fees from any of the
parties hereto, or from any person controlling, controlled by, or under
common control with any of the parties hereto, in connection with this
Agreement or any of the transactions contemplated herein.
2.2. Representations and Warranties of Parent and Sub. Each of Parent and
Sub represents and warrants to and for the benefit of the Company and the
Shareholders all of the following except as and to the extent expressly
disclosed on the Schedule (the "Parent Disclosure Schedule") attached hereto
as Exhibit B, with reference to the corresponding paragraph of this Section
2.2 to which each disclosure relates:
(a) Due Organization; Good Standing and Corporate Power. Each of Parent
and its subsidiaries is a corporation validly existing and in good
standing under the laws of the jurisdiction of its incorporation (or
domestication) and each such corporation has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of Parent and its subsidiaries is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by its makes such qualification
necessary, except in such jurisdictions where the failure to be so
qualified or licensed and in good standing would not have a material
adverse effect on the Condition of Parent and its subsidiaries taken as a
whole.
(b) Authorization and Validity of Agreement. Each of Parent and Sub has
full corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery and performance
of this Agreement by Parent and Sub, and the consummation by each of them
of the transactions contemplated hereby, have been duly authorized and
approved by the Boards of Directors of Parent and Sub and by Parent as the
sole shareholder of Sub. No other corporate action on the part of either
of Parent or Sub is necessary to authorize the execution, delivery and
performance by each of Parent and Sub of this Agreement and the
consummation by them of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by each of Parent and Sub
and is a valid and binding obligation of each of Parent and Sub,
enforceable against each of Parent and Sub in accordance with its terms,
except that such enforcement may be limited by applicable bankruptcy,
insolvency or other similar laws affecting creditors' rights generally,
and general equitable principles.
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(c) Capitalization of Parent.
(i) The authorized capital stock of Parent consists of 100,000,000
shares of Parent Stock and 15,000,000 shares of preferred stock, par
value $1.00 per share ("Preferred Stock"). As of the date of this
Agreement, (1) 31,247,349 shares of Parent Stock are issued and
outstanding, (2) 6,068,485 shares of Parent Stock have been reserved
for issuance upon the exercise of outstanding options and warrants of
Parent and (3) no shares of Preferred Stock have been issued. All
issued and outstanding shares of Parent 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. All of the shares
of Parent Stock have the same voting and other rights.
(ii) All of the outstanding shares of capital stock of each of
Parent's subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable, are not subject to, nor were they issued
in violation of, any preemptive rights, and are owned, directly or
indirectly, by Parent, free and clear of all liens, encumbrances,
options or claims whatsoever.
(d) Capitalization of Sub. The authorized capital stock of Sub consists
of 1,000 shares of Common Stock, par value $.01 per share, all of which
shares are validly issued and outstanding and owned by Parent on the date
hereof, and all of which shares have the same voting and other rights.
(e) Consents and Approvals. Assuming (i) the filings required under the
HSR Act are made and the waiting period thereunder has been terminated or
has expired, (ii) the filing of the Ohio Certificate of Merger and other
appropriate merger documents, if any, as required by the laws of the State
of Ohio are made, (iii) the requirements of the federal securities laws
relating to (A) the registration of Parent Stock issuable in the Merger at
the Effective Time pursuant to the Registration Statement and applicable
state securities laws, and (B) the submission of the Merger to, and the
solicitation of proxies from, the Company's shareholders, are complied
with, and (iv) the requirements and conditions of this Agreement are met,
the execution and delivery of this Agreement by Parent and Sub and the
consummation by Parent and Sub of the transactions contemplated hereby
will not: (1) violate any provision of the charter documents or by-laws of
Parent or Sub; (2) violate in any material respect any statute, ordinance,
rule, regulation, order or decree of any court or of any governmental or
regulatory body, agency or authority applicable to Parent or Sub or by
which any of their respective properties or assets may be bound; (3)
require any filing with, or permit, consent or approval of, or the giving
of any notice to, any governmental or regulatory body, agency or
authority; or (4) except as disclosed on the Parent Disclosure Schedule,
result in a material violation, termination or breach of, conflict with,
constitute (with or without the giving of notice or lapse of time or both)
a default (or give rise to any right of termination, cancellation, payment
or acceleration) under, result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of
Parent under, result in the forfeiture of any rights, entitlements or
privileges under, create any right or entitlement (including, without
limitation, to employment or compensation) not expressly provided for
herein, or require the consent or approval of any party under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
license, franchise, permit, agreement, lease, franchise agreement or other
instrument or obligation to which Parent or any of its subsidiaries is a
party, or by which it or any of their respective properties or assets may
be bound, except for such violations, filings, consents, approvals,
notices, terminations, breaches, conflicts, defaults, liens, security
interests, charges, encumbrances, forfeitures, rights and entitlements
that would not, individually or in the aggregate, have a material adverse
effect on the Condition of Parent.
(f) Registration Statement. When the Registration Statement or any
post-effective amendment thereto shall become effective, and at all times
subsequent to such effectiveness up to and including the time of the
Company Meeting, the Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein
furnished by Parent relating to Parent or its subsidiaries, shall comply
in all material respects with the provisions of all applicable securities
laws. If at any time prior to the Closing Date any event occurs which
should be described in the Registration Statement or any supplement or
amendment thereto, Parent will file and disseminate, as required, a
supplement or amendment which complies in all material respects with the
provisions of all applicable securities laws. Prior to its filing with the
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Commission, the Registration Statement and each amendment or supplement
thereto shall be delivered to the Company and its counsel. The Registration
Statement will not, at the time the prospectus included therein is mailed to
shareholders of the Company, and at the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Any
written information supplied or to be supplied by Parent specifically for
inclusion in the Proxy Statement will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made not misleading. Notwithstanding the foregoing, Parent
makes no representation or warranty with respect to any information with
respect to the Company or its officers, directors or affiliates provided to
Parent by the Company in writing for inclusion in the Registration Statement
or in any supplements or amendments thereto.
(g) Parent Reports and Financial Statements. Since February 1, 1992,
Parent has filed all forms, reports and documents with the Commission
required to be filed by it pursuant to the federal securities laws and the
Commission rules and regulations thereunder, and all such forms, reports
and documents filed with the Commission have complied in all material
respects with all applicable requirements of the federal securities laws
and the Commission rules and regulations promulgated thereunder. Parent
has heretofore made available to the Company true and complete copies of
all forms, reports, documents, amendments thereto and other filings filed
by Parent with the Commission prior to the date hereof (such forms,
reports, documents and other filings, together with any amendments
thereto, are listed on the Parent Disclosure Schedule and are collectively
referred to herein as the "Parent Commission Filings"). As of their
respective dates, the Parent Commission Filings did not contain any 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. Each of the
balance sheets as of the end of the fiscal years ended January 30, 1993,
January 29, 1994 and January 28, 1995, and the quarters ended within such
fiscal years, and the statements of income, statements of shareholders'
equity (if presented) and statements of cash flows for the fiscal years
ended January 30, 1993, January 29, 1994 and January 28, 1995 and the
quarters ended within such fiscal years included in the Parent Commission
Filings, were prepared in accordance with generally accepted accounting
principles consistently applied and fairly present the consolidated
financial position of Parent as of the dates thereof and the results of
its operations, shareholders' equity and cash flows for the periods then
ended.
(h) Absence of Undisclosed Liabilities. Except as set forth in the
audited balance sheet of Parent as of January 28, 1995 or the notes
thereto, (the "Parent Balance Sheet") or on the Parent Disclosure
Schedule, neither Parent nor any of its subsidiaries has any material
outstanding claims against it, liabilities or indebtedness, contingent or
otherwise, other than liabilities incurred subsequent to January 28, 1995
in the ordinary course of business, consistent with past practices.
(i) Accounts Receivable. The accounts receivable of Parent as reflected
in the Parent Balance Sheet are, to the extent uncollected on the date of
this Agreement, valid and existing and, to Parent's Knowledge, fully
collectible through the use of ordinary collection procedures (except for
reserves set forth in such financial statements, which reserves were
established in accordance with GAAP and in an amount consistent with
Parent's historical accounting policies), represent monies due for goods
sold and delivered or services rendered (except as set forth in the Parent
Audited Balance Sheet), and are subject to no refunds, discounts, rebates
or other adjustments (except discounts for prompt payment given in the
ordinary course of business) and, to Parent's Knowledge, are not subject
to any defenses, rights of setoff, assignments, restrictions, encumbrances
or conditions enforceable by third parties on or affecting any thereof.
None of Parent's accounts receivable is subject to any factoring
agreement.
(j) Inventories. The inventories reflected in the Parent Balance Sheet
were, and those reflected on the books of Parent since the date thereof
have been, determined and valued in accordance with GAAP applied on a
consistent basis as reflected in the Parent Balance Sheet, subject to
inventory and obsolescence reserves established in accordance with GAAP
applied on a consistent basis as reflected in the Parent Balance Sheet.
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In all material respects, the inventories of Parent consist of items which
are good and merchantable, and are of a quality and quantity presently usable
or salable in the ordinary course of business, subject to inventory and
obsolescence reserves established in accordance with GAAP applied on a
consistent basis.
(k) Title to Properties; Encumbrances. Parent and each of its
subsidiaries has good, valid and marketable title to (i) all its material
tangible properties and assets (real and personal), including, without
limitation, tangible properties and assets reflected in the Parent Balance
Sheet, except as indicated in the notes thereto and except for tangible
properties and assets reflected in such balance sheet which have been sold
or otherwise disposed of in the ordinary course of business consistent
with past practices, and (ii) all the material tangible properties and
assets purchased by Parent and any of its subsidiaries since January 28,
1995, except for such properties and assets which have been sold or
otherwise disposed of in the ordinary course of business consistent with
past practices; in each case subject to no encumbrance, lien, charge or
other restriction of any kind or character, except for (1) liens reflected
in the Parent Balance Sheet or liens granted in the ordinary course of
business which are not material, (2) liens consisting of zoning or
planning restrictions, easements, permits and other restrictions or
limitations on the use of real property or irregularities in title thereto
which do not materially detract from the value of, or impair the use of,
such property by Parent or any of its subsidiaries in the operation of its
respective business and (3) liens for current taxes, assessments or
governmental charges or levies on property not yet due and delinquent.
Parent and each of its subsidiaries are in material compliance with all
leases of real property leased by any of them, and have no Knowledge of
any material default by the landlords under any such leases. In all
material respects, the buildings and improvements leased by Parent and its
subsidiaries, and the operation and maintenance thereof, do not contravene
any zoning or building law or ordinance or violate any restrictive
covenant or any provision of federal, state or local law. Parent has no
Knowledge of any pending or threatened condemnation, eminent domain or
similar proceeding with respect to any real property owned or leased by
the Parent or any of its subsidiaries.
(l) Absence of Certain Changes and Events. Except as expressly
disclosed in the Commission Filings, since January 28, 1995: (i) there has
not been any material adverse change in the Condition of Parent and its
subsidiaries, taken as a whole; (ii) the businesses of Parent and each of
its subsidiaries have been conducted in the ordinary course consistent
with past practices; and (iii) neither Parent nor any of its subsidiaries
has incurred any material liabilities (direct, contingent or otherwise) or
engaged in any material transaction or entered into any material agreement
except in the ordinary course of business.
(m) Compliance with Laws; Permits. Parent and its subsidiaries are in
compliance in all material respects with all applicable laws, regulations,
orders, judgments and decrees (whether domestic or foreign), and have all
material franchises, licenses, permits and certificates and other
authorizations from federal, state, local and foreign governments and
governmental agencies that are necessary for the conduct of their business
except where such failure to comply or to obtain such authorization does
not have, and is not reasonably likely to have, a material adverse effect
on the Condition of Parent.
(n) Environmental Liability. There is no legal, administrative,
arbitral or other proceeding, claim, action, cause of action or
governmental investigation of any nature seeking to impose, or that is
reasonably likely to result in the imposition, on Parent or any of its
subsidiaries of any liability arising under any local, state or federal
environmental statute, regulation or ordinance, including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, pending or, to the Knowledge of Parent,
threatened against Parent or any of its subsidiaries, which would be
required to be disclosed pursuant to Item 103 or 303 of Regulation S-K (17
CFR 229); to the Knowledge of Parent and except as set forth in the Parent
Disclosure Schedule, there is no reasonable basis for any such proceeding,
claim, action or governmental investigation that would impose any such
liability; and neither Parent nor any of its subsidiaries is subject to
any agreement, order, judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability.
(o) Material Contracts. All of the material contracts of Parent or any
of its subsidiaries are valid, enforceable in accordance with their terms
and in full force and effect and neither Parent nor any of its
subsidiaries is in default thereunder in any material respect.
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(p) Litigation. Except as expressly disclosed in the Parent Commission
Filings, there is no action, suit, proceeding at law or in equity, or any
arbitration or any administrative or other proceeding by or before (or, to
the Knowledge of Parent, any investigation by) any governmental or other
instrumentality or agency, pending, or, to the Knowledge of Parent,
threatened, against or affecting Parent or any of its subsidiaries, or any
of their properties or rights, except for such actions, suits,
proceedings, arbitrations or investigations that do not have and are not
reasonably likely to have, individually or in the aggregate, a material
adverse effect on the Condition of Parent. There are no such suits,
actions, claims, proceedings or investigations pending or, to the
Knowledge of Parent, threatened, seeking to prevent or challenging the
transactions contemplated by this Agreement. Neither Parent nor any of its
subsidiaries is subject to any judgment, order or decree entered in any
lawsuit or proceeding, that has had or could have a material adverse
effect on the Condition of Parent.
(q) Employee Benefit Plans. Neither Parent nor any of its subsidiaries
maintains or contributes to any Benefit Plan subject to ERISA which is not
in material compliance with ERISA and, to the extent applicable, the Code.
No material liability under Title IV of ERISA has been incurred by Parent
or any trade or business (whether or not incorporated) which, together
with Parent, is treated as an ERISA Affiliate that has not been satisfied
in full, and no condition exists that presents a material risk to Parent
or an ERISA Affiliate of incurring a material liability under such Title.
(r) Relations With Certain Vendors. Parent and its subsidiaries have
maintained and have good work relationships with their respective vendors
and suppliers, as a group, and neither Parent nor any of its subsidiaries
has any disputes with their respective vendors, which, individually or in
the aggregate, have or are reasonably likely to have a material adverse
effect on the Condition of Parent.
(s) Taxes and Audits. All federal tax returns, reports, statements,
estimates, declarations and forms (collectively, the "Parent Federal
Returns") and all state and local tax returns, reports, statements,
estimates, declarations and forms (collectively, the "Parent State and
Local Returns") required to be filed by Parent on or prior to the Closing
Date have been or will be filed (or extensions for such filings will have
been obtained) with the appropriate governmental agencies in all
jurisdictions in which such Parent Federal Returns and Parent State and
Local Returns are required to be filed. All of the Parent Federal Returns
are or will be, when filed, true, correct and complete in all material
respects and all amounts shown as owing on any Parent Federal Returns have
been or will be paid or accrued. All of the Parent State and Local Returns
are or will be, when filed, true, correct and complete in all material
respects, and all amounts shown as owing thereon have been or will be paid
or accrued. To Parent's Knowledge, there is no action, suit, proceeding,
investigation, audit, claim or assessment pending or proposed with respect
to any Parent Federal Return or Parent State and Local Return, except as
disclosed in the Parent Disclosure Schedule.
All federal, state or local income, profits, franchise, sales, use,
occupation, property, business and occupation, labor and industry, excise
or other taxes (including interest and penalties) payable by Parent for
the period extending up to the Closing Date, relating to or chargeable
against Parent or its assets, properties, revenues or income, or for which
an assessment or demand has been made, have been or will be fully paid or
accrued in accordance with GAAP. All business and occupation, payroll and
other employment-related tax deposits for the period extending up to the
Closing Date and payable by Parent have been or will be fully paid or
accrued in accordance with GAAP.
(t) Intellectual Properties. Parent and its subsidiaries own or have
the right to use all domestic and foreign patents, patent applications,
patent licenses, software licenses, know-how licenses, trade names,
trademarks, copyrights, unpatented inventions, service marks, trademark
registrations and applications, service mark registrations and
applications, copyright registrations and applications (collectively the
"Intellectual Property") necessary to the operation of its business. The
Parent Disclosure Schedule lists all material notices or claims currently
pending or received by Parent or any of its subsidiaries during the past
two years which claim infringement, contributory infringement, inducement
to infringe, misappropriation or breach by Parent or any of its
subsidiaries of any domestic or foreign patents, patent applications,
patent licenses and know-how licenses, trade names, trademark
registrations and applications, service marks, copyrights, copyright
registrations or applications, trade secrets or other confidential
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proprietary information. To the Knowledge of Parent, no basis exists upon
which a material claim (a "Parent Infringement Claim") may be asserted
against Parent or any of its subsidiaries, for infringement, contributory
infringement, inducement to infringe, misappropriation or breach of any
domestic or foreign patents, patent applications, patent licenses, know-how
licenses, trade names, trademark registrations and applications, common law
trademarks, service marks, copyrights, copyright registrations or
applications, trade secrets or other confidential proprietary information. To
the Knowledge of Parent, no person or entity is infringing the Intellectual
Property.
(u) Broker's or Finder's Fee. Except for Merrill Lynch & Co. (whose
fees and expenses will be paid by Parent), no agent, broker, person or
firm acting on behalf of Parent is, or will be, entitled to any commission
or broker's or finder's fees from any of the parties hereto, or from any
person controlling, controlled by, or under common control with any of the
parties hereto, in connection with this Agreement or any of the
transactions contemplated herein.
ARTICLE 3
COVENANTS
3.1. Acquisition Proposals. The Company agrees that neither it nor any of
its subsidiaries nor any of the respective officers, directors, employees,
representatives, investment bankers, attorneys, accountants and other agents
and affiliates (collectively, "Representatives") of the Company or any of its
subsidiaries shall, during the period commencing on the date hereof and
ending at the Effective Time: subject to fiduciary duties of its Board of
Directors under applicable law, directly or indirectly, take any action to
encourage, solicit, initiate, discuss or negotiate with, or furnish any
information to, or afford any access to the properties, books or records of
the Company, to any person other than Parent and its Representatives in
connection with any possible or proposed merger, consolidation, business
combination, liquidation, reorganization, sale or other disposition of a
material amount of assets, acquisition of a material amount of assets or
similar transaction involving the Company.
3.2. Employee Benefits. For the remainder of the calendar year in which
the Merger occurs, officers and employees of the Company and its subsidiaries
who remain employees of the Surviving Corporation and its subsidiaries
following the Merger shall continue to be provided with employee benefits,
including, without limitation, pension benefits, health and welfare benefits,
life insurance and vacation, which are no less favorable in the aggregate
than those which were provided to such officers and employees prior to the
Merger. Parent hereby agrees to, and to cause its subsidiaries to, provide to
officers and employees of the Company and its subsidiaries who become regular
(full time) employees of the Parent or any of its subsidiaries (other than
the Surviving Corporation and its subsidiaries) within such calendar year
employee benefits, including, without limitation, pension benefits, health
and welfare benefits, life insurance and vacation, which are no less
favorable in the aggregate to those provided from time to time by the Parent
and its subsidiaries to their similarly situated officers and employees or,
if Parent has no other employees in similar positions, which are no less
favorable in the aggregate than those provided to such employees of the
Company prior to the Merger. Any employee of the Company or any of its
subsidiaries who becomes a participant in any employee benefit plan, program,
policy, or arrangement of the Parent or any of its subsidiaries shall be
given credit under such plan, program, policy, or arrangement for all service
prior to becoming such a participant with the Company or any of its
subsidiaries for purposes of eligibility, vesting and benefit accrual. If the
group medical benefit plan covering employees and officers of the Company and
its subsidiaries is replaced by a group medical benefit plan of Parent or any
of its subsidiaries, all participants in the Company's group medical benefit
plan shall be credited with benefits received and payments made under the
Company's group medical benefit plan, for purposes of applying provisions
regarding pre-existing condition limitations, deductibles, co-insurance,
benefit maximums and out-of-pocket maximums in the new plan. Parent will not
take any action or permit the Surviving Corporation to take any action, after
the Effective Time, inconsistent with the employment agreements of the
Company and certain Company employees expressly disclosed on the Company
Disclosure Schedule.
3.3. Access and Information. Upon reasonable notice, each of the parties
shall (and shall cause each of the parties' subsidiaries to) afford to the
other parties and their Representatives such access during normal business
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hours throughout the period prior to the Effective Time to the books, records
(including, without limitation, tax returns and work papers of independent
auditors), properties, personnel and to such other information as any party may
reasonably request; provided, however, that no investigation pursuant to this
Section 3.3 shall affect or be deemed to limit or modify any representation or
warranty made herein. Each party will not, and will cause its representatives
not to, use any information obtained pursuant to this Section 3.3 for any
purpose unrelated to the consummation of the transactions contemplated by this
Agreement. The rights and obligations of Parent, Sub and the Company pursuant to
the confidentiality letters dated January 27, 1995 and March 8, 1995,
respectively (the "Confidentiality Agreements") from The Robinson-Humphrey
Company, Inc. to Parent and from Parent to the Company, respectively, shall
survive the execution and delivery of this Agreement, and all information
heretofore and hereafter obtained by the parties hereto or any of their
respective representatives pursuant to this Section 3.3 (including writings
based on such information) or otherwise shall be deemed "Proprietary
Information" (as that term is defined in the Confidentiality Agreements), and
shall be subject to the provisions of the Confidentiality Agreements.
3.4. Certain Filings, Consents and Arrangements. Parent and the Company
shall (a) promptly make any filings and applications required to be filed in
order to obtain all approvals, consents and waivers of governmental
authorities necessary or appropriate for the consummation of the transactions
contemplated hereby, (b) cooperate with one another (i) in promptly
determining what filings are required to be made or approvals, consents or
waivers are required to be obtained under any relevant federal, state or
foreign law or regulation and (ii) in promptly making any such filings,
furnishing information required in connection therewith and seeking timely to
obtain any such approvals, consents or waivers and (c) deliver to the other
copies of the publicly available portions of all such filings and
applications promptly after they are filed.
3.5. Indemnification and Insurance.
(a) Subject to applicable law, for a period of six years after the
Effective Time, Parent will indemnify the present and former directors,
officers, employees and agents of the Company to the extent provided in
Article IV of the Company's Code of Regulations in effect on the date of
this Agreement and will not amend, reduce or limit rights of indemnity
afforded to them or the ability of Parent to indemnify them, nor hinder,
delay or make more difficult the exercise of such rights of indemnity. For
a period of two years after the Effective Time, Parent shall use its best
efforts to maintain director and officer liability insurance coverage
providing the present and former directors and officers of the Company
with coverage at least as favorable as, at Parent's option from time to
time, either (i) the policies in effect immediately prior to the Effective
Time covering the Company's directors and officers (as summarized in the
Company Disclosure Schedule) or (ii) the policies covering Parent's
directors and officers from time to time.
(b) If any claim is (or claims are) made against any present or former
director, officer, employee or agent of the Company, arising from his or
her services as such, within six years from the Effective Time, the
provisions of this Section 3.5 respecting the Company's Code of
Regulations shall continue in effect until the final disposition of all
such claims.
(c) Any indemnified party wishing to claim indemnification under this
Section, upon learning of any indemnifiable action, suit, claim,
proceeding or investigation, shall promptly notify Parent thereof;
provided, however, that any failure so to notify Parent of any obligation
to indemnify such indemnified party or of any other obligation imposed by
this Section shall not affect such obligation except to the extent Parent
is prejudiced thereby. The indemnified parties as a group shall retain
only one counsel in each jurisdiction to represent them with respect to
any such matter (which counsel shall be reasonably acceptable to the
Parent); provided, however, in the event that there is, under applicable
standards of professional conduct, a conflict on any significant issue
between the positions of any two or more indemnified parties, Parent and
such indemnified parties may retain, at the expense of Parent, such number
of additional counsel as are necessary to eliminate all conflicts of the
type referred to above.
(d) Notwithstanding anything to the contrary contained in this Section
3.5: (i) Parent will have no obligation to indemnify any present director,
officer, employee or agent of the Company in respect of matters relating
to periods of time preceding the Effective Time (or for third party claims
in respect of such matters) if (1) the matters are not disclosed in this
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Agreement or in the Company Disclosure Schedule, (2) such non-disclosure
constitutes a breach of a representation or warranty made by the Company
herein and (3) such director, officer, employee or agent had Knowledge of
such non- disclosure and that such non-disclosure constituted a material
breach of a representation or warranty made by the Company herein, and (ii)
Parent will have no obligation to indemnify a present or former director,
officer, employee or agent of the Company against any loss, cost, liability
or expense arising out of or in connection with any action or claim asserted
by Parent or any of its subsidiaries against such director, officer, employee
or agent for fraud, provided that Parent prevails in such action or claim.
(e) The provisions of this Section 3.5 shall be binding on any
successor entity to Parent.
3.6. Publicity. The initial press release announcing this Agreement shall
be a joint press release and thereafter the Company and Parent 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 governmental entity or with any national securities
exchange with respect thereto.
3.7. Proxy; Registration Statement. As soon as practicable after the date
hereof, the Company and Parent shall prepare and file with the Commission a
proxy statement and related materials to be furnished by the Company to the
holders of Company Common Stock in connection with the Merger (the "Proxy
Statement") and the Registration Statement, subject, however, to deferral
until such time as Parent and the Company may reasonably agree in the event
that Parent enters into a Business Combination Agreement (as defined in
Section 4.2(k) and, as a result thereof, Parent is required to obtain
shareholder approval of the Merger either under Pennsylvania corporate law or
NASDAQ requirements, as provided in Section 4.2(k). As soon as practicable
following receipt of final comments from the staff of the Commission on the
Proxy Statement and the Registration Statement (or advice that such staff
will not review such filing), Parent shall use its best efforts to have the
Registration Statement declared effective by the Commission and to maintain
the effectiveness of such Registration Statement until completion of the
Merger. Promptly after the effectiveness of the Registration Statement, the
Company shall mail the Proxy Statement to all holders of Company Common
Stock. Parent and the Company shall cooperate with each other in the
preparation of the Proxy Statement and the Registration Statement and shall
advise the other in writing if, at any time prior to the Company Meeting, any
such party shall obtain Knowledge of any facts that might make it necessary
or appropriate to amend or supplement the Proxy Statement or the Registration
Statement in order to make the statements contained or incorporated by
reference therein not misleading or to comply with applicable law.
Notwithstanding the foregoing, each party shall be responsible for the
information and disclosures which it makes or incorporates by reference in
all regulatory filings, the Proxy Statement and the Registration Statement.
In the event that Parent enters into a Business Combination Agreement and, as
a result thereof, Parent is required to obtain shareholder approval of the
Merger, then Parent shall take all action necessary in accordance with
applicable law, NASDAQ requirements and its Articles of Incorporation and
By-laws, to convene a meeting of its shareholders as promptly as practicable
for the purpose of considering and taking action on the Merger.
3.8. Shareholders' Meeting. The Company shall take all action necessary,
in accordance with applicable law and its Articles of Incorporation and Code
of Regulations, to convene a meeting of the holders of the Company Common
Stock (the "Company Meeting") as promptly as practicable for the purpose of
considering and taking action required by this Agreement, subject, however,
to deferral until such time as Parent and the Company may reasonably agree in
the event that Parent enters into a Business Combination Agreement and, as a
result thereof, Parent is required to obtain shareholder approval of the
Merger either under Pennsylvania corporate law or NASDAQ requirements. Except
to the extent legally required for the discharge by the board of directors of
its fiduciary duties, the board of directors of the Company shall recommend
that the holders of the Company Common Stock vote in favor of and approve the
Merger and adopt this Agreement at the Company Meeting.
3.9. Antitakeover Statutes. The Company shall take all steps reasonably
requested by Parent for the purpose of (i) compliance with the requirements
of any state antitakeover law by action of its board of directors or
otherwise and (ii) assistance in any challenge by Parent to the applicability
to the Merger of any state antitakeover law.
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3.10. Listing. Parent shall use its best efforts to list on the Nasdaq
National Market upon official notice of issuance the Parent Stock to be
issued in the Merger.
3.11. Restriction on Dividends, Splits, Etc. Each of the Company and
Parent agrees that, except as expressly consented to or approved in writing
by the other, during the period commencing on the date hereof and ending on
the Closing Date, it will not declare, pay or make any dividend or other
distribution or payment with respect to, or split, redeem or reclassify, any
shares of its capital stock.
3.12. Conduct of the Business of the Company Pending the Closing Date. The
Company agrees that, except as set forth in the Company Disclosure Schedule,
expressly permitted by this Agreement or otherwise consented to or approved
in writing by Parent, during the period commencing on the date hereof and
ending on the Closing Date:
(a) The Company and each of its subsidiaries will conduct their
respective operations only in the ordinary course of business consistent
with past practice (subject, in any event, to the provisions of paragraph
(b) below) and will use reasonable efforts to preserve intact their
respective business organizations, keep available the services of their
officers and employees and maintain satisfactory relationships with
licensors, suppliers, distributors, customers, clients and others having
business relationships with them;
(b) Neither the Company nor any of its subsidiaries shall (i) make any
change in or amendment to its Articles of Incorporation or Code of
Regulations; (ii) grant, issue or sell any shares of its capital stock
(except shares of Company Common Stock issued upon the exercise of options
and warrants outstanding on the date hereof granted under any of the stock
option plans or pursuant to any of the warrant agreements identified in
the Company Disclosure Schedule) or any other securities, or grant, issue
or sell any securities convertible into, or options, warrants or rights to
purchase or subscribe to, or enter into any arrangement or contract with
respect to the issuance or sale of, any shares of its capital stock or any
other securities, or make any other changes in its capital structure,
(iii) terminate operations at any site where operations are currently
being conducted or commence operations at any site where operations are
not currently being conducted; (iv) enter into, terminate, assign or
sublease any lease of real property; (v) amend any employee or
non-employee benefit plan or program, employment agreement, license
agreement, franchise agreement or retirement agreement, or pay any bonus
or contingent compensation, or contribute to any pension or profit-sharing
plan, or grant any severance or termination pay except in each case as may
be required by law or contract; (vi) incur any indebtedness for borrowed
money in excess of $250,000 or subject or allow their properties or assets
to be subjected to any mortgages, pledges, security interests,
encumbrances, liens and charges of any kind (other than to secure
inventory financing and commitments under the "Power By the Hour Program"
in the ordinary course of business consistent with past practice or such
as are covered by clauses (1), (2) or (3) of Section 2.1(j) hereof), incur
any liability on any guaranties, or make any investments in or loans,
advances (other than advances to employees not exceeding $7,500 in the
aggregate for any individual employee and only if made in the ordinary
course of business at levels consistent with past practices) or extensions
of credit (other than trade credit extended to customers in the ordinary
course of business at levels consistent with past practices) to any person
or entity, (vii) agree to the settlement of any Proceeding in excess of
$200,000, or (viii) agree, in writing or otherwise, to take any of the
foregoing actions. The Company and its subsidiaries (1) may only enter
into a contract or commitment (i) if such contract or commitment is
entered into in the ordinary course of business and the amount involved
thereunder, viewed individually and collectively with other contracts and
commitments entered into by the Company and its subsidiaries, is at a
level consistent with past practices of the Company and its subsidiaries
or (ii) if such contract or commitment is outside the ordinary course of
business, if the amount involved thereunder does not exceed $500,000 and
if the amount involved thereunder, when added to the amount involved under
other such contracts and commitments entered into between the date hereof
and the Closing Date, does not exceed $1,000,000; (2) shall not dispose of
any assets except inventory and fixed assets in the ordinary course of
business; and (3) shall not agree, in writing or otherwise, to take any of
the foregoing actions.
(c) The Company shall not, and shall not permit any of its subsidiaries
to, purchase or acquire, or offer to purchase or acquire, any shares of
capital stock of the Company.
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3.13. Best Efforts. Subject to the terms and conditions herein provided,
each of the Company, Parent and Sub shall, and the Company shall cause each
of its subsidiaries to, cooperate and use their respective reasonable best
efforts to take, or cause to be taken, all appropriate action, and to make,
or cause to be made, all filings necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
their respective reasonable best efforts to obtain, prior to the Closing
Date, all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to
contracts with the Company and its subsidiaries as are necessary for
consummation of the transactions contemplated by this Agreement and to
fulfill the conditions to the Merger and to rectify any event or circumstance
which could impede consummation of the transactions contemplated by this
Agreement; provided, however, that no loan agreement or contract for borrowed
money shall be repaid, in whole or in part, and no contract shall be amended
to increase the amount payable thereunder or otherwise to be more burdensome
to the Company or any of its subsidiaries in order to obtain any such
consent, approval or authorization without first obtaining the written
approval of Parent; and provided further, that Parent shall have no
obligation to take any steps not expressly provided for herein to facilitate
satisfaction of the conditions contained in Sections 4.1(j) and 4.1(k).
3.14. Notice of Default.
(a) The Company and Parent promptly will give notice to the other of
the occurrence of any event or the failure of any event to occur that
results in a breach of any representation or warranty by the Company or
Parent contained herein or a failure by the Company or Parent to comply
with any covenant, condition or agreement contained herein.
(b) The Company and Parent will (i) use their respective reasonable
best efforts to take all action necessary to render accurate in all
material respects as of the Closing Date the representations and
warranties of the Company and Parent contained herein, (ii) refrain from
taking any action that would render any such representation or warranty
inaccurate as of such time and (iii) use their respective reasonable best
efforts to perform or cause to be satisfied each covenant or condition to
be performed or satisfied by them as contemplated by this Agreement.
3.15. Treatment of Certain Debt. Promptly following completion of the
Merger (and no later than the close of business on the Closing Date), unless
the Banks (as defined below) shall have consented, at the request of Parent,
to the continuation after the Merger of the Company's secured indebtedness
under the Secured Credit Agreement dated as of September 9, 1993, by and
among the Company, its subsidiaries and PNC Bank, Ohio, N.A., as Agent, The
First National Bank of Chicago as Co-Agent and other participating banks
(collectively, the "Banks"), or any agreement successor thereto, Parent, in
its sole discretion, shall either discharge such indebtedness in full,
including any accrued and unpaid interest to the date of payment, or purchase
from the Banks such indebtedness in full, including any accrued and unpaid
interest to the date of payment (or effected a combination of such discharge
and purchase). The Company agrees to take all steps reasonably requested by
Parent to assist Parent in discharging or purchasing, without premium or
penalty, the indebtedness to the Banks, as contemplated above. The Company
represents and warrants to and for the benefit of Parent and Sub that the
Company's indebtedness to the Banks may be prepaid or paid as a result of the
Merger without premium or penalty.
3.16. Tax Status. In the event that Arnold & Porter is unable to deliver
the opinion referred to in Section 4.1(j) hereof within 30 days after the
execution of this Agreement, Parent, Sub and the Company shall take all
reasonable action to amend this Agreement to modify the structure of, or to
substitute affiliated parties to, the transactions contemplated by this
Agreement, if possible to do so without adversely affecting the economic
consequences of the transactions contemplated hereby to Parent, the Company
or their respective shareholders, to the extent necessary to obtain such
opinion within 60 days after execution of this Agreement.
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ARTICLE 4
CONDITIONS PRECEDENT TO MERGER
4.1. Conditions Precedent to Obligations of Parent, Sub and the Company.
The respective obligations of Parent and Sub, on the one hand, and the
Company, on the other hand, to effect the Merger are subject to the
satisfaction or waiver (subject to applicable law) at or prior to the
Effective Time of each of the following conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of shareholders of the Company.
(b) Governmental Approvals. All filings required to be made prior to
the Effective Time with, and all authorizations, consents, orders or
approvals required to be obtained prior to the Effective Time from, and
all expirations of waiting periods imposed by, any governmental entity
(including without limitation under the HSR Act) shall have been made or
obtained.
(c) Registration Statement. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act
and no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the Commission and remain in effect.
(d) Injunction. No preliminary or permanent injunction or other order
shall have been issued by any court or by any governmental or regulatory
agency, body or authority which prohibits the consummation of the Merger
and which is in effect at the Effective Time.
(e) Statutes. No statute, rule, regulation, executive order, decree or
order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the
consummation of the Merger.
(f) Nasdaq. The Parent Stock, including the shares issuable in the
Merger, shall have been designated for inclusion in The Nasdaq National
Market.
(g) Legal Actions. There shall not have been any action taken, or any
statute, rule, regulation, judgment, order or injunction promulgated,
enacted, entered or enforced by any state, federal or foreign government
or governmental authority or by any court, domestic or foreign, that would
(i) require the divestiture by Parent, Sub or the Company or any of their
respective subsidiaries or affiliates of all or any material portion of
the business, assets or property of any of them or impose any material
limitation on the ability of any of them to conduct their business and own
such assets and properties or (ii) impose any limitations on the ability
of Parent or Sub or any of their respective subsidiaries effectively to
control in any material respect the business or operations of the Company
or any of the Company's subsidiaries.
(h) Third Party Consents. Each of the persons and entities listed on
the Company Disclosure Schedule and the Parent Disclosure Schedule shall
have consented to the consummation of the Merger if, and to the extent,
required by the provisions of the existing documents between such persons
and entities and the Company or Parent, respectively, or their respective
subsidiaries, and if the failure to have obtained such consent would have
a material adverse effect on the Company or Parent, respectively.
(i) Blue Sky Approvals. Parent shall have received all state securities
laws and "Blue Sky" permits and other authorizations necessary to
consummate the transactions contemplated hereby.
(j) Tax Opinion. Within 30 days of the execution of this Agreement,
Arnold & Porter shall have delivered to the Company an opinion, reasonably
satisfactory in form and substance to the Company, to the effect that the
Merger when consummated in accordance with the terms hereof should
constitute a reorganization within the meaning of Section 368(a) of the
Code, and Arnold & Porter shall not have revoked such opinion provided,
however, that in the event that Arnold & Porter is not able to deliver
such opinion within such time and this Agreement is amended pursuant to
Section 3.16 hereof, then Arnold & Porter shall have delivered such
opinion within 60 days of the execution of this Agreement.
(k) Confirmation of Fairness Opinion. The Robinson-Humphrey Company,
Inc. shall have delivered to the Company a letter, as of a date not more
than five days prior to the date the Proxy Statement is mailed to the
Company's shareholders, confirming the Fairness Opinion.
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4.2. Conditions Precedent to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions unless waived by Parent and Sub:
(a) Accuracy of Representations and Warranties. All representations and
warranties of the Company contained herein shall be true and correct in
all material respects as of the date hereof and at and as of the Closing,
with the same force and effect as though made on and as of the Closing
Date (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date), except as
consented to in writing by Parent.
(b) The Company's Performance. The Company shall have performed in all
material respects all obligations and agreements, and complied in all
material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it prior to the Closing
Date, except as consented to in writing by Parent.
(c) No Material Changes. No change shall have occurred (and no
condition, event or development shall have occurred involving a
prospective change) in the Condition of the Company or any of its
subsidiaries which is or is reasonably likely to be materially adverse to
such Condition.
(d) Third Party Consents. Each of the persons and entities listed on
the Parent Disclosure Schedule shall have consented to the consummation of
the Merger if, and to the extent, required by the provisions of the
existing documents between such persons and entities and Parent or its
subsidiaries.
(e) Accountant's Letter. Parent shall have received from the Company's
independent certified public accountants "cold comfort" letters, dated (i)
the date of the mailing of the Proxy Statement to the Company's
shareholders and (ii) shortly prior to the Effective Date, with respect to
certain financial information regarding the Company in substantially the
form customarily issued by such accountants at such time in transactions
of this type.
(f) Dissenting Shareholders. Holders of not more than ten percent (10%)
of the issued and outstanding shares of Company Common Stock entitled to
make a demand under Section 1701.85(A)(2) of the OGCL shall have properly
served a written demand, in accordance with Section 1701.85(A)(2) of the
OGCL, upon the Company for the payment of the fair cash value of their
shares of Company Common Stock.
(g) Execution of Employment-Related Agreements. Neither Terry L. Theye
nor Lewis E. Miller shall have rescinded, terminated (other than on
account of death or disability) or breached any agreement he might reach
with Parent regarding his employment with Parent or the Surviving
Corporation following the Merger (as contemplated by Section 5.1(l)
hereof).
(h) Opinion of Counsel. Parent shall have received the opinion of Norma
Skoog, Esq., Vice President, Secretary and General Counsel of the Company,
dated the Closing Date, covering the matters identified on Schedule
4.2(h).
(i) Compliance Certificate. Parent shall have received a certificate of
the Chief Executive Officer of the Company, dated the Closing Date, that,
to the best of his knowledge and belief after due inquiry, the conditions
set forth in Sections 4.2(a) and 4.2(b) have been satisfied.
(j) Limit on Indebtedness. The amount of the Company's secured
indebtedness which may be required to be discharged pursuant to Section
3.15 hereof does not exceed $55,000,000.
(k) Parent Shareholder Approval. In the event that Parent, after the
date of this Agreement, enters into any agreement for a business
combination with a third party (a "Business Combination Agreement") as a
result of which, under Pennsylvania corporate law or NASDAQ requirements,
Parent would be required to obtain shareholder approval as a condition to
the consummation of the Merger, then Parent shall have received such
shareholder approval.
4.3. Conditions Precedent to the Obligations of the Company. The
obligation of the Company to effect the Merger is also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions unless waived by the Company:
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(a) Accuracy of Representations and Warranties. All representations and
warranties of Parent and Sub contained herein shall be true and correct in
all material respects as of the date hereof and at and as of the Closing,
with the same force and effect as though made on and as of the Closing
Date (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date), except as
consented to in writing by the Company.
(b) Parent's Performance. Parent and Sub shall have performed in all
material respects all obligations and agreements, and complied in all
material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by them prior to the Closing
Date, except as consented to in writing by the Company.
(c) No Material Changes. No change shall have occurred (and no
condition, event or development shall have occurred involving a
prospective change) in the Condition of Parent which is or may be
materially adverse to such Condition.
(d) Accountant's Letter. The Company shall have received from Parent's
independent certified public accountants "cold comfort" letters, dated (i)
the date of the mailing of the Proxy Statement to the Company's
shareholders and (ii) shortly prior to the Effective Date, with respect to
certain financial information regarding Parent in substantially the form
customarily issued by such accountants at such time in transactions of
this type.
(e) Opinion of Counsel. The Company shall have received the opinion of
Pepper, Hamilton & Scheetz, dated the Closing Date, covering the matters
identified on Schedule 4.3(e). (f) Compliance Certificate. The Company
shall have received a certificate of the Chief Executive Officer of
Parent, dated the Closing Date, that, to the best of his knowledge and
belief after due inquiry, the conditions set forth in Sections 4.3(a) and
(b) have been satisfied.
ARTICLE 5
TERMINATION AND ABANDONMENT
5.1. Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned:
(a) at any time prior to the Effective Time, by mutual consent of the
Company, on the one hand, and of Parent and Sub, on the other hand;
(b) by either Parent or the Company if the Effective Time shall not
have occurred by September 30, 1995, unless extended by mutual agreement
of Parent, Sub and the Company, provided that, if the Effective Time shall
not have occurred by September 30, 1995 because Parent enters into a
Business Combination Agreement which, under Pennsylvania corporate law or
NASDAQ requirements, would require Parent to obtain shareholder approval
as a condition to consummation of the Merger, Parent may only terminate
this Agreement pursuant to this Section 5.1(b) if the Effective Time shall
not have occurred by December 31, 1995;
(c) by Parent, if there has been a breach of a representation or
warranty in this Agreement (including the Schedules and Exhibits) or any
certificate, instrument or other document delivered pursuant hereto by the
Company in any material respect, or a breach by the Company of any
covenant of the Company set forth herein in any material respect, or a
failure of any condition to which the obligations of Parent and Sub
hereunder are subject in any material respect, except (i) as consented to
in writing by Parent or (ii) insofar as any breach of a representation or
warranty is attributable to the initiation of a Proceeding against the
Company or any of its subsidiaries or is attributable to the assertion
against the Company or any of its subsidiaries of a Company Infringement
Claim, in each case after the date hereof and in each case which does not
have (viewed individually and collectively with any other such Proceedings
or Company Infringement Claims) and is not reasonably likely to have
(viewed individually and collectively with any other such Proceedings or
Company Infringement Claims) a material adverse effect on the Condition of
the Company;
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(d) by the Company, if there has been a breach of a representation or
warranty in this Agreement (including the Schedules and Exhibits) or any
certificate, instrument or other document delivered pursuant hereto by
Parent or Sub in any material respect, or a breach by Parent or Sub of any
covenant of Parent or Sub, as the case may be, set forth herein in any
material respect, or a failure of any condition to which the obligations
of the Company hereunder are subject in any material respect, except (i)
as consented to in writing by the Company or (ii) insofar as any breach of
a representation or warranty is attributable to the initiation of a
Proceeding against Parent or any of its subsidiaries or the assertion
against Parent or any of its subsidiaries of a Parent Infringement Claim,
in each case after the date hereof and in each case which does not have
(viewed individually and collectively with any other such Proceedings or
Parent Infringement Claims) and is not reasonably likely to have (viewed
individually and collectively with any other such Proceedings or Parent
Infringement Claims) a material adverse effect on the Condition of Parent;
(e) by the Company, if the shareholders of the Company do not approve
the Merger at the Company Meeting, or by Parent, if Parent enters into a
Business Combination Agreement which, under Pennsylvania corporate law or
NASDAQ requirements, would require Parent to obtain shareholder approval
as a condition to the consummation of the Merger and the shareholders of
Parent do not approve the Merger at a shareholders meeting convened by
Parent for a shareholder vote on the Merger;
(f) by Parent, on the one hand, or the Company, on the other hand, if
any court of competent jurisdiction in the United States, or other United
States governmental body shall have issued an order, decree or ruling or
taken any other action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action
shall have become final and unappealable;
(g) by the Company, in the event (i) of the acquisition, without the
consent of the Company, by any person or group of persons (other than
persons or groups of persons who (A) acquire shares of Parent Stock
pursuant to any merger of Parent in which Parent is the surviving
corporation or (B) disclose their beneficial ownership of shares of Parent
Stock on Schedule 13G under the Securities Exchange Act of 1934 (the
"Exchange Act"), of beneficial ownership of 50% or more of the outstanding
shares of Parent Stock (the terms "person," "group" and "beneficial
ownership" having the meanings ascribed thereto in Section 13(d) of the
Exchange Act) (as constituted prior to the Merger and computed on a fully
diluted basis assuming the exercise of all options and warrants granted by
Parent and the conversion and exchange of all convertible and exchangeable
Parent securities, whether or not then exercisable, convertible or
exchangeable), (ii) the Board of Directors of Parent, without the consent
of the Company, accepts or publicly recommends acceptance of an offer from
a third party to acquire 50% or more of the outstanding shares of Parent
Stock (as constituted prior to the Merger and computed on a fully diluted
basis assuming the exercise of all options and warrants granted by Parent
and the conversion and exchange of all convertible and exchangeable Parent
securities, whether or not then exercisable, convertible or exchangeable)
or of Parent's consolidated assets; or (iii) Parent, without the consent
of the Company, executes a definitive agreement for any transaction
involving the issuance of a number of shares of Parent Stock, or
securities exchangeable therefor, that would increase the total number of
shares of Parent Stock issued and outstanding by at least 20% (as
constituted prior to the Merger and computed on a fully diluted basis
assuming the exercise of all options and warrants granted by Parent and
the conversion and exchange of all convertible and exchangeable Parent
securities, whether or not then exercisable, convertible or exchangeable).
The Company shall be deemed to have consented to the occurrence of one or
more events described in clause (i), (ii) or (iii) of this paragraph (g)
if the Company does not object thereto in writing to Parent within 10
business days after written notice from Parent that such an event has
occurred;
(h) by Parent, if the Company shall have taken any action entitling
Parent to receive payment of the Basic Fee pursuant to Section 5.4 upon
termination of this Agreement;
(i) by Parent, if the Average Closing Price of a share of Parent Stock
exceeds $11.00, subject, however, to the right of the Company to override
any such termination election by Parent by agreeing in writing, by no
later than 5:00 p.m. on the trading day preceding the Closing Date, that
the Conversion Number will be changed to the quotient that results from
dividing $7.2468 by the Average Closing Price of a share of Parent Stock;
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(j) by the Company, if the Average Closing Price of a share of Parent
Stock is less than $9.00, subject, however, to the right of Parent to
override any such termination election by the Company by agreeing in
writing, by no later than 5:00 p.m. on the trading day preceding the
Closing Date, that the Conversion Number will be changed to the quotient
that results from dividing $5.9292 by the Average Closing Price of a share
of Parent Stock;
(k) by Parent, if the Banks referenced in Section 3.15 accelerate the
secured indebtedness referenced therein or otherwise pursue legal remedies
against the Company or any of its subsidiaries on account of a default
under the agreements relating thereto; or
(l) by Parent, on or before June 15, 1995, if Parent has not entered
into agreements satisfactory to it, after good faith negotiations on its
behalf, with each of Terry L. Theye and Lewis E. Miller replacing the
existing employment agreements (each dated January 1, 1994) between each
of such executives and the Company by the earlier of (i) the thirtieth day
following the date hereof and (ii) date of the mailing by the Company of
the Proxy Statement pursuant to Section 3.7.
5.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 5.1 hereof by Parent or Sub, on the one hand,
or the Company, on the other hand, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof pursuant
to which such termination is made, and this Agreement shall become void and
have no effect (other than Section 3.3, Article V and Article VI, which shall
survive termination), and there shall be no liability hereunder on the part
of Parent, Sub or the Company; provided that, subject to Section 5.4 hereof,
(i) if Parent terminates this Agreement pursuant to Section 5.1(c) or if the
Company terminates this Agreement pursuant to Section 5.1(d) on account of an
intentional or wilful breach of a representation, warranty or covenant, then
the terminating party shall have the right to pursue its legal and equitable
remedies for breach of contract and (ii) if Parent terminates this Agreement
pursuant to Section 5.1(c) or if the Company terminates this Agreement
pursuant to Section 5.1(d) other than on account of an intentional or wilful
breach of a representation, warranty or covenant, then the terminating party
shall have the right to recover its costs and expenses incurred in connection
with the transactions contemplated hereby.
5.3. Expenses. Subject to Section 5.2, each party hereto shall bear and
pay all costs and expenses incurred by it in connection with the transactions
contemplated hereby, including fees and expenses of its own financial
consultants, accounts and counsel, except that Parent and the Company each
shall bear and pay 50% of all printing costs.
5.4. Basic Fee. If on or prior to September 30, 1995, the Company shall
have consummated, or entered into an agreement providing for, a merger of the
Company with, sale of all or a substantial part of the assets of the Company
to (excluding sales of inventory in the ordinary course of business), or any
other business combination involving the Company with, any person or entity,
including any "group" within the meaning of Rule 13d-5 promulgated under the
Exchange Act (other than Parent or Sub) (a "Company Combination Event") and
this Agreement is terminated as a result thereof, the Company shall, within
two days after the first of such events has occurred, pay Parent an amount
(the "Basic Fee") equal to $1.5 million. If this Agreement is terminated on
account of the occurrence of a Company Combination Event, then payment of the
Basic Fee shall be inclusive of all expenses incurred by Parent and Sub in
connection with this Agreement and the matters contemplated hereby and shall
be the exclusive remedy of Parent for any claim of liability against the
Company arising out of such termination or the breach of this Agreement
resulting from the occurrence of the Company Combination Event.
ARTICLE 6
MISCELLANEOUS
6.1. Knowledge. For purposes of Section 3.5(d)(i)(3) of this Agreement,
"Knowledge" shall mean the actual knowledge (but not the constructive or
implied knowledge) of the person in question, and a fact shall not be within
the knowledge of any such person if it is not actually and specifically known
by such person, regardless of whether that person should have known of such
fact. For all other purposes of this Agreement, "Knowledge" shall mean both
the actual knowledge of an "Applicable Person" (as defined below) and the
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knowledge which the Applicable Person would have acquired had he or she
conducted a reasonable inquiry of the applicable subject matter. Each of the
following is an Applicable Person of the Company and its subsidiaries: Terry
L. Theye, Lewis E. Miller, Timothy M. Mooney and Norma Skoog. Each of the
following is an Applicable Person of Parent and its subsidiaries: Richard D.
Sanford, Gregory A. Pratt, Stephanie D. Cohen, Edward A. Meltzer and Steven
M. Kawalick.
6.2. Survival. Only those agreements and covenants of the parties that are
applicable in whole or in part after the Effective Time shall survive the
Effective Time. All representations and warranties and other agreements and
covenants shall be deemed to be conditions of this Agreement and shall not
survive the Effective Time.
6.3. Waiver. Prior to the Effective Time, any provision of this Agreement
may be (i) waived by the party benefitted by the provision or by both parties
by a writing executed by an executive officer, or (ii) amended or modified at
any time (including the structure of the transaction ) by an agreement in
writing between the parties hereto approved by their respective boards of
directors, except that, after the vote by the shareholders of the Company at
the Company Meeting, no such amendment or modification which by law requires
further approval by shareholders may be made without further shareholder
approval.
6.4. Notices. All notices, requests, acknowledgements and other
communications hereunder to a party shall be in writing and shall be deemed
to have been duly given when delivered by hand, telecopy, telegram or telex
(confirmed in writing) to such party at its address set forth below or such
other address as such party may specify by notice to the other party hereto.
If to the Company, to:
The Future Now, Inc.
8044 Montgomery Road
Suite 601
Cincinnati, Ohio 45236
Attention: Terry L. Theye
With copies to:
The Future Now, Inc.
8044 Montgomery Road
Suite 601
Cincinnati, Ohio 45236
Attention: Norma Skoog, Esquire
and
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Attention: Steven L. Kaplan, Esquire
If to Parent or Sub, to:
Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, Pennsylvania 19341
Attention: Richard D. Sanford
With copies to:
Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, Pennsylvania 19341
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Attention: Legal Department
and
Pepper, Hamilton & Scheetz
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103
Attention: Barry M. Abelson, Esquire
6.5. Entire Agreement; Etc. This Agreement represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written
agreements heretofore or contemporaneously made. All terms and provisions of
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Except for the
provisions of Sections 1.5, 3.2 and 3.5, nothing in this Agreement is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
6.6. Assignment. This Agreement may not be assigned by any party hereto
without the written consent of the other parties, provided that Parent and
Sub may assign their rights and obligations hereunder to a direct or indirect
wholly-owned subsidiary, but no such assignment shall relieve Parent of its
obligations hereunder.
6.7. Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only, do not
constitute a part of this Agreement and shall not affect in any way the
meaning or interpretation of this Agreement.
6.8. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, and all of which together
shall be deemed to be one and the same instrument.
6.9. Applicable Law. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws
of the Commonwealth of Pennsylvania, without regard to the conflict of laws
rules thereof, except that the Merger, and the effects thereof, shall be
governed by and construed in accordance with the laws of the State of Ohio,
without regard to the conflict of laws rules thereof.
6.10. Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
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IN WITNESS WHEREOF, each of Parent, Sub and the Company has executed this
Agreement as of the date first above written.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Edward A. Meltzer
---------------------
Name: Edward A. Meltzer
Title: Vice President
IE OHIO ACQUISITION CORPORATION
By: /s/ Edward A. Meltzer
---------------------
Name: Edward A. Meltzer
Title: Vice President
THE FUTURE NOW, INC.
By: /s/ Terry L. Theye
--------------------
Name: Terry L. Theye
Title: Chairman and Chief Executive Officer
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SCHEDULE 4.2(H)
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SCHEDULE 4.2(H)
FORM OF NORMA SKOOG OPINION
[DEFINED TERMS HAVE THE MEANINGS ATTRIBUTED
TO THEM IN THE MERGER AGREEMENT]
1. The Company is validly existing as a corporation and is in good
standing under the laws of the State of Ohio.
2. The Company has full corporate power and authority to execute and
deliver the Merger Agreement, to perform its obligations thereunder and to
consummate the transactions contemplated thereby. The execution, delivery and
performance by the Company of the Merger Agreement, and the consummation by
it of the transactions contemplated thereby, have been duly authorized and
approved by its Board of Directors and holders of its capital stock and no
other corporate action on the part of the Company is necessary to authorize
the execution, delivery and performance of the Merger Agreement by the
Company and the consummation of the transactions contemplated thereby. The
Merger Agreement has been duly executed and delivered by the Company and is a
valid and binding obligation of the Company enforceable against the Company
in accordance with its terms, except to the extent that its enforceability
may be subject to limitations imposed by general principles of equity
(regardless of whether such enforceability is considered in a proceeding at
law or in equity) and to the effect of applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws of general application relating to or
affecting creditors' rights, including, without limitation, the effect of
statutory or other laws regarding fraudulent conveyances and preferential
transfers.
3. Upon the filing of the Ohio Certificate of Merger with the Secretary of
State of the State of Ohio, Sub shall be merged with and into the Company,
the separate corporate existence of Sub shall cease and the corporate
existence of the Company shall continue.
4. The authorized, issued and outstanding capital stock of the Company is
as set forth in Section 2.1(c) of the Merger Agreement or as otherwise
permitted by the Merger Agreement. The outstanding shares of Company Common
Stock have been duly authorized and validly issued and are fully paid and
non-assessable and were not issued in violation of any preemptive rights. To
the best of such counsel's knowledge, except as set forth in Section 2.1(c)
or in the Company Disclosure Schedule: there are no outstanding or authorized
options, warrants, rights, subscriptions, claims of any character,
agreements, obligations, convertible or exchangeable securities, or other
commitments, contingent or otherwise, relating to the capital stock of the
Company, pursuant to which the Company is or may become obligated to issue
shares of capital stock or any securities convertible into, exchangeable for,
or evidencing the right to subscribe for, any shares of capital stock of the
Company.
5. The execution and delivery of the Merger Agreement by the Company and
the consummation by the Company of the transactions contemplated thereby will
not: (i) violate any provision of the Articles of Incorporation or the Code
of Regulations, as amended to date, of the Company; (ii) violate any statute,
ordinance, rule, regulation, order or decree of any court or of any
governmental or regulatory body, agency or authority known to such counsel
and applicable to the Company or any of its subsidiaries or by which any of
their respective properties or assets may be bound; or (iii) require any
filing with, or permission, consent or approval of, or the giving of any
notice to, any governmental or regulatory body, agency or authority, except
such as have been made and obtained; excluding from the foregoing clause
(iii) filings, notices, permits, consents and approvals the absence of which,
and violations, breaches, defaults, conflicts and liens which, in the
aggregate, would not have a material adverse effect on the Condition of the
Company and which would not impede, interfere with or delay the Merger.
Without limiting the generality of the foregoing, the conversion of options
and warrants pursuant to Section 1.5 of the Merger Agreement will not require
the consent or approval of any of the holders of such options or warrants.
A-36
<PAGE>
SCHEDULE 4.3(E)
A-37
<PAGE>
SCHEDULE 4.3(E)
FORM OF PEPPER, HAMILTON & SCHEETZ OPINION
[DEFINED TERMS HAVE THE MEANINGS ATTRIBUTED
TO THEM IN THE MERGER AGREEMENT]
1. Sub is validly existing as a corporation and is in good standing under
the laws of the State of Ohio. Parent is validly existing as a corporation
and is in good standing under the laws of the Commonwealth of Pennsylvania.
2. Each of Parent and Sub has full corporate power and authority to
execute and deliver the Merger Agreement, to perform its obligations
thereunder and to consummate the transactions contemplated thereby. The
execution, delivery and performance by Parent and Sub of the Merger
Agreement, and the consummation by each of the transactions contemplated
thereby, have been duly authorized and approved by the Board of Directors of
Parent and Sub and by Parent, as the sole shareholder of Sub, and no other
corporate action on the part of the Parent or Sub is necessary to authorize
the execution, delivery and performance of the Merger Agreement by Parent and
Sub and the consummation of the transactions contemplated thereby. The Merger
Agreement has been duly executed and delivered by Parent and Sub and is a
valid and binding obligation of each of them enforceable against each of them
in accordance with its terms, except to the extent that its enforceability
may be subject to limitations imposed by general principles of equity
(regardless of whether such enforceability is considered in a proceeding at
law or in equity) and to the effect of applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws of general application relating to or
affecting creditors' rights, including, without limitation, the effect of
statutory or other laws regarding fraudulent conveyances and preferential
transfers.
3. The issued and outstanding capital stock of Sub, and the shares of
Parent Stock which have been issued in the Merger, have been duly authorized
and validly issued, are fully paid and non-assessable, and are not subject
to, and were not issued in violation of, any preemptive rights.
4. The execution and delivery of the Merger Agreement by Parent and Sub
and the consummation by Parent and Sub of the transactions contemplated
thereby will not: (i) violate any provision of the Articles of Incorporation
or the Bylaws of Parent or Sub; (ii) violate any statute, ordinance, rule,
regulation, order or decree of any court or of any governmental or regulatory
body, agency or authority known to such counsel and applicable to Parent or
Sub or by which any of their respective properties or assets may be bound; or
(iii) require any filing with, or permission, consent or approval of, or the
giving of any notice to, any governmental or regulatory body, agency or
authority, except such as have been made and obtained, excluding from the
foregoing clause (iii) filings, notices, permits, consents and approvals the
absence of which, and violations, breaches, defaults, conflicts and liens
which, in the aggregate, would not have a material adverse effect on the
Condition of Parent and which would not impede, interfere with or delay the
Merger.
5. The Registration Statement has become effective under the Securities
Act of 1933 (the "Act") and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Agreement or
suspending or preventing the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted, are pending or, to the
best of such counsel's knowledge, are contemplated under the Act.
6. The Registration Statement, as of its effective date, complied as to
form in all material respects with the requirements of the Act, and the
applicable rules and regulations of the Securities and Exchange Commission
thereunder.
A-38
<PAGE>
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
DATED JULY 6, 1995
A-39
<PAGE>
AMENDMENT NO. 1
TO
AGREEMENT
AND
PLAN OF MERGER
This Amendment No. 1 to Agreement and Plan of Merger (the "Amendment") is
made as of this 6th day of July, 1995 by and among Intelligent Electronics,
Inc. ("Parent"), IE Ohio Acquisition Corporation ("Sub"), and The Future Now,
Inc. ("Company").
BACKGROUND
The parties hereto have entered into an Agreement and Plan of Merger dated
as of April 28, 1995 (the "Merger Agreement"). The parties hereto desire to
amend the Merger Agreement as provided herein.
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Section 1.2(a) of the Merger Agreement is hereby amended and
restated in its entirety to read as follows:
(a) At the Effective Time, each share of Common Stock, no par
value, of the Company (the "Company Common Stock") then issued and
outstanding (including any shares of Company Common Stock owned by any
subsidiary of Parent, but excluding (i) any shares of Company Common
Stock which are held by any subsidiary of the Company or in the
treasury of the Company and any shares of Company Common Stock which
are held directly by Parent, all of which shall be canceled and none of
which shall receive any payment with respect thereto, and (ii) shares
of Company Common Stock held by Dissenting Shareholders, as defined in
Section 1.3 hereof) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and
represent the Per Share Merger Consideration (as defined in paragraph
(b) below); and each issued and outstanding share of common stock of
Sub shall be converted into and represent an issued and outstanding
share of common stock of the Surviving Corporation. Nothing contained
herein or in any other agreement between Parent and the Company shall
restrict Parent's right to transfer, prior to the Effective Time,
shares of Company Common Stock to any of its subsidiaries.
2. The second sentence of Section 2.2(c)(i) of the Merger Agreement is
hereby amended and restated in its entirety to read as follows:
As of the date of this Agreement, (1) 31,247,349 shares of Parent Stock
are issued and outstanding, (2) 3,401,765 shares of Parent Stock have
been reserved for issuance upon the exercise of outstanding options and
warrants of Parent, and (3) no shares of Preferred Stock have been
issued.
3. The last sentence of Section 1.5 of the Merger Agreement is hereby
amended and restated in its entirety to read as follows:
Immediately after the Effective Time, Parent shall file a registration
statement or a post-effective amendment to the Registration Statement
(as defined in Section 2.1(d) or to any other registration statement
registering the issuance of shares of Parent Common Stock upon exercise
of the stock options issued or granted pursuant to this Section 1.5.
4. Except as expressly provided above, the Merger Agreement, as
originally executed and delivered, shall continue in full force and
effect.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be executed as of the date first above written.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Gregory A. Pratt
------------------------------------
Title: President
IE OHIO ACQUISITION CORPORATION
By: /s/ Gregory A. Pratt
------------------------------------
Title: President
THE FUTURE NOW, INC.
By: /s/ Norma Skoog
------------------------------------
Title: Vice President,
Secretary and General Counsel
A-41
<PAGE>
ANNEX B
THE ROBINSON-HUMPHREY COMPANY, INC.
CORPORATE FINANCE INVESTMENT BANKERS
DEPARTMENT SINCE 1894
August 5, 1995
Board of Directors
The Future Now, Inc.
8044 Montgomery Road
Suite 601
Cincinnati, OH 45236
Dear Gentlemen:
We understand that Intelligent Electronics, Inc. ("Intelligent
Electronics"), through its wholly owned subsidiary, IE Ohio Acquisition
Corporation ("IE Ohio"), intends to merge with and thereby acquire The Future
Now, Inc. (the "Company"), in exchange for Intelligent Electronics common
stock (the "Proposed Transaction"). Each issued and outstanding share of the
Company common stock (other than shares held in treasury, by a subsidiary of
the Company, directly by Intelligent Electronics or by Dissenting
Shareholders (as defined in the Agreement), shall be converted into .6588
shares of Intelligent Electronics common stock, subject to adjustment as
provided in Section 1.2(b) of the Agreement (the "Conversion Number"). The
terms and conditions of the Proposed Transaction are set forth in more detail
in the Agreement and Plan of Merger (the "Agreement") by and among the
Company, IE Ohio and Intelligent Electronics dated as of April 28, 1995, as
amended as of July 6, 1995 and are subject to, among other things, the Company
having obtained the approval of its shareholders with respect to the Proposed
Transaction.
Section 5.1(i) of the Merger Agreement provides that to the extent that
the Average Closing Price (as defined in the Agreement) of Intelligent
Electronics, Inc. common stock exceeds $11.00, Intelligent Electronics may
elect to terminate the Proposed Transaction, subject, however, to the right
of the Company to override any such termination election by Intelligent
Electronics by agreeing in writing, by no later than 5:00 p.m. on the trading
day preceding the Closing Date (as defined in the Agreement), that the
Conversion Number will be changed to the quotient that results from dividing
$7.2468 by the Average Closing Price of a share of Intelligent Electronics
common stock (the "Alternative Consideration"). You have informed us that to
the extent that Intelligent Electronics invokes the provisions of Section
5.1(i) of the Agreement, it is the intention of the Board of Directors, as of
the date hereof, to override such termination, thereby causing the Conversion
Number to be reduced to the Alternative Consideration.
We have been requested by you to render our opinion as to whether each of
the Conversion Number and the Alternative Consideration is fair from a
financial point of view to the Company's shareholders. The Robinson-Humphrey
Company, with over 100 years of experience in the securities industry, is
well-qualified in the area of securities valuation. As a member of The New
York Stock Exchange and all other leading securities exchanges and as a full
service investment banking and brokerage firm, we are constantly involved in
judging the value of securities in connection with debt and equity financing,
mergers and acquisitions and private stock valuations. Further, members of
our Corporate Finance Department are active in the mergers and acquisitions
field, having advised clients in over 200 transactions since 1985.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement,
(2) the Proxy Statement/Prospectus relating to the Proposed Transaction and
the Registration Statement of which it is a part, (3) the most recent
available annual reports, Form 10-Ks, Form 10-Qs, proxy statements and such
other publicly available information concerning both the Company and
Intelligent Electronics which we believe to be relevant to our inquiry, (4)
financial and operating information with respect to the business, operations
and prospects of the Company and Intelligent Electronics furnished to us by
both the Company and Intelligent Electronics, respectively, (5) a comparison
of the historical financial results and present financial condition of both
the Company and Intelligent Electronics with those of other companies which
we deemed relevant, (6) trading histories of the common stock of both the
Company and Intelligent Electronics, and (7) a comparison of the financial
B-1
<PAGE>
terms of the Proposed Transaction with the terms of certain other recent
transactions which we deemed relevant. In addition, we have had discussions with
the managements of both the Company and Intelligent Electronics concerning their
respective business, operations, assets, present condition and future prospects
and undertook such other studies, analyses and investigations as we deemed
appropriate.
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion and
have not assumed any responsibility for independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities, contingent or otherwise, of the Company or Intelligent
Electronics nor have we been furnished with any such appraisals. With respect
to financial forecasts of the Company, we have assumed that they have been
reasonably prepared by the Company on bases reflecting the best currently
available estimates and judgments of the Company's management as to the
future financial performance of the Company. With respect to the financial
forecasts of Intelligent Electronics, we have assumed that they have been
reasonably prepared by Intelligent Electronics on bases reflecting the best
currently available estimates and judgments of Intelligent Electronics'
management as to the future financial performance of Intelligent Electronics.
In rendering our opinion with respect to the Conversion Number, we have
assumed that the Proposed Transaction will be consummated on the terms
described in the Agreement (including, without limitation, the tax-free
status of the Proposed Transaction) without any waiver of any of the terms or
conditions by the Company. In rendering our opinion with respect to the
Alternative Consideration, we have assumed that the Proposed Transaction will
be consummated on the terms described in the Agreement (including, without
limitation, the tax-free status of the Proposed Transaction) without any
waiver of any of the terms or conditions by the Company, except that the
termination and override provisions of Section 5.1(i) of the Agreement shall
become operative. Our opinion is necessarily based upon information made
available to us and market, economic, industry and other conditions as they
exist on, and can be evaluated as of, the date of this letter. It should be
understood that subsequent developments may affect this opinion and that we
do not have any obligation to update, revise or reaffirm this opinion.
We have acted as financial advisor to the Board of Directors in connection
with the Proposed Transaction and will receive a fee for our services a
significant portion of which is contingent upon the consummation of the
Proposed Transaction. In addition, the Company has agreed to indemnify us for
certain liabilities arising out of the rendering of this opinion. We have
also performed various investment banking services for the Company in the
past and have received fees for rendering such service. Additionally, in the
past we have performed various investment banking services for Intelligent
Electronics and have received fees for rendering such services, the most
recent of which was a February 1991 offering of common stock for which we
served as a co-manager. In the ordinary course of our business, we have
actively traded in the equity securities of the Company and Intelligent
Electronics for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such
securities.
This letter is provided to the Board of Directors of the Company in its
evaluation of the Proposed Transaction, and our opinion is not intended to be
and does not constitute a recommendation to any shareholder as to how such
shareholder should vote on the Proposed Transaction. This letter may not be
published or otherwise used or referred to, nor shall any public reference to
The Robinson-Humphrey Company, Inc. be made without our prior written consent,
except for inclusion in a Proxy Statement/ Prospectus related to the Proposed
Transaction which we have had an opportunity to review.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that each of the Conversion Number and the Alternative Consideration
is fair from a financial point of view to the Company's shareholders.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, INC.
B-2
<PAGE>
ANNEX C
PROCEDURE IN CASE OF DISSENTS
Sec. 1701.85. RELIEF FOR DISSENTING SHAREHOLDERS; QUALIFICATION;
PROCEDURES.
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with
this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder
of the shares of the corporation as to which he seeks relief as of the
date fixed for the determination of shareholders entitled to notice of a
meeting of the shareholders at which the proposal is to be submitted, and
such shares shall not have been voted in favor of the proposal. Not later
than ten days after the date on which the vote of the proposal was taken
at the meeting of the shareholders, the dissenting shareholder shall
deliver to the corporation a written demand for payment to him of the fair
cash value of the shares as to which he seeks relief, which demand shall
state his address, the number and class of such shares, and the amount
claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled
to relief under division (E) of section 1701.84 of the Revised Code in the
case of a merger pursuant to section 1701.801 of the Revised Code shall be
record holder of the shares of the corporation as to which he seeks relief
as of the date on which the agreement of merger was adopted by the
directors of that corporation. Within twenty days after he has been sent
the notice provided in section 1701.80 or 1701.801 of the Revised Code,
the dissenting shareholder shall deliver to the corporation a written
demand for payment with the same information as that provided for in
division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or
the new entity, whether the demand is served before, on, or after the
effective date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates
representing the shares as to which he seeks relief, the dissenting
shareholder, within fifteen days from the date of the sending of such
request, shall deliver to the corporation the certificates requested, so
that the corporation may forthwith endorse on them a legend to the effect
that demand for the fair cash value of such shares has been made. The
corporation promptly shall return such endorsed certificates to the
dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the
option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the
fifteen-day period, unless a court for good cause shown otherwise directs.
If shares represented by a certificate on which such a legend has been
endorsed are transferred, each new certificate issued for them shall bear
a similar legend, together with the name of the original dissenting holder
of such shares. Upon receiving a demand for payment from a dissenting
shareholder who is the record holder of uncertificated securities, the
corporation shall make an appropriate notation of the demand for payment
in its shareholder records. If uncertificated shares for which payment has
been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as
provided in this paragraph. A transferee of the shares so endorsed, or of
uncertificated securities where such notation has been made, acquires only
such rights in the corporation as the original dissenting holder of such
shares had immediately after the service of a demand for payment of the
fair cash value of the shares. A request under this paragraph, by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving
or new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of
the county in which the principal office of the corporation that issued the
shares is located or was located when the proposal was adopted by the
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<PAGE>
shareholders of the corporation, or, if the proposal was not required to be
submitted to the shareholders, was approved by the directors. Other dissenting
shareholders, within that three-month period, may join as plaintiffs, or may be
joined as defendants in any such proceeding, and any two or more such
proceedings may be consolidated. The complaint shall contain a brief statement
of the facts, including the vote and the facts entitling the dissenting
shareholder to the relief demanded. No answer to such a complaint is required.
Upon the filing of such a complaint, the court, on motion of the petitioner,
shall enter an order fixing a date for a hearing on the complaint, and requiring
that a copy of the complaint and a notice of the filing and of the date for
hearing be given to the respondent or defendant in the manner in which summons
is required to be served or substituted service is required to be made in other
cases. On the day fixed for hearing on the complaint or any adjournment of it,
the court shall determine from the complaint and from such evidence as is
submitted by either party whether the dissenting shareholder is entitled to be
paid the fair cash value of any shares and, if so, the number and class of such
shares. If the court finds that the dissenting shareholder is so entitled, the
court may appoint one or more persons as appraisers to receive evidence and to
recommend a decision on the amount of the fair cash value. The appraisers have
such power and authority as is specified in the order of their appointment. The
court thereupon shall make a finding as to the fair cash value of a share and
shall render judgment against the corporation for the payment of it, with
interest at such rate and from such date as the court considers equitable. The
costs of the proceeding, including reasonable compensation to the appraisers to
be fixed by the court, shall be assessed or apportioned as the court considers
equitable. The proceeding is a special proceeding and final orders in it may be
vacated, modified, or reversed on appeal pursuant to the Rules of Appellate
Procedure and, to the extent not in conflict with those rules, Chapter 2505 of
the Revised Code. If, during the pendency of any proceeding instituted under
this section, a suit or proceeding is or has been instituted to enjoin or
otherwise to prevent the carrying out of the action as to which the shareholder
has dissented, the proceeding instituted under this section shall be stayed
until the final determination of the other suit or proceeding. Unless any
provision in division (D) of this section is applicable, the fair cash value of
the shares that is agreed upon by the parties or fixed under this section shall
be paid within thirty days after the date of final determination of such value
under this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined
as of the day prior to the day on which the vote by the shareholders was
taken, and, in the case of a merger pursuant to section 1701.80 or 1701.801
of the Revised Code, fair cash value as to shareholders of a constituent
subsidiary corporation shall be determined as of the day before the adoption
of the agreement of merger by the directors of the particular subsidiary
corporation. The fair cash value of a share for the purposes of this section
is the amount that a willing seller, who is under no compulsion to sell,
would be willing to accept, and that a willing buyer, who is under no
compulsion to purchase, would be willing to pay, but in no event shall the
fair cash value of a share exceed the amount specified in the demand of the
particular shareholder. In computing such fair cash value, any appreciation
or depreciation in market value resulting from the proposal submitted to the
directors or to the shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to
pay the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally enjoined
or prevented from carrying it out, or the shareholders rescind their
adoption, of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
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<PAGE>
(d) The corporation and the dissenting shareholder have not come to an
agreement as to fair cash value per share, and neither the shareholder nor
the corporation filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or
the comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in
substitution for such shares, an amount equal to the dividend, distribution,
or interest that, except for the suspension, would have been payable upon
such shares or securities shall be paid to the holder of record as a credit
upon the fair cash value of the shares. If the right to receive fair cash
value is terminated other than by the purchase of the shares by the
corporation, all rights of the holder shall be restored and all distributions
which, except for the suspension, would have been made shall be made to the
holder of record of the shares at the time of termination.
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<PAGE>
ANNEX D
ACQUIRING PERSON'S STATEMENT
1. The identity of the "Acquiring Person" is: Intelligent Electronics,
Inc., a Pennsylvania corporation ("IE"), and its wholly-owned subsidiary, IE
Ohio Acquisition Corporation, an Ohio corporation ("Sub"), (IE and Sub are
hereinafter collectively referred to as the "Acquiring Person").
2. This Acquiring Person Statement is being given by the Acquiring Person
pursuant to Section 1701.831 of the Ohio Revised Code.
3. The number of shares of common stock, no par value, of The Future Now,
Inc., an Ohio corporation, owned, directly or indirectly, by the Acquiring
Person on the date of this statement is: 2,344,024.
4. The range of voting power, described in division (Z)(1) of Section
1701.01 of the Ohio Revised Code, under which the proposed control share
acquisition will, if and on the date it is consummated, fall is: a majority
or more of such voting power.
5. The proposed control share acquisition is to be consummated on the
terms contained in the Agreement and Plan of Merger (the "Merger Agreement"),
an unexecuted copy of which is attached hereto as Exhibit A.
6. The Acquiring Person hereby represents that the proposed control share
acquisition, if consummated in accordance with the terms of the Merger
Agreement, will not be contrary to law and hereby further represents that the
Acquiring Person has the financial capacity to make the proposed control
share acquisition.
IN WITNESS WHEREOF, the undersigned have caused this Statement to be
executed and delivered to The Future Now, Inc. this 3rd day of May, 1995.
INTELLIGENT ELECTRONICS, INC.
By: /s/ EDWARD A. MELTZER
------------------------------------
Title: Vice President
IE OHIO ACQUISITION CORPORATION
By: /s/ EDWARD A. MELTZER
------------------------------------
Title: Vice President
D-1
<PAGE>
ANNEX E
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
August 3, 1995
The Future Now, Inc.
Suite 601
8044 Montgomery Road
Cincinnati, Ohio 45236
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed merger of IE Ohio Acquisition Corporation
("Sub"), a wholly owned subsidiary of Intelligent Electronics, Inc. ("IE"),
with and into The Future Now, Inc. ("TFN") (the "Merger").
FACTS
A. TFN
TFN is a corporation organized and in good standing under the laws of the
State of Ohio. TFN's principal office is located at 8044 Montgomery Road,
Cincinnati, Ohio. TFN is the parent corporation of an affiliated group of
corporations that files consolidated federal income tax returns on the
calendar-year basis using the accrual method of accounting.
TFN is a computer sales and services company that sells and installs
microcomputers, UNIX workstations, turnkey local and wide area network
systems, computer software and peripheral products for business,
professional, educational and governmental customers. TFN also offers a wide
range of sophisticated customer support and consulting services which
generally carry higher gross margins than product sales and are the principal
focus of TFN's marketing strategy. TFN currently operates 22 sales offices in
15 states and manages eight additional sales offices in five major
metropolitan areas for IE. TFN does not maintain any retail facilities.
From 1988 through 1993, TFN expanded its operations by acquiring 15
existing businesses, including the Company Center Division of IE in 1992 and
Direct Computer Corporation, Premium Computer Corporate Center and
Basicomputer Corporation in 1993.
The authorized capital stock of TFN consists solely of 20,000,000 shares
of common stock, no par value ("TFN Common Stock"), of which (i) 7,578,566
shares are issued and outstanding, (ii) 573,500 shares are reserved for
issuance upon the exercise of outstanding options, and (iii) 159,161 shares
are reserved for issuance pursuant to outstanding warrants. The TFN Common
Stock is traded on the Nasdaq National Market.
As of June 7, 1995, (i) TFN had options outstanding under its 1991 and
1994 employee stock option plans to purchase 545,500 shares of TFN Common
Stock; (ii) TFN had options outstanding under its 1991 outside directors
stock option plan to purchase 28,000 shares of TFN Common Stock, and (iii)
TFN had outstanding warrants to purchase 159,161 shares of TFN Common Stock,
of which warrants to purchase 149,361 shares are owned by IE.
Except for the options and warrants described in the preceding paragraph,
there are no outstanding warrants or options to purchase capital stock of
TFN, and there are no outstanding securities or stock that are convertible
into shares of TFN capital stock. Neither TFN nor any of its subsidiaries
owns any of the issued and outstanding shares of TFN Common Stock.
TFN finances its operations in part through a Secured Credit Agreement
dated as of September 9, 1993, as amended, by and among TFN and its
subsidiaries and PNC Bank, Ohio, N.A., as Agent, the First National
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The Future Now, Inc.
August 3, 1995
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Bank of Chicago, as Co-Agent, and other participating banks (collectively,
the "Banks"). The Secured Credit Agreement provides TFN with a revolving line
of credit up to $70 million. TFN's obligations under the Secured Credit
Agreement are secured by all of TFN's assets other than inventory.
B. IE
IE is a corporation in good standing under the laws of the Commonwealth of
Pennsylvania. IE's principal office is located at 411 Eagleview Boulevard,
Exton, Pennsylvania 19341. IE is the parent corporation of an affiliated
group of corporations (which includes Sub) that files consolidated federal
income tax returns using the accrual method of accounting for fiscal years
ending on the Saturday closest to January 31 of each year. IE directly owns
14.06% of the issued and outstanding TFN Common Stock, and RND, Inc. ("RND"),
a wholly owned direct subsidiary of IE, owns 16.87% of the issued and
outstanding TFN Common Stock. None of the TFN Common Stock owned by IE and
RND was acquired by IE, RND or any predecessor or affiliate of either IE or
RND in contemplation of the Merger or at any time during which discussions
relating to the Merger were taking place.
IE provides information technology products, services and solutions to
network integrators (the "Network"), and to large and small corporate
customers, educational institutions and governmental agencies. In March 1984,
IE commenced the wholesale distribution of microcomputers. IE provides
business solutions through product management, sales demand generation
programs and logistics services. As of January 28, 1995, the Network
comprised more than 2,500 locations.
The authorized capital stock of IE consists solely of (i) 100,000,000
shares of common stock, par value $.01 per share ("IE Common Stock") of which
as of June 1, 1995, (a) 31,472,949 shares are issued and outstanding, and (b)
3,417,165 shares are reserved for issuance upon the exercise of options and
warrants, and (ii) 15,000,000 shares of preferred stock, par value $1.00 per
share, none of which have been issued. The IE Common Stock is traded on the
Nasdaq National Market.
Except for the options and warrants described in the preceding paragraph,
there are no outstanding warrants or options to purchase capital stock of IE,
and there are no outstanding securities or stock that are convertible into
shares of IE capital stock.
C. Sub
Sub is a newly organized Ohio corporation created solely for the purpose
of facilitating the acquisition of TFN by IE through the Merger. The
authorized capital stock of Sub consists solely of 1,000 shares of common
stock, $.01 par value per share ("Sub Common Stock"), all of which are issued
and outstanding and owned directly by IE. Prior to consummation of the
Merger, IE will make a capital contribution to Sub in an amount approximately
equal to the amount TFN will owe to the Banks under the Secured Credit
Agreement immediately following the Merger.
D. Business Relationships Between TFN and IE
TFN and IE have engaged in business transactions with each other since at
least 1988. The following is a brief summary of some of those relationships.
1. CCD Acquisition
In July 1992, four newly organized subsidiaries of TFN acquired by way
of merger the assets of certain subsidiaries of IE, which together
operated under the name Company Center Division ("CCD"). CCD was engaged
in the computer resale business. Under the terms of the merger agreement
pursuant to which TFN acquired CCD, IE and its subsidiaries acquired
1,638,377 shares of newly issued TFN Common Stock, or approximately 31% of
the then outstanding TFN Common Stock plus a promissory note in the
principal amount of $29,480,000. The amount of consideration paid by TFN
to IE and its subsidiaries to acquire CCD was the result of arm's-length
negotiations between the parties. The stock received by IE and its
subsidiaries is restricted and, in general, is not available for public
sale until registered. For federal income tax purposes, the transactions
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pursuant to which TFN acquired CCD were reorganizations under section
368(a)(1)(A) and (a)(2)(D).(1)
With TFN's public offering in March 1993, of additional shares of TFN Common
Stock, the percentage of TFN owned by IE and its subsidiaries decreased to
approximately 24%. In October 1993, TFN sold an additional 681,447 shares of
newly issued TFN Common Stock to IE. The price of these additional shares was
based on the then market value of TFN's Common Stock, as reported on the Nasdaq
National Market. After this transaction, IE and its subsidiaries again owned
approximately 31% of the outstanding TFN Common Stock. These shares are also
restricted and, in general, are not available for public sale until registered.
In January 1994, the subsidiaries of IE owning TFN Common Stock merged into
RND. Since that time, RND has owned the TFN Common Stock previously held by
those subsidiaries.
As part of the CCD acquisition, TFN and IE entered into a number of
agreements described below.
(a) Warrant. To prevent dilution of the percentage of TFN Common
Stock owned by IE and its subsidiaries, TFN granted to IE a Warrant to
acquire up to 184,489 additional shares of Common Stock in the event
that any shares of TFN Common Stock are issued pursuant to the exercise
of options or other warrants outstanding on or about the date of the
CCD acquisition. The per share price to be paid by IE to TFN is payable
in cash in an amount equal to the per share exercise price of such
warrants or options. To date, IE has purchased 24,200 shares of newly
issued TFN Common Stock under this Warrant, with the most recent
purchase occurring in September 1994.
(b) Registration Rights Agreement. Under this agreement, IE has
the right to make five demands that TFN register IE's shares of TFN
Common Stock with the Securities and Exchange Commission as well as
certain rights to participate in any registration by TFN of TFN Common
Stock in connection with a sale to the public. TFN has agreed to incur
certain of the costs and expenses attributable to such registration.
(c) Standstill Agreement. IE has generally agreed that, until July
2, 1997, it will not acquire, directly or indirectly, any TFN Common
Stock if, immediately thereafter, the percentage of TFN's voting
securities then issued and outstanding and held by IE would be greater
than 31.1%. Such an acquisition of additional shares is, however,
permitted under certain circumstances. Because the TFN Board of
Directors has approved the Merger, the provisions of the Standstill
Agreement do not prohibit IE's acquisition of TFN Common Stock pursuant
to the Merger.
(d) Designation Agreement. Under the Designation Agreement, IE may
designate one person to serve on the Board of Directors of TFN and any
executive committee of the Board. Prior to October 1994, IE's designate
served as a member of TFN's Board. Since October 1994, IE has not had a
designate on TFN's Board.
(e) Restriction Agreement. IE has pledged all of the shares of the
TFN Common Stock it owns and collaterally assigned the promissory note
in the principal amount of $29,480,000 made by TFN in favor of IE to
IBM Credit Corporation ("IBM Credit") in order to secure certain
indebtedness of IE and its affiliates to IBM Credit. The promissory
note was paid by TFN during 1992. In connection with the foregoing
pledge, IBM Credit entered into a Restriction Agreement with TFN, as
required by the terms of the Standstill Agreement between TFN and IE,
which places certain restrictions on IBM Credit's ability to acquire
additional shares of TFN Common Stock and on IBM Credit's ability to
transfer shares held by IBM Credit and its affiliates. As a result of
IBM Credit's execution of the Restriction Agreement, IBM Credit may
have rights under the Registration Rights Agreement between TFN and IE
with respect to the pledged shares.
2. Franchise Agreements
TFN is a party to Franchise Agreements with IE. Under the Franchise
Agreements, TFN sells certain products approved for sale by IE. Although
such products may generally be acquired from a manufacturer approved by IE,
------------
1. Except where otherwise specifically indicated, all section references are
to sections of the Internal Revenue Code of 1986, as amended (the "Code").
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the Franchise Agreements require TFN to purchase certain products only from
IE. TFN is the largest customer of IE, having purchased approximately $580
million of products from IE in 1994. All of the Franchise Agreements have
10-year terms expiring in December 2000, or September 2003, and are renewable
by TFN for one additional 10-year term upon certain conditions. IE may
terminate the Franchise Agreements immediately upon the occurrence of certain
specified events, including TFN's insolvency, failure to make timely payments
or other financial impairment, or upon 30 days' notice in the event of
certain other defaults by TFN. The Franchise Agreements provide that TFN has
the right to terminate the Franchise Agreements without cause upon 90 days'
prior written notice to IE. In the event of such a termination, TFN is
obligated to make a buy-out payment to IE equal to IE's gross profits
(mark-ups of its costs from manufacturers) realized from its sales of
products to TFN during the 12-month period immediately preceding termination.
In no event will this buy-out payment be less than $1,000,000. Under this
formula, if TFN had exercised its right to terminate the Franchise Agreement
effective December 31, 1994, TFN believes that the total buy-out payment to
IE would have been approximately $17 million. In the event of such a
termination, TFN also has the right to pay IE an additional sum of $500,000
to be released from all non-competition covenants contained in the Franchise
Agreements.
3. Guaranty Arrangement
IE serves as guarantor of up to $20,000,000 of the amounts owed by TFN
to ITT Commercial Finance Corp., one of the two inventory finance
companies that has advances outstanding to TFN.
4. Branch Sales
On December 30, 1994, TFN sold certain of its branch locations in five
major metropolitan areas to IE for approximately $34.2 million in cash
received on December 30, 1994 and $5.0 million received January 9, 1995.
The transferred branch locations, certain of which had previously been
acquired by TFN pursuant to the CCD acquisition, serve the Boston, New
York City, Los Angeles, San Francisco and Baltimore/Washington, D.C.
metropolitan areas. The Asset Purchase Agreements provided for IE's
purchase of all receivables arising from the operation of the branch
locations (subject to TFN's right to receive collections on such
receivables in excess of $23 million), approximately $6 million of
inventories at the branch locations and fixed assets at the branch
locations. In addition, IE assumed obligations to pay rentals under the
leases of the branch locations accruing after December 30, 1994. In
connection with this transaction, TFN entered into a Management Agreement
with IE pursuant to which TFN agreed to manage the branch locations for
IE, using TFN employees. Under the Management Agreement, IE is responsible
for paying direct expenses of the operation of the branch locations and
$20,000 per branch per month on account of certain indirect expenses. The
Management Agreement also provides for payment by IE to TFN of incentive
compensation upon the achievement by the branch locations of certain
performance targets.
E. The Merger
The terms of the Merger are contained in the Agreement and Plan of Merger
dated as of April 28, 1995, as amended as of July 6, 1995 (the "Merger
Agreement"). Terms not otherwise defined in this letter shall have the
meanings assigned to them in the Merger Agreement.
You have directed us to assume in preparing this opinion that (1) the Merger
will be consummated in accordance with the terms, conditions and other
provisions of the Merger Agreement, and (2) all of the factual information,
descriptions, representations and assumptions set forth in this letter (an
advance copy of which has been provided to you), in the Merger Agreement, in the
letters to us from TFN dated August 3, 1995, and from IE dated August 3, 1995
(the "Letters," copies of which are attached hereto), and in the Proxy
Statement/Prospectus pertaining to the Merger (the "Proxy Statement/Prospectus")
as filed with the Securities and Exchange Commission, are accurate and complete
and will be accurate and complete at the time the Merger becomes effective (the
"Effective Time"). We have not independently verified any factual matters
relating to the Merger in connection with or apart from our preparation of this
opinion and, accordingly, our opinion does not take into account any matters not
set forth herein which might have been disclosed by independent verification.
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Prior to the Merger, IE will transfer to RND all of the shares of TFN
Common Stock directly owned by IE. Following that transfer, IE will not own
any shares of TFN Common Stock, and RND will own approximately 31 percent of
the outstanding TFN Common Stock.
Pursuant to the Merger Agreement, Sub will be merged, in accordance with
the applicable provisions of the Ohio General Corporation Law, with TFN as
the surviving corporation. The Merger is subject to approval as required by
law by the TFN shareholders at a special meeting. Any shareholder of TFN
entitled to vote on approval of the Merger may exercise dissenters' rights
and elect to receive the fair cash value of his or her shares of TFN Common
Stock pursuant to Section 1701.85 of the Ohio Revised Code.
At the Effective Time: (i) all assets and liabilities of Sub will be
transferred by operation of law to TFN, (ii) the separate corporate existence
of Sub will cease, (iii) each issued and outstanding share of Sub Common
Stock will be converted into and represent an issued and outstanding share of
TFN Common Stock, (iv) except for shares held by dissenters and fractional
shares, each share of TFN Common Stock then outstanding (including those
shares held by RND) will be converted into .6588 shares of IE Common Stock,
subject to adjustment as described in the Merger Agreement and the Proxy
Statement/Prospectus, and (v) shares of TFN Common Stock held by persons who
perfect their dissenters' rights shall become the right to receive from TFN
cash in an amount equal to the fair value of their shares determined in
accordance with Ohio law. In the event that during the period commencing on
the date of the Merger Agreement and ending at the Effective Time, the
outstanding shares of IE Common Stock shall have been increased, decreased or
changed into or exchanged for a different number or kind of shares or
securities by reorganization, recapitalization, reclassification, stock
dividend, stock split or other like changes in IE's capitalization, without
IE's receiving consideration therefor, then an appropriate and proportionate
adjustment shall be made in the number and kind of shares of IE Common Stock
to be delivered to TFN shareholders pursuant to the Merger Agreement.
No fractional shares of IE Common Stock will be issued in the Merger. Each
holder of TFN Common Stock who otherwise would be entitled to receive a
fraction of a share of IE Common Stock will receive, instead, cash equal to
such fractional part of a share multiplied by the "Average Closing Price of a
share of Parent Stock" (as defined in the Merger Agreement). Except for cash
paid to dissenters and cash exchanged in lieu of issuing fractional shares of
IE Common Stock, no cash will be exchanged for shares of TFN Common Stock or
shares of Sub Common Stock pursuant to the Merger. TFN will provide the funds
to pay dissenters out of the post-Merger cash flow from its operations. No
portion of the funds used to pay dissenters will be derived, directly or
indirectly, from IE, Sub, or any of their affiliates, nor will IE, Sub, or
any affiliate directly or indirectly reimburse TFN for payments to
dissenters.
At the Effective Time, TFN's obligations with respect to options and
warrants granted by TFN which are outstanding immediately prior to the Merger
shall be converted into options and warrants to purchase shares of IE Common
Stock on the same terms and conditions as are in effect immediately prior to
the Merger, adjusted as provided in Section 1.5 of the Merger Agreement.
Except for the options and warrants described previously, no options or
warrants to purchase TFN Common Stock and no securities or other instruments
convertible into TFN Common Stock will be outstanding at the Effective Time.
Immediately following the Merger, TFN will pay cash to the Banks in full
and complete satisfaction of its obligations under the Secured Credit
Agreement, and the Secured Credit Agreement will terminate. The cash used by
TFN to pay the Banks will come from cash capital contributions IE will make
to Sub prior to the Merger.
Following the Merger, TFN will continue to purchase products from and
through IE on terms and conditions generally consistent with past practice.
IE and TFN anticipate that some of their historic business practices and
relationships will be modified following the Merger to maximize economic
returns to the consolidated group of corporations of which IE and TFN will be
members after the Merger.
F. Representations and Assumptions.
We have also relied with your permission on the following additional
representations and/or assumptions:
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1. The Merger will be effected for bona fide business reasons.
2. To the best of the knowledge of the management of TFN, the fair
market value of the IE Common Stock received by each TFN shareholder will
be approximately equal to the fair market value of the TFN Common Stock
exchanged pursuant to the Merger.
3. To the best of the knowledge of the management of TFN, there is no
plan or intention by the shareholders of TFN who own one percent or more
of the TFN Common Stock, and there is no plan or intention on the part of
the remaining shareholders of TFN, to sell, exchange, or otherwise dispose
of a number of shares of IE Common Stock received in the Merger that would
reduce the TFN shareholders' ownership of IE Common Stock to a number of
shares having a value, as of the date of the Merger, of less than 50% of
the value of all of the formerly outstanding stock of TFN as of the same
date. There is no plan or intention by RND to sell, exchange, or otherwise
dispose of any shares of IE Common Stock to be received in exchange for
its shares of TFN Common Stock pursuant to the Merger. For purposes of
this representation, shares of TFN Common Stock surrendered by dissenters
or exchanged for cash in lieu of fractional shares of IE Common Stock will
be treated as outstanding TFN Common Stock on the date of the Merger.
Moreover, shares of TFN Common Stock and shares of IE Common Stock held by
TFN shareholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the Merger will be considered in making this representation.
It is possible that, following the Merger, RND may distribute the
shares of IE Common Stock it will receive pursuant to the Merger to IE.
Although there is no definitive plan or intention at this time to make any
such distribution, it is probable such distributions will be made if
certain tax rules permit the distribution without triggering gain to RND.
Any such distribution by RND of IE Common Stock to IE will be treated as a
dividend for federal income tax purposes; RND will not receive any
consideration, directly or indirectly, in exchange for any distribution to
IE of IE Common Stock.
4. Following the Merger, TFN will hold at least 90 percent of the fair
market value of its net assets and at least 70 percent of the fair market
value of its gross assets and at least 90 percent of the fair market value
of Sub's net assets and at least 70 percent of the fair market value of
Sub's gross assets. For purposes of this paragraph, amounts paid by TFN to
dissenters, amounts paid by TFN or Sub to shareholders in lieu of issuing
fractional shares of IE Common Stock, amounts used by IE or Sub to pay
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by TFN will be included as assets held by
TFN or Sub immediately before the Merger.
5. Prior to the Merger, IE will be in control of Sub within the meaning
of Section 368(c).
6. Immediately following the Merger, IE will own directly all of the
issued and outstanding capital stock of TFN. Following the Merger, TFN has
no plan or intention to issue additional shares of its stock that would
result in IE losing control of TFN within the meaning of section 368(c).
7. IE has no plan or intention to liquidate TFN; to merge TFN into
another corporation; to cause TFN to sell or otherwise dispose of any of
its assets, except for dispositions made in the ordinary course of
business; or to sell or otherwise dispose of any of the TFN Common Stock
acquired in the Merger.
8. Except as described in Paragraph 3, IE has no plan or intention to
reacquire any of its stock issued in the Merger. In the normal course of
its business, IE makes purchases of shares of its stock on the Nasdaq
National Market. It is possible that IE might so purchase shares issued to
TFN shareholders pursuant to the Merger, but any such purchases would be
made without actual knowledge by IE that the seller is a former TFN
shareholder.
9. Sub will have no liabilities assumed by TFN in the Merger, nor will
Sub transfer to TFN any assets subject to liabilities pursuant to the
Merger.
10. IE, Sub, TFN and the shareholders of TFN will pay their respective
expenses, if any, incurred in connection with the Merger.
11. There is no intercorporate indebtedness existing between IE and TFN
or between Sub and TFN that was issued, acquired, or will be settled at a
discount.
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12. IE will acquire TFN Common Stock solely in exchange for IE voting
stock. For purposes of this representation, TFN Common Stock redeemed for
cash or other property furnished by IE will be considered as acquired by
IE. Further, no liabilities of TFN or the TFN shareholders will be assumed
by IE, nor will any of the TFN Common Stock be subject to any liabilities.
Neither IE nor any person affiliated with IE will furnish any property to
TFN for the purpose of replacing the cash TFN will use to pay dissenters.
13. In the Merger, at least 80 percent of the TFN Common Stock will be
exchanged solely for IE voting stock.
14. Immediately following the Merger, TFN will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in TFN that, if exercised
or converted, would affect IE's acquisition or retention of control of
TFN, as defined in section 368(c).
15. IE and RND currently own approximately 31% of the outstanding TFN
Common Stock, all of which was acquired by IE and its subsidiaries prior
to the time any negotiations concerning the Merger took place. The TFN
Common Stock held by IE and RND was not acquired as part of, in connection
with, or in contemplation of the Merger.
16. Except as described in the last sentence of this paragraph and for
any arm's-length transactions arising in the ordinary course of business,
none of the existing or historic business relationships and transactions
(including, but not limited to, those described in this letter and in the
Proxy Statement/Prospectus) between IE and its affiliates, on the one
hand, and TFN and its affiliates, on the other hand, were established,
undertaken or consummated during or after the commencement of any
negotiations concerning the Merger. Except as described in the last
sentence of this paragraph and for any arm's-length transactions arising
in the ordinary course of business, no transactions between IE and its
affiliates, on the one hand, and TFN and its affiliates, on the other
hand, have arisen or taken place as part of, in connection with, or in
contemplation of the Merger. Since the execution of the Merger Agreement,
IE has guaranteed to certain of TFN's existing customers that TFN will
perform fully its obligations to those customers under certain service
contracts.
17. Following the Merger, TFN will continue its historic business and
use a significant portion of its historic business assets in a business.
18. No two parties to the Merger are investment companies as defined in
sections 368(a)(2)(F)(iii) and (iv).
19. TFN will pay its dissenting shareholders the value of their stock
out of its own funds.
20. On the date of the Merger, the fair market value of the assets of
TFN will exceed the sum of its liabilities (including, without limitation,
any liabilities to which the assets are subject).
21. No dividends or distributions will be made with respect to any TFN
Common Stock prior to the Merger. After the Merger, no dividends or
distributions will be made to the former TFN shareholders by IE, other
than dividend distributions made with regard to all shares of IE Common
Stock.
22. None of the compensation received by any shareholder-employees of
TFN will be separate consideration for, or allocable to, any of their
shares of TFN Common Stock. The compensation paid to any
shareholder-employees of TFN will be for services actually rendered and
will be commensurate with amounts paid to third parties bargaining at
arm's length for similar services. None of the IE Common Stock received
pursuant to the Merger Agreement by any shareholder-employee of TFN in
exchange for his TFN Common Stock will be in exchange for, or in
consideration of, services rendered to IE, TFN or any other entity by such
shareholder-employee.
23. The payment of cash in lieu of fractional shares of IE Common Stock
is solely for the purpose of avoiding the expense and inconvenience to IE
of issuing fractional shares and does not represent separately
bargained-for consideration. In addition, this cash payment will not be
made pro rata either to all TFN shareholders or to all IE shareholders.
The total cash consideration that will be paid in the Merger to TFN
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shareholders in lieu of issuing fractional shares of IE Common Stock will not
exceed one percent of the total consideration that will be issued in the
Merger to the TFN shareholders in exchange for their shares of TFN Common
Stock. The fractional share interests of each TFN shareholder will be
aggregated, and no TFN shareholder will receive cash in an amount equal to or
greater than the value of one full share of IE Common Stock.
24. Negotiations relating to the Merger commenced no earlier than
February 1995; the first public announcement concerning the Merger was
made on March 7, 1995.
25. All of the shares of TFN Common Stock owned by IE and RND were
newly issued shares acquired by IE and its subsidiaries directly from TFN
pursuant to the CCD mergers described above or in exchange for cash. TFN
did not acquire or purchase from its shareholders any shares of TFN Common
Stock in any transaction that was related, directly or indirectly, to any
issuance of TFN Common Stock to IE or any of its subsidiaries. None of the
consideration paid by IE and its subsidiaries for their TFN Common Stock
(including, but not limited to, cash and the assets of the CCD
subsidiaries) has been or will be transferred or distributed, directly or
indirectly, by TFN to its shareholders.
OPINION
Assuming that the Merger is consummated in accordance with the terms and
conditions set forth in the Merger Agreement and based on the facts set forth
in the Letters and this letter (including all assumptions and
representations) and subject to the qualifications and other matters set
forth herein, it is our opinion that for federal income tax purposes the
Merger will constitute a reorganization within the meaning of section 368(a),
with the following material federal income tax consequences:
(i) no gain or loss would be recognized by any of TFN, Sub or IE as a
result of the Merger (Sections 354, 361 and 1032; Rev. Rul. 67-448, 1967-2
C.B. 144);
(ii) no gain or loss would be recognized by a holder of TFN Common
Stock upon the receipt of IE Common Stock in exchange for TFN Common Stock
in the Merger, except as discussed below with respect to cash received in
lieu of a fractional share interest in IE Common Stock (Section 354);
(iii) the aggregate adjusted tax basis of the shares of IE Common Stock
to be received by a holder of TFN Common Stock in the Merger would be the
same as the aggregate adjusted tax basis in the shares of TFN Common Stock
surrendered in exchange therefor (Section 358); and
(iv) the holding period of the shares of IE Common Stock to be received
by the holders of TFN Common Stock in the Merger would include the holding
period of the shares of TFN Common Stock surrendered in exchange therefor,
provided that such shares of TFN Common Stock are held as capital assets
at the Effective Time (Section 1223).
It is our further opinion that a holder of shares of TFN Common Stock who
receives cash in the Merger in lieu of a fractional share interest in IE
Common Stock will be treated for federal income tax purposes as having
received cash in redemption of such fractional share interest. The receipt of
such cash generally should result in capital gain or loss in an amount equal
to the difference between the amount of cash received and the portion of such
shareholder's adjusted tax basis in the shares of TFN Common Stock allocable
to the fractional share interest. Such capital gain or loss will be long-term
capital gain or loss if the holder holds the shares as capital assets and the
holding period for the fractional shares of IE Common Stock deemed to be
received and then redeemed is more than one year.
It also is our opinion that a holder of shares of TFN Common Stock who
perfects dissenters' rights under the laws of the State of Ohio and who
receives cash payment of the fair value of his shares of TFN Common Stock
will be treated as having received such payment in redemption of such shares.
Such redemption will be subject to the conditions and limitations of Code
Section 302, including the attribution rules of Code Section 318. In general,
if the shares of TFN Common Stock are held by the holder as a capital asset
at the Effective Time, a dissenting holder will recognize capital gain or
loss measured by the difference between the amount of cash received by such
holder and the basis for such shares. If, however, such holder owns, either
actually or constructively, any other TFN Common Stock or IE Common Stock,
the payment made to such holder could be treated as dividend income. In
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general, under the constructive ownership rules of the Code, a holder may be
considered to own stock that is owned, and in some cases constructively owned,
by certain related individuals or entities, as well as stock that such holder
(or related individuals or entities) has the right to acquire by exercising an
option or converting a convertible security.
Our opinion is limited to the foregoing federal income tax consequences of
the Merger, which are the only matters as to which you have requested our
opinion. We do not address any other federal income tax consequences of the
Merger or other matters of federal law and have not considered matters
(including state or local tax consequences) arising under the laws of any
jurisdiction other than matters of federal law arising under the laws of the
United States.
Our opinion is based on the understanding that the relevant facts are, and
will be at the Effective Time, as set forth or referred to in this letter. If
this understanding is incorrect or incomplete in any respect, our opinion
could be affected. Our opinion is based on the facts as expressed herein.
Our opinion is also based on the Code, Treasury Regulations, case law, and
Internal Revenue Service rulings as they now exist, none of which squarely
addresses every precise factual circumstance present in the connection with
the Merger but all of which, taken together, in our opinion provide a
sufficient legal basis for our opinions set forth herein. However, the
possibility exists that our opinion as to the proper application of the law
to the facts of the Merger would not be accepted by the Internal Revenue
Service or would not prevail in court. In addition, the authorities upon
which we have relied are all subject to change and such change may be made
with retroactive effect. We can give no assurance that after any such change,
our opinion would not be different.
We undertake no responsibility to update or supplement our opinion. Only
TFN may rely on this opinion, and only with respect to the Merger.
We hereby consent to the filing with the Securities and Exchange Commission
of this opinion as Annex E to the Proxy Statement/Prospectus and as an exhibit
to IE's Registration Statement on Form S-4 relating to shares of IE Common Stock
that may be issued in connection with the Merger and to the reference to our
firm under the headings "Summary -- Certain Federal Income Tax Consequences" and
"Certain Federal Income Tax Consequences of the Merger" in the Proxy
Statement/Prospectus. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
ARNOLD & PORTER
E-9
<PAGE>
THE FUTURE NOW, INC.
SUITE 601
8044 MONTGOMERY ROAD
CINCINNATI, OHIO 45236
August 3, 1995
Arnold & Porter
555 12th Street, Northwest
Washington, D.C. 20004
Ladies and Gentlemen:
Intelligent Electronics, Inc. ("IE"), IE Ohio Acquisition Corporation
("Sub"), and The Future Now, Inc. ("TFN") have entered into the Agreement and
Plan of Merger dated as of April 28, 1995, as amended on July 6, 1995 (the
"Merger Agreement"). In accordance with section 4.1(j) of the Merger
Agreement, your opinion is requested that the Merger, when consummated in
accordance with the terms of the Merger Agreement, will constitute a
reorganization within the meaning of Section 368(a) of the Code.
In preparing your opinion, you may assume that (1) the Merger will be
consummated in accordance with the terms, conditions and other provisions of
the Merger Agreement, and (2) all of the factual information, descriptions,
representations and assumptions set forth in this letter, in the Merger
Agreement, in your opinion letter (an advance copy of which has been
delivered to us), in the letter to you from IE dated August 3, 1995, and in
Proxy Statement/Prospectus dated August 4, 1995, are accurate and complete
and will be accurate and complete at the Effective Time.
The foregoing is provided in connection with the preparation of your
opinion. We understand that your opinion will be premised on the basis that
all of the facts, representations and assumptions on which you are relying,
whether contained herein or in the documents identified in the second
paragraph of this letter, are accurate and complete and will be accurate and
complete at the Effective Time. We further understand that your opinion will
be subject to the qualifications and limitations set forth in your opinion
letter.
Very truly yours,
THE FUTURE NOW, INC.
By: /s/ TIMOTHY M. MOONEY
----------------------------------
Timothy M. Mooney,
Vice President, Treasurer
and Chief Financial Officer
------------
1. Terms not otherwise defined in this letter shall have the meanings
assigned to them in the Merger Agreement.
E-10
<PAGE>
INTELLIGENT ELECTRONICS, INC.
411 EAGLEVIEW BOULEVARD
EXTON, PENNSYLVANIA 19341
August 3, 1995
Arnold & Porter
555 12th Street, Northwest
Washington, D.C. 20004
Ladies and Gentlemen:
Intelligent Electronics, Inc. ("IE"), IE Ohio Acquisition Corporation
("Sub"), and The Future Now, Inc. ("TFN") have entered into the Agreement and
Plan of Merger dated as of April 28, 1995, as amended by Amendment No. 1
dated as of July 6, 1995 (the "Merger Agreement"). In accordance with Section
4.1(j) of the Merger Agreement, your opinion is requested that the Merger,
when consummated in accordance with the terms of the Merger Agreement, will
constitute a reorganization within the meaning of Section 368(a) of the Code.
In preparing your opinion, you may assume that (1) the Merger will be
consummated in accordance with the terms, conditions and other provision of
the Merger Agreement, and (2) all of the factual information, descriptions,
representations and assumptions set forth in this letter, in the Merger
Agreement, in your opinion letter (an advance copy of which has been
delivered to us), in the letter to you from The Future Now, Inc. dated on or
about the date hereof and in the Proxy Statement/Prospectus dated August 4,
1995, are accurate and complete and will be accurate and complete at the
Effective Time.
The foregoing is provided in connection with the preparation of your
opinion. We understand that your opinion will be premised on the basis that
all of the facts, representations and assumptions on which you are relying,
whether contained herein or in the documents identified in the second
paragraph of this letter, are accurate and complete and will be accurate and
complete at the Effective Time. We further understand that your opinion will
be subject to the qualifications and limitations set forth in your opinion
letter.
Very truly yours,
INTELLIGENT ELECTRONICS, INC.
By: /s/ EDWARD A. MELTZER
-------------------------------
Edward A. Meltzer,
Vice President
----------
1. Terms not otherwise defined in this letter shall have the meanings
assigned to them in the Merger Agreement.
E-11
<PAGE>
FORM OF PROXY
THE FUTURE NOW, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Dennis J. Sullivan, Jr., Dudley S. Taft and
Terry L. Theye, and each of them, with power of substitution, attorneys and
proxies to represent and to vote all shares of Common Stock of The Future Now,
Inc. ("The Future Now") which the undersigned is entitled to vote at the Special
Meeting of Shareholders of TFN to be held on August 17, 1995, at 10:00 a.m.
local time, at The Harley Hotel, 8020 Montgomery Road, Cincinnati, Ohio, and at
any adjournment or postponement thereof:
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY TODAY IN THE ENCLOSED ENVELOPE.
1 -- To adopt the Agreement and Plan of Merger dated April 28, 1995 (the
"Merger Agreement"), by and among The Future Now, IE Ohio Acquisition
Corporation and Intelligent Electronics, Inc. Approval of the Merger Agreement
will also authorize The Future Now's Board of Directors to exercise its
discretion whether to proceed with the merger in the event a termination right
is or may be exercised because the Average Closing Price (as defined in the
Merger Agreement) of the Intelligent Electronics, Inc. Common Stock is outside
the $9.00 to $11.00 range.
| | For | | Against | | Abstain
PLEASE MARK INSIDE BOXES SO THAT DATA PROCESSING
EQUIPMENT WILL RECORD YOUR VOTES.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
The Board of Directors recommends a vote FOR adoption of the Merger Agreement.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If the "For" box is checked under proposal 1
above or if no direction is made, this Proxy will be voted FOR adoption of the
Merger Agreement. Unless the "Against" box is checked under proposal 1 above,
this Proxy will be voted in the discretion of the proxies appointed on the front
of this card with respect to such other matters as may properly come before the
Special Meeting or any adjournment or postponement thereof. Under The Future
Now's Code of Regulations, business transacted at the Special Meeting of
Shareholders is confined to the purposes stated in the Notice of Special
Meeting.
Dated ___________________________, 1995
---------------------------------------
(Signature of Shareholder)
---------------------------------------
(Signature of Shareholder)
This Proxy should bear your signature(s)
exactly as your name(s) appear in the
stencil to the left. When signing as
attorney, executor, administrator,
personal representative, trustee,
guardian or corporate officer, please
give full title. For joint accounts,
each joint owner should sign.
