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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
INTELLIGENT ELECTRONICS, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$15,600
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2) Form, Schedule or Registration Statement No.:
Preliminary Schedule 14A
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3) Filing Party:
Intelligent Electronics, Inc.
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4) Date Filed:
May 13, 1997
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INTELLIGENT ELECTRONICS, INC.
411 Eagleview Boulevard
Exton, PA 19341
(610) 458-5500
NOTICE AND PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 16, 1997
To the shareholders of Intelligent Electronics, Inc.:
NOTICE IS HEREBY GIVEN THAT the Annual Meeting of Shareholders of
Intelligent Electronics, Inc. (the "Company") will be held at the Holiday Inn,
815 North Pottstown Pike, Exton, PA 19341, on July 16, 1997 at 10:00 a.m. local
time (the "Meeting"), for consideration of and action upon the following
matters:
1. The approval of the sale of the Company's Reseller Network (the
"Indirect Business"), a segment of the Company engaged in the distribution of
computer products, and the adoption of the Stock Purchase Agreement (the
"Acquisition Agreement") providing for the sale of the Indirect Business;
2. The election of four directors for a three-year term; and
3. The transaction of such other business as may properly come before
the Meeting and any postponement or adjournment thereof, and matters incident to
the conduct of the Meeting.
The Board of Directors has fixed the close of business on June 2, 1997
as the record date for the determination of shareholders of the Company entitled
to notice of, and to vote at, the Meeting and any postponement or adjournment
thereof.
If the Meeting is adjourned for one or more periods aggregating at
least 15 days because of an absence of the quorum with respect to any Proposal,
then those shareholders entitled to vote who are present at the adjourned
Meeting in person or by proxy shall nevertheless constitute a quorum for the
purpose of acting upon such Proposal. In the event that there are not sufficient
votes to approve any of the Proposals, it is expected that the Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by the
Company.
BY ORDER OF THE BOARD OF DIRECTORS,
/S/ Richard D. Sanford
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Richard D. Sanford
Chairman of the Board and Chief Executive Officer
Exton, PA
June 20, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE MARK,
DATE AND SIGN YOUR PROXY, AND MAIL IT IN THE STAMPED ENVELOPE ENCLOSED FOR YOUR
CONVENIENCE. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO THE COMPANY OF FURTHER
SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY PROMPTLY. RETURNING
THE PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON ON ALL MATTERS BROUGHT
BEFORE THE MEETING, BUT WILL HELP ASSURE A QUORUM IF YOU DO NOT ATTEND.
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Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, Pennsylvania 19341
(610) 458-5500
PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
JULY 16, 1997
----------------
The enclosed proxy is solicited by and on behalf of the Board of
Directors (the "Board of Directors" or the "Board") of Intelligent Electronics,
Inc. (the "Company") for use at the Annual Meeting of Shareholders to be held on
July 16, 1997 at 10:00 a.m., local time, and at any postponement or adjournment
thereof (the "Meeting"). This Proxy Statement and the enclosed proxy are first
being mailed to shareholders of the Company on or about June 23, 1997.
At the Meeting, the shareholders will be asked to consider and take
action on the following matters (collectively, the "Proposals"):
1. The approval of the sale of the Company's Reseller Network
(the "Indirect Business"), a segment of the Company engaged in the distribution
of computer products, and the adoption of the Acquisition Agreement (as defined
below) providing for the sale of the Indirect Business (the "Sale of the
Indirect Business"). The Company provides information technology products,
services and solutions to network integrators and resellers (the "Network")
through the Indirect Business. The Sale of the Indirect Business is intended to
be made pursuant to the terms of a Stock Purchase Agreement (as it may be
amended or supplemented from time to time, the "Acquisition Agreement"), dated
April 29, 1997, among the Company, XLSource, Inc., an indirect wholly-owned
subsidiary of the Company ("XLSource"), and Ingram Micro Inc. ("Ingram").
Approval of the Sale of the Indirect Business and adoption of the Acquisition
Agreement and the transactions contemplated therein by the shareholders will
also authorize the Company, without further shareholder approval, to make such
modifications and amendments to the terms and conditions of the Sale of the
Indirect Business, including changes in the amount or type of consideration to
be received or the stock or assets to be sold, as the Board of Directors of the
Company may deem appropriate. See "Proposal No. 1--APPROVAL OF SALE OF THE
INDIRECT BUSINESS."
2. The election of four directors nominated by the Board of
Directors for a three-year term. See "Proposal No. 2--ELECTION OF DIRECTORS."
3. The transaction of such other business as may properly come
before the Meeting and any adjournment thereof, and matters incident to the
conduct of the Meeting.
The proposed Sale of the Indirect Business is a complex transaction.
Shareholders are urged to read this Proxy Statement in its entirety.
In the absence of contrary instructions, properly executed proxies,
received and unrevoked, will be voted by the persons named in the proxy: (i) FOR
the Sale of the Indirect Business and adoption of the Acquisition Agreement;
(ii) FOR the election of four directors nominated by the Board of Directors for
a three-year term; and (iii) in accordance with their best judgment with respect
to such other business as may properly come before the Meeting and matters
incident to the conduct of the Meeting.
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The Board of Directors of the Company has approved each of the
Proposals and recommends that the Company's shareholders vote for each of the
Proposals.
In arriving at its conclusion that the Sale of the Indirect Business is
fair to, and in the best interests of, the Company and its shareholders, the
Board of Directors considered the opinion of Legg Mason Wood Walker,
Incorporated ("Legg Mason"), its independent financial advisor, that, as of
April 29, 1997, the consideration to be received by the Company from the Sale of
the Indirect Business pursuant to the Acquisition Agreement was fair to the
shareholders from a financial point of view. A copy of Legg Mason's opinion is
attached as Appendix A to this Proxy Statement and shareholders should read this
opinion in its entirety.
The Board of Directors knows of no business that will be presented at
the Meeting other than the matters described in this Proxy Statement. If any
other matter should be presented at the Meeting for action, the persons named in
the accompanying proxy card will vote the proxy in accordance with their best
judgment on the matter.
A shareholder may revoke his or her proxy at any time by executing and
returning another proxy of a later date, by written notice to the Company
(attention: Alan Resneck, Secretary of the Company) at its address above, or by
attending the Meeting and voting in person.
If the Meeting is adjourned for one or more periods aggregating at
least 15 days because of an absence of the quorum with respect to any Proposal,
then those shareholders entitled to vote who are present at the adjourned
Meeting in person or by proxy shall nevertheless constitute a quorum for the
purpose of acting upon such Proposal. In the event that there are not sufficient
votes to approve any of the Proposals, it is expected that the Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by the
Company.
The delivery of this Proxy Statement shall not, under any
circumstances, create any implication that the information contained herein is
correct after the date hereof, June 20, 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
VOTING SECURITIES OF THE COMPANY
Only holders of Common Stock of record at the close of business on June
2, 1997 (the "Record Date") are entitled to notice of, and to vote at, the
Meeting. At the close of business on the Record Date, 37,206,311 shares of
Common Stock were outstanding. Each share of Common Stock is entitled to one
vote on all matters presented at the Meeting with no right to vote cumulatively
in the election of directors. Under Pennsylvania law and the By-laws of the
Company, the presence at the Meeting, in person or by proxy, of shareholders
entitled to cast at least a majority of the votes that all shareholders are
entitled to cast on a particular matter to be acted upon at the Meeting shall
constitute a quorum. All valid proxies returned will be included in the
determination of whether a quorum is present at the Meeting.
Directors are elected by a plurality vote; therefore, the four nominees
who receive the largest number of votes cast will be elected as directors. An
affirmative vote of a majority of the votes cast by shareholders present in
person or by proxy and entitled to vote at the Meeting is required for approval
of the other matters presented. Votes withheld, abstentions and "broker
non-votes" will not be counted as votes cast and will not be voted and will have
no effect on matters to be voted on at the Meeting.
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Certain directors and officers of the Company who have the power to
vote approximately 11.3% of the outstanding shares of Common Stock have
indicated that they intend to vote their shares in favor of each of the
Proposals.
SOLICITATION OF PROXIES
The Company has retained D.F. King & Co., Inc. (the "Proxy Agent") to
assist in the solicitation of proxies. The Proxy Agent will receive a fee from
the Company of approximately $6,000 for its services, plus reimbursement for its
out-of-pocket expenses. All additional expenses of the solicitation of proxies
for the Meeting, including the cost of mailing, will be borne by the Company. In
addition to solicitation by mail, and the services performed by the Proxy Agent,
officers and regular employees of the Company may solicit proxies from
shareholders by telephone, telegram, facsimile or in person. Such persons will
receive no additional compensation for such services.
MARKET PRICES FOR THE COMMON STOCK
The Common Stock is listed on the Nasdaq Stock Market ("Nasdaq") under
the symbol "INEL." On April 29, 1997, the trading day immediately preceding
announcement of the execution of the Acquisition Agreement, the high and low
prices of the Common Stock, as indicated on Nasdaq, were $2-13/16 and $2-3/8,
respectively. For additional information relating to market prices of the Common
Stock, see "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters" in the Company's Annual Report on Form 10-K for the fiscal
year ended February 1, 1997 ("fiscal 1996") attached hereto as Appendix B-1 and
made a part hereof.
PRINCIPAL SHAREHOLDERS AND HOLDINGS OF OFFICERS AND DIRECTORS
The following table sets forth the number and percentage of shares of
Common Stock which, according to information supplied to the Company, are
beneficially owned by: (i) each person who is the beneficial owner of more than
5% of the Common Stock; (ii) each of the directors and the nominees for
directorship of the Company individually; (iii) the Company's Chief Executive
Officer and each of the Company's four other most highly compensated executive
officers for fiscal 1996; and (iv) all current directors and officers of the
Company as a group. Under rules of the Securities and Exchange Commission, a
person is deemed to be the beneficial owner of Common Stock with respect to
which such person has or shares voting power or investment power. A person is
also deemed to be the beneficial owner of shares of Common Stock as of a given
date with respect to which such person has the right to obtain voting or
investment power within 60 days of such given date, such as upon the exercise of
options or warrants. Unless otherwise indicated, the information in the
following table is as of May 7, 1997.
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Percentage
Amount and Nature of Shares
of Beneficial Outstanding
Name of Beneficial Owner Ownership(1) (if 1% or greater)
- ----------------------- ---------------------- ------------------
Barry M. Abelson 419,279 (2) 1.2%
Mark R. Briggs 78,100 (3) --
Thomas J. Coffey 50,100 --
Timothy D. Cook 54,000 --
Christopher T. G. Fish 718,020 (4) 2.0%
Roger J. Fritz 60,004 --
Arnold S. Hoffman 6,000 --
William E. Johnson 40,000 --
Kathleen R. Mayo 200 (5) --
Michael A. Norris -- --
John A. Porter 50,000 --
Gregory A. Pratt 310,000 --
William L. Rulon-Miller 14,136 --
Richard D. Sanford 3,678,166 (6) 10.0%
Wellington Management Company 1,868,200 (7) 5.1%
Lazard Freres & Co. LLC 1,894,480 (8) 5.2%
All directors and current officers
as a group (12 persons) 5,151,588 (9) 13.8%
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(1) The number of shares of Common Stock indicated in this table as
beneficially owned by the following individuals includes the respective
number of shares purchasable upon the exercise of stock options which are
exercisable within 60 days of May 7, 1997: Mr. Briggs, 78,000; Mr. Coffey,
50,000; Mr. Cook, 50,000; Mr. Johnson, 20,000; Mr. Porter, 30,000; Mr.
Pratt, 310,000; Mr. Sanford, 470,000; and all directors and current
officers as a group, 930,000.
(2) 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 176,407 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.
(3) Mr. Briggs resigned as the Company's Assistant to the Chairman on
December 31, 1996.
(4) Includes 612,310 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.
(5) Ms. Mayo resigned as the Company's Secretary on March 31, 1997.
(6) Includes 176,407 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.
(7) 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 January 24, 1997, a copy of which was
received by the Company and relied upon in making this disclosure. The
address of Wellington Management Company is 75 State Street, Boston,
Massachusetts, 02109.
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(8) The information with respect to Lazard Freres & Co. LLC was reported on a
Schedule 13-G filed by Lazard Freres & Co. LLC with the Securities and
Exchange Commission on February 14, 1997, a copy of which was received by
the Company and relied upon in making this disclosure. The address of
Lazard Freres & Co. LLC is 30 Rockefeller Plaza, New York, New York, 10020.
(9) Excludes shares owned by Mr. Briggs and Ms. Mayo, who are no longer
employed by the Company.
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PROPOSAL NO. 1
APPROVAL OF THE SALE OF THE INDIRECT BUSINESS
Introduction
On April 29, 1997, the Company entered into the Acquisition Agreement
with Ingram to sell the stock and related assets and liabilities of the Indirect
Business for $78 million, subject to reduction (but not below $68 million)
depending on the date of closing ("Closing Date Adjustment") and also on certain
revenues during the period through closing ("Revenue Adjustment"). If the
closing had occurred on May 3, 1997, the end of the first quarter of the fiscal
year ending January 31, 1998 ("fiscal 1997"), the purchase price would have been
reduced by $5 million on account of the Revenue Adjustment. The purchase price
will be payable by assumption of liabilities, based on the balance sheet of the
Indirect Business at the time of closing (the "Closing Date"), and cash if the
purchase price exceeds such liabilities. The Company will be required, at
closing, to pay to Ingram any amount by which the estimated net assumed
liabilities exceed the adjusted purchase price and to fund a $10 million escrow
for final settlement for any purchase price adjustments and indemnity claims. If
the closing had occurred on May 3, 1997, the net assumed liabilities would have
exceeded the purchase price by approximately $4.3 million. The consummation of
the Sale of the Indirect Business is subject to the approval of the shareholders
at the Meeting and required government approvals, as well as other conditions
summarized below. The Company expects, on a preliminary basis, that the Sale of
the Indirect Business will result in a pre-tax gain of approximately $14
million, after adjustment for the $5 million Revenue Adjustment referred to
above. Additionally, pursuant to a separate agreement, XLSource (described
below) must purchase its product requirements from Ingram over an initial term
of up to three years following the closing.
The Company and Ingram
Description of the Company. The Company provides information technology
products, services and solutions to the Network through the Indirect Business
and to large and small corporate customers, educational institutions and
governmental agencies in the United States, primarily through its branch
locations (the "Direct Business").
The Indirect Business provides distribution of microcomputers and
related equipment to the Network through a business-to-business approach.
Specifically, the Company provides product selection, technical support,
marketing programs and promotions and configuration. The Direct Business
operates through XLSource and XLConnect Solutions, Inc. ("XLConnect"), a
professional services organization that is an 80%-owned subsidiary of the
Company. As of the date of this Proxy Statement, the Company is exploring its
strategic alternatives relative to XLSource, including the possible sale of all
or a portion of XLSource, and is in negotiations with an unaffiliated third
party for the possible sale (the "Possible XLS Sale") of a substantial portion
of XLS' business (representing approximately 60% of the Direct Business'
revenues during the fiscal quarter ended May 3, 1997). There can be no assurance
that any such sale will be completed. For additional information relating to the
business of the Company, see "Item 1. Business" in the Company's Annual Report
on Form 10-K attached hereto as Appendix B-1 and made a part hereof. Since the
business which would be sold in the Possible XLS Sale does not currently
constitute all or substantially all of the assets of the Company, it is not
expected that the Possible XLS Sale will require shareholder approval if it were
consummated prior to the Sale of the Indirect Business. As of the date of this
Proxy Statement, the Company has not made a determination as to whether the
Possible XLS Sale, if consummated after the Sale of the Indirect Business, would
then constitute the sale of all or substantially all of the assets of the
Company and therefore require shareholder approval. If a definitive agreement
for the Possible XLS Sale is entered into before the Meeting, the Company will
file with the Securities and Exchange Commission and mail to shareholders of the
Company a Current Report on Form 8-K describing and providing information with
regard to such definitive agreement.
Description of Ingram. Ingram is a leading wholesale distributor of
microcomputer products worldwide. It markets microcomputer hardware, networking
equipment and software products to more than 100,000 reseller
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customers in approximately 120 countries worldwide. Ingram's executive offices
are located at 1600 East St. Andrew Place, Santa Ana, California 92705, and its
telephone number is (714) 566-1000.
Prior Purchases. The Company has periodically purchased computer
products from Ingram. Such purchases have been on arm's-length terms, consistent
with industry practice. During fiscal 1996, the Indirect Business purchased
approximately $1 million of product from Ingram and the Direct Business
purchased approximately $13 million of product from Ingram. The Company has had
no material arrangements or contracts with Ingram prior to the Acquisition
Agreement.
Background of Sale of the Indirect Business
In March 1984, the Company commenced its Indirect Business, the
wholesale distribution of microcomputers through its Reseller Network.
Historically, the Company's largest vendors required resellers to purchase
products from only one source. Members of the Network agreed to purchase
computer products on a cost-plus basis through the Company as their single
source. In 1988 and 1989, the Company acquired Entre Computer Center, Inc.
("Entre") and Connecting Point of America, Inc. ("CPA"), each of which had
substantial franchise operations when they were acquired and thus became an
integral part of the Indirect Business.
All of the Company's major vendors have now changed their "single
source" policy, allowing either "open sourcing" or "second sourcing"
(collectively "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 and brand
loyalty have been reduced. The Company believes that the change to open sourcing
has had and will continue to have an adverse effect on the Indirect Business'
(and therefore the Company's) results of operations and its financial position.
Although the Indirect Business has historically generated positive cash
flows for the Company, it has experienced a trend of declining revenues caused
by the Company's inability to retain and attract customers resulting from a
number of factors and, accordingly, it is not currently generating positive cash
flow. These factors include: fewer product lines offered by the Company compared
to its larger competitors; a less favorable allocation of constrained products
(which can command a higher gross margin) compared to prior years; increased
competition; and continued consolidation in the reseller channel. Additionally,
the Indirect Business is no longer able to take advantage of cash incentives
offered by vendors due to the limited financial resources available to the
Company. As a result, gross margins and product availability have been
negatively impacted. Product allocation and cash incentives are used by many
vendors as an incentive for early payment.
During the third quarter of fiscal 1996, a decision to adopt open
sourcing was made by two of the Company's largest vendors. These vendors'
products have totaled approximately 30% to 36% of the Company's revenues during
the past three fiscal years. This change and a trend of declining revenues,
gross margins, earnings and cash flows in the Indirect Business caused the
Company to undertake a review of its long-lived assets in this business unit. As
a result of this review, which was based on estimated future cash flows of the
business, it was determined that certain assets were impaired. The Company
determined that the carrying value of its goodwill relative to the Indirect
Business would not be recovered from future operations. Accordingly, this
goodwill, amounting to approximately $55.5 million, was written-off as of
November 2, 1996. This goodwill was recorded in 1988 and 1989 and was related to
the acquisitions of Entre and CPA, respectively.
The Company recognized that it could no longer support both the
Indirect Business and the Direct Business given the effects of open sourcing and
the Company's capital constraints. The Company retained McKinsey and Company
("McKinsey"), a consulting firm, to provide strategic consulting, and Legg Mason
to explore various strategic and transactional alternatives for the Company to
maximize shareholder value. On January 24, 1997, the Company publicly announced
that it was exploring strategic alternatives that might include the sale or
spin-off of one or more of its operations, as well as various merger and
acquisition alternatives.
At a meeting of the Board of Directors on January 26, 1997, McKinsey
and Legg Mason reviewed various alternatives available to the Company to
maximize shareholder value. On January 27, 1997, the Board reviewed the
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various alternatives which had been discussed, including a spin-off of XLConnect
to the Company's shareholders and sale or merger transactions involving the
Direct Business and/or the Indirect Business. The Board then authorized the
spin-off of XLConnect to the Company's shareholders, subject to the receipt of a
ruling from the Internal Revenue Service as to the tax-free nature of the
spin-off, the receipt of necessary governmental and third-party consents and a
subsequent formal declaration of the distribution by the Board. The Board also
authorized management to continue its exploration of additional alternatives.
Subsequent to the January Board meeting, Legg Mason and the Company
began contacting select potential acquirors of the Indirect Business, including
Ingram.
On February 7, 1997, Ingram and the Company entered into a
confidentiality agreement. Shortly thereafter, the Company provided to Ingram
certain non-public information regarding the Indirect Business. Eleven potential
purchasers of the Indirect Business signed confidentiality agreements and were
provided with non-public information regarding the Indirect Business.
On February 11, 1997, Company management met with representatives of
Ingram. At that meeting, Ingram advised the Company of its interest in
purchasing the Indirect Business, and attendees discussed potential synergies
between the two companies. On February 15, 1997, the Company, Legg Mason and
Ingram's investment advisor, Morgan Stanley & Co., Inc., convened by telephone
to discuss the possible acquisition of the Indirect Business.
On March 16, 1997, management of the Company and Ingram met to continue
discussions concerning a possible purchase by Ingram of the Indirect Business.
On March 24, 1997, Ingram submitted, in writing, a preliminary, non-binding
indication of interest. The written indication required the Company, in effect,
to deal only with Ingram regarding the possible transaction and was not agreed
to by the Company.
On April 3, 1997, following a meeting of the Board which authorized the
action, the Company entered into an agreement, required by Ingram as a condition
to continuing discussions, restricting the Company, subject to certain
exceptions, from soliciting from third parties proposals to purchase the
Indirect Business for a period up to 30 days. The agreement further provided for
a $2 million payment from the Company to Ingram if, during the 30-day period,
the Company were to accept a third-party proposal made during such period to
acquire the Indirect Business. Shortly thereafter, the Company provided to
Ingram certain additional non-public information regarding the Indirect
Business. Although the other potential purchasers of the Indirect Business, who
had signed confidentiality agreements, had expressed an interest in considering
the purchase, no firm or specific proposal was received from them on or prior to
April 3, 1997 and none was received thereafter.
Between April 3, 1997 and April 29, 1997, Ingram continued to conduct a
due diligence investigation of the Indirect Business. The Company, Ingram and
their respective counsel developed the structure for the Sale of the Indirect
Business and negotiated the terms of the Acquisition Agreement during this
period.
At a meeting of the Board held on April 29, 1997, the Board considered
the proposed transaction with Ingram, including the Acquisition Agreement, and
reviewed with management the business operations of the Indirect Business.
Present at the meeting, in person or by phone, were eight of the Directors,
senior members of the Company's management, representatives of Legg Mason and
outside legal counsel for the Company. At the meeting, Legg Mason presented a
summary of the Indirect Business sale process to date and its valuation analysis
of the Indirect Business. The Directors noted that, except for the Ingram
proposal, no other firm or specific proposal to purchase the Indirect Business
had been received. Legg Mason then orally rendered its opinion to the Board
that, as of such date and based on the terms of the then-current draft of the
Acquisition Agreement, the consideration to be received by the Company from the
Sale of the Indirect Business pursuant to the Acquisition Agreement was fair to
the shareholders from a financial point of view.
After discussion, and with the recommendation of the Company's senior
management, the Board determined to sell the Indirect Business, approved the
transaction with Ingram, and authorized the execution of the Acquisition
Agreement.
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Thereafter, negotiations continued by telephone among management of the
Company, Ingram and counsel to both the Company and Ingram. On April 29, 1997,
all issues having been resolved, the Acquisition Agreement was executed. On
April 30, 1997, the Company and Ingram issued press releases announcing the
transaction.
The Company's Reasons for the Sale of the Indirect Business;
Recommendation of the Board of Directors
The Board of Directors has determined that the Sale of the Indirect
Business is fair to, and in the best interests of, the Company and its
shareholders, and has approved the Acquisition Agreement. Accordingly, the Board
recommends that the shareholders vote to adopt the Acquisition Agreement and
approve the Sale of the Indirect Business. In reaching its conclusion, the Board
considered a number of factors, including:
o The decline in revenues of the Indirect Business and its inability to
retain and attract customers. Revenues declined 9.2% in fiscal 1996 compared to
the fiscal year ended February 3, 1996 ("fiscal 1995"). More importantly,
revenues declined 14.8% in the fourth quarter of fiscal 1996 as compared to the
third quarter of fiscal 1996. The decline resulted from a number of factors,
including: (i) fewer product lines offered by the Company compared to its larger
competitors; (ii) a less favorable allocation of constrained products (which can
command a higher gross margin) in fiscal 1996 compared to fiscal 1995; (iii)
continued competitive pressures in the industry primarily due to open sourcing;
and (iv) the continued consolidation in the reseller channel.
o The decline in gross margin of the Indirect Business. Gross margin as
a percentage of revenues in the Indirect Business was 2.6% in fiscal 1996
compared to 3.1% in fiscal 1995. This trend has continued with gross margin of
2.4% in the fourth quarter of fiscal 1996. Exclusive of inventory-related
charges recorded in fiscal 1995 of approximately $10 million, gross margin in
fiscal 1995 would have been 3.3%. The decline in the gross margin percentage
resulted primarily from: (i) a less favorable allocation of constrained products
compared to prior years; (ii) the continued competitive pressures in the
industry; (iii) increased freight and configuration costs; and (iv) the
Company's inability to take advantage of purchasing and prepayment discounts due
to the Company's limited financial resources.
o The Company's restricted access to capital and credit and its
correspondingly limited ability to expand the size and scale of the Indirect
Business in order to attempt to restore the competitive position of the Indirect
Business.
o The continuing losses of the Company partially attributable to the
Indirect Business. Such losses have had an adverse effect on the Company's
operating results, liquidity and ability to satisfy debt covenants.
o The likely inability of the Company to satisfy amended debt covenants
and maintain adequate working capital and tangible net worth if the Indirect
Business is not sold.
o The greater financial resources available to many of the competitors
of the Indirect Business and their correspondingly greater ability to secure
product availability and manufacturer incentives, such as purchasing and
prepayment discounts.
o The continuation or increase of the foregoing factors since the
end of fiscal 1996.
o The analysis prepared by Legg Mason and the oral opinion of Legg
Mason presented to the Board on April 29, 1997 to the effect that as of such
date the consideration to be received by the Company in the Sale of the Indirect
Business is fair to the shareholders from a financial point of view. See
"Opinion of Financial Advisor" below and Legg Mason's written opinion attached
as Appendix A.
o The terms and conditions of the Acquisition Agreement.
o The unlikelihood that a Sale of the Indirect Business could be
structured with another purchaser that would offer comparable or greater value
to the Company.
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The foregoing discussion of the factors considered by the Board is not
intended to be all inclusive. In view of the variety of factors considered in
connection with its evaluation of the Sale of the Indirect Business, the Board
did not find it practicable to and did not attempt to rank or assign relative
weights to the foregoing factors.
The Board recommends that the shareholders vote FOR adoption of the
Acquisition Agreement and the Sale of the Indirect Business.
Opinion of Financial Advisor
At the April 29, 1997 meeting of the Board, the Company's financial
advisor, Legg Mason, delivered its oral opinion to the Board, which opinion was
subsequently confirmed in writing (the "Opinion") that, as of such date, the
consideration to be received by the Company in the Sale of the Indirect Business
to Ingram is fair from a financial point of view to the shareholders. The full
text of the Opinion, which sets forth the assumptions made, matters considered,
scope and limitations of the review undertaken and procedures followed by Legg
Mason in rendering its Opinion, is attached to this Proxy Statement as Appendix
A. Shareholders should read the Opinion in its entirety. The Opinion is directed
only to the fairness from a financial point of view to the shareholders of the
consideration to be received by the Company in the Sale of the Indirect
Business, and does not constitute a recommendation to any shareholder as to how
such shareholder should vote at the Meeting. The summary of the Opinion set
forth in this Proxy Statement is qualified in its entirety by reference to the
full text of the Opinion.
In arriving at its Opinion, Legg Mason, among other things: (i)
reviewed the Acquisition Agreement and other related agreements; (ii) reviewed
certain unaudited financial statements of the Indirect Business; (iii) reviewed
certain internal information, primarily financial in nature, concerning the
Indirect Business, prepared by the Company's management; (iv) discussed the past
and current operations and financial condition and future prospects of the
Indirect Business with the Company's management; (v) reviewed financial
projections of the Indirect Business prepared by the management of the Company;
(vi) conducted such other financial studies, analyses and investigations and
considered such other information as Legg Mason deemed necessary or appropriate;
and (vii) visited certain facilities of the Indirect Business.
In connection with its review, Legg Mason assumed and relied upon the
accuracy and completeness of all financial and other information supplied to it
by the management of the Company, and all publicly available information, and
did not independently verify such information. Legg Mason also relied upon the
management of the Company as to the reasonableness of the financial projections
(and the assumptions and bases therein) provided to Legg Mason for the Indirect
Business, and assumed that such projections were reasonably prepared on bases
reflecting the best currently available estimates and judgments of management as
to the future operating performance of the Indirect Business. The Company does
not publicly disclose internal management projections of the type provided to
Legg Mason in connection with Legg Mason's review of the Sale of the Indirect
Business. Such projections were not prepared with the expectation of public
disclosure. The projections were based on numerous variables and assumptions
that are inherently uncertain, including, without limitation, factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such projections.
Legg Mason was not requested to make, and did not make, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities of
the Indirect Business and was not furnished with any such appraisal or
evaluation. The estimates of values of companies and assets produced in the
course of developing the Opinion are not appraisals, and should not be
misconstrued as appraisals, nor should such estimates be expected to reflect the
prices at which companies and assets may actually be sold. Because such
estimates are inherently subject to uncertainty, Legg Mason assumes no
responsibility for their accuracy. The Opinion is necessarily based on economic
and other conditions and circumstances as existed or were in effect on, and the
information made available to it as of April 29, 1997.
In connection with rendering its Opinion, Legg Mason considered a
variety of financial analyses and determined that under the circumstances, the
only relevant analysis would be an Asset Liquidation Analysis, as
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more fully explained below. The summary of such analysis set forth below does
not purport to be a complete description of the analysis performed and factors
considered by Legg Mason in arriving at its Opinion. Legg Mason believes that
its analysis must be considered as a whole and that selecting portions of its
analysis and of the factors considered by it, without considering all the
factors and the analysis in its entirety, would create a misleading view of the
processes underlying its Opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to a partial analysis or
summary description. Legg Mason assumed that the Sale of the Indirect Business
described elsewhere in this Proxy Statement will be consummated according to the
terms and conditions described in the form of the Acquisition Agreement reviewed
by Legg Mason and that obtaining any necessary government regulatory approvals
or satisfying any other conditions for consummation of the Sale of the Indirect
Business would not have an adverse effect on the value of the consideration
received by the Company. In addition, Legg Mason did not make any determination
regarding the Supply Agreement (discussed below) in evaluating the consideration
to be received by the Company in the Sale of the Indirect Business, and relied
on management's advice that the terms of the Supply Agreement were at least as
favorable as could be obtained from any third party. Accordingly, the Supply
Agreement was assumed to have no impact on the fairness of the consideration to
be received in the Sale of the Indirect Business.
Although Legg Mason evaluated the financial terms of the Sale of the
Indirect Business, Legg Mason did not recommend the amount of consideration to
be received in the Sale of the Indirect Business, and was not involved in the
discussions or negotiations regarding the terms of the Sale of the Indirect
Business, which were determined through negotiations between the Company and
Ingram.
The following is a summary of the analysis performed by Legg Mason in
connection with the preparation of the Opinion. This analysis was presented to
the Board at its meeting on April 29, 1997 and was based on available financial
information as of April 29, 1997.
Overview of the Indirect Business. Based on industry research and its
discussions with the management of the Company, Legg Mason considered the
changing industry dynamics and resulting operational difficulties which the
Indirect Business has experienced, including the continuing decline in revenues,
gross margins, earnings and cash flows. Legg Mason also considered management's
belief that without a significant infusion of capital into the Indirect
Business, sources for which may not be available, the decline would likely
continue. Management further informed Legg Mason that in light of the foregoing,
the Indirect Business was not expected to generate positive operating cash flow
in the foreseeable future.
Legg Mason also considered the results of the selling process for the
Indirect Business. Beginning in early February 1997 and ending with the
execution of the Acquisition Agreement, Legg Mason and the management of the
Company contacted forty-two potential purchasers of the Indirect Business
located throughout North America, Europe and Asia. As a result of the selling
effort, eleven potential purchasers signed confidentiality agreements and were
sent a descriptive memorandum describing the Indirect Business. The management
of the Company conducted meetings (either in person or telephonically) with
eight potential purchasers and, except for the proposal which resulted in the
Acquisition Agreement, received no proposals, which the management of the
Company deemed firm or specific.
Legg Mason relied upon managements' projections, assumptions and
conclusions in the development and application of its valuation analyses. As a
result of the declining operating performance of the Indirect Business, Legg
Mason determined that analysis based on comparisons with the financial
performance and market valuations of publicly traded peer companies (Comparable
Company Analysis) and analysis based on comparisons with the financial
performance and transaction valuations of peer companies (Comparable Transaction
Analysis) were not meaningful. Legg Mason also determined that analyses based on
a company's ability to generate operating cash flow (Discounted Cash Flow
Analysis and Leveraged Buyout Analysis) were inapplicable, as the Indirect
Business was not expected to produce sufficient cash flow to produce a positive
valuation. Given the expectation of a continuing decline in the Indirect
Business' operating performance, the expectation of negative operating cash flow
in the foreseeable future, management's belief that without a significant
infusion of capital into the Indirect Business, sources for which may not be
available, the decline would likely continue, and the absence of any
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proposal, other than the Ingram proposal, which management deemed firm or
specific, Legg Mason concluded that the only relevant comparative valuation
methodology was an Asset Liquidation Analysis.
Asset Liquidation Analysis. An Asset Liquidation Analysis is most
relevant when a company cannot be sold as a going concern and is likely to be
liquidated. In an Asset Liquidation Analysis, the liquidation value of a company
is derived by estimating the value of the company's assets and assuming their
conversion into cash and then deducting all of the liabilities of the company
from the total cash that could be received. Liquidation value can be determined
by assuming either an orderly liquidation or a more rapid, forced liquidation of
the business. Ordinarily the latter approach results in a lower value.
In performing the analysis, Legg Mason relied upon estimates made by
the management of the Company of the range of percentages of book value likely
to be realizable in liquidation for each of the operating assets of the Indirect
Business. Neither Legg Mason nor the Company made an appraisal or evaluation of
the assets of the Indirect Business, and the estimated percentages developed by
management were not appraisals. Legg Mason then applied these estimated
percentages to the Indirect Business' asset balances as of April 5, 1997, the
most recent balance sheet available, to develop estimated asset liquidation
values. Legg Mason then deducted the liabilities of the Indirect Business from
the estimated asset liquidation values to determine the overall liquidation
value for the Indirect Business. Based on the adjusted balance sheet as of April
5, 1997, provided to Legg Mason by the Company, the book value of assets was
approximately $342 million and the book value of liabilities was approximately
$360 million. None of the assets of the Indirect Business were considered to be
worth in excess of book value. Estimated liquidation values for the assets of
the Indirect Business ranged from 0% to 100% of book value, depending on the
asset. All of the liabilities of the Indirect Business were deducted, and
liabilities were not reduced in value.
Legg Mason's estimation of value resulting from the Asset Liquidation
Analysis yielded a range of negative values for the Indirect Business that
ranged from ($97.6) million to ($125.8) million, before adjusting for the costs
of the liquidation process, as well as legal and accounting fees and the costs
of operating the business through the liquidation period. The range of negative
values primarily reflected several factors including that the book value of
liabilities was estimated to exceed the book value of assets by approximately
$18 million, the liquidation value of the inventory was estimated to be
approximately $34 million to $55 million less than the book value of the
inventory, and the liquidation value of the fixed assets was estimated to be
approximately $42 million less than the book value of the fixed assets.
Other Factors. In rendering its Opinion, Legg Mason considered certain
other factors, including a review of the businesses and operations of the
Indirect Business and the industry in which it operates, a review of the
Indirect Business' operating results and the financial and operating information
with respect to the business, operations, and prospects of the Indirect
Business, and other factors it deemed relevant. No limitations were imposed by
the Board upon Legg Mason with respect to the investigations made or the
procedures followed by it in rendering its opinion.
Legg Mason is an investment banking firm engaged in, among other
things, the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Legg Mason is a nationally recognized investment banking firm which
has substantial experience in merger and acquisition transactions. The Board
selected Legg Mason as the Company's financial advisor on the basis of Legg
Mason's favorable reputation and substantial experience in merger and
acquisition transactions. Arnold S. Hoffman, a member of the Board, is a Senior
Managing Director of Legg Mason. Mr. Hoffman abstained from the Board's decision
to retain Legg Mason as its financial advisor. In the ordinary course of its
business, Legg Mason may actively trade in the securities of the Company for its
own account and the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
Pursuant to the terms of an engagement letter, the Company paid $75,000
to Legg Mason for providing general financial advisory services, including a
review of strategic alternatives for the Company and its operating
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units. In a supplemental engagement letter, the Company agreed to pay Legg Mason
an advisory fee, contingent upon the closing of the Sale of the Indirect
Business, in the amount of the greater of $500,000 or 1.5% of the value of the
consideration to be paid to the Company in the Sale of the Indirect Business. In
addition, for providing the Opinion, the Company has agreed to pay Legg Mason a
fee in the amount of the greater of $125,000 or 0.3% of the value of the
consideration to be paid to the Company in the Sale of the Indirect Business, of
which $125,000 has been paid as of the date of this Proxy Statement. If the sum
of the advisory fee and the Opinion fee exceeds $625,000, a portion of the
Opinion fee equal to the excess amount will be credited against the advisory
fee. The Company has agreed to reimburse Legg Mason for its reasonable
out-of-pocket expenses (including the fees and expenses of its legal counsel),
and to indemnify Legg Mason and certain related parties against certain
liabilities, including liabilities under the federal securities laws, arising
out of or in connection with the services rendered by Legg Mason under the
supplemented engagement letter.
Business of the Company after the Sale
After the completion of the Sale of the Indirect Business, the Company
anticipates that it will operate solely as a Direct Business. Based on the
Company's expected level of operations, including plans to reduce the operating
losses of XLSource, and capital expenditure requirements, management believes
that the Company's cash, internally generated funds and available financing
arrangements will be sufficient to meet the Company's cash requirements, at
least through the end of fiscal 1997. However, if the Company is unable to
complete the Sale of the Indirect Business, or continues to experience losses
and negative operating cash flows, the Company's vendors could elect to restrict
product availability and modify credit terms, which could have a material
adverse effect on the Company's liquidity position. In such circumstances, there
can be no assurance that alternate sources of financing could be obtained.
The Company's Direct Business, as of the date of this Proxy Statement,
consists of two operating companies, XLConnect and XLSource:
a) XLSource. Through its acquisition of The Future Now, Inc. ("FNOW") in
August 1995 and five branch locations in December 1994 from FNOW, the Company
acquired a direct hardware sales organization, now operating in 21 locations
throughout the United States under the name XLSource. XLSource purchases the
majority of its products from the Indirect Business and is an authorized dealer
or a reseller for the products of over 80 manufacturers. XLSource, in
conjunction with XLConnect (described below), focuses its sales and marketing
efforts toward selling computer related products and services to medium-sized
businesses, Fortune 1000 corporations, professional firms, and governmental and
educational institutions. These customers are relying more on business partners
and suppliers to provide complete solutions to their information technology
needs, in addition to competitive pricing. Also, many larger customers are
outsourcing their information technology needs. In order to meet these complex
needs, XLSource supplies the hardware and partners with XLConnect, which
provides sophisticated information technology services. After the completion of
the Sale of the Indirect Business, XLSource will be required to purchase 100% of
its requirements of products available from Ingram pursuant to the Supply
Agreement. The Company believes that the terms and conditions to be applicable
to such purchases are at least as favorable as could be obtained from any other
third party, and that XLSource will be able to satisfy the minimum purchase or
other obligations in the Supply Agreement, although there can be no assurances
as to the latter.
During the third quarter of fiscal 1996, the Company closed the XLSource
portion of five branch locations. Four of these branches were acquired from FNOW
in December 1994 and one was acquired from FNOW in August 1995. As a result of
these closures, the Company recorded an $8 million charge relating to the
allocable portion of goodwill for these locations. In addition to the goodwill
charge, the Company also recorded a charge of approximately $1.8 million to
reflect the write-off of property and equipment and remaining lease obligations
related to these branches.
The Company has closed and is in the process of closing XLSource branch
locations at several locations as part of the Company's migration to a virtual
sales model, which will allow certain XLSource account executives in these
markets to work out of their homes. The Company continues to evaluate the
individual branch locations of
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XLSource with the goal of becoming more efficient and having the ability to hire
additional account executives, as needed, without renting office space and
increasing overhead costs.
XLSource incurred losses in the first quarter of fiscal 1997, and in
fiscal 1996 and 1995. The Company is continuing to explore its strategic
alternatives relative to XLSource, including the Possible XLS Sale. If a
definitive agreement for the Possible XLS Sale is entered into, the Company
currently expects that it will retain XLSource operations representing
approximately 25% of the Direct Business' revenues during the first quarter of
fiscal 1997 and that these retained XLSource operations will continue to
function in a partnership relationship with XLConnect. There can be no assurance
that the Possible XLS Sale, or any other XLSource sale, will be completed.
b) XLConnect. Following the acquisition of FNOW, XLConnect was formed by
combining the operations of one of the Company's existing subsidiaries with
FNOW's professional services organization. XLConnect, an 80%-owned subsidiary
of the Company, became a Nasdaq-traded company as a result of its initial public
offering on October 17, 1996. On February 6, 1997, the Company announced the
planned distribution, conditioned on the receipt of an IRS ruling as to its
tax-free nature and customary regulatory and contractual approvals and consents,
of all of the shares of common stock of XLConnect owned by the Company
(13,325,000 shares) in a spin-off to the Company's shareholders. As a result of
the Acquisition Agreement, the Company has been advised that it is unlikely that
the spin-off would qualify as a tax-free distribution of stock. Accordingly, the
Company does not currently intend to effect the spin-off of XLConnect.
XLConnect offers a wide range of professional services including project
and network management, consulting services, enterprise design, training,
technology deployment and telecommunications services.
XLConnect focuses on four specific areas, emphasizing total connectivity
solutions:
Internetworking Solutions: The Internetworking group provides network and
communication systems management, local and wide area network design
services, web site development, and connectivity consulting.
Managed Service Solutions: Managed Service Solutions maximizes the
productivity of its customers' networks and the equipment on the network.
It offers a full range of services including PC, local and wide area
network outsourcing, asset management, work group collaboration,
electronic mail and electronic commerce services.
Application Services Group: The Application Services Group provides
Internet and Intranet solutions, training, and help desk solutions. It
designs, develops, installs and supports Internet and Intranet
applications running over enterprise-wide networks. It also trains
personnel, agents and its customers on how to sell and support these
complex solutions.
Telecommunication Services: Telecommunication services include data,
video and voice transmission services. These services are provided
through alliances with several leading telecommunications carriers and
Internet service providers.
Acquisition Agreement
The following summary of the Acquisition Agreement is subject to, and
qualified in its entirety by, the complete text of the Acquisition Agreement
which is attached to this Proxy Statement as Appendix C. The terms of the
Acquisition Agreement are the result of arms' length negotiations between the
Company and Ingram.
General. Pursuant to the Acquisition Agreement, the Company will sell
the assets and liabilities of the Indirect Business to Ingram, including the
capital stock of the subsidiaries (collectively, the "Indirect Business
Companies") through which it conducts the Indirect Business. The base purchase
price (the "Base Purchase Price")
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payable by Ingram is $78 million, subject to reduction (but not below $68
million) depending on the Closing Date Adjustment and the Revenue Adjustment.
The purchase price will be payable by assumption of liabilities of the Indirect
Business as of the Closing Date ("Closing Net Liabilities Assumed") and cash if
the purchase price exceeds the Closing Net Liabilities Assumed. The Company will
be required to pay to Ingram the amount by which Closing Net Liabilities Assumed
exceed the adjusted Base Purchase Price. The calculation of Closing Net
Liabilities Assumed includes all assets and liabilities based on the balance
sheet of the Indirect Business other than cash, property and equipment, other
assets and deferred income taxes, although Ingram will acquire the property and
equipment and other assets. If the closing had occurred on May 3, 1997, Closing
Net Liabilities Assumed would have been approximately $77.3 million. Because of
the impracticality of computing, on the Closing Date, Closing Net Liabilities
Assumed, payments on the Closing Date will be made based on the net liabilities
of the Indirect Business as of the fiscal-month end preceding the Closing Date
(the "Estimated Net Liabilities Assumed"). The Acquisition Agreement includes a
procedure for a purchase price adjustment based on the difference between
Closing Net Liabilities Assumed and Estimated Net Liabilities Assumed. To fund
such a purchase price adjustment and to secure the Company's indemnity
obligations under the Acquisition Agreement, a $10 million escrow account (the
"Escrow Account") will be funded out of a portion of the Base Purchase Price.
The Base Purchase Price will be subject to reduction pursuant to the
Revenue Adjustment and the Closing Date Adjustment. Under the Revenue Adjustment
formula, the Base Purchase Price will be reduced by $10 for each $1 by which the
average daily revenues of the Indirect Business (other than revenues
attributable to sales to XLSource) during the 20 business days ending on the
Friday immediately prior to closing is less than $6,730,596 (representing 90% of
the average daily revenues of the Indirect Business, other than revenues
attributable to sales to XLSource, during the five weeks ended April 5, 1997).
The maximum reduction under this formula is $5 million. Under the Closing Date
Adjustment formula, the Base Purchase Price will be reduced by $1 million for
each of the five weeks after July 18, 1997 that the closing does not occur.
Reductions under this formula are also limited to $5 million. Consequently,
under these two formulae, the Base Purchase Price may be reduced by an aggregate
of $10 million. If the closing had occurred on May 3, 1997 (the end of the first
quarter of fiscal 1997), the Base Purchase Price would have been reduced by $5
million on account of the Revenue Adjustment.
If Closing Net Liabilities Assumed exceed Estimated Net Liabilities
Assumed, the Company will owe Ingram the amount of such excess. If Estimated Net
Liabilities Assumed exceed Closing Net Liabilities Assumed, Ingram will owe the
Company the amount of such excess. If such payment is made from the Company to
Ingram, up to $8 million of such payment will be made from the Escrow Account
and, if the amount owed is in excess of $8 million (net of the amount of any
indemnity claims that Ingram may then be asserting), the remainder must be paid
directly by the Company, leaving a $2 million balance in the Escrow Account.
Alternatively, if such payment is made from Ingram to the Company, it will be
made directly by Ingram to the Company and, concurrently, all of the funds
remaining in the Escrow Account, other than an amount equal to $2 million, will
be released to the Company. The $2 million remaining in the Escrow Account
secures the obligations of the Company to indemnify Ingram for alleged
misstatements of representations or alleged breaches of warranties and covenants
contained in the Acquisition Agreement. All amounts as to which Ingram has not
asserted a claim for indemnity will be released to the Company six months
following the Closing Date. Amounts as to which Ingram has made an indemnity
claim within such six-month period will be released from time to time to the
Company or Ingram promptly after a final determination as to the propriety and
amount of the claim has been made.
If the closing of the Sale of the Indirect Business had occurred on May
3, 1997, the reduction in the Base Purchase Price on account of the Revenue
Adjustment formula would have been the full $5 million, and the amount by which
Closing Net Liabilities Assumed would have exceeded the $73 million adjusted
Base Purchase Price would have been approximately $4.3 million.
In the ordinary course of business, the Indirect Business makes
intercompany sales of inventory to other divisions of the Company, thereby
creating accounts payable in favor of the Indirect Business, and the Indirect
Business has borrowed funds for working capital and other purposes from the
Company, thereby creating accounts receivable in favor of the Company. These
transactions occur and are calculated on a daily basis. The Acquisition
Agreement requires the Company to cause the amount of receivables owing to it by
the Indirect Business to exceed
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by at least $10 million the amount of payables owing by the Company to the
Indirect Business (such amount is herein referred to as the "Excess Amount").
The Company believes that it is able to manage its purchases of inventory from
the Indirect Business and the borrowings by the Indirect Business from the
Company so as to cause the Excess Amount to be at least $10 million. The
Acquisition Agreement further requires the Company to contribute to the Indirect
Business, immediately prior to the closing, an amount equal to the amount by
which Estimated Net Liabilities Assumed exceeds the Base Purchase Price, as
adjusted pursuant to the two formulae summarized above. The purpose of the
Excess Amount, which has no effect on the adjusted Base Purchase Price, is to
fund the Escrow Account. The Excess Amount is to be settled at closing by
payment of $10 million to the Escrow Account by Ingram, and by payment of any
remaining balance to the Company. If the Company were not successful in so
managing the accounts to achieve at least a $10 million Excess Amount, the
Company would be required to fund the Escrow Account at closing from other
sources.
Representations and Warranties. In the Acquisition Agreement, the
Company makes customary representations and warranties to Ingram, including
representations and warranties as to: (i) corporate existence and power; (ii)
corporate authorization; (iii) governmental authorization; (iv)
noncontravention; (v) consents required to consummate the Sale of the Indirect
Business; (vi) capitalization of the Indirect Business Companies; (vii)
ownership of the shares of the Indirect Business Companies and the assets to be
transferred; (viii) the Indirect Business's financial statements; (ix) the
absence of certain changes in the Indirect Business; (x) the absence of
undisclosed material liabilities; (xi) intercompany accounts; (xii) material
contracts; (xiii) litigation; (xiv) compliance with laws and court orders; (xv)
properties; (xvi) intellectual property; (xvii) insurance coverage; (xviii)
licenses and permits; (xix) inventory; (xx) receivables; (xxi) product liability
and product warranties; (xxii) employees; (xxiii) labor matters; (xxiv)
environmental matters; (xxv) bank accounts; (xxvi) suppliers and licensors;
(xxvii) reseller loans; (xxviii) the Company's proxy materials; (xxix) taxes;
and (xxx) employee benefits. Additionally, XLSource makes customary
representations and warranties to Ingram, including representations and
warranties as to: (i) corporate existence and power; (ii) corporate
authorization; (iii) government authorization; and (iv) noncontravention.
Ingram also makes customary representations and warranties to the
Company, including representations and warranties as to: (i) corporate existence
and power, (ii) corporate authorization, (iii) governmental authorization, (iv)
noncontravention and (v) litigation. In addition, Ingram makes representations
and warranties that it has sufficient funds to pay the Base Purchase Price and
that it is purchasing the shares of the Indirect Business Companies for its own
account and not with a view toward any distribution thereof.
Covenants. The Acquisition Agreement provides that the Company comply
with certain covenants during the period between execution of the Acquisition
Agreement on April 29, 1997 and the Closing Date (the "Pre-Closing Period") and
following the closing. Among such covenants, during the Pre-Closing Period (and,
in the case of the covenant in clause (iv) below, after the closing), the
Company must: (i) generally cause the business of the Indirect Business
Companies to be conducted in the ordinary course consistent with past practice
and use commercially reasonable efforts to preserve intact its business
organizations, relationships with third parties and keep available the services
of its present officers and employees; (ii) afford Ingram access to its books
and records; (iii) use its best efforts to obtain the return of information
provided to third parties in discussions relating to the purchase of the
Indirect Business; and (iv) hold confidential all documents and information
related to the Indirect Business. The Company must also make certain transfers
of its subsidiary businesses to separate those assets which are used in the
Indirect Business from those which will remain with the Company. The Acquisition
Agreement also requires the Company not to solicit or encourage proposals from
third parties to purchase the Indirect Business or engage in negotiations with
third parties concerning the sale of all or a material portion of the Indirect
Business, except to the extent required by fiduciary duties applicable to the
Board. In the event of a sale of all or a part of XLSource to a party not
approved by Ingram, the Acquisition Agreement requires that XLSource pay to
Ingram an amount equal to 1.5% of the present value of the minimum obligation
under the Supply Agreement then remaining multiplied by the portion of XLSource
transferred (based on revenues of XLSource). See "Volume Purchase Agreement"
below.
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Non-Competition. For a period of three years from the Closing Date,
neither the Company nor any of its remaining subsidiaries may engage, either
directly or indirectly, within the United States, Canada and Mexico in any
business ("Competitive Business") that: (i) distributes and sells to resellers
(both retail and otherwise) branded microcomputers and related equipment; or
(ii) in connection with the distribution and sale to resellers (both retail and
otherwise) of branded microcomputers and related equipment (a) offers to such
resellers value-added services, including but not limited to product selection,
technical support, cost-efficient marketing programs and promotions, national
service network, SKU-able services, financing programs and product delivery
services and (b) performs "built to order" configuring of branded microcomputers
and related equipment and light manufacturing in connection therewith. However,
the definition of Competitive Business excludes: (i) making isolated sales of
branded microcomputers and related equipment to such resellers to the extent and
in the circumstances such sales are currently made by the Company's
subsidiaries; (ii) providing information technology services in the areas of (a)
internetworking (the consulting, design and implementation of local area
networks and wide area networks), (b) applications development (the
customization and adaption of proven software as well as training and education
to support applications and internetworking solutions), (c) telecommunications
(including data, video and voice transmission) or (d) managed services (such as
install, add, move and change service, break fix, help desk, network management
and asset management); (iii) manufacturing, assembling or configuring
microcomputers if the Supply Agreement referenced below has been terminated due
to Ingram's breach of the performance standards contained therein; (iv)
acquiring a diversified company having not more than 5% of its revenues (based
on its latest published annual audited financial statements) attributable to a
Competitive Business; or (v) owning, individually or in the aggregate, less than
1% of a company listed or traded on a national securities exchange or in an
over-the-counter securities market.
The Company has also agreed not to solicit or employ, without Ingram's
consent, any of the employees of the Indirect Business for a period of three
years from the Closing Date.
Guarantees. Under the Acquisition Agreement, the Company has guaranteed
to Ingram performance by XLSource of its obligations under the Supply Agreement.
The Company's obligations under this guarantee may be subject to reduction upon
a sale of all or a portion of XLSource to a person approved by Ingram, based
upon the percentage of XLSource sold. In addition, XLSource has guaranteed the
obligations of the Company under the Acquisition Agreement. The XLSource
guarantee will terminate if, prior to closing, the Company obtains a letter of
credit for Ingram's benefit in the amount of $7.5 million. The letter of credit,
if obtained, will collateralize the XLSource guarantee of the Company's
obligations and, accordingly, it will not increase the obligations of the
Company and XLSource. Such letter of credit must remain in effect until the
third anniversary of the Closing Date or the second anniversary of the Closing
Date if, prior to such second anniversary, all of the equity securities of
XLSource have been sold by the Company in one or more transactions. In
connection with a sale of all or a portion of XLSource, prior to termination of
the guarantee obligations of XLSource, the Company will be required to segregate
an amount in cash equal to a portion of the sale proceeds in an account to
secure the obligations of the Company and XLSource under the Acquisition
Agreement and the Supply Agreement. The portion of proceeds required to be
segregated will be equal to the product of $7.5 million multiplied by the
percentage of XLSource so sold. In lieu of segregating sales proceeds, the
Company may obtain a letter of credit for Ingram's benefit in an amount equal to
the amount of proceeds otherwise required to be segregated.
Employee Related Matters. During the Pre-Closing Period, Ingram will
have an opportunity to interview the employees of the Company employed by the
Indirect Business for the purpose of determining whom it desires to employ after
the Closing Date. Prior to the Closing Date, Ingram will provide the Company a
list of those persons who have accepted an offer to become Ingram employees and
who will begin working for Ingram after the Closing Date (the "Transferred
Employees") and those persons Ingram desires to be available to provide
transitional services after the Closing Date for a period of up to 90 days
("Seconded Employees"). At closing, the Company will transfer all of its
employees employed in the Indirect Business to a subsidiary of the Company. The
Seconded Employees may provide certain transitional services to Ingram at
Ingram's expense during the transition period. Further, during such time, Ingram
may hire any of such Seconded Employees ("Assumed Employees").
17
<PAGE>
The Company will retain all liabilities associated with its employees
arising from their employment with the Company, including any liabilities under
any employee benefits plans or arrangements with its employees employed in the
Indirect Business, except as follows: (i) Ingram will reimburse the Company in
respect to any employees employed by the Company immediately prior to the
Closing Date for actual severance payments triggered on or after the Closing
Date and all actual costs incurred by the Company in connection with the Worker
Adjustment and Retraining Notification Act of 1988 for the period beginning on
the Closing Date and ending 65 days following the date of the provision of
notice by Ingram to the Company to the effect that Ingram no longer requires the
services of the transitional employees; and (ii) Ingram will reimburse the
Company in respect of certain identified employees of the Company who will
receive severance payments pursuant to severance or employment agreements
whether such employees are terminated by the Company before or after the Closing
Date.
All service of Transferred Employees and Assumed Employees with the
Company will be counted for purposes of determining any period of eligibility to
participate in or to vest in, benefits under Ingram's benefits plans to the same
extent such service was counted under similar Company plans.
Required Consents and Approvals. The Acquisition Agreement provides
that the consummation of the transaction thereunder is subject to the expiration
or termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"). The applicable waiting period under
the HSR Act expired on May 14, 1997.
The Acquisition Agreement also provides that the Company will convene a
meeting of its shareholders as soon as reasonably practicable to consider and
vote upon the approval of the Sale of the Indirect Business. The Acquisition
Agreement further provides that the Board will recommend to the shareholders,
subject to fiduciary duties under applicable law, approval of the Sale of the
Indirect Business, and the Company will use its best efforts to solicit from
shareholders of the Company proxies in favor of such approval.
Other Conditions to Closing. In addition to the required consents and
approvals described above, the obligations of the Company and Ingram to
consummate the Sale of the Indirect Business are subject to the satisfaction or
waiver of the following conditions: (i) no provision of any applicable law or
regulation and no judgment, injunction or order will prohibit the consummation
of the Sale of the Indirect Business; and (ii) all actions by any governmental
entity required to permit the consummation of the Sale of the Indirect Business
will have been taken.
The obligation of Ingram to consummate the Sale of the Indirect
Business is further subject to the satisfaction or waiver of the following
conditions, among others: (i) the Company and XLSource must have performed their
obligations under all covenants required to be performed prior to the Closing
Date; (ii) the representations and warranties of the Company and XLSource
contained in the Acquisition Agreement must be true at and as of the Closing
Date; (iii) the absence of certain litigation; (iv) the absence of any statute,
rule, regulation, injunction or order by any court or governmental authority
that could prohibit the operation by Ingram of any material portion of the
Indirect Business or limit Ingram from exercising ownership rights to the
Indirect Business; (v) receipt by Ingram of legal opinions of the Company's
counsel in form and substance reasonably satisfactory to Ingram; (vi) receipt by
the Company of all required consents under contracts or other agreements; (vii)
the Company will have made a capital contribution to the Indirect Business
Companies in an amount at least equal to the amount by which the Estimated Net
Liabilities Assumed are greater than the Base Purchase Price; (viii) XLSource
will have executed the Supply Agreement and the Company shall have executed the
agreement relating to the Escrow Account (the "Escrow Agreement"); (ix) Ingram
will have received from XLSource confirmation that XLSource has entered into a
floor plan financing arrangement reasonably satisfactory to Ingram; (x) Ingram
will have received confirmation from each of the Company's principal vendors
that after closing such principal vendor will continue to supply Ingram, the
Indirect Business and the Indirect Business Companies on terms and conditions
similar to those under which the Indirect Business is currently supplied; (xi)
the Company will have obtained from each of the Company's lenders an
unconditional release of the obligations of the Indirect Business Companies
under such credit facilities; and (xii) either all of the capital stock of
certain of the Company's remaining subsidiaries (not among the Indirect Business
Companies) will have been transferred to XLSource or the Acquisition Agreement
and
18
<PAGE>
the Supply Agreement will be amended to require such parties to guaranty the
obligations of the Company and XLSource under the Acquisition Agreement.
Additionally, the obligation of the Company to consummate the Sale of
the Indirect Business is further subject to the satisfaction or waiver of the
following conditions, among others: (i) Ingram must have performed its
obligations under all covenants required to be performed prior to the Closing
Date; (ii) the representations and warranties of Ingram contained in the
Acquisition Agreement must be true at and as of the Closing Date; (iii) the
Company must have received all consents, authorizations or approvals from
governmental agencies required to consummate the Sale of the Indirect Business;
(iv) the Company must have received legal opinions of Ingram's counsel in form
and substance reasonably satisfactory to the Company; and (v) Ingram must have
executed the Escrow Agreement and Supply Agreement.
Survival and Indemnification. The representation and warranties of the
parties set forth in the Acquisition Agreement will survive two years from the
Closing Date, except those regarding taxes and environmental matters (which
survive through six months after the end of the applicable statute of
limitations), ownership of the shares of the Indirect Business Companies sold
(which survive indefinitely) and saleability and condition of inventory (which
do not survive the closing). The covenants and agreements contained in the
Acquisition Agreement will survive in accordance with their terms (or if no
survival period, until six months following the end of the applicable statute of
limitations).
The Company will indemnify Ingram and its affiliates for any damage,
loss, liability or expense (including reasonable investigation and attorneys'
fees) incurred or suffered by Ingram arising out of any misrepresentation or
breach of warranty or any failure to comply with covenants contained in the
Acquisition Agreement. The Company is not required to indemnify Ingram for any
such claims arising out of any misrepresentations or breaches of warranties
until the aggregate damages and expenses paid or incurred by Ingram in
connection with such claims arising out of any misrepresentations or breaches of
warranties exceed $500,000 and then only for the amount of such excess. The
Company's maximum indemnification obligation (other than for taxes) is $10
million. The Company is also required to indemnify Ingram for any losses arising
from existing litigation and from EEOC-related matters at the Company's Memphis
warehouse (other than those losses arising post-closing due to Ingram's actions)
and from any liabilities in connection with Ingram's assumption of certain
contracts which contain limited non-competition provisions.
Ingram will indemnify the Company and its affiliates for any damage,
loss, liability or expense (including reasonable investigation and attorneys'
fees) incurred or suffered by the Company arising out of any misrepresentation
or breach of warranty or any failure to comply with covenants contained in the
Acquisition Agreement. This indemnity contains a deductible and a limitation
which are the same as those applicable to the Company's indemnity obligations.
In addition, Ingram will indemnify the Company and its affiliates from any
damage, loss, liability or expense arising out of or relating to certain
identified liabilities, agreements and guarantees of the Company relating to the
Indirect Business, and any actions, suits, investigations or proceedings arising
out of any claim made by an individual who works or has worked at the Indirect
Business' facilities in Denver, Colorado, alleging discrimination or similar
charges either in connection with the designation of individuals as Transferred
Employees, Seconded Employees and Assumed Employees or in connection with such
individual's employment by or provision of services to Ingram after the Closing
Date.
Termination Provisions; Break-up Fees. The Acquisition Agreement may be
terminated prior to closing at any time: (i) by mutual written agreement of the
Company and Ingram; (ii) by Ingram if the closing does not occur before August
22, 1997; (iii) by the Company if the closing does not occur on or before
September 15, 1997; (iv) by either party if there exists any law or regulation
that makes consummation of the Sale of the Indirect Business illegal or
otherwise prohibited or if consummation of the Sale of the Indirect Business
would violate any nonappealable final order, decree or judgment of any court or
governmental authority; (v) by Ingram if it shall have received any formal
communication from the Department of Justice or the Federal Trade Commission
indicating that such entity has authorized the institution of litigation seeking
an order, decree or injunction to restrain or prohibit the consummation of the
Sale of the Indirect Business or the ownership or operation by Ingram of the
Indirect Business;
19
<PAGE>
(vi) by either the Company or Ingram if (a) the Company has entered into or
announced its intention to enter into an agreement to sell the Indirect Business
to a third party, (b) the Company's Board of Directors has withdrawn or
materially modified its approval or recommendation of the Sale of the Indirect
Business or the Acquisition Agreement, (c) prior to mailing a proxy statement to
its shareholders, the Company has received an acquisition proposal which the
Board of the Company has determined is more favorable to the Company's
shareholders than the Sale of the Indirect Business or (d) the opinion of Legg
Mason as to fairness of the Sale of the Indirect Business has been revoked;
(vii) after June 27, 1997, by the Company if the Estimated Net Liabilities
Assumed exceed the Base Purchase Price and if the amount of the excess
(excluding the impact of any retention or severance payments and any interest
expense paid or accrued after April 5, 1997 and prior to giving effect to any
capital contribution to the Indirect Business Companies made by the Company) is
greater than the sum of (a) $10 million, (b) $1 million for each Monday during
the period commencing on June 30, 1997 and ending on July 28, 1997 prior to any
termination of the Acquisition Agreement and (c) $2 million for each Monday
after July 28, 1997 prior to the Closing Date; and (viii) after May 15, 1997, by
Ingram if the Company has not obtained an irrevocable letter of credit in the
amount of $5 million to secure the Company's obligation to pay any break-up fee
as more fully described below. The letter of credit was obtained on May 14,
1997.
If the Acquisition Agreement is terminated for certain reasons, the
Company may be required to pay Ingram a break-up fee. If the Acquisition
Agreement is terminated because of a failure to obtain shareholder approval, the
Company must pay Ingram a break-up fee of $2.5 million. If the Acquisition
Agreement is terminated due to any of the conditions described in clause (vi),
(vii) or (viii) of the prior paragraph, the break-up fee is $5 million.
Expenses. The Acquisition Agreement provides that each party will pay
all fees and expenses incurred by it (including the fees and expenses of counsel
and investment advisors) in connection with the negotiation, execution, delivery
and performance of the Acquisition Agreement and the Sale of the Indirect
Business, except as described in the preceding paragraph.
Volume Purchase Agreement
In connection with the Sale of the Indirect Business, XLSource has
entered into a Volume Purchase Agreement (the "Supply Agreement") with Ingram
dated April 29, 1997 pursuant to which XLSource is required to purchase 100% of
its requirement of products available from Ingram up to a minimum of $1.8
billion in products from Ingram. The Supply Agreement is for an initial term of
up to three years and requires minimum purchases of $600 million in products
annually. In any year in which XLSource purchases less than the minimum volume,
XLSource can either pay Ingram liquidated damages in an amount equal to 1.5% of
the short-fall in volume or extend the term of the Supply Agreement and defer
the amount of the short-fall multiplied by a factor based on the year in which
the short-fall occurred into a fourth or fifth year. The Company has guaranteed
to Ingram performance by XLSource of its obligations under the Supply Agreement.
The Company's obligations under this guarantee are subject to reduction upon a
sale of all or a portion of XLSource to a person approved by Ingram. The amount
of the reduction will be based upon the percentage of XLSource sold. The Supply
Agreement was viewed by both parties as a beneficial aspect of the Sale of the
Indirect Business, although no specific value was assigned to it in the
negotiation of the purchase price.
Interests of Certain Persons in the Sale of the Indirect Business
In considering the Sale of the Indirect Business, shareholders should
be aware that certain directors and an executive officer of the Company have
interests in the Sale of the Indirect Business, as described below.
Pursuant to an agreement with the Company executed in April 1997,
Timothy D. Cook, the Chief Operating Officer of the Indirect Business and a
Senior Vice President of the Company, earned a $100,000 bonus upon the execution
of the Acquisition Agreement. In addition, Mr. Cook will earn an additional
$100,000 bonus if the Sale of the Indirect Business is completed before October
31, 1997.
20
<PAGE>
Arnold S. Hoffman, a member of the Board of Directors and shareholder,
is a Senior Managing Director of Legg Mason. Legg Mason has provided financial
advisory services to the Company and rendered the fairness opinion to the Board
in connection with the proposed Sale of the Indirect Business. See "--Opinion of
Financial Advisor."
Barry M. Abelson, a member of the Board of Directors and shareholder,
is a partner in the law firm of Pepper, Hamilton & Scheetz LLP, which provides
legal services to the Company, including legal services relating to the Sale of
the Indirect Business.
Shareholder Approval
The Company is a Pennsylvania corporation and, under Pennsylvania law,
a sale of all or substantially all of the Company's assets requires shareholder
approval by the affirmative vote of a majority of the votes cast by all
shareholders entitled to vote thereon. The Sale of the Indirect Business may
constitute the sale of all or substantially all of the Company's assets under
applicable Pennsylvania law. Accordingly, the Sale of the Indirect Business will
be concluded only if it receives the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote thereon, voting in person or by proxy
at the Meeting. Approval at the Meeting by the shareholders of the Acquisition
Agreement and the transactions contemplated thereby will also authorize the
Company, without further shareholder approval and without further solicitation
of proxies from shareholders, to make future modifications and amendments to the
terms and conditions of the Sale of the Indirect Business which the Company
determines to be necessary or appropriate. Except as discussed below, there are
no limitations on the Company's ability to alter or change the amount or type of
consideration to be received or the assets to be sold. However, in the event of
any material amendment or modification in the amount or type of consideration to
be received or the assets to be sold by the Company under the Acquisition
Agreement that is made prior to the Meeting, the Company will furnish
shareholders with written notice of the material terms thereof. No material
amendment or modification in the amount or type of consideration to be received
or the assets to be sold by the Company under the Acquisition Agreement will be
made after the Meeting without obtaining the approval of the shareholders of the
Company. The Company is not currently aware of any such amendments or
modifications that are expected to occur respecting the Sale of the Indirect
Business.
If the shareholders do not approve the Sale of the Indirect Business
and adoption of the Acquisition Agreement by the required vote, the Company will
terminate the Acquisition Agreement and be required to pay Ingram a $2.5 million
fee upon such termination. In addition, the Board of Directors will explore
other alternatives available to the Company. Such alternatives could include
continuing or discontinuing the operation of the Indirect Business or attempting
to locate another purchaser for all or a portion of the Indirect Business.
Rights of Dissenting Shareholders
Dissenters' rights of appraisal will not be available under
Pennsylvania law in connection with the Sale of the Indirect Business.
Accounting Treatment
The Sale of the Indirect Business will be considered a sale by the
Company, for financial statement purposes and will be accounted for in
accordance with APB 30. As such, the Indirect Business will be classified in the
Company's financial statements as a Discontinued Operation. The Company believes
that it will realize a gain on the Sale of the Indirect Business.
21
<PAGE>
Federal Income Tax Consequences
General. The following discussion is a general summary of the federal
income tax consequences that will result from the Sale of the Indirect Business.
This summary does not discuss state or local taxation, or all aspects of federal
taxation that may be relevant to the Sale of the Indirect Business and is not
intended as tax advice.
Consequences to the Company. On account of an election for federal
income taxes which will be made jointly by the Company and Ingram, the Sale of
the Indirect Business will be treated as though the assets of the Indirect
Business were sold to Ingram. The sale will be a taxable disposition for federal
income tax purposes. It is expected that a gain will be realized for federal
income tax purposes. It is further expected that the Sale of the Indirect
Business will not result in the payment of any significant federal income taxes
as a consequence of the Company's current and accumulated net operating losses.
Consequences to Shareholders. The Sale of the Indirect Business will
not result in any independent federal income tax consequences to the
shareholders of the Company.
Regulatory Compliance
The Sale of the Indirect Business is subject to review by the Federal
Trade Commission and the Antitrust Division of the Department of Justice under
the HSR Act. The applicable waiting period under the HSR Act expired on May 14,
1997.
22
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data for the Company.
The historical financial data for the five years ended February 1, 1997 are
derived from the Company's audited consolidated financial statements. The
unaudited historical financial data for the quarters ended May 3, 1997 and May
4, 1996 are derived from the Company's unaudited consolidated financial
statements. The pro forma financial data reflects the estimated results and
financial position of the Company as if the Sale of the Indirect Business
occurred as described under "PRO FORMA FINANCIAL STATEMENTS." These tables
should be read in conjunction with the financial statements and other
information included in this document (See "APPENDICES B-1 and B-2") and the pro
forma financial statements included elsewhere herein (see "PRO FORMA FINANCIAL
STATEMENTS"). Pro forma financial information is not necessarily indicative of
the results of operations that would have occurred had the Sale of the Indirect
Business taken place at the beginning of the periods presented or of future
results of operations. All amounts are in thousands, except share-related data.
STATEMENT OF OPERATIONS DATA (1)
<TABLE>
<CAPTION>
Quarter Quarter Fiscal year ended
ended ended --------------------------------------------------------------
May 3, May 4, February 1, February 3, January 28, January 29, January 30,
1997 1996 1997 1996 1995 1994 1993
----------- --------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 668,256 $877,939 $ 3,346,557 $3,588,099 $ 3,208,083 $ 2,646,102 $ 2,016,686
Income (loss) from continuing
operations applicable
to common shareholders (12,114) (3,194) (104,174) (19,488) 8,060 41,117 22,134
Income (loss) per common share
from continuing operations
applicable to common shareholders $ (0.34) $ (0.09) $ (2.98) $ (0.59) $ 0.23 $ 1.13 $ 0.58
Cash dividends declared per share
of Common Stock $ - $ - $ - $ 0.30 $ 0.38 $ 2.24 $ -
</TABLE>
PRO FORMA STATEMENT OF OPERATIONS DATA (1)
<TABLE>
<CAPTION>
Quarter Quarter Fiscal year ended
ended ended ------------------------------------------
May 3, May 4, February 1, February 3, January 28,
1997 1996 1997 1996 1995
------------ -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 199,452 $ 187,979 $ 779,642 $ 469,266 $ 10,357
Loss from continuing operations
applicable to common shareholders (5,859) (3,845) (44,340) (22,557) (22,649)
Loss per common share from continuing operations
applicable to common shareholders $ (0.16) $ (0.11) $ (1.27) $ (0.69) $ (0.65)
Cash dividends declared per share of Common Stock $ - $ - $ - $ 0.30 $ 0.38
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
Pro Forma
May 3, May 3, February 1, February 3, January 28, January 29, January 30,
1997 1997 1997 1996 1995 1994 1993
------------ ------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $ 312,042 $610,860 $ 699,081 $ 839,349 $ 670,774 $ 577,011 $ 630,332
Long-term debt reclassified as current - 55,000 55,000 - - - -
Long-term debt 60,163 8,051 3,496 80,025 - - 97
Total shareholders' equity 131,924 123,672 135,471 178,036 167,484 218,850 280,527
Book value per common share $ 3.62 $ 3.4 $ 3.76 $ 5.15 $ 5.37 $ 6.23 $ 7.75
</TABLE>
(1) See Note 3 to the Consolidated Financial Statements in the Company's Form
10-K for the fiscal year ended February 1, 1997 for information regarding
the acquisition of The Future Now, Inc. on August 17, 1995 and the
acquisition of five branch locations from The Future Now, Inc. on December
30, 1994.
23
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following unaudited Pro Forma Balance Sheet as of May 3, 1997, and
the Pro Forma Statements of Operations for the fiscal quarters ended May 3, 1997
and May 4, 1996, and the fiscal years ended February 1, 1997, February 3, 1996,
and January 28, 1995, are presented to give effect to the Sale of the Indirect
Business. The Sale of the Indirect Business will be accounted for in accordance
with APB 30. As such, the Indirect Business will be classified as a Discontinued
Operation.
Historical financial data used to prepare the pro forma financial
statements were derived from the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for fiscal 1996, which is
attached to this Proxy Statement as Appendix B-1 and made a part hereof, and the
unaudited consolidated financial statements included in the Company's quarterly
report on Form 10-Q for the first quarter of fiscal 1997, which is attached to
this Proxy Statement as Appendix B-2 and made a part hereof. See "Additional
Company Information." These pro forma financial statements should be read in
conjunction with such historical financial statements.
The pro forma adjustments reflected herein are based on available
information and certain assumptions that the Company's management believes are
reasonable. Pro forma adjustments made in the Pro Forma Balance Sheet assume
that the Sale of the Indirect Business was consummated on May 3, 1997 (based
upon a purchase price of $78 million reduced by the $5 million Revenue
Adjustment, and as may be further reduced by the Closing Date Adjustment), and
do not reflect the impact of the Indirect Business' operating results or changes
in balance sheet amounts subsequent to May 3, 1997. The pro forma adjustments to
the Pro Forma Statement of Operations assume that the Sale of the Indirect
Business was consummated on January 29, 1994.
The Pro Forma Balance Sheet and Pro Forma Statements of Operations are
based on assumptions and approximations and, therefore, do not reflect in
precise numerical terms the impact of the transaction on the historical
financial statements. In addition, such pro forma financial statements should
not be used as a basis for forecasting the future operations of the Company.
24
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Pro Forma Consolidated Balance Sheet
As of May 3, 1997
(in thousands, unaudited)
<TABLE>
<CAPTION>
Pro forma
adjustments
As Increase
reported (decrease) Pro forma
------------------ ------------------ --------------------
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 37,997 $ (4,297)(a) $ 33,700
Escrow receivable - 10,000 (b) 10,000
Accounts receivable, net 139,673 (9,855)(c) 129,818
Inventory 240,228 (231,285)(c) 8,943
Prepaid expenses and other current assets 4,240 (633)(c) 3,607
Deferred income taxes 11,861 (11,861)(c)(f) 0
------------------ ------------------ --------------------
Total current assets 433,999 (247,931) 186,068
Property and equipment 58,409 (43,894)(c) 14,515
Intangible assets, primarily goodwill, net 90,653 90,653
Other assets 27,799 (6,993)(c) 20,806
------------------ ------------------ --------------------
Total assets $ 610,860 $ (298,818) $ 312,042
================== ================== ====================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 34,135 $ (2,811)(c) $ 31,324
Accounts payable 325,032 (289,705)(c) 35,327
Accrued liabilities 42,089 (10,479)(d) 31,610
Long-term debt reclassified as current 55,000 (55,000)(e) 0
------------------ ------------------ --------------------
Total current liabilities 456,256 (357,995) 98,261
------------------ ------------------ --------------------
Long-term debt 8,051 52,112 (e) 60,163
Other long-term liabilities 12,238 (1,187)(c) 11,051
Minority interest 10,643 10,643
Shareholders' equity:
Preferred stock 700 700
Common stock 417 417
Additional paid-in capital 285,027 285,027
Treasury stock (67,311) (67,311)
Retained earnings (deficit) (95,161) 8,252(f) (86,909)
------------------ ------------------ --------------------
Total shareholders' equity 123,672 8,252 131,924
------------------ ------------------ --------------------
Total liabilities and shareholders' equity $ 610,860 $ (298,818) $ 312,042
================== ================== ====================
</TABLE>
See accompanying notes to the pro forma financial statements.
25
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the quarter ended May 3, 1997
(in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Deduct
Sale of the
As Indirect
reported Business (g) Pro forma
----------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 668,256 $ 468,804 $ 199,452
Cost of goods sold 635,596 460,997 174,599
----------------- -------------- --------------
Gross profit 32,660 7,807 24,853
----------------- -------------- --------------
Operating expenses:
Selling, general and administrative expenses 44,456 16,877 (h) 27,579
Amortization of intangibles, primarily goodwill 1,261 1,261
----------------- -------------- --------------
Total operating expenses 45,717 16,877 28,840
----------------- -------------- --------------
Loss from operations (13,057) (9,070) (3,987)
Other income (expense):
Investment and other income (expense), net 170 104 66
Interest expense (3,805) (2,191) (i) (1,614)
----------------- -------------- --------------
Loss before income tax benefit and minority interest (16,692) (11,157) (5,535)
Income tax benefit (4,902) (4,902) 0
----------------- -------------- --------------
Loss before minority interest (11,790) (6,255) (5,535)
Minority interest (99) (99)
----------------- -------------- --------------
Net loss (11,889) (6,255) (5,634)
Preferred stock dividend 225 225
----------------- -------------- --------------
Net loss applicable to common shareholders $ (12,114) $ (6,255) $ (5,859)(j)
================= ============== ==============
Loss per share applicable to common shareholders $ (0.34) $ (0.16)
================= ==============
Weighted average number of common shares 36,066 36,066
</TABLE>
See accompanying notes to the pro forma financial statements.
26
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the quarter ended May 4, 1996
(in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Deduct
Sale of the
As Indirect
reported Business (g) Pro forma
----------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 877,939 $ 689,960 $ 187,979
Cost of goods sold 832,355 666,832 165,523
----------------- -------------- --------------
Gross profit 45,584 23,128 22,456
----------------- -------------- --------------
Operating expenses:
Selling, general and administrative expenses 42,935 19,555(h) 23,380
Amortization of intangibles, primarily goodwill 2,400 1,117 1,283
----------------- -------------- --------------
Total operating expenses 45,335 20,672 24,663
----------------- -------------- --------------
Income (loss) from operations 249 2,456 (2,207)
Other income (expense):
Investment and other income (expense), net (105) (115) 10
Interest expense (3,867) (512)(i) (3,355)
----------------- -------------- --------------
Income (loss) before income tax provision (benefit) (3,723) 1,829 (5,552)
Income tax provision (benefit) (529) 1,178 (1,707)
----------------- -------------- --------------
Net income (loss) $ (3,194) $ 651 $ (3,845)(j)
================= ============== ==============
Loss per share $ (0.09) $ (0.11)
================= ==============
Weighted average number of common shares 34,537 34,537
</TABLE>
See accompanying notes to the pro forma financial statements.
27
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the year ended February 1, 1997
(in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Deduct
Sale of the
As Indirect
reported Business (g) Pro forma
----------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 3,346,557 $ 2,566,915 $ 779,642
Cost of goods sold 3,190,683 2,485,757 704,926
----------------- -------------- --------------
Gross profit 155,874 81,158 74,716
----------------- -------------- --------------
Operating expenses:
Selling, general and administrative expenses 174,230 72,731(h) 101,499
Amortization of intangibles, primarily goodwill 8,311 3,351 4,960
Branch closure costs 9,790 9,790
Impairment losses 61,576 61,576 0
----------------- -------------- --------------
Total operating expenses 253,907 137,658 116,249
----------------- -------------- --------------
Loss from operations (98,033) (56,500) (41,533)
Other income (expense):
Investment and other income (expense), net (451) (651) 200
Interest expense (12,018) (3,306)(i) (8,712)
----------------- -------------- --------------
Loss before income tax benefit and minority interest (110,502) (60,457) (50,045)
Income tax benefit (6,518) (623) (5,895)
----------------- -------------- --------------
Loss before minority interest (103,984) (59,834) (44,150)
Minority interest (70) (70)
----------------- -------------- --------------
Net loss (104,054) (59,834) (44,220)
Preferred stock dividend 120 120
----------------- -------------- --------------
Net loss applicable to common shareholders $ (104,174) $ (59,834) $ (44,340)
================= ============== ==============
Loss per share applicable to common shareholders $ (2.98) $ (1.27)
================= ==============
Weighted average number of common shares 34,988 34,988
</TABLE>
See accompanying notes to the pro forma financial statements.
28
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the year ended February 3, 1996
(in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Deduct
Sale of the
As Indirect
reported Business (g) Pro forma
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 3,588,099 $ 3,118,833 $ 469,266
Cost of goods sold 3,432,262 3,015,380 416,882
----------- ----------- -----------
Gross profit 155,837 103,453 52,384
----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 154,403 90,120(h) 64,283
Amortization of intangibles, primarily goodwill 6,957 4,657 2,300
----------- ----------- -----------
Total operating expenses 161,360 94,777 66,583
----------- ----------- -----------
Income (loss) from operations (5,523) 8,676 (14,199)
Other income (expense):
Investment and other income (expense), net 3,679 1,580 2,099
Interest expense (8,331) (2,493)(i) (5,838)
----------- ----------- -----------
Income (loss) before income tax provision
(benefit) and equity in loss of affiliate (10,175) 7,763 (17,938)
Income tax provision (benefit) (1,449) 4,694 (6,143)
----------- ----------- -----------
Income (loss) before equity in loss of affiliate (8,726) 3,069 (11,795)
Equity in loss of affiliate (10,762) (10,762)
----------- ----------- -----------
Net income (loss) $ (19,488) $ 3,069 $ (22,557)(j)
=========== =========== ===========
Loss per common share $ (0.59) $ (0.69)
=========== ===========
Weighted average number of common shares 32,794 32,794
</TABLE>
See accompanying notes to the pro forma financial statements.
29
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the year ended January 28, 1995
(in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Deduct
Sale of the
As Indirect
reported Business (g) Pro forma
---------------- --------------- ----------------
<S> <C> <C> <C>
Revenues $ 3,208,083 $ 3,197,726 $ 10,357
Cost of goods sold 3,075,342 3,066,425 8,917
----------- ----------- -----------
Gross profit 132,741 131,301 1,440
----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 96,193 75,342(h) 20,851
Amortization of intangibles, primarily goodwill 4,758 4,720 38
----------- ----------- -----------
Total operating expenses 100,951 80,062 20,889
----------- ----------- -----------
Income (loss) from operations 31,790 51,239 (19,449)
Other income (expense):
Investment and other income (expense), net 4,374 1,066 3,308
Interest expense (1,238) (1,238)(i) 0
----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes
and equity in loss of affiliate 34,926 51,067 (16,141)
Provision (benefit) for income taxes 13,853 20,358 (6,505)
----------- ----------- -----------
Income (loss) before equity in loss of affiliate 21,073 30,709 (9,636)
Equity in loss of affiliate (13,013) (13,013)
----------- ----------- -----------
Net income (loss) $ 8,060 $ 30,709 $ (22,649)(j)
=========== =========== ===========
Income (loss) per common share $ 0.23 $ (0.65)
=========== ===========
Weighted average number of common shares 34,848 34,848
</TABLE>
See accompanying notes to the pro forma financial statements.
30
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Notes to the Pro Forma Consolidated Financial Statements
(unaudited)
Notes to the Pro Forma Consolidated Balance Sheet
(a) Amount is based upon the Estimated Net Liabilities Assumed, on May 3, 1997,
of $77,297,000 exceeding the assumed purchase price of $73,000,000
(computed in accordance with terms of the Acquisition Agreement and reduced
as a result of the Revenue Adjustment). The purchase price is also subject
to reduction depending on the date of closing.
(b) Reflects the escrow amount due to the Company upon settlement of any
purchase price adjustments and the Company's indemnity obligations.
(c) Represents the elimination of the Indirect Business' assets and liabilities
as a result of the sale.
(d) Includes the elimination of the Indirect Business' accrued liabilities
($12,479,000) and the accrual of transaction costs approximating
$2,000,000.
(e) Represents the reclassification of the Company's long-term debt
reclassified as current to long-term debt ($55,000,000) as a result of the
Sale of the Indirect Business, less the assumption of the Indirect
Business' long-term debt of $2,888,000 by Ingram.
(f) Represents a pre-tax gain of $13,754,000, net of transaction costs, less
taxes of $5,502,000, based on a purchase price of $73,000,000. The Pro
Forma Balance Sheet assumes that the transaction was consummated May 3,
1997, and therefore does not give effect to the Indirect Business'
operating results subsequent to that date.
Notes to the Pro Forma Consolidated Statements of Operations
(g) Represents the elimination of revenues and expenses related to the
operations of the Indirect Business.
(h) Excludes allocated corporate general and administrative expenses.
(i) Represents the elimination of interest expense incurred by the Indirect
Business.
(j) The accompanying Pro Forma Statements of Operations do not include any
non-recurring effects directly attributable to the Sale of the Indirect
Business. The Company will provide a reserve for all expected costs
associated with the Sale of the Indirect Business. Such costs are expected
to include fees paid to Legg Mason, professional fees to attorneys and
accountants, printing charges and filing fees. The amount of such costs is
estimated to total $2,000,000 and is included as a reduction in the
after-tax gain reflected in retained earnings on the Pro Forma Consolidated
Balance Sheet (see Note f to the Notes to the Pro Forma Consolidated
Balance Sheet).
31
<PAGE>
PROPOSAL NO. 2
ELECTION OF DIRECTORS
In accordance with the Company's By-laws, the Board of Directors is
classified into three classes as nearly equal in number as possible. At the
Meeting, four directors will be elected, each for a three-year term expiring at
the 2000 Annual Meeting of Shareholders. The Board of Directors has recommended
four nominees for election as directors at the Meeting. It is the intention of
the persons named in the proxy, unless otherwise directed, to vote all proxies
for the election to the Board of Directors of the nominees listed below. The
Board of Directors has no reason to believe that any of the nominees will be
unable or unwilling to be a candidate for election at the time of the Meeting.
If any nominee is unable or unwilling to serve, it is presently intended that
the proxy shall be voted for the election of a nominee who will be designated by
the Board or its Executive Committee, or the number of directors constituting
the full Board may be reduced.
The Board of Directors recommends that shareholders vote FOR the
election of each of the nominees as Directors.
Set forth below are the names of the nominees for director of the
Company to serve for a three-year term expiring at the 2000 Annual Meeting of
Shareholders, their ages, and certain other information. The Board recommends a
vote for all nominees.
Name Age Position
- ----- ----- ----------
Roger J. Fritz 68 Director
Arnold S. Hoffman 61 Director
Michael A. Norris 46 Director, President of the Company and
Chief Executive Officer of the Reseller
Network
John A. Porter 52 Director
Roger J. Fritz has been a director of the Company 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 the Company since August 1985.
In January 1992, Mr. Hoffman became a Senior Managing Director of Legg Mason
Wood Walker Incorporated, an investment banking firm ("Legg Mason"). From
September 1990 to that date, Mr. Hoffman was Chairman of the Middle Market
Group, L.P., an investment banking firm. Mr. Hoffman also serves on the Board of
Directors of SunSource L.P.
Michael A. Norris joined the Company in August 1996 as President of the
Company and Chief Executive Officer of its Reseller Network. Mr. Norris was
appointed a director of the Company in September 1996. Prior to joining the
Company, Mr. Norris held various executive positions at Compaq Computer
Corporation since July 1992, the most recent as Vice President of North American
Sales. Prior to that, Mr. Norris held the position of Executive Vice President
for Murata Business Systems from 1988 through July 1992.
John A. Porter has been a director of the Company since May 1994 and of
XLConnect since March 1996. From May 1995 to the present, Mr. Porter has served
as Chairman of the Board of Directors and Chief Executive Officer of Industrial
Electric Manufacturing, Inc., a manufacturer of electrical power distribution
products. Mr. Porter also serves as Chairman of the Board of Directors of
Phillips & Brooks/Gladwin, Inc., a manufacturer of pay telephone enclosures and
equipment. Mr. Porter had been Vice Chairman of WorldCom, Inc. (formerly
LDDS/Metro Media Communications), a long distance telecommunications carrier,
from September 1993 until December 31, 1996 and Chairman from 1988 until
September 1993 and has been a director of WorldCom since
32
<PAGE>
1988. Mr. Porter was President and sole shareholder of P.M. Restaurant Group,
Inc., which filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
March 1995, subsequent to which Mr. Porter sold his shares. Mr. Porter also
serves on the Board of Directors of Uniroyal Technology Corporation.
The names of the other directors of the Company who will continue in
office after the Meeting, their ages, the term for which they have been elected
and certain other information is set forth below:
<TABLE>
<CAPTION>
Name Age Position Annual Meeting in
- ----- ----- -------- -----------------
<S> <C> <C> <C>
Barry M. Abelson 51 Director 1998
William E. Johnson 55 Director 1998
William L. Rulon-Miller 48 Director 1998
Christopher T.G. Fish 54 Director 1999
Gregory A. Pratt 49 Director 1999
Richard D. Sanford 53 Director, Chairman and 1999
Chief Executive Officer
</TABLE>
Barry M. Abelson has been a director of the Company since January 1989.
In May 1992, he joined the law firm of Pepper, Hamilton & Scheetz LLP,
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). Mr. Abelson also serves on the Board
of Directors of Covenant Bancorp, Inc. and XLConnect.
William E. Johnson has been a director of the Company 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, and serves
on the Board of Directors of XLConnect.
William L. Rulon-Miller serves as Senior Vice President and
Co-Director of Corporate Finance 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 the Company from April 1983 until December 1986,
and was re-elected to the Board in November 1987. Mr. Rulon-Miller also serves
on the Board of Directors of Mothers Work, Inc.
Christopher T.G. Fish has been a director of the Company 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 the
Company's Common Stock. Mr. Fish resides in the Channel Islands, U.K. and is a
citizen of the United Kingdom.
Gregory A. Pratt has been a director of the Company since May 1994. Mr.
Pratt joined the Company in March 1992 as Executive Vice President and was
appointed to the position of President and Chief Operating Officer shortly
thereafter. Mr. Pratt resigned as President and Chief Operating Officer and was
elected Executive Vice President in April 1996. Mr. Pratt resigned as the
Company's Executive Vice President on December 6, 1996. Since that time, Mr.
Pratt has been President and Chief Executive Officer of Pratt Capital Advisors,
Inc., a private investment company.
Richard D. Sanford has been the Company's Chairman and Chief Executive
Officer since he founded the Company in May 1982. Mr. Sanford was named
President of the Company in April 1996, a position which he relinquished when
Mr. Norris joined the Company in August 1996. Mr Sanford is also the Chairman of
the Board of Directors of XLConnect.
33
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
The Company's Board of Directors held sixteen meetings during fiscal
1996. During fiscal 1996, each incumbent member of the Board attended at least
75% of the aggregate meetings of the Board and its Committees for which he is a
member, except Messrs. Johnson, Porter and Alex A.C. Wilson, a former director
of the Company.
The Board of Directors has established Audit, Compensation and Stock
Option, and Executive Committees to devote attention to specific subjects and to
assist in the discharge of its responsibilities. The functions of those
committees, their current members and the number of meetings held during fiscal
1996 are described below. The Board of Directors has not established a
Nominating Committee.
Audit Committee. The Audit Committee is currently composed of Messrs.
Fish, Fritz, Johnson, Hoffman, Porter and Rulon-Miller. The functions of the
Audit Committee include the recommendation and selection of independent
accountants, the review of audit results and the evaluation of internal
accounting procedures of the Company. There were two meetings of the Audit
Committee during fiscal 1996.
Compensation and Stock Option Committee. The Compensation and Stock
Option Committee is currently composed of Messrs. Fritz, Hoffman, Johnson,
Porter and Rulon-Miller. The Compensation and Stock Option Committee is
responsible for determining the annual salary, bonus and incentive compensation
of the Company's executive officers and, on the basis of recommendations
received from executive officers, awarding incentive compensation in the form of
stock options to the Company's employees generally. The Report of the
Compensation and Stock Option Committee is included later in this Proxy
Statement. The Compensation and Stock Option Committee held four meetings and
acted by written consent two times during fiscal 1996.
Executive Committee. The Executive Committee is currently composed of
Messrs. Abelson, Fish, Fritz, Hoffman, Johnson, Porter, Rulon-Miller and
Sanford, and has the authority of the Board of Directors in the management of
the business and affairs of the Company, subject to applicable legal
limitations. The Executive Committee did not meet during fiscal 1996.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during the years ended February 1, 1997, February 3, 1996, and
January 28, 1995, to the Company's Chief Executive Officer and each of the
Company's six other most highly compensated executive officers based on salary
and bonus earned during fiscal 1996 (the "named executive officers").
34
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
---------------
Securities
Name and Principal Fiscal Annual Compensation Underlying All Other
Position(1) Year Salary($) Bonus($) Options (#)(2) Compensation ($)(3)
- ---------------------------- ------ --------- -------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Richard D. Sanford 1996 $500,000 $350,000 -- $ 442,758
Chairman of the 1995 850,000 0 500,000 453,879
Board and Chief 1994 850,000 0 -- 496,945
Executive Officer
Michael A. Norris 1996(4) 193,654 125,000 750,000 243,843
President and Chief
Executive Officer of
the Reseller Network
Gregory A. Pratt 1996 256,410 166,667 -- 84,423
Executive Vice President(5) 1995 500,000 0 200,000 8,024
1994 500,000 30,000 -- 3,178
Mark R. Briggs 1996 470,208 0 0 14,761
Assistant to the Chairman(6) 1995 325,000 0 140,000 4,500
1994 325,000 38,500 50,000 3,792
Timothy D. Cook 1996 300,385 0 150,000 39,789
Senior Vice President 1995 250,000 67,500 100,000 1,251
1994(7) 76,923 90,000 100,000 0
Thomas J. Coffey 1996 340,385 100,000 150,000 2,019
Senior Vice President, 1995(8) 177,846 100,000 100,000 0
Treasurer and Chief
Financial Officer
Kathleen R. Mayo 1996 140,769 2,500 44,000 3,574
Secretary(9) 1995 111,798 0 19,000 1,848
1994 113,752 37,148 5,000 1,825
</TABLE>
- ---------
(1) In each instance, the position indicated is the position held by the
executive officer on the last day of fiscal 1996 or, in the case of
executive officers not employed by the Company on such date, the final
position held by such executive officer with the Company.
(2) The amounts included in this column for fiscal 1996 includes stock options
repriced on March 4, 1996 (Mr. Coffey, 100,000; Mr. Cook, 100,000 and Ms.
Mayo, 19,000).
(3) Except as indicated below, the amount included in the column for fiscal
1996 represent the matching contribution under the Company's 401(k) Plan
(Mr. Sanford, $4,750, Mr. Pratt, $1,000, Mr. Briggs, $1,219, Mr. Cook,
$2,019, Mr. Coffey, $2,019 and Ms. Mayo, $3,574), director's fees (Mr.
Sanford, $7,500 and Mr. Pratt, $6,500), reimbursement of relocation
expenses and related tax gross-up (Mr. Norris, $243,843 and Mr. Cook,
$37,770) and severance payments (Mr. Pratt, $76,923 and Mr. Briggs,
$13,542). The Company 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 term life insurance
component of permanent life insurance policies insuring the life of Mr.
35
<PAGE>
Sanford and owned by the trust, and the Company pays the balance of the
premiums. Upon the termination of the agreements or Mr. Sanford's death,
all premiums previously advanced by the Company under the policies are
required to be repaid by the trust. The Company 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 1996, 1995 and 1994 are amounts representing the value of the
premium payments by the Company 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 1994, the Company entered into a
deferred compensation agreement with Mr. Sanford which provides for the
Company to credit $716,715 annually for Mr. Sanford's account for five
years commencing in fiscal 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 1999. In the
event of his death, disability, termination by the Company without cause or
a change of control of the Company, all amounts not yet credited for future
periods will be credited and all credited amounts will be paid to Mr.
Sanford.
(4) Mr. Norris began his employment with the Company on August 27, 1996. See
"Employment and Severance Agreements."
(5) On December 6, 1996, Mr. Pratt resigned his position as Executive Vice
President. See "Employment and Severance Agreements."
(6) Mr. Briggs resigned as Assistant to the Chairman on December 31, 1996. See
"Employment and Severance Agreements."
(7) Mr. Cook began his employment with the Company on October 10, 1994. See
"Employment and Severance Agreements."
(8) Mr. Coffey began his employment with the Company on July 3, 1995. See
"Employment and Severance Agreements."
(9) Ms. Mayo resigned as Secretary on March 31, 1997.
36
<PAGE>
Option Grants During Fiscal 1996
The following table provides information related to options to purchase Common
Stock which were granted to the named executive officers during fiscal 1996.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Individual Grants Price Appreciation for
----------------------------------------------- Option Terms
% of Total ---------------------------
Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted Fiscal Year Per Share Date 5% (1) 10% (1)
---- ------- --------------- ----------- -------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Sanford . -- -- -- -- -- --
Michael A. Norris .. 750,000(2) 17.2% $7.00 8/27/06 $ 3,301,697 $ 8,367,148
Gregory A. Pratt.... -- -- -- -- -- --
Mark R. Briggs...... -- -- -- -- -- --
Timothy D. Cook..... 100,000(3) 2.3% 8.00 10/10/04 217,536 718,288
50,000(4) 1.1% 6.50 4/24/06 204,391 517,966
Thomas J. Coffey.... 100,000(5) 2.3% 8.00 7/3/05 254,367 827,496
50,000(6) 1.1% 6.6875 3/4/06 210,287 532,908
Kathleen R. Mayo(7) 3,000 0.1% 8.00 12/5/01 2,568 10,725
1,000 * 8.00 3/10/03 1,418 5,052
5,000 0.1% 8.00 2/25/04 9,356 31,545
10,000 0.2% 8.00 6/8/05 25,085 81,691
25,000 0.6% 6.6875 3/4/06 105,143 266,454
</TABLE>
- ------------
* Less than 0.1%
(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 Company's Common Stock over the term of the options.
(2) The options are exercisable in four equal annual installments beginning
August 27, 1997.
(3) The options were originally granted on October 10, 1994 and were repriced
on February 25, 1995 and March 4, 1996. The original vesting schedule was
retained and the options are exercisable in five equal annual installments
beginning October 10, 1995.
(4) The options are exercisable in five equal annual installments beginning
April 24, 1997.
(5) The options were originally granted on July 3, 1995 and were repriced on
March 4, 1996. The original vesting schedule was retained and the options
are exercisable in five equal annual installments beginning July 3, 1996.
(6) The options are exercisable in five equal annual installments beginning
March 4, 1997.
(7) The options were canceled on April 30, 1997.
37
<PAGE>
Aggregated Option Exercises During Fiscal 1996
and Option Values at February 1, 1997
The following table provides information related to options to
purchase Common Stock which were exercised by the named executive officers
during fiscal 1996 and the number and value of options held on February 1, 1997.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(2)
Shares Acquired Value ------------------------------ ------------------------------
Name on Exercise(#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- --------------- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Sanford 0 0 460,000 40,000 0 0
Michael A. Norris 0 0 0 750,000 0 0
Gregory A. Pratt 0 0 245,000 105,000 0 0
Mark R. Briggs 10,000 $8,750 56,000 74,000 0 0
Timothy D. Cook 0 0 40,000 110,000 0 0
Thomas J. Coffey 0 0 20,000 130,000 0 0
Kathleen R. Mayo 0 0 7,600 36,400 0 0
</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 $4.25 per share on January 31, 1997.
38
<PAGE>
Ten-Year Option Repricing
The following table provides information related to options to purchase
Common Stock of the Company, which were repriced for executive officers during
fiscal 1995 and fiscal 1996.
<TABLE>
<CAPTION>
Number of
Securities Market Value Exercise Length of
Underlying of Stock Price at New Original Option
Options at Time of Time of Exercise Term at Time
Name Date Repriced(#) Repricing($) Repricing($) Price($) of Repricing
- ------------------------ -------- ------------- ------------ ------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Sanford 02/25/95 450,000 $9.75 $22.875 $13.25 8 years 267 days
Gregory A. Pratt 02/25/95 50,000 9.75 15.00 13.25 8 years 13 days
02/25/95 100,000 9.75 24.875 13.25 8 years 300 days
Mark R. Briggs 02/25/95 30,000 9.75 15.50 13.25 6 years 283 days
02/25/95 10,000 9.75 15.00 13.25 8 years 13 days
02/25/95 50,000 9.75 24.00 13.25 9 years 0 days
Timothy D. Cook 03/04/96 100,000 6.6875 13.25 8.00 8 years 220 days
02/25/95 100,000 9.75 16.25 13.25 9 years 228 days
Thomas J. Coffey 03/04/96 100,000 6.6875 13.375 8.00 9 years 121 days
Kathleen R. Mayo(1) 03/04/96 3,000 6.6875 13.25 8.00 5 years 276 days
03/04/96 1,000 6.6875 13.25 8.00 7 years 6 days
03/04/96 5,000 6.6875 13.25 8.00 7 years 358 days
03/04/96 10,000 6.6875 13.125 8.00 9 years 96 days
02/25/95 3,000 9.75 15.50 13.25 6 years 238 days
02/25/95 1,000 9.75 15.00 13.25 8 years 13 days
02/25/95 5,000 9.75 24.00 13.25 9 years 0 days
Stephanie D. Cohen(2) 03/04/96 8,000 6.6875 10.375 8.00 5 years 276 days
03/04/96 20,000 6.6875 13.25 8.00 4 years 327 days
03/04/96 60,000 6.6875 13.25 8.00 5 years 276 days
03/04/96 5,000 6.6875 13.25 8.00 7 years 6 days
03/04/96 50,000 6.6875 9.25 8.00 9 years 62 days
02/25/95 20,000 9.75 14.125 13.25 5 years 335 days
02/25/95 60,000 9.75 15.50 13.25 6 years 283 days
02/25/95 5,000 9.75 15.00 13.25 8 years 13 days
</TABLE>
- ---------
(1) Ms. Mayo resigned as the Company's Secretary on March 31, 1997.
(2) In conjunction with assuming the duties of Executive Vice President and
Chief Financial Officer of XLConnect Solutions, Inc., an 80%-owned
subsidiary of the Company, Ms. Cohen ceased serving as the Company's Vice
President, Secretary and Treasurer on May 16, 1996.
39
<PAGE>
Compensation Committee Interlocks and Insider Participation
Arnold S. Hoffman, a member of the Compensation and Stock Option
Committee, is a Senior Managing Director of Legg Mason, an investment banking
firm that provides advisory services to the Company. Legg Mason provided
financial advisory services to the Company and rendered the fairness opinion to
the Board of Directors in connection with the proposed Sale of the Indirect
Business discussed under Proposal No. 1.
William L. Rulon-Miller, a member of the Compensation and Stock Option
Committee, is a Senior Vice President and Co-Director of Corporate Finance for
Janney Montgomery Scott Inc. ("JMS"), an investment banking firm that provides
advisory services to the Company. JMS rendered fairness opinions to the Board of
Directors in connection with certain transactions in fiscal 1996 and provided
investment advisory services in connection with the issuance of the Company 's
Series B Convertible Preferred Stock in fiscal 1996.
Stock Performance Chart
The following chart compares the yearly percentage change in the
cumulative total shareholder return on the Company's Common Stock during the
five fiscal years ended February 1, 1997, with the cumulative total return on
the S&P Mid Cap 400 Index and a peer index comprised of seven companies. The
comparison assumes $100 was invested on February 1, 1992 (with dividends
reinvested), in the Company's Common Stock, the S&P Mid Cap 400 Index and a
composite index, weighted by market capitalization, of the following seven
companies: Compucom Systems, Inc., Dataflex Corporation, Government Technology
Services, Inc., Inacom Corp., Merisel, Inc., MicroAge, Inc., and Tech Data
Corporation. Ameridata Technologies, Inc., which was a part of the Company's
peer group index for fiscal 1995, was purchased by a third-party and is no
longer a publicly-traded company.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, S&P MID CAP 400, AND PEER GROUP
200 |--------------------------------------------------------------------|
| # & |
| |
|--------------------------------------------------------------------|
| |
| & # |
150 |---------------------------@----------------------------------------|
| |
| & |
|--------------------------------------&-----------------------------|
D | # |
O | & # |
L 100 |----#&@-------------------------------#-----------------------------|
L | |
A | |
R |--------------------------------------------------------------------|
S | @ |
| @ |
50 |--------------------------------------------------------------------|
| |
| @ |
|---------------------------------------------------------------@----|
| |
| |
0 |--------------------------------------------------------------------|
January January January January January January
1992 1993 1994 1995 1996 1997
YEARS
ASSUMES INITIAL INVESTMENT OF $100
* TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
NOTE TOTAL RETURNS BASED ON MARKET CAPITALIZATION
|-----------------------------------------------------------------------------|
| # = PEER GROUP & = MID-CAP 400 @ = INTELLIGENT ELECTRONCIS |
|-----------------------------------------------------------------------------|
===============================================================================
MEASUREMENT PERIOD INTELLIGRNT
FISCAL YEAR ENDED: PEER GROUP MID-CAP 400 ELECTRONICS
- -------------------------------------------------------------------------------
JANUARY 1992 $100.00 $100.00 $100.00
JANUARY 1993 122.65 111.34 69.46
JANUARY 1994 185.87 128.23 148.10
JANUARY 1995 99.86 122.08 53.54
JANUARY 1996 106.28 160.50 27.99
JANUARY 1997 154.51 195.66 25.04
===============================================================================
40
<PAGE>
COMPENSATION AND STOCK OPTION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee (the "Committee") for
fiscal 1996 consisted of five non-employee directors. The Committee is
responsible for determining the annual salary, bonus and incentive compensation
of the Company's executive officers and, on the basis of recommendations
received from executive officers, awarding incentive compensation in the form of
stock options to the Company's employees generally. This report describes the
policies of the Committee in establishing the principal components of executive
compensation for fiscal 1996.
The Committee's compensation policies for executive officers reflect a
commitment to attract and retain quality executives, to provide incentives to
the executives to achieve performance objectives that enhance shareholder value
and to reward executives for operational excellence. The Committee believes that
its policies are best served by a compensation program that provides executives
a competitive base salary, annual incentive bonuses in amounts that reflect
achievement of prescribed financial targets and long-term incentives in the form
of stock options.
In establishing compensation for executive officers, the Committee
considers industry data generally, the Company's financial performance and
industry position and the recommendations of the Chairman of the Board and Chief
Executive Officer. The Committee exercises judgment and discretion in the
information and analyses it reviews and considers.
In fiscal 1996, the Committee determined to reduce the base salary of
Richard D. Sanford, the Chairman and Chief Executive Officer, to $500,000. In
contrast with fiscal 1995, Mr. Sanford was also entitled to receive a bonus of
up to $1 million based on the price of the Company's Common Stock at the end of
fiscal 1996 as compared to fiscal 1995. Although the initial bonus criterion was
not met, the Committee determined to pay Mr. Sanford a $350,000 bonus in
recognition of his contributions to the Company during the fiscal year,
including the employment of a new president for the Company and the successful
completion by XLConnect of its initial public offering.
In fiscal 1996, the Committee approved the reduction of the exercise
price, to $8.00 per share, of outstanding stock options having exercise prices
in excess of $8.00 per share, held by currently-active employees, except certain
executive officers. The Committee concluded that the decline in the market price
of the Company's Common Stock had frustrated the purpose of these options (i.e.,
to attract and retain the employees' services and to provide incentives for them
to exert maximum efforts for the Company's success), and that it was important
to reduce the exercise price of these options so as to reinstitute the incentive
originally intended to be afforded by the options. The terms of the repricings
with respect to options held by certain executive officers are described in the
table captioned "Ten-Year Option Repricing" set forth above.
Section 162(m) of the Internal Revenue Code imposes a $1 million limit
on the allowable tax deduction of compensation paid by a publicly-held
corporation to its chief executive officer and its other four most highly
compensated officers employed at year-end, subject to certain pre-established
objective performance-based exceptions. The Committee takes Section 162(m) into
account when formulating its compensation policies for the Company's executive
officers and to comply with Section 162(m), if and where the Committee
determines compliance to be practicable and in the best interests of the Company
and its shareholders.
William L. Rulon-Miller
Roger J. Fritz
William E. Johnson
Arnold S. Hoffman
John A. Porter
41
<PAGE>
EMPLOYMENT AND SEVERANCE AGREEMENTS
In connection with Mr. Pratt's assumption of the position of Executive
Vice President of the Company in April 1996, Mr. Pratt entered into an
employment agreement with the Company. The agreement provided for Mr. Pratt to
receive a base annual salary of $300,000, together with an annual bonus of at
least $200,000 if certain performance objectives are achieved. Mr. Pratt
resigned from the Company on December 6, 1996. Mr. Pratt's employment agreement:
(i) requires the Company to pay Mr. Pratt $500,000 in 12 monthly installments
during the one-year period following termination ("Severance Payment"); and (ii)
prohibits Mr. Pratt from competing with the Company and from soliciting the
Company's employees while Mr. Pratt remains a member of the Board. In addition,
Mr. Pratt has been retained to perform certain consulting services which may
result in additional compensation from the Company in an amount not yet
determined.
In March 1996, Mr. Briggs entered into an agreement with the Company
providing for the termination of his employment effective September 30, 1996 and
for certain payments and other benefits to be provided by the Company to Mr.
Briggs following the termination of his employment. This agreement was amended
in September 1996 to: (i) extend the termination date to December 31, 1996; and
(ii) to provide for a one-time payment in an amount equal to $100,000 and a
payment of $20,000 for each of certain acquisitions entered into by the Company.
The amended agreement provides that for a period of 18 months following the
termination of his employment, Mr. Briggs will continue to receive payment equal
to his current base annual salary of $325,000, participate in the Company's
medical program, and vest in his stock options. During such 18-month period, Mr.
Briggs is prohibited from working for certain of the Company's competitors,
soliciting the Company's customers and suppliers, or employing or retaining the
Company's employees.
In March 1996, Mr. Coffey entered into an employment agreement with the
Company. The agreement provides for Mr. Coffey to receive a base annual salary
of $350,000, with a minimum bonus of $100,000 for fiscal 1996. The agreement
also provides that if the Company terminates Mr. Coffey's employment without
cause on or before April 1, 1999, the Company will be obligated to continue to
pay Mr. Coffey's base annual salary plus all benefits then in effect until April
1, 1999, provided that in the event such termination occurs before April 1,
1998, the amount of total compensation in excess of $350,000 included in such
severance payments will be reduced by all compensation earned by Mr. Coffey from
all sources from the date of such termination until March 31, 1999. The
agreement also provides that if Mr. Coffey's base annual compensation for fiscal
1997 is less than $450,000 and he voluntarily terminates his employment after
the Company files its Annual Report on Form 10-K for that fiscal year, then the
Company will be obligated to continue to pay Mr. Coffey's base annual salary
plus all benefits then in effect until April 1, 1999.
In April 1997, Mr. Coffey's employment agreement was replaced by an
agreement pursuant to which Mr. Coffey agreed that his employment with the
Company will terminate on May 15, 1997 or upon the filing of the Company's Form
10-K for fiscal 1996 with the Securities and Exchange Commission, whichever
occurs first (the "Separation Date"). The Separation Date has been extended upon
mutual agreement of Mr. Coffey and the Company. Mr. Coffey can terminate his
employment at any time by giving the Company two weeks' prior written notice.
The Company has agreed to pay Mr. Coffey, as salary continuation, a sum equal to
$525,000 during the 18 months following the Separation Date (the "Severance
Period"), subject to acceleration upon a change of control of the Company and
certain other events. In addition, Mr. Coffey will receive up to $20,000 for
outplacement services and certain legal expenses. Mr. Coffey will be entitled to
receive medical benefits during the Severance Period, unless he is covered by a
new employer. Mr. Coffey's stock options will continue to vest in accordance
with their terms during the Severance Period.
In May 1996, Mr. Cook entered into an employment agreement with the
Company. The agreement provides for Mr. Cook to receive a base annual salary of
$300,000 and reflects the grant to Mr. Cook of options to purchase 50,000 shares
of Common Stock on April 24, 1996. The agreement provides that if Mr. Cook's
employment is terminated by the Company without cause: (i) the Company will be
required to pay Mr. Cook his
42
<PAGE>
base annual salary as in effect at the time of termination in 12 monthly
installments during the one-year period following termination and (ii) Mr. Cook
will be prohibited from working for certain of the Company's competitors and
from soliciting the Company's employees during such period. For purposes of this
agreement, Mr. Cook's employment will be considered to have been terminated by
the Company without cause if, following a change in control of the Company, Mr.
Cook voluntarily terminates his employment as a result of a reduction in his
base salary or a material reduction in his duties or responsibilities.
In April 1997, Mr. Cook entered into another agreement with the Company
providing for his retention as an executive until the earlier of a sale of the
Indirect Business and July 31, 1997 or, at the option of the Company and
subsequent to certain conditions, September 15, 1997 (the "Retention Period").
During the Retention Period, the Company is required to pay Mr. Cook an annual
base salary of $300,000. In addition, if Mr. Cook remains with the Company
through the Retention Period, he will be entitled to a $150,000 bonus.
Furthermore, pursuant to the agreement, Mr. Cook earned a $100,000 bonus upon
the execution of the Acquisition Agreement and will earn an additional $100,000
bonus if the Sale of the Indirect Business is completed before October 31, 1997.
If Mr. Cook remains employed by the Company through the Retention Period, Mr.
Cook will receive as salary continuation his base salary of $300,000 for the 12
month period following the subsequent termination of his employment with the
Company, other than a termination by the Company with cause. If Mr. Cook is
employed by an acquiring company, such salary continuation will cease on April
30, 1998.
In August 1996, Mr. Norris entered into an employment agreement with
the Company. The agreement provides for Mr. Norris to receive a base annual
salary of $475,000, with an opportunity to receive a bonus of up to an
additional $250,000 per year. Mr. Norris also received reimbursement of his
relocation expenses, unused country club dues and private school tuition and
related tax gross-up. In addition, the Company has agreed to pay for the
premiums on Mr. Norris' life insurance policy. The Company also agreed to
reimburse Mr. Norris for any interest expense incurred, for a period of one
year, in connection with a loan the proceeds of which are used to purchase stock
options granted by his former employer. Pursuant to the agreement, Mr. Norris
received options to purchase 750,000 shares of the Company's Common Stock, with
an exercise price of $7.00 per share (the "Initial Options"). These Initial
Options are exercisable in four equal installments, commencing August 27, 1997.
The agreement also provides that if Mr. Norris is employed by the Company on
January 30, 1999 or the Company terminates Mr. Norris' employment without cause
on or before January 30, 1999, the Company is obligated to pay a bonus up to
$1,700,000, less any proceeds from the exercise of the Initial Options, based on
the price of the Company's Common Stock on January 30, 1999 compared to the
exercise price of the Initial Options. Upon termination without cause, Mr.
Norris' stock options will continue to vest in accordance with their terms. The
agreement provides that for a period of 12 months following the termination of
his employment without cause within the first 36 months of his employment, Mr.
Norris will continue to receive payment equal to his then-current base salary.
43
<PAGE>
DIRECTOR COMPENSATION
Directors received $500 for each Board meeting attended during fiscal
1996. Directors are also reimbursed for expenses in attending Board meetings.
There was no additional compensation for participation in or attendance at
Committee meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Barry M. Abelson is a partner in the law firm of Pepper, Hamilton &
Scheetz LLP, which provides legal services to the Company. The Company believes
that the fees charged by Pepper, Hamilton & Scheetz LLP are comparable to those
charged by other law firms for comparable services.
Arnold S. Hoffman is a Senior Managing Director of Legg Mason, an
investment banking firm that provides services to the Company. Legg Mason
provided financial advisory services to the Company and rendered the fairness
opinion to the Board of Directors in connection with the proposed Sale of the
Indirect Business discussed under Proposal No. 1. The Company believes that the
fees charged by Legg Mason are comparable to those charged by other investment
banking firms for comparable services.
William L. Rulon-Miller, a member of the Compensation and Stock Option
Committee, is a Senior Vice President and Co-Director of Corporate Finance for
Janney Montgomery Scott Inc. ("JMS"), an investment banking firm that provides
advisory service to the Company. JMS rendered fairness opinions to the Board of
Directors in connection with certain transactions in fiscal 1996 and provided
investment advisory services in connection with the issuance of the Company's
Series B Convertible Preferred Stock in fiscal 1996.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and officers, and persons who own more than 10%
of a registered class of the Company's equity securities, to file initial
reports of ownership and reports of changes in ownership with the Securities and
Exchange Commission. Such persons are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms received
by it with respect to fiscal 1996, or written representations from certain
reporting persons, the Company believes that all filing requirements applicable
to its directors, officers and persons who own more than 10% of a registered
class of the Company's equity securities have been met and were filed on a
timely basis, except that a Form 4 was filed late by Mr. Johnson in connection
with the purchase of shares of Common Stock in February 1996.
44
<PAGE>
INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed the Company's present independent
accountants, Price Waterhouse LLP, as the Company's independent accountants for
the fiscal year ending January 31, 1998. Representatives of Price Waterhouse LLP
are expected to be present at the Meeting, where they will be available to
respond to appropriate questions and have the opportunity to make a statement if
they so desire.
SHAREHOLDER PROPOSALS
Shareholder proposals submitted for presentation at the next Annual
Meeting of Shareholders must be received by the Secretary of the Company at its
principal executive offices in Exton, Pennsylvania on or before March 18, 1998.
ADDITIONAL COMPANY INFORMATION
Appendix B-1 to this Proxy Statement includes the Company's Annual
Report on Form 10-K for fiscal 1996 and Appendix B-2 to this Proxy Statement
includes the Company's Quarterly Report on Form 10-Q for the first quarter of
fiscal 1997, each as filed with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, and each of which is made a part hereof.
The Form 10-K and Form 10-Q include certain historical financial information and
per share data. The Form 10-K has been amended by a Form 10-K/A. Except for the
exhibits thereto, the information contained in the Form 10-K/A is contained
elsewhere herein. The Company will provide to each person to whom a copy of this
Proxy Statement is delivered without charge and upon written or oral request, by
first class mail, a copy of the Form 10-K/A and any of the exhibits to the Form
10-K, the Form 10-K/A and the Form 10-Q. Written requests for any exhibit
should be directed to Investor Relations for the Company at 411 Eagleview
Boulevard, Exton, Pennsylvania 19341. Oral requests should be directed to
Investor Relations at (610) 458-5500.
OTHER BUSINESS
The Company knows of no other matter to be presented at the Meeting.
However, if other matters should properly come before the Meeting, it is the
intention of the persons named in the enclosed proxy to vote the proxy with
respect to such matters in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
/S/ Richard D. Sanford
-----------------------------------------------
Richard D. Sanford
Chairman of the Board and Chief Executive Officer
Exton, Pennsylvania
June 20, 1997
45
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
Corporate Finance
LOGO
Legg Mason Wood Walker, Incorporated
Suite 1100, 1735 Market Street, Philadelphia, PA 19103
215-496-8300 Fax: 215-568-2031
May 9, 1997
The Board of Directors
Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Members of the Board:
Intelligent Electronics, Inc. (the "Company") and Ingram Micro, Inc.
("Ingram") have entered into a Stock Purchase Agreement (the "Acquisition
Agreement") dated April 29, 1997, which provides, among other things, for the
sale to Ingram by the Company of 100% of the outstanding capital stock of each
of the following direct subsidiaries of the Company (the "Sale"): RND, Inc.,
Intelligent Advanced Systems Inc., Intelligent Distribution Services, Inc.,
Intelligent Express Inc., Intelligent SP, Inc., referred to herein collectively
as the Indirect Business (the "Indirect Business"). This letter confirms the,
oral opinion we provided to the Board of Directors of the Company (the "Board")
on April 29, 1997.
In arriving at our opinion set forth below, we have, among other
things: (i) reviewed the Acquisition Agreement and other related agreements;
(ii) reviewed certain unaudited financial statements of the Indirect Business;
(iii) reviewed certain internal information, primarily financial in nature,
concerning the Indirect Business, prepared by the management of the Company;
(iv) discussed the past and current operations and financial condition and
future prospects of the Indirect Business with the management of the Company;
(v) reviewed financial projections of the Indirect Business prepared by the
management of the Company; (vi) conducted such other financial studies, analysis
and investigations and considered such other information as Legg Mason deemed
necessary or appropriate; and (vii) visited certain facilities of the Indirect
Business.
In connection with our review, we have assumed and relied upon the
accuracy independently of all financial and other information supplied to us by
the management of the Company, and all publicly available information, and we
have not and completeness verified such information. We also relied upon the
management the Company as to the reasonableness of the financial projections
(and the assumptions and bases therein) provided to Legg Mason for the Indirect
Business, and assumed that such projections were reasonably prepared on bases
reflecting the best currently available estimates and judgments of management as
to the future operating performance of the Indirect Business. The Company does
not publicly disclose internal management projections of the type provided to
Legg Mason in connection with Legg Mason's review of the Sale. Such projections
were not prepared with the expectation of public disclosure. The projections
were based on numerous variables and assumptions that are inherently uncertain,
including without limitation, factors related to general economic and
competitive conditions. Accordingly, actual results could vary significantly
from those set forth in such projections.
<PAGE>
Legg Mason Wood Walker, Incorporated
The Board of Directors May 9, 1997
Intelligent Electronics, Inc. Page 2
We have not been requested to make, and we have not made, an
independent appraisal or evaluation of the assets, properties, facilities or
liabilities of the Indirect Business and we have not been furnished with any
such appraisal or evaluation. The estimates of values of companies and assets
used in the course of developing the Opinion are not appraisals, and should not
be misconstrued as appraisals, nor should such estimates be expected to reflect
the prices at which companies and assets may actually be sold. Because such
estimates are inherently subject to uncertainty, Legg Mason assumes no
responsibility for their accuracy.
Our opinion is necessarily based on economic conditions and
circumstances as existed or were in effect on, and the information made
available to us as of, April 29, 1997. We have not been involved in the
discussions or negotiations involving the terms of the transaction and have
assumed that the Sale will be consummated on the terms and conditions described
in the form of the Acquisition Agreement reviewed by us, and that obtaining any
necessary regulatory approvals or satisfying any other conditions for
consummation of the Sale will not have a material adverse effect on the value of
the consideration to be received.
It is understood that this letter is directed to the Board and does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote on the Sale. This letter is not to be quoted or referred
to, in whole or in part, in any registration statement, prospectus or proxy
statement, or in any other document used in connection with the offering or sale
of securities, nor shall this letter be used for any other purposes, without the
prior written consent of Legg Mason Wood Walker, Incorporated, provided that
this Opinion may be included in its entirety in any filing made by the Company
with the Securities and Exchange Commission with respect to the Sale and the
transactions related thereto.
Based upon and subject to the foregoing, we are of the opinion that, as
of April 29, 1997, the consideration to be received for the Indirect Business
pursuant to the Acquisition Agreement is fair to the shareholders of the
Company, from a financial point of view.
We have acted as financial advisor to the Board in connection with the
Sale and will receive a fee for our services, a portion of which is contingent
upon the consummation of the Sale. In addition, we will receive a separate fee
for providing this Opinion. An officer of Legg Mason Wood Walker, Incorporated
has served and continues to serve as a Director of the Company.
Very truly yours.
/s/ Legg Mason Wood Walker, Incorporated
----------------------------------------
LEGG MASON WOOD WALKER, INCORPORATED
<PAGE>
APPENDIX B-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended February 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to Commission file number 0-15991
INTELLIGENT ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2208404
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
(Address of principal executive offices, including zip code)
(610)458-5500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
[Title of Class]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of April 8, 1997:
Common Stock, $.01 Par Value - $102,635,172
The number of shares outstanding of the issuer's common stock as of
April 8, 1997:
Common Stock, $.01 Par Value - 36,049,641
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1997 Annual
Shareholders' Meeting are incorporated by reference into Items 10, 11, 12
and 13 (Part III) of this Report. Such Proxy Statement, except for the
parts therein which have been specifically incorporated by reference, shall
not be deemed "filed" for the purposes of this report on Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
<PAGE>
PART I
Item 1. BUSINESS
Introduction
Intelligent Electronics, Inc. (the "Company") provides information
technology products, services and solutions to network integrators and
resellers (the "Network"), through its Reseller Network (the "Indirect
Business") and to large and small corporate customers, educational
institutions and governmental agencies in the United States, primarily
through its branch locations (the "Direct Business"). The Company was
founded in 1982 and is a Pennsylvania corporation. In March 1984, the
Company commenced the wholesale distribution of microcomputers. On August
17, 1995, the Company exchanged shares of its Common Stock for all of the
remaining shares (approximately 69%) of The Future Now, Inc. ("FNOW"), not
previously owned by the Company (See Note 3 to the Consolidated Financial
Statements). The acquisition of FNOW, a computer sales and services
company, expanded the Company's offerings through the addition of a direct
hardware sales organization ("XLSource") and a professional services
organization providing a wide range of sophisticated customer support and
consulting services. The professional services organization was combined
with one of the Company's existing subsidiaries to form XLConnect
Solutions, Inc., ("XLConnect") which was incorporated in January 1996. On
October 17, 1996, XLConnect completed an initial public offering with the
Company retaining an 80%-ownership interest (See Note 4 to the Consolidated
Financial Statements). The principal products sold, installed and serviced
by the Company include microcomputers, workstations, local and wide area
network systems, computer software and peripherals and telecommunications
equipment. The Company also offers a wide range of sophisticated customer
support and consulting services.
The Company's principal executive offices are located at 411 Eagleview
Boulevard, Exton, Pennsylvania, 19341, telephone (610)458-5500. As used
herein and unless otherwise required by the context, the "Company" shall
mean Intelligent Electronics, Inc. and its majority-owned subsidiaries.
The matters discussed in this Form 10-K that are forward-looking statements
are based on current management expectations that involve risks and
uncertainties. Potential risks and uncertainties include, without
limitation: the impact of economic conditions generally and in the industry
for microcomputer products and services; the trend of declining sales,
gross margins, earnings and cash flows in the Indirect Business; the
potential decline generally in the level of demand for the Company's
products and services; the potential termination or non-renewal of a supply
agreement with a major vendor; continued competitive and pricing pressures
in the industry; product supply shortages; open sourcing of products from
vendors; rapid product improvement and technological change, short product
life cycles and resulting obsolescence risks; legal proceedings; and the
risks of unavailability of adequate products, credit, capital or financing.
(See 'Management's Discussion and Analysis of Financial Condition' in Item
7 of this Form 10-K.)
<PAGE>
Reseller Network (the "Indirect Business")
The Company provides distribution of microcomputers and related equipment
to the Network through a business-to-business approach. Specifically, the
Company provides product selection, technical support, cost-efficient
marketing programs and promotions and configuration. The Company believes
that it purchases the majority of the products distributed at the lowest
published prices available to it and passes on to the Network a portion of
the discount which it receives from vendors. This pricing, together with
the Company's service offerings and access to product inventories,
generally enables the Network to purchase products from the Company at
better terms than they could obtain directly from vendors which allows them
to effectively compete in the marketplace.
The Company provides and develops 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 National Service Network, which assists
members of the Network in servicing multi-location, regional or national
accounts, and the Business Technology Centers program, which assists
Network members in positioning themselves in the small-to-medium business
market.
The Company 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, the
Company, in partnership with Network members, provides products and extends
credit directly to end-users who have been approved both by the Company and
the Network member. This program frees up the existing credit line of the
Network member. Also, certain members of the Network are provided credit
in order to facilitate their ability to purchase certain products from the
Company and to allow the Company to compete with competitors who offer such
credit terms.
Although the Indirect Business has historically generated positive cash
flows for the Company, it has experienced a trend of declining sales caused
by the Company's inability to retain and attract customers resulting from a
number of factors and, accordingly, it is no longer generating positive
cash flow. These factors include: fewer product lines offered by the
Company compared to its larger competitors; a less favorable allocation of
constrained products (which can command a higher gross margin) compared to
prior years; increased competition; and continued consolidation in the
reseller channel. Additionally, the Indirect Business is no longer able to
take advantage of cash incentives offered by vendors due to the limited
financial resources available to the Company. As a result, gross margin
and product availability have been negatively impacted. Product allocation
and cash incentives are used by many vendors as an incentive for early
payment.
On April 29, 1997, the Company entered into a definitive agreement with Ingram
Micro Inc. ("Ingram") to sell the stock and related assets and liabilities of
the Indirect Business for $78 million, subject to reductions depending on the
date of closing and also on revenues during the period through closing. The
purchase price will be payable in cash and assumption of liabilities, based on
the Indirect Business' balance sheet at time of closing. The Company will be
required, at closing, to pay to Ingram any amount by which the estimated assumed
liabilities exceed the adjusted purchase price and to fund a $10 million escrow
for final settlement for any purchase price adjustments. The consummation of the
transaction is subject to the approval of the Company's shareholders and
required government approvals, as well as other customary conditions. It is
currently anticipated that the transaction will close during the Company's
second quarter of fiscal 1997 or shortly thereafter. However, there can be no
assurance that the sale will be completed. The Company expects, on a preliminary
basis, that the sale will result in a pre-tax gain of approximately $20 million,
subject to reductions depending on the date of closing and revenues during the
period of closing. Additionally, Ingram will provide XLSource with its product
requirements over an initial term of up to three years.
<PAGE>
Network Structure
Most of the relationships between the Company and its Network members are
governed by Reseller agreements which are non-binding distribution
agreements and which permit the members to purchase certain products from
the Company at competitive prices and terms. Certain of the relationships
between the Company and its Network are governed by franchise agreements.
The franchise 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 as
"Todays Computers Business Centers" and "TCBC," or "Entre Computer Centers"
or "Connecting Point of America." The Company no longer offers new
franchises. Normally, when a franchise agreement expires, the franchisee
is offered a Reseller agreement. Franchisees operating under TCBC or Entre
marks are subject to certain restrictions against competition following
termination. Members of the Network can participate in various
supplemental programs offered by the Company and obtain the right to use
proprietary service marks of the Company including Intelligent Systems
Group ("ISG") and Business Technology Centers ("BTC").
FNOW accounted for approximately 16% of the Company's consolidated revenues
during the fiscal year ended January 28, 1995. From January 29,1995
through August 17, 1995, FNOW accounted for approximately 12% of the
Company's revenues. The direct hardware portion of FNOW, renamed as
XLSource, a wholly-owned subsidiary of the Company, remains a significant
member of the Network.
Products
The Company currently markets technology products consisting of
microcomputer systems, workstations, networking and telecommunications
equipment and software. The Company'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 the
Company, and in turn the Network, to benefit from quantity purchasing
economies. The Company currently distributes products of approximately 75
vendors, principally Hewlett-Packard Company ("Hewlett-Packard"), COMPAQ
Computer Corporation ("COMPAQ"), International Business Machines
Corporation ("IBM"), Apple Computer, Inc. ("Apple"), Toshiba America
Information Systems, Inc., NEC Technologies, Inc., Microsoft Corporation,
3COM Corporation, Epson America, Inc., and Novell, Inc.
<PAGE>
In the past, certain vendors of the Company required resellers to purchase
products from only one source. All of the Company's major vendors have
changed their policy, allowing either "open sourcing," or "second sourcing"
(collectively "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 and
brand loyalty have been reduced. The Company believes that this change has
had and will continue to have an adverse effect on the Indirect Business'
(and therefore the Company's) results from operations and its financial
position.
The Company'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 who 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 the Company.
Under the agreements with vendors, products may be returned to the vendors
at restocking fees ranging up to 5%. These agreements also limit the
amount of returns to between 5% and 15% of the previous quarter's
purchases. Additional return privileges apply to damaged on arrival
purchases. The agreements generally provide for price adjustments for
specified periods which protect the Company in the event of price
reductions by the vendor. The Company administers certain vendors' price
adjustment programs for the benefit of the Network. In 1995, the Company
instituted a policy allowing members of the Network to return up to 3% of
the previous quarter's purchases without a restocking fee. If returns
exceed 3%, a restocking fee may be charged.
Products from the following vendors comprised the following percentages of
the Company's consolidated revenues during the years ended February 1,1997
("fiscal 1996"), February 3, 1996 ("fiscal 1995") and January 28, 1995
("fiscal 1994"):
Fiscal Fiscal Fiscal
1996 1995 1994
------- ------- -------
Hewlett-Packard 26% 25% 24%
COMPAQ 26% 24% 25%
IBM 12% 15% 15%
Apple 4% 8% 12%
No other vendors' products comprised more than 10% of the Company's
consolidated revenues during fiscal 1996, fiscal 1995 or fiscal 1994.
<PAGE>
Impairment Losses
During the third quarter of fiscal 1996, a decision to adopt open sourcing
was made by two of the Company's largest vendors. These vendors' products
have totaled approximately 30% to 36% of the Company's revenues during the
past three years. Under open sourcing, franchisees and other resellers are
no longer required to purchase product exclusively from the Company. This
change and a trend of declining sales, gross margins, earnings and cash
flows in the Indirect Business caused the Company to undertake a review of
its long-lived assets in this business unit. As a result of this review,
which was based on estimated future cash flows of the business, it was
determined that certain assets were impaired. The Company determined that
the carrying value of its goodwill relative to the Indirect Business would
not be recovered from future operations. Accordingly, this goodwill,
amounting to approximately $55.5 million, was written-off as of November 2,
1996. This goodwill was recorded in 1988 and 1989 with the acquisitions of
Entre Computer Centers, Inc. ("Entre") and Connecting Point of America,
Inc. ("CPA"), respectively. Both Entre and CPA had substantial franchise
operations when they were acquired.
Also, as a result of this review, the Company determined that certain
technology investments would not be fully recovered from estimated future
cash flows. The Company's configuration software, primarily consisting of
licenses purchased from a third party in 1994 for the use of this system,
was written down to its estimated recoverable value. This write-down,
approximating $6 million, was due to a continuing trend of expenses
exceeding revenues in this portion of the business and the introduction of
competitive technology available through the use of the Internet.
XLSource
Through its acquisition of FNOW in August 1995 and five branch locations in
December 1994 from FNOW, the Company acquired a direct hardware sales
organization, now operating in 21 locations throughout the United States
under the name of XLSource. XLSource purchases the majority of its
products from the Indirect Business and is an authorized dealer or a
reseller for the products of over 80 manufacturers. XLSource, in
conjunction with XLConnect (described below), focuses its sales and
marketing efforts towards selling computer related products and services to
medium-sized businesses, Fortune 1000 corporations, professional firms, and
governmental and educational institutions. These customers are relying
more on business partners and suppliers to provide a complete solution to
their information technology needs, in addition to competitive pricing.
Also, many larger customers are outsourcing their information technology
needs. In order to meet these complex needs, XLSource supplies the
hardware and partners with XLConnect, which provides sophisticated
information technology services.
<PAGE>
During the third quarter of fiscal 1996, the Company closed the XLSource
portion of five branch locations. Four of these branches were acquired
from FNOW in December 1994 and one was acquired from FNOW in August 1995.
As a result of these closures, the Company recorded an $8 million charge
relating to the allocable portion of goodwill for these locations. In
addition to the goodwill write-down, the Company also recorded a charge of
approximately $1.8 million to reflect the write-off of property and
equipment and remaining lease obligations related to these branches.
The Company has closed and is in the process of closing the XLSource branch
locations at several other locations as part of the Company's migration to
a virtual sales model, which will allow certain XLSource account executives
in these markets to work out of their homes. In conjunction with this
change, branch support functions were enhanced at the Company's Denver
facility. The Company continues to evaluate the individual branch
locations of XLSource with the goal of becoming more efficient and to have
the ability to hire additional account executives, where needed, without
renting office space and increasing overhead costs.
The Company is continuing to explore its strategic alternatives relative to
XLSource, including the possible sale of all or a portion of XLSource.
There can be no assurances that any such sale will be completed.
XLConnect
Following the acquisition of FNOW, XLConnect was formed by combining the
operations of one of the Company's existing subsidiaries with FNOW's
professional services organization. XLConnect, an 80%-owned subsidiary of
the Company, became a NASDAQ-traded company as a result of its initial
public offering on October 17, 1996. On February 6, 1997, the Company
announced the planned distribution, conditioned on the receipt of an IRS
ruling as to its tax-free nature and customary regulatory and contractual
approvals and consents, of all of the shares of common stock of XLConnect
owned by the Company (13,325,000 shares) in a spin-off to the Company's
shareholders. As a result of the definitive agreement to sell the
Company's Indirect Business (See Note 2 to the Consolidated Financial
Statements), the Company has been advised that it is unlikely that the
spin-off would qualify as a tax-free distribution of stock. Accordingly,
the Company does not currently intend to effect the spin-off of XLConnect.
XLConnect offers a wide range of professional services including project
and network management, consulting services, enterprise design, training,
technology deployment and telecommunications services.
XLConnect focuses on four specific areas, emphasizing total connectivity
solutions:
<PAGE>
Internetworking Solutions: The Internetworking group provides network and
communication systems management, local and wide area network design
services, web site development, and connectivity consulting.
Managed Service Solutions: Managed Service Solutions maximizes the
productivity of its customers' networks and the equipment on the network.
It offers a full range of services including PC, local and wide area
network outsourcing, asset management, workgroup collaboration, electronic
mail and electronic commerce services.
Application Services Group: The Application Services Group provides
Internet and Intranet solutions, training, and help desk solutions. It
designs, develops, installs and supports Internet and Intranet applications
running over enterprise-wide networks. It also trains personnel, agents
and its customers on how to sell and support these complex solutions.
Telecommunication Services: Telecommunication services include data, video
and voice transmission services. These services are provided through
alliances with several leading telecommunications carriers and Internet
service providers.
Competition
Competition in the microcomputer industry is intense, principally in the
areas of price, breadth of product line, product availability and technical
consulting, support and service. The Company and its Network compete with
computer aggregators, distributors, resellers and retailers in the sale of
its products and services as well as firms offering information technology
implementation consulting services. The Company faces competition from
microcomputer manufacturers that sell their products through direct sales
forces and from distributors that emphasize mail order and telemarketing.
The Company is 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. As previously stated, open
sourcing has intensified competitive pricing pressures throughout the
industry and specifically has had an adverse effect on the Company.
Certain competitors have greater technical, marketing and financial
resources than the Company.
XLConnect's competitors in the total connectivity solutions industry
include computer resellers, Internet service providers, long-distance
carriers, regional Bell operating companies and traditional hardware and
software providers. Management believes that the breadth of services
offered by XLConnect (and the prices charged) should allow XLConnect to
compete effectively for customers. However, XLConnect operates in an
emerging industry, which is likely to undergo continuous change, and there
can be no assurance that it will be able to achieve and sustain a strong
competitive position. Certain competitors have greater technical,
marketing and financial resources than XLConnect.
<PAGE>
Trademarks and Service Marks
The trademarks or service marks "The Future Now, Inc.," "IE," "IE
Intelligent Electronics," "TCBC Todays Computers Business Centers,"
"Entre," "Entre Computer Center," "Connecting Point," "Intelligent Systems
Group," "Intelligent Electronics BTC Business Technology Center," "FAMA,"
"Intelligent Lease," "The Intelligent Leasing Center," "XLConnect,"
"XLConnect Solutions," "XLConnect Services," "XLConnect Systems,"
"XLSource," 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 the
Company. Although the marks may not be registered with any states, the
Company claims common law rights to the marks based on adoption and use.
To the Company's knowledge, there are no pending interference, opposition
or cancellation proceedings, or litigation, threatened or claimed, with
respect to the marks in any jurisdiction. The Company holds no patents.
Management believes that the Company's marks are valuable; however, the
loss of use of any of the marks would not have a material adverse effect on
the Company's business.
Government Regulation
Although the Company no longer offers new franchises, it is subject to a
substantial number of United States and state laws regulating franchise
operations for existing franchise agreements. In certain states, there are
substantive laws or regulations affecting the relationship between the
Company and the franchisees, especially in the area of termination of the
franchise agreement. The Company has also registered with various
regulatory agencies with respect to its sale of telecommunications
services. The Company believes it is currently and has been in the past in
substantial compliance with all such regulations.
<PAGE>
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
------ --- ---------
Richard D. Sanford 53 Chairman of the Board and
Chief Executive Officer
Michael A. Norris 46 President; Chief Executive
Officer of the Reseller
Network
Timothy D. Cook 36 Senior Vice President
Thomas J. Coffey 44 Senior Vice President, Chief
Financial Officer and
Treasurer
Richard D. Sanford has been the Company's Chairman and Chief Executive
Officer since he founded the Company in May 1982. Mr. Sanford was named
President of the Company in April 1996, a position which he relinquished
when Mr. Norris joined the Company in August 1996.
Michael A. Norris joined the Company in August 1996 as President of the
Company and Chief Executive Officer of its Reseller Network. Prior to
joining the Company, Mr. Norris held various executive positions at Compaq
Computer Corporation since July 1992, the most recent as Vice President of
North American Sales. Prior to that, Mr. Norris held the position of
Executive Vice President for Murata Business Systems from 1988 through July
1992.
Timothy D. Cook joined the Company as Senior Vice President in October
1994. Prior to joining the Company, 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 the Company as Vice President and Chief Financial
Officer in July 1995. On April 1, 1996, Mr. Coffey was named Senior Vice
President and in May 1996, Mr. Coffey was named Treasurer of the Company.
Prior to joining the Company, Mr. Coffey was a partner in the international
accounting firm of KPMG Peat Marwick which position he held since 1985.
Employees
As of February 1, 1997, the Company had 2,849 full-time employees. No
employee is represented by a labor union and the Company believes that its
employee relations are good.
<PAGE>
Item 2. PROPERTY
The Company currently distributes products from two leased facilities in
the United States. One distribution center is located in approximately
488,000 square feet of space in Memphis, Tennessee, under a lease which
expires in February 2005. The other distribution center is located in
Denver, Colorado in approximately 200,000 square feet of space under a
lease expiring in August 1997.
The Company leases approximately 31,000 square feet in Exton, Pennsylvania,
primarily for its principal executive offices with a lease term expiring in
December 1997 and approximately 130,000 square feet in the Denver, Colorado
area, primarily for its Indirect Business offices, under a lease expiring
in December 2001. In addition, the Company leases facilities for the
XLConnect and XLSource branch locations expiring at various dates between
1997 and 2007. The Company believes that its facilities are adequate for
its present needs.
Item 3. LEGAL PROCEEDINGS
In December 1994, several 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 the
Company and certain directors and officers; these lawsuits were
consolidated with a class action lawsuit filed in 1992 against the Company,
certain directors and officers, and the Company's auditor's in the United
States District Court for the Eastern District of Pennsylvania (Civil
Action No. 92-CV-1905). A derivative lawsuit was also filed in December
1994 in the Court of Common Pleas of Philadelphia County (No. 803) against
the Company and certain of its directors and officers. These lawsuits
alleged 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 sought damages in unspecified amounts as well as other monetary
and equitable relief. The Company has reached a tentative settlement of the
class and derivative actions, without admitting any liability, under which
the class and derivative plaintiffs will receive a total of $10 million.
Of the $10 million, the Company will be contributing $3.8 million and the
balance will be funded by insurance. The settlements are subject to court
approval. Management cannot predict when the final settlements will be
approved.
In addition, the Company is involved in various litigation and arbitration
matters in the ordinary course of business. The Company believes that it
has meritorious defenses in and is vigorously defending against all such
matters. Management believes the resolution of these matters will not have
a material adverse effect on the Company's financial position or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter in the NASDAQ
National Market System (symbol INEL). As of March 31, 1997, there were
1,163 shareholders of record.
Set forth below is the range of the high and low sale prices for the
Company's Common Stock as reported by NASDAQ during each fiscal quarter
within the two most recent fiscal years:
Quarter ended High Low
------------------- --------- --------
February 1, 1997 $ 9 1/8 $ 3 3/4
November 2, 1996 $ 10 3/4 $ 5 3/4
August 3, 1996 $ 11 1/2 $ 5
May 4, 1996 $ 9 7/8 $ 3 1/2
February 3, 1996 $ 8 1/4 $ 4 1/2
October 28, 1995 $ 13 5/8 $ 7 1/4
July 29, 1995 $ 14 1/2 $ 8 5/8
April 29, 1995 $ 10 1/2 $ 9
The Company instituted a quarterly dividend of $0.08 per share on Common
Stock in the second quarter of the year ended January 29, 1994 ("fiscal
1993"). On June 1, 1993, the Company paid a one-time special cash dividend
of $2.00 per share on Common Stock. In the second quarter of fiscal 1994,
the quarterly dividend was increased to $0.10 per share on Common Stock.
In the fourth quarter of fiscal 1995, the quarterly dividend on Common
Stock was suspended. It is unlikely that the quarterly dividend on Common
Stock will be resumed.
<PAGE>
RECENT SALE OF UNREGISTERED SECURITIES
In October 1996, the Company issued 807,415 shares of Common Stock to four
individuals in connection with their sale to the Company of E-C Computer
Technical Services, Inc.("E-C"), a Houston, Texas computer reseller. In
connection with the acquisition, two of the sellers were employed by the
Company to manage the acquired business and received options to purchase a
total of 90,000 shares of Common Stock under the Company's 1995 Long-Term
Incentive Plan.
In December 1996, the Company issued 412,737 shares of Common Stock to four
individuals in connection with their sale to the Company of RCK Computers,
Inc.("RCK"), a Waco, Texas computer reseller. In connection with the
acquisition, three of the sellers were employed by the Company to manage
the acquired business.
The sale of the shares of Common Stock in the two acquisitions was exempt
from the registration provisions of the Securities Act (the "Act") pursuant
to Section 4 (2) of the Act for transactions not involving a public
offering, based on the fact that the shares were issued to a limited number
of accredited investors who had access to financial and other relevant data
concerning the Company, its financial condition, business and assets. In
accordance with the acquisition agreements, the Company has filed a
registration statement with the Securities and Exchange Commission which
registers the resale of the shares of Common Stock by the sellers.
Item 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA(1)
for fiscal 1996, fiscal 1995, fiscal 1994,
fiscal 1993 and for the year ended January 30, 1993 ("fiscal 1992")
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,346,557 $ 3,588,099 $ 3,208,083 $ 2,646,102 $ 2,016,686
Income (loss) applicable to common shareholders (104,174) (19,488) 8,060 41,117 22,134
Income (loss) per common share
applicable to common shareholders $ (2.98) $(0.59) $ 0.23 $ 1.13 $ 0.58
Cash dividends declared per
share of Common Stock -- $ 0.30 $ 0.38 $ 2.24 --
BALANCE SHEET DATA
Fiscal Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Total assets $ 699,081 $ 839,349 $ 670,774 $ 577,011 $ 630,332
Long-term debt 3,496 80,025 -- -- 97
Total shareholders' equity 135,471 178,036 167,484 218,850 280,527
</TABLE>
(1) See Note 3 to the Consolidated Financial Statements for information
regarding the acquisition of The Future Now, Inc. on August 17, 1995.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
The Company incurred an operating loss of $98.0 million for fiscal 1996
compared to an operating loss of $5.5 million for fiscal 1995. The most
significant items affecting fiscal 1996 were impairment losses of $61.6
million (See Note 7 to the Consolidated Financial Statements), branch
closure costs of $9.8 million (See Note 8), and other charges in the third
quarter of fiscal 1996 totaling $21.7 million (See Note 9), which consisted
of charges to cost of goods sold of $15.7 million, the establishment of
reserves for certain accounts receivable of $2.2 million, and write-offs
for unutilized property and equipment and miscellaneous accruals totaling
$3.8 million.
The following table shows revenues and gross margins as a percentage of
revenues, by business segment, for fiscal 1996 and fiscal 1995 (dollars in
millions).
Fiscal 1996 Fiscal 1995
------------------- -------------------
Gross Gross
Revenues Margin Revenues Margin
-------- ------ -------- ------
Indirect Business $ 3,086 2.6% $ 3,399 3.1%
Direct Business 780 9.6% 469 11.2%
Intercompany eliminations * (519) -- (280) --
-------- ------ -------- ------
Totals $ 3,347 4.7% $ 3,588 4.3%
======== ====== ======== ======
* Intercompany eliminations consist primarily of sales from the Indirect
Business to the Direct Business.
Revenues in the Indirect Business declined 9.2% in fiscal 1996 compared to
fiscal 1995 as a result of continued competitive pressures throughout the
industry primarily due to open sourcing and an additional week of sales in
fiscal 1995 due to the Company's 52-53 week fiscal year. The Indirect
Business has experienced a trend of declining sales in recent quarters
caused by the Company's inability to retain and attract customers resulting
from a number of factors. These factors include: fewer product lines
offered by the Company compared to its larger competitors; a less favorable
allocation of constrained products (which can command a higher gross
margin) in fiscal 1996 compared to fiscal 1995; increased competition;
and continued consolidation in the reseller channel.
<PAGE>
The increase in revenues by the Direct Business is due to the inclusion of
its operating results for the full year in fiscal 1996 compared to only 24
weeks in fiscal 1995.
Gross profit as a percentage of revenues in the Indirect Business was 2.6%
in fiscal 1996 compared to 3.1% in fiscal 1995. Exclusive of special
inventory-related charges recorded in fiscal 1995 of approximately $10
million, gross margin percent in fiscal 1995 would have been 3.3%. The
decrease in the gross profit percentage was due primarily to a less
favorable allocation of constrained products, continued competitive
pressures in the industry, increased freight and configuration costs, and
the inability to take advantage of purchasing and prepayment discounts due
to the Company's limited financial resources.
The decrease in gross margin percent for the Direct Business in fiscal 1996
compared to fiscal 1995 was primarily due to approximately $15.7 million of
charges recorded in fiscal 1996. During fiscal 1996, a major customer of
the Direct Business' rental program announced the adoption of a new
technology platform resulting in the reassessment by the Company of the
estimated future revenue stream under this program. This resulted in an
estimated shortfall, of approximately $8 million, in future rental revenue
compared to the Company's future related lease obligations. In addition,
charges for changes in estimates for inventory reserves ($3.2 million) and
vendor payables and receivable issues ($4.5 million) in the Direct Business
were also recorded. Excluding these charges, the gross margin percent for
the Direct Business for fiscal 1996 would have been 11.6%, reflecting an
increase in revenues from the services sector (XLConnect) of the Direct
Business, which generates a higher gross margin percent. Competitive
pressures and their impact on margins are expected to continue in the
future.
Selling, general and administrative ("SG&A") expenses increased to $174.2
million (5.2% of revenues) in fiscal 1996 compared to $154.4 million (4.3%
of revenues) in fiscal 1995. Fiscal 1996 includes the establishment of
reserves for certain accounts receivable in the Indirect Business of $2.2
million and write-offs for unutilized property and equipment and
miscellaneous accruals totaling approximately $3.8 million. Fiscal 1995
includes charges of approximately $14 million consisting primarily of
severance costs in connection with a reduction in the Company's workforce
and a charge related to certain management information systems projects
reevaluated and realigned following the acquisition of FNOW. After the
elimination of these items, SG&A increased approximately $28 million. This
increase is primarily due to an increase of approximately $39 million in
the Direct Business' SG&A and an increase of $3.1 million in depreciation
in the Indirect Business, partially offset by savings realized as a result
of the workforce reductions which took place in fiscal 1995. The increase
of the Direct Business SG&A is due to the inclusion of operating costs for
the full year in fiscal 1996 compared to only 24 weeks in fiscal 1995. The
increase in depreciation in the Indirect Business is related to the
implementation and enhancement of certain management information systems.
It is anticipated that the workforce reductions and other cost control
measures and processes implemented by the Company will somewhat mitigate
the higher selling, general and administrative costs required to support
the operations of the Direct Business.
<PAGE>
During the third quarter of fiscal 1996, the Company closed the XLSource
portion of five branch locations. Four of these branches were acquired
from FNOW in December 1994 and one was acquired from FNOW in August 1995.
As a result of these closures, the Company recorded an $8 million charge
relating to the allocable portion of goodwill for these locations. In
addition to the goodwill write-down, the Company also recorded a charge of
approximately $1.8 million to reflect the write-off of property and
equipment and remaining lease obligations related to these branches.
During the third quarter of fiscal 1996, a decision to adopt open sourcing
was made by two of the Company's largest vendors. These vendors' products
have totaled approximately 30% to 36% of the Company's revenues during the
past three years. Under open sourcing, franchisees and other resellers are
no longer required to purchase product exclusively from the Company. This
change and a trend of declining sales, gross margins, earnings and cash
flows in the Indirect Business caused the Company to undertake a review of
its long-lived assets in this business unit. As a result of this review,
which was based on estimated future cash flows of the business, it was
determined that certain assets were impaired. The Company determined that
the carrying value of its goodwill relative to the Indirect Business would
not be recovered from future operations. Accordingly, this goodwill,
amounting to approximately $55.5 million, was written-off as of November 2,
1996. This goodwill was recorded in 1988 and 1989 with the acquisitions of
Entre Computer Centers, Inc. ("Entre") and Connecting Point of America,
Inc. ("CPA"), respectively. Both Entre and CPA had substantial franchise
operations when they were acquired.
Also, as a result of this review, the Company determined that certain
technology investments would not be fully recovered from estimated future
cash flows. The Company's configuration software, primarily consisting of
licenses purchased from a third party in 1994 for the use of this system,
was written down to its estimated recoverable value. This write-down,
approximating $6 million, was due to a continuing trend of expenses
exceeding revenues in this portion of the business and the introduction of
competitive technology available through the use of the Internet.
Amortization of intangibles increased in fiscal 1996 compared to fiscal
1995 due to a full year of goodwill amortization associated with the FNOW
acquisition, offset in part by the write-off of goodwill in the Indirect
Business discussed above.
Investment and other income (expense) declined in fiscal 1996 compared to
fiscal 1995 primarily due to the use of available cash during fiscal 1995
for the payment of cash dividends, capital expenditures and the repayment
of FNOW's bank and finance company debt following the acquisition in August
1995. Interest expense increased in fiscal 1996 compared to fiscal 1995
as a result of the Company's more frequent use of its available financing
arrangements for inventory financing and working capital purposes, higher
average borrowing rates and the addition of $75 million of long-term debt
in October 1995. The long-term debt was reduced to $55 million in October
1996.
<PAGE>
The Company's effective tax rate for fiscal 1996 was a 5.9% benefit
compared to a 14.2% benefit for fiscal 1995. The decrease in the effective
tax rate was due primarily to the increase in the valuation allowance for
deferred tax assets.
Fiscal 1995 Compared to Fiscal 1994
Revenues for fiscal 1995 increased approximately 12% compared to fiscal
1994. This increase was primarily due to the revenues generated by the
branch locations acquired from FNOW in December 1994 and the acquisition of
the remainder of FNOW in August 1995, the addition of new network
integrators, an additional week of sales in fiscal 1995 due to the
Company's 52-53 week fiscal year, and industry growth.
Gross profit as a percentage of revenues increased from 4.1% in fiscal 1994
to 4.3% in fiscal 1995. This increase was primarily due to the higher
gross margin percent realized by the FNOW locations which sell directly to
end-users, partially offset by continued competitive pricing pressures
throughout the industry and special inventory-related charges of
approximately $10 million recorded in the second quarter of fiscal 1995
which represented estimates of inventory obsolescence, damaged merchandise
and inventory losses.
Selling, general and administrative expenses increased to $154.4 million
(4.3% of revenues) in fiscal 1995 compared to $96.2 million (3.0% of
revenues) in fiscal 1994. During fiscal 1995, the Company incurred charges
of approximately $14 million (as previously discussed). Other causes of
the increase in selling, general and administrative expenses include:
operating costs for the FNOW locations; costs to service the higher volume
of revenues, larger network, new programs and expanded vendor and SKU base;
and expenses and depreciation relative to the enhancement of existing and
implementation of new management information systems. These increases were
offset in part by savings following the elimination of certain peripheral
ventures. In addition, certain costs were incurred in fiscal 1994
including: a $9 million reserve for litigation and arbitration matters; and
costs relating to the implementation of IE 2000. IE 2000 was a project
designed to transform the Company to a process-driven model.
Amortization of intangibles increased in fiscal 1995 compared to fiscal
1994 due to goodwill related to the FNOW acquisition.
Investment and other income (expense) declined in fiscal 1995 compared to
fiscal 1994 due to the use of available cash for the payment of cash
dividends and share repurchases, the acquisition of certain assets of
branch locations from FNOW in December 1994, capital expenditures and the
repayment of FNOW's bank and finance company debt following the acquisition
in August 1995. Interest expense increased from fiscal 1994 compared to
fiscal 1995 as a result of the Company's more frequent use of its available
financing arrangements for inventory financing and working capital purposes
and the addition of $75 million of long-term debt in October 1995.
<PAGE>
The Company's effective tax rate for fiscal 1995 was a 14.2% benefit
compared to a 39.7% provision for fiscal 1994. The effect of
non-deductible goodwill amortization on the pre-tax loss in fiscal 1995 was the
primary reason for the difference in the effective tax rate.
Liquidity Outlook
During fiscal 1996, both of the Company's segments incurred substantial
operating losses (and such operating losses are continuing ). Management
has been exploring the Company's strategic alternatives, and in connection
therewith, on April 29, 1997 the Company entered into a definitive
agreement to sell the stock and related assets and liabilities the Indirect
Business for $78 million, subject to reductions depending on the date of
closing and also on revenues during the period through closing. The
purchase price will be payable in cash and assumption of
liabilities, based on the Indirect Business' balance sheet at time of
closing. The Company will be required, at closing, to pay to Ingram any
amount by which the estimated assumed liabilities exceed the adjusted purchase
price and to fund a $10 million escrow for final settlement of any purchase
price adjustments. It is currently anticipated that the transaction will
close during the Company's second quarter of fiscal 1997 or shortly thereafter.
The Company expects, on a preliminary basis, that the sale will result in a
pre-tax gain of approximately $20 million, subject to reductions depending on
the date of closing and revenues during the period through closing. The
consummation of the transaction is subject to the approval of the Company's
shareholders and required government approvals, as well as other customary
conditions. Accordingly, there can be no assurance that the sale will be
completed. In the event the transaction is not consummated, and
management's operating plans are not achieved, the Company's operating results
will continue to adversely affect cash flows and liquidity.
The Company is continuing to explore its strategic options with respect to
the Direct Business segment, including the implementation of operating
plans to improve its results and the possible sale of all or a part of the
segment. There can be no assurance that such results will improve or that
any such sale will be completed.
One of the consequences of the Company's operating losses was the
failure to meet certain of the financial covenants of the Company's
financing agreement as of February 1, 1997. The Company and the finance
company have agreed to new covenants which management believes the Company
will meet throughout fiscal 1997, if the sale of the Indirect Business is
completed. However, until necessary shareholder and governmental approvals
are obtained, the long-term portion of the facility will be classified
as a current liability in the Company's Consolidated Balance Sheets.
Notwithstanding such classification, the finance company has agreed that
the long-term debt, which is not due until October 5, 1998, will not be
treated as short-term debt for purposes of the financing agreement.
<PAGE>
Liquidity and Capital Resources
The Company 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,
invest in systems technology, and pay cash dividends.
During fiscal 1996, cash used by operating activities totaled $1.3 million
compared to $23.5 million of cash used in fiscal 1995. The decrease can be
attributed primarily to the reduction of accounts receivable, partially
offset by increased operating losses and lower inventory levels in fiscal
1996 compared to fiscal 1995.
At February 1, 1997, the Company had cash and cash equivalents of $42.9
million compared to $34.6 million at February 3, 1996. This increase is
primarily a result of proceeds from the public offering of XLConnect and
the sale of preferred stock. A portion of these proceeds were used to
repay $20 million of the long-term debt with the balance used for working
capital purposes. Working capital was negative $18.3 million at February
1, 1997 compared to positive working capital of $25.6 million at February
3, 1996. The reason for the negative working capital is the
reclassification of $55 million of long-term debt to a current liability,
as discussed above in "Liquidity Outlook". Without this reclassification,
the Company would have had positive working capital of $36.7 million as of
February 1, 1997. Based on fiscal year-end balances, days sales in
accounts receivable were 18.1 days (18.6 days in fiscal 1995) and inventory
turnover was 9.0 times (10.3 times in fiscal 1995). The decrease in
inventory turnover is primarily related to significantly lower sales
particularly in the fourth quarter of fiscal 1996.
At February 1, 1997, the Company had a $225 million financing agreement
with a finance company, of which $40.4 million was available after
considering the borrowing base formula and trade payables principally
outstanding to a vendor related to the finance company. The agreement has
a rolling eighteen month term and is renewable for six-month periods with
the consent of the lender. The facility can be used for inventory
financing, equipment financing and working capital purposes. Of the $225
million, $20 million was available to XLConnect and its subsidiaries, which
availability was measured against a borrowing base formula relying on
XLConnect's separate assets. XLConnect guaranteed up to a total of $20
million under the agreement. This facility imposes certain financial
covenants relating to working capital, tangible net worth, long-term debt
to tangible net worth and fixed charge coverage. As of February 1, 1997,
the Company was in violation of the working capital and the fixed charge
coverage covenants. The Company has obtained a waiver for non-compliance
with these financial covenants as of February 1, 1997. Additionally, the
long-term debt to tangible net worth and the fixed charge coverage
financial covenants were deleted, a current ratio financial covenant was
added and the financial covenants for working capital and tangible net
worth have been amended for the year ending January 30, 1998 ("fiscal
1997"). The Company believes it will be in compliance with the financial
covenants imposed under this agreement during fiscal 1997, if the sale of
the Indirect Business is completed. The facility has been extended to
October 5, 1998. In March 1997, the agreement was further amended to
delete the assets of XLConnect and its subsidiaries from the borrowing
base, which in effect reduces the amount the Company can borrow under this
credit facility by $20 million. In conjunction with the March 1997
amendment, XLConnect entered into a separate credit agreement with this
lender in the amount of $25 million, which the Company has guaranteed.
<PAGE>
In the fourth quarter of fiscal 1995, the Board of Directors suspended the
Company's quarterly dividend.
Based on the Company's expected level of operations, including plans to
reduce the operating losses of XLSource, and capital expenditure
requirements, management believes that the Company's cash, internally
generated funds, available financing arrangements and proceeds from the
sale of the Indirect Business, will be sufficient to meet the Company's
cash requirements at least through the end of fiscal 1997. However, if the
Company is unable to complete the transaction with Ingram, or continues to
experience losses and negative operating cash flows, the Company's vendors
could elect to restrict product availability and modify credit terms, which
could have a material adverse effect on the Company's liquidity position.
In such circumstances, there can be no assurance that alternative sources
of financing could be obtained.
Inflation and Seasonality
The Company believes that inflation has not had a material impact on its
operations or liquidity to date. The Company's financial performance does
not exhibit significant seasonality, although certain computer product
lines and the Direct Business follow a seasonal pattern with peaks
occurring near the end of the calendar year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Intelligent Electronics, Inc.
and its subsidiaries, listed under Item 14(a)(1) are filed as part of this
annual report on Form 10-K.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders
Intelligent Electronics, Inc.
In our opinion, the consolidated financial statements listed under Item
14(a)(1) and (2) on page 38 present fairly, in all material respects, the
financial position of Intelligent Electronics, Inc. and its subsidiaries at
February 1, 1997 and February 3, 1996 and the results of their operations
and their cash flows for each of the three years in the period ended
February 1, 1997, 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 30, 1997
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
February 1, February 3,
1997 1996
----------- -----------
Assets
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 42,881 $ 34,618
Accounts receivable (net of allowance for doubtful
accounts of $8,101 in 1996 and $8,909 in 1995) 149,107 192,687
Inventory 311,669 346,058
Prepaid expenses and other current assets 4,834 3,411
Deferred income taxes 11,861 16,041
----------- -----------
Total current assets 520,352 592,815
Property and equipment, net 58,712 68,213
Intangible assets, primarily goodwill (net of accumulated
amortization of $7,389 in 1996 and $32,941 in 1995) 91,914 155,390
Other assets 28,103 22,931
----------- -----------
Total assets $ 699,081 $ 839,349
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 3,486 $ 8,744
Accounts payable 430,107 508,747
Accrued liabilities 50,034 49,718
Long-term debt reclassified as current 55,000 --
----------- -----------
Total current liabilities 538,627 567,209
Long-term debt 3,496 80,025
Other long-term liabilities 11,015 14,079
Minority interest 10,472 --
Commitments and contingencies (Notes 5, 6, 10, 15 and 16)
Shareholders' equity:
Preferred stock $1.00 par value per share:
Authorized 15,000,000 shares, none issued
and outstanding -- --
Series B convertible preferred stock $50.00 par
value per share:
Authorized 200,000 shares, 15,000 shares
issued and outstanding 750 --
Common stock $.01 par value per share:
Authorized 100,000,000 shares; issued: 41,352,973
in 1996 and 39,910,649 in 1995 413 399
Additional paid-in capital 284,666 224,260
Treasury stock (5,303,332 shares in 1996 and
5,373,918 shares in 1995) (67,311) (68,207)
Retained earnings (deficit) (83,047) 21,584
----------- -----------
Total shareholders' equity 135,471 178,036
----------- -----------
Total liabilities and shareholders' equity $ 699,081 $ 839,349
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Year ended
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 3,346,557 $ 3,588,099 $ 3,208,083
Cost of goods sold 3,190,683 3,432,262 3,075,342
----------- ----------- -----------
Gross profit 155,874 155,837 132,741
----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 174,230 154,403 96,193
Amortization of intangibles, primarily goodwill 8,311 6,957 4,758
Branch closure costs 9,790 -- --
Impairment losses 61,576 -- --
----------- ----------- -----------
Total operating expenses 253,907 161,360 100,951
----------- ----------- -----------
Income (loss) from operations (98,033) (5,523) 31,790
Other income (expense):
Investment and other income (expense), net (451) 3,679 4,374
Interest expense (12,018) (8,331) (1,238)
----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes, equity in loss of
affiliate, and minority interest
(110,502) (10,175) 34,926
Provision (benefit) for income taxes (6,518) (1,449) 13,853
------------ ----------- -----------
Income (loss) before equity in loss of
affiliate, and minority interest (103,984) (8,726) 21,073
Equity in loss of affiliate (net
of benefit of $1,123 and $2,497) -- (10,762) (13,013)
------------ ----------- -----------
Income (loss) before minority interest (103,984) (19,488) 8,060
Minority interest (70) -- --
------------ ----------- -----------
Net Income (loss) (104,054) (19,488) 8,060
Preferred stock dividend 120 -- --
------------ ----------- -----------
Net income (loss) applicable to common
shareholders $ (104,174) $ (19,488) $ 8,060
============ ============ ===========
Net income (loss) per share applicable
to common shareholders $ (2.98) $ (0.59) $ 0.23
============ =========== ===========
Weighted average number of common shares
and share equivalents outstanding: 34,988 32,794 34,848
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands, except share-related data)
<TABLE>
<CAPTION>
Series B Total
Convertible Additional Retained share-
Common preferred paid-in Treasury earnings holders'
stock stock capital stock (deficit) equity
-------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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 395 221,008 (105,677) 51,758 167,484
Issuance of 390,700 shares on exercise
of options and related tax benefit 4 2,986 -- -- 2,990
Reissuance of 2,952,282 shares of treasury
stock for the acquisition of FNOW -- -- 37,470 (936) 36,534
Cash dividends ($0.30 per share) -- -- -- (9,750) (9,750)
Net change in unrealized loss on
securities and investments -- 266 -- -- 266
Net loss -- -- -- (19,488) (19,488)
-------- ------------ ------------ ------------ -------------
Balance at February 3, 1996 399 224,260 (68,207) 21,584 178,036
Issuance of 222,172 shares on exercise
of options and related tax benefit 2 1,982 -- -- 1,984
Issuance of 807,415 shares for
acquisition of E-C 8 7,208 -- -- 7,216
Issuance of 412,737 shares for
acquisition of RCK 4 3,014 -- -- 3,018
Issuance of 15,000 shares of
preferred stock -- $ 750 13,456 -- -- 14,206
Reissuance of 70,586 shares of treasury
stock for employee stock purchase plan -- -- -- 896 (457) 439
Sale of stock by subsidiary -- -- 34,708 -- -- 34,708
Net change in unrealized loss of
securities and investments -- -- 38 -- -- 38
Preferred stock dividend -- -- -- -- (120) (120)
Net loss -- -- -- -- (104,054) (104,054)
-------- ----------- ------------ ------------- ------------ ------------
Balance at February 1, 1997 $ 413 $ 750 $ 284,666 $ (67,311) $(83,047) $135,471
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(in thousands)
Year ended
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (104,054) $ (19,488) $ 8,060
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 27,578 20,081 10,108
Write-off of property and equipment 1,384 7,978 --
Branch closure costs 9,790 -- --
Impairment losses 61,576 -- --
Deferred taxes (861) (5,624) (6,206)
Provision for losses on trade receivables 4,721 3,875 336
Provision for write-down of inventory 12,567 7,766 1,796
Provision for litigation and arbitration matters -- -- 9,000
Minority interest in net income of XLConnect 70 -- --
Equity in loss of affiliate -- 11,885 15,510
Changes in assets and liabilities excluding
effects of business acquisitions:
Accounts receivable 44,839 (23,683) (46,027)
Inventory 22,733 41,814 (110,620)
Other current assets 3,098 4,554 2,159
Accounts payable (81,454) (78,649) 132,964
Accrued liabilities (3,272) 5,946 6,224
----------- ----------- -----------
Net cash provided by (used for) operating activities
(1,285) (23,545) 23,304
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities -- -- (31,709)
Sales and maturities of marketable securities
-- 8,675 84,164
Acquisition of property and equipment,
net of disposals
(17,543) (34,437) (28,001)
Purchase of net assets of franchised centers
-- -- (39,101)
Investments in and loans to resellers (4,000) -- (2,162)
Other (243) 56 (762)
----------- ----------- -----------
Net cash used for investing activities (21,786) (25,706) (17,571)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchased -- -- (48,496)
Net proceeds (repayments) from working
capital advances (7,540) -- --
Proceeds from long-term debt -- 75,000 --
Cash dividends paid -- (12,869) (12,523)
Net proceeds from XLConnect initial public offering 45,110 -- --
Net proceeds from sale of preferred stock 14,206 -- --
Repayment of long-term debt (20,000) -- --
Repayment of FNOW's bank debt -- (50,009) --
Proceeds from exercise of stock options 1,984 2,990 2,207
Proceeds from employee stock purchase plan 439 -- --
Reduction in capital lease obligations (2,865) (270) (143)
----------- ----------- -----------
Net cash provided by (used for) financing activities
31,334 14,842 (58,955)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,263 (34,409) (53,222)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,618 69,027 122,249
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 42,881 $ 34,618 $ 69,027
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<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
Intelligent Electronics, Inc. (the "Company") provides information
technology products, services and solutions to network integrators and
resellers (the "Network"), through its Reseller Network (the "Indirect
Business") and to large and small corporate customers, educational
institutions and governmental agencies in the United States, primarily
through its branch locations (the "Direct Business"). The Company was
founded in 1982 and is a Pennsylvania corporation. In March 1984, the
Company commenced the wholesale distribution of microcomputers. On August
17, 1995, the Company exchanged shares of its Common Stock for all of the
remaining shares (approximately 69%) of The Future Now, Inc. ("FNOW"), not
previously owned by the Company (See Note 3). The acquisition of FNOW, a
computer sales and services company, expanded the Company's offerings
through the addition of a direct hardware sales organization ("XLSource")
and a professional services organization providing a wide range of
sophisticated customer support and consulting services. The professional
services organization was combined with one of the Company's existing
subsidiaries to form XLConnect Solutions, Inc., ("XLConnect") which was
incorporated in January 1996. On October 17, 1996, XLConnect completed an
initial public offering with the Company retaining an 80%-ownership
interest (See Note 4). The principal products sold, installed and serviced
by the Company include microcomputers, workstations, local and wide area
network systems, computer software and peripherals and telecommunications
equipment. The Company also offers a wide range of sophisticated customer
support and consulting services.
Preparation of Financial Statements: Significant Risks, Uncertainties and
Estimates
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Actual results could differ from those estimates. All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in prior periods have been reclassified to
conform with the current year presentation.
<PAGE>
During fiscal 1996, both of the Company's segments incurred substantial
operating losses (and such operating losses are continuing). Management
has been exploring the Company's strategic alternatives, and in connection
therewith, on April 29, 1997 the Company entered into a definitive
agreement to sell the Indirect Business. It is currently anticipated that
the transaction will close during the Company's second quarter of fiscal
1997 or shortly thereafter. The Company expects, on a preliminary basis, that
the sale will result in a pre-tax gain. The consummation of the transaction
is subject to the approval of the Company's shareholders and required
government approvals, as well as other customary conditions. Accordingly,
there can be no assurance that the sale will be completed. In the event
the transaction is not consummated, the losses incurred by the Indirect
Business will continue to adversely affect the Company's operating cash
flows and liquidity.
The Company is continuing to explore its strategic options with respect to
the Direct Business segment, including the implementation of operating
plans to improve its results and the possible sale of all or a part of the
segment. There can be no assurance that such results will improve or that
any such sale will be completed.
<PAGE>
One of the consequences of the Company's operating losses was the failure
to meet certain of the financial covenants of the Company's financing
agreement as of February 1, 1997. The Company and the finance company have
agreed to new covenants which management believes the Company will meet
throughout fiscal 1997 if the sale of the Indirect Business is completed.
However, until necessary shareholder and governmental approvals are obtained,
the long-term portion of the facility will be classified as a current
liability in the Company's Consolidated Balance Sheets. Notwithstanding such
classification, the finance company has agreed that the long-term debt,
which is not due until October 5, 1998, will not be treated as short-term
debt for purposes of the financing agreement.
The matters discussed that are forward-looking statements are based on
current management expectations that involve risks and uncertainties.
Potential risks and uncertainties include, without limitation: the impact
of economic conditions generally and in the industry for microcomputer
products and services; the trend of declining sales, gross margins,
earnings and cash flows in the Indirect Business; the potential decline
generally in the level of demand for the Company's products and services;
the potential termination or non-renewal of a supply agreement with a major
vendor; continued competitive and pricing pressures in the industry;
product supply shortages; open sourcing of products from vendors; rapid
product improvement and technological change, short product life cycles and
resulting obsolescence risks; legal proceedings; and the risks of
unavailability of adequate products, credit, capital or financing.
<PAGE>
Definition of Fiscal Year
The fifty-two week period ended February 1, 1997, the fifty-three week
period ended February 3, 1996 and the fifty-two week period ended January
28, 1995 are referred to herein as "fiscal 1996," "fiscal 1995" and "fiscal
1994," respectively.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents comprise the Company's cash balances and short-
term investments with an initial maturity of less than ninety days and
include money-market funds and commercial paper. Short-term investments
totaled $37,467 and $34,702 at February 1, 1997 and February 3, 1996,
respectively. The carrying amount of cash, short-term investments and
marketable securities approximates fair market value due to the short-term
maturity of these instruments.
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 or the remaining lease term. Leases meeting the capitalization
requirements of the Statement of Financial Accounting Standards ("SFAS")
No. 13 are capitalized and depreciated over the lease term. Depreciation
expense totaled $19,267 ($1,607 included in cost of goods sold), $13,124
($1,143 included in cost of goods sold) and $5,350 ($1,154 included in cost
of goods sold) for fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
Accumulated depreciation totaled $40,320 at February 1, 1997 and $25,209
at February 3, 1996.
The Company has completed and is in the process of upgrading certain
management information systems, including its warehouse management system
and a sales, order entry and purchasing system. Certain costs associated
with this development process, including purchased software, outside
consulting fees for software development and related incremental internal
costs are being capitalized and upon implementation of the system are
amortized over the estimated useful life of the software (5 years).
Approximately $26,014 and $24,309 was capitalized as of February 1, 1997
and February 3, 1996, respectively (net of accumulated amortization of
$5,028 and $2,164 as of February 1, 1997 and February 3, 1996,
respectively).
<PAGE>
Goodwill
Goodwill, resulting from acquisitions accounted for under the purchase
method, is amortized using the straight-line method over a 20-year period.
The Company continually evaluates the carrying value of the goodwill by
comparing it to the estimated cash flows of the operations which gave rise
to such goodwill. Accordingly, during fiscal 1996, the Company wrote-off
$55.5 million of goodwill relating to acquisitions made in 1988 and 1989
and wrote-down an additional $8 million of goodwill relating to the portion
of the goodwill associated with the closed XLSource branch locations.
(See Notes 7 and 8).
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 related to
these contracts are recorded when incurred. Revenue from professional
service contracts is recognized as the services are provided to the
customer on a percentage-of-completion basis. The Company receives various
marketing development funds from vendors for marketing programs and product
rebates which are accounted for as revenue, a reduction in product cost or
a reduction of selling, general and administrative expenses ("SG&A"),
according to the nature of the program. The amounts classified as SG&A
offset marketing program costs that were incurred to administer and
implement the marketing program designed to promote the sale of vendors'
products. The amounts recorded for fiscal 1996, fiscal 1995 and fiscal
1994 for vendor supported marketing programs are as follows :
Fiscal 1996 Fiscal 1995 Fiscal 1994
----------- ----------- -----------
Revenues $ 2,394 $ 4,429 $ 5,950
Product cost 3,406 5,692 7,475
SG&A 16,498 25,244 25,275
----------- ------------ -----------
Total funding $ 22,298 $ 35,365 $ 38,700
=========== ============ ===========
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109.
Pursuant to SFAS No. 109, deferred tax assets and liabilities are recorded
for temporary differences which enter into the determination of taxable
income in different periods for financial reporting and income tax
purposes. A valuation allowance has been provided to reduce deferred tax
assets to their estimated net realizable amount.
<PAGE>
Income (Loss) Per Share Applicable to Common Shareholders
Accrued cumulative preferred stock dividends (6% per annum) are deducted
from net income (loss) in determining net income (loss) applicable to
common shareholders. Treasury stock transactions are recorded on their
trade date and reduce weighted average shares outstanding from that date.
Income per share applicable to common shareholders is computed using the
weighted average number of common shares (34,262,118 in fiscal 1994) and
dilutive common share equivalents outstanding (585,435 in fiscal 1994).
The amount of dilution is computed by application of the treasury stock
method.
Loss per share applicable to common shareholders is computed using the
weighted average number of common shares outstanding (34,987,762 in fiscal
1996 and 32,794,047 in fiscal 1995).
Recent Pronouncements
On February 4, 1996, the Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 provides guidance for recognition
and measurement of impairment of long-lived assets and certain identifiable
intangibles and goodwill related both to assets to be held and used, and
assets to be disposed. The new standard was effective for fiscal years
beginning after December 15, 1995 (See Note 7).
On February 4, 1996, the Company adopted the disclosure-only option of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires
that companies with stock-based compensation plans either recognize
compensation expense based on fair value accounting methods or continue to
apply the existing accounting rules and disclose pro forma net income and
income per share assuming the fair value method had been applied. The new
standard was effective for fiscal years beginning after December 15, 1995
(See Note 10).
<PAGE>
(2) SUBSEQUENT EVENTS
On April 29, 1997, the Company entered into a definitive agreement with
Ingram Micro Inc. ("Ingram") to sell the stock of certain subsidiaries and
other related assets and liabilities of the Indirect Business for $78
million, subject to reductions depending on the date of closing and also on
revenues during the period through closing. The purchase price will be
payable in cash and assumption of liabilities, based on the Indirect
Business' balance sheet at time of closing. The Company
will be required, at closing, to pay to Ingram any amount by which the
estimated assumed liabilities exceed the adjusted purchase price and to fund
a $10 million escrow for final settlement of any purchase price adjustments.
The consummation of the transaction is subject to the approval of the
Company's shareholders and required government approvals, as well as other
customary conditions. It is currently anticipated that the transaction will
close during the Company's second quarter of fiscal 1997 or shortly thereafter.
However, there can be no assurance that the sale will be completed. The
Company expects, on a preliminary basis, that the sale will result in a pre-tax
gain. Additionally, Ingram will provide XLSource with its product require-
ments over an initial term of up to three years.
The Company is continuing to explore its strategic alternatives relative to
XLSource, including the possible sale of all or a portion of XLSource.
There can be no assurance that any such sale will be completed.
As a result of the definitive agreement to sell the Company's Indirect
Business, the Company has been advised that it is unlikely that the
previously planned spin-off of XLConnect to the Company's shareholders
would qualify as a tax free distribution of stock. Accordingly, the
Company does not currently intend to effect the spin off of XLConnect.
<PAGE>
(3) ACQUISITIONS
On October 23, 1996, the Company issued 807,415 shares of its Common Stock
(valued at $7.2 million) in exchange for all of the common stock of E-C
Computer Technical Services, Inc. ("E-C"), a computer reseller. On
December 23, 1996, the Company issued 412,737 shares of its Common Stock
(valued at $3.0 million) in exchange for all of the common stock of RCK
Computers, Inc. ("RCK"), a computer reseller. The acquisition of E-C was
originally accounted for as a pooling of interests transaction during the
third quarter of 1996 and was subsequently changed to the purchase method
in the fourth quarter of 1996. This change occurred as a result of the
Company's announcement that it was exploring strategic alternatives
including the possible sale of all or a portion of XLConnect, the spin-off
of XLConnect to the Company's shareholders or the sale of one or more of
the Company's operations or business segments. The acquisition of E-C,
therefore, no longer qualified for the use of the pooling of interests
method. The acquisition of RCK was accounted for using the purchase method.
The operating results of E-C and RCK have been included in the consolidated
operating results since their dates of acquisition. The allocation of the
purchase price for both E-C and RCK was based on the estimated fair value
of the assets acquired and liabilities assumed. The purchase price was
allocated as follows:
Accounts receivable $ 6,135
Inventory 911
Other current assets 216
Property and equipment 274
Goodwill 8,353
Short-term debt (1,780)
Accounts payable (3,160)
Accrued liabilities (697)
Long-term debt (18)
----------
$ 10,234
==========
The acquisitions of E-C and RCK had no material effect on the consolidated
results of operations in fiscal 1996. Additionally, if the acquisitions
had occurred at the beginning of fiscal 1996, they would not have had a
material effect on the consolidated results of operations.
On August 17, 1995, the Company acquired FNOW by issuing 2,952,282 shares
of its Common Stock (valued at $36,534, excluding acquisition-related costs
of approximately $1,700) in exchange for all of the remaining shares
(approximately 69%) of FNOW Common Stock not previously owned by the
Company. The acquisition was accounted for using the purchase method and,
accordingly, the operating results of FNOW have been included in the
consolidated operating results since the date of acquisition. The
allocation of the purchase price was based on the estimated fair value of
the assets acquired and liabilities assumed as follows:
Accounts receivable $ 94,087
Inventory 31,032
Other current assets 4,460
Property and equipment 11,488
Goodwill 90,841
Other long-term assets 13,342
Short-term debt (50,564)
Accounts payable (126,558)
Accrued liabilities (29,934)
Long-term debt (286)
Other long-term liabilities (1,374)
----------
$ 36,534
==========
<PAGE>
Unaudited pro forma results of operations of the Company for fiscal 1995,
assuming the FNOW acquisition was consummated on January 29, 1995, are as
follows:
Fiscal
1995
--------------
Revenues $ 3,704,390
Net loss (28,469)
Loss per share $ (0.80)
Pro forma financial information presented above is not necessarily
indicative of the results of operations that would have occurred had the
acquisition taken place at the beginning of the period presented or of
future results of operations of the combined companies.
Prior to August 17, 1995, as a result of the Company's July 1992 sale of
its Company Center Division and subsequent purchases of shares of FNOW's
common stock, the Company owned approximately 31% of FNOW, which was
accounted for by the equity method. During fiscal 1995 and fiscal 1994,
the Company recorded equity in loss of affiliate of $(10,762), and
$(13,013) respectively, in the accompanying Consolidated Statements of
Operations.
On December 30, 1994, the Company purchased certain assets of branch
locations in five major-metropolitan cities from FNOW. The aggregate
purchase price was approximately $39,101 in cash 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:
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
=========
Prior to the FNOW acquisition, these locations were operated by FNOW under
a management agreement. The acquisition of these locations had no material
effect on the consolidated results of operations in fiscal 1994.
<PAGE>
(4) INITIAL PUBLIC OFFERING OF XLCONNECT
On October 17, 1996, XLConnect, formerly a wholly-owned subsidiary,
completed an initial public offering of 3,330,000 shares of its common
stock at $15 per share, raising approximately $45.1 million, net of
offering costs. As a result of this offering, the Company, through one of
its wholly-owned subsidiaries, now owns 80% of XLConnect. The net proceeds
were primarily used by XLConnect to repay intercompany obligations to the
Company. The Company used the proceeds to repay $20 million of its long-
term debt and used the remainder for working capital purposes. The excess
of the proceeds over the minority interest in XLConnect was credited to
additional paid-in capital.
(5) CREDIT FACILITIES
In April 1996, the Company's $270 million financing agreement was replaced
by a new financing agreement, which has a rolling eighteen month term and
is renewable for six-month periods with the consent of the lender and
allows for total borrowings of up to $225 million, subject to a borrowing
base formula. The facility can be used for inventory financing, equipment
financing and working capital purposes. Of the $225 million, $20 million
was available to XLConnect and its subsidiaries, which availability was
measured against a borrowing base formula relying on XLConnect's separate
assets. XLConnect guaranteed up to a total of $20 million under the
agreement. This facility imposes certain financial covenants relating to
working capital, tangible net worth, long-term debt to tangible net worth
and fixed charge coverage. As of February 1, 1997, the Company was in
violation of the working capital and the fixed charge coverage covenants.
The Company has obtained a waiver for non-compliance with these financial
covenants as of February 1, 1997. Additionally, the long-term debt to
tangible net worth and the fixed charge coverage financial covenants were
deleted, a current ratio financial covenant was added and the financial
covenants for working capital and tangible net worth have been amended for
fiscal 1997. The Company believes that it will be in compliance with the
financial covenants imposed under this agreement during fiscal 1997 if the
sale of the Indirect Business is completed. However, until necessary
shareholder and governmental approvals are obtained, the $55 million long-term
portion of the facility (due October 5, 1998) will be classified as a
current liability on the Company's Consolidated Balance Sheets.
Notwithstanding such classification, the finance company has agreed that
the long-term debt, which is not due until October 5, 1998, will not be
treated as short-term debt for purposes of the financing agreement. As of
February 1, 1997, the interest rate for the short and long-term portions of
this agreement was prime plus 1.0% and prime plus 1.625%, respectively.
Approximately $40.4 million was available under this credit line, after
considering the borrowing base formula and trade payables outstanding to a
vendor related to the finance company, at February 1, 1997. In March 1997,
the agreement was further amended to delete the assets of XLConnect and its
subsidiaries from the borrowing base, which in effect reduces the amount
the Company can borrow under this credit facility by $20 million. In
conjunction with the March 1997 amendment, XLConnect entered into a
separate credit agreement with this lender in the amount of $25 million,
which the Company has guaranteed.
The Company and its subsidiaries have agreements with several other lenders
and finance companies to finance product purchases from vendors. Amounts
outstanding are included in accounts payable.
In connection with these arrangements, such creditors have a lien on all of
the Company's assets.
<PAGE>
(6) LEASE OBLIGATIONS
The Company has non-cancelable 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 1996,
fiscal 1995 and fiscal 1994 amounted to $9,313, $7,660, and $6,020,
respectively.
Future minimum lease payments under non-cancelable operating and capital
leases are as follows:
Fiscal Operating Capital
Year leases leases
-------- ------------- -----------
1997 $ 9,892 $ 3,916
1998 7,786 2,630
1999 7,318 919
2000 6,598 146
2001 6,250 121
Thereafter 8,185 --
-------
7,732
Less interest portion (rates ranging from 4.9% to 10.9%) (750)
-------
Present value of capital lease obligations 6,982
Less current portion (3,486)
-------
$ 3,496
=======
In addition, as part of the Direct Business' rental program, the Company
has non-cancelable leases for computer equipment. The future minimum lease
payments under the leases for fiscal 1997, fiscal 1998 and fiscal 1999 are
$11,866, $7,620 and $2,548, respectively.
<PAGE>
(7) IMPAIRMENT LOSSES
During the third quarter of fiscal 1996, a decision to adopt open sourcing
was made by two of the Company's largest vendors. These vendors' products
have totaled approximately 30% to 36% of the Company's revenues during the
past three years. Under open sourcing, franchisees and other resellers are
no longer required to purchase product exclusively from the Company. This
change and a trend of declining sales, gross margins, earnings and cash
flows in the Indirect Business caused the Company to undertake a review of
its long-lived assets in this business unit. As a result of this review,
which was based on estimated future cash flows of the business, it was
determined that certain assets were impaired. The Company determined that
the carrying value of its goodwill relative to the Indirect Business will
not be recovered from future operations. Accordingly, this goodwill,
amounting to approximately $55.5 million, was written-off as of November 2,
1996. This goodwill was recorded in 1988 and 1989 with the acquisitions of
Entre Computer Centers, Inc. ("Entre") and Connecting Point of America,
Inc. ("CPA"), respectively. Both Entre and CPA had substantial franchise
operations when they were acquired.
Also, as a result of this review, the Company determined that certain
technology investments will not be fully recovered from estimated future
cash flows. The Company's configuration software, primarily consisting of
licenses purchased from a third party in 1994 for the use of this system,
was written down to its estimated recoverable value. This write-down,
approximating $6 million, was due to a continuing trend of expenses
exceeding revenues in this portion of the business and the introduction of
competitive technology available through the use of the Internet.
(8) BRANCH CLOSURE COSTS
During the third quarter of fiscal 1996, the Company closed the XLSource
portion of five branch locations. Four of these branches were acquired
from FNOW in December 1994 and one was acquired from FNOW in August 1995.
As a result of these closures, the Company recorded an $8 million charge
relating to the allocable portion of goodwill for these locations. In
addition to the goodwill write-down, the Company also recorded a charge of
approximately $1.8 million to reflect the write-off of property and
equipment and remaining lease obligations related to these branches.
<PAGE>
(9) THIRD QUARTER OF FISCAL 1996 CHARGES
During the third quarter of 1996, the Company recorded charges totaling
approximately $21.7 million. Approximately $15.7 million of these charges
were recorded as cost of sales and relate to the following. A major
customer of the Direct Business' rental program announced the adoption of a
new technology platform resulting in the reassessment by the Company of the
estimated future revenue stream under this program. This resulted in an
estimated shortfall, of approximately $8 million, in future rental revenue
compared to the Company's future related lease obligations. In addition,
the Company provided for changes in estimates for inventory reserves ($3.2
million) and vendor payables and receivable issues ($4.5 million) in the
Direct Business. Charges recorded as selling, general and administrative
expenses consist of reserves for certain accounts receivable in the
Indirect Business ($2.2 million) and write-offs for unutilized property and
equipment and miscellaneous accruals totaling approximately $3.8 million.
(10) CAPITAL STOCK
Preferred Stock
During fiscal 1996, the Company sold 15,000 shares of its Series B
Convertible Preferred Stock ("Preferred Stock") and warrants to purchase
450,000 shares of its Common Stock in a private placement to an
institutional buyer. The transaction was closed on two different dates.
On October 16, 1996, the Company issued 5,000 shares of its Preferred Stock
and warrants to purchase 225,000 shares of its Common Stock. On January
13, 1997, the Company issued 10,000 shares of its Preferred Stock and
warrants to purchase 225,000 shares of its Common Stock.
The Preferred Stock is convertible into Common Stock at the option of the
holder at a conversion ratio based on the average trading prices of the
Company's Common Stock, but in any event not exceeding $9.175 per share
(subject to anti-dilution adjustments), and converts automatically into
Common Stock on October 15, 2001. The warrants are exercisable for five
years at exercise prices of $11.469 per share for those issued on October
16, 1996 and $10.094 per share for those issued on January 13, 1997. A
dividend of 6% per annum on the Preferred Stock will accrue until such a
time that the Preferred Stock is converted into Common Stock, at which time
the cumulative dividend will be paid in Common Stock or cash, at the
Company's option. If all outstanding shares of Preferred Stock were
converted and all of the related warrants were exercised on February 1,
1997, 3,610,746 shares of Common Stock would have been issuable to the
holder by the Company.
<PAGE>
Stock Options
On June 8, 1995, the Company adopted the 1995 Long-Term Incentive Plan,
permitting the grant of stock, stock-related and performance-based awards
to employees and directors of the Company. A total of five million shares
of the Company's Common Stock have been reserved for grant under the 1995
Long-Term Incentive Plan.
The Company also has a non-qualified stock option plan for employees and
directors. After June 8, 1995, no new options may be granted under this
plan. However, previous options granted will continue to vest as per the
original terms of the grant.
These stock option plans are intended to provide an incentive for employees
to maximize their efforts and enhance the success of the Company. Options
are generally granted at option prices equivalent to fair market value on
the date of grant. The options are exercisable commencing one year after
the date of grant in five equal annual installments (unless otherwise
provided in the grant) and expire ten years after the date of grant,
subject to earlier termination and other rules relating to the cessation of
employment. As of February 1, 1997, the weighted average remaining
contractual life was approximately 8 years.
On March 4, 1996, the Board of Directors of the Company authorized the
repricing of all outstanding options, with exercise prices in excess of
$8.00 per share to $8.00 per share, held by currently-active employees,
except certain executive officers. As of that date, 1,767,447 options were
repriced.
On February 25, 1995, the Board of Directors of the Company 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.
<PAGE>
Changes in stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Option price Average Price
shares Range per Share Per Share
--------- --------------- ---------
<S> <C> <C> <C>
Balance outstanding - January 29, 1994 2,606,940 $ 2.85 - $24.88
Granted 945,300 $13.25 - $24.00 $19.50
Exercised (208,070) $ 2.85 - $15.50 $ 7.42
Canceled (233,780) $ 7.63 - $24.00 $17.68
--------
Balance outstanding - January 28, 1995 3,110,390 $ 5.75 - $24.88 $15.85
Granted 3,618,695 $ 6.25 - $13.38 $12.39
Exercised (370,700) $ 5.75 - $13.25 $ 7.44
Canceled (2,710,230) $ 5.75 - $24.88 $18.01
---------
Balance outstanding - February 3, 1996 3,648,155 $ 6.25 - $13.38 $11.67
Granted 3,798,635 $ 6.50 - $ 8.94 $ 7.51
Exercised (77,650) $ 8.00 - $ 9.25 $ 8.16
Canceled (2,939,625) $ 6.69 - $13.38 $10.84
---------
Balance outstanding - February 1, 1997 4,429,515 $ 6.25 - $13.25 $ 8.72
=========
</TABLE>
As of February 1, 1997, there were 1,287,195 options exercisable under the
1995 Long-Term Incentive Plan and the employee and director stock option
plan at exercise prices ranging from $6.25 to $13.25 per share.
The Company also has a non-qualified stock option plan which permits the
granting of options to purchase an aggregate of two million shares of
Common Stock to franchisees of the Company. This plan is intended to
reward franchisees' performance and commitment to the Company. 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 February 1, 1997, there were 122,555 options outstanding
under this plan. Of this amount, 119,555 were exercisable at prices
ranging from $14.75 to $16.625 per share.
<PAGE>
In connection with the acquisition of FNOW, all outstanding options and
warrants to purchase FNOW common stock were converted into options and
warrants to purchase the Company's Common Stock. Generally, these options
and warrants will continue to vest in accordance with the original terms of
the grant expiring at various dates between 2001 and 2004. As of February
1, 1997, there were 250,585 options outstanding and exercisable at prices
ranging from $8.00 to $21.94 per share.
As of February 1, 1997, shares of Common Stock are reserved for issuance
for the following stock options:
Shares
---------
Exercise of employee and director stock options 6,729,560
Exercise of franchisee stock options 1,933,435
Exercise of other stock options 250,585
---------
Total 8,913,580
=========
The Company accounts for stock option awards in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. In
accordance with this Opinion, no compensation cost has been recognized in
the Company's Consolidated Statements of Operations. Had the Company
recorded compensation expense for the fair value of the options granted and
repriced, as provided by SFAS No. 123, the Company's net loss and net loss
per share would have been as follows:
Fiscal Fiscal
1996 1995
----------- -----------
Net loss applicable to common shareholders
As reported $ (104,174) $ (19,488)
Pro forma (109,391) (23,707)
Net loss per share applicable to common shareholders
As reported $ (2.98) $ (0.59)
Pro forma (3.13) (0.72)
In order to calculate the fair value of stock options at date of grant or
repricing, the Company used the Black-Scholes option pricing model. The
following assumptions were used for both 1996 and 1995: expected option
term of 5 years from date of original grant; risk free interest rates
ranging from 5.39% to 7.16%; stock price volatility factor of 62%; and
dividend yield of 0.0%. The weighted average fair value at grant date
of options granted in fiscal 1996 and 1995 was $4.18 and $6.42, respectively.
<PAGE>
Employee Stock Purchase Plan
In June 1995, shareholders approved the 1995 Employee Stock Purchase Plan
("ESPP"). Under the ESPP, a total of 500,000 shares of the Company's
Common Stock may be purchased by employees (except executive officers) of
the Company through payroll deductions. There are two separate six-month
offering periods per year, whereby the purchase price per share is equal to
90% of the lower of the beginning or ending quoted closing market price of
each offering period. During fiscal 1996, 70,586 shares of treasury stock
were re-issued pursuant to this plan. The impact of the ESPP on the
proforma in the preceding paragraph was immaterial.
Shareholders' Rights Plan
On March 8, 1996, the Board of Directors of the Company adopted a
Shareholders' Rights Plan (the "Plan") and declared a distribution of one
right for each outstanding share of the Company's Common Stock to
shareholders of record at the close of business on March 25, 1996 and for
each share of Common Stock issued by the Company thereafter and prior to
the subsequent distribution date of the rights.
Under the Plan, each right entitles the holder to buy one-thousandth of a
share of Series A Junior Participating Preferred Stock (a "Unit") at a
purchase price of $28.00 per unit, subject to adjustment. The rights will
expire in ten years unless redeemed earlier and will not be exercisable or
transferable separately from the shares of Common Stock to which the rights
are attached until the earlier of (i) ten business days following a public
announcement ("Stock Acquisition Date") that a person or group of
affiliated or associated persons (other than the Company, any subsidiary of
the Company or any employee benefit plan of the Company or such subsidiary)
(an "Acquiring Person") has acquired, obtained the right to acquire, or
otherwise obtained beneficial ownership of 15% or more of the then
outstanding shares of the Company Common Stock, and (ii) ten business days
following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 15% or more of the then
outstanding shares of Company Common Stock.
At any time until ten business days following the Stock Acquisition Date, a
majority of independent directors of the Company may redeem the rights in
whole, but not in part, at a price of $0.001 per right, subject to
adjustment.
<PAGE>
In the event that (i) the Company is the surviving corporation in a merger
with an Acquiring Person and shares of Company Common Stock remain
outstanding, (ii) a person becomes the beneficial owner of 15% or more of
the then outstanding shares of Company Common Stock, (iii) an Acquiring
Person engages in one or more "self-dealing" transactions as set forth in
the Rights Agreement, or (iv) during such time as there is an Acquiring
Person, an event occurs which results in such Acquiring Person's ownership
interest being increased by more than 1%, then each holder of a right will
have the right to receive, upon exercise, Units of Preferred Stock having a
current market value equal to two times the exercise price of the right.
The exercise price is the purchase price multiplied by the number of Units
of Preferred Stock issuable upon exercise of a right prior to the events
described in this paragraph. Notwithstanding any of the foregoing,
following the occurrence of any of the events set forth in this paragraph,
all rights that were beneficially owned by any Acquiring Person will be
null and void.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination
transaction and the Company is not the surviving corporation, (ii) any
person consolidates or merges with the Company and all or part of the
Company Common Stock is converted or exchanged for securities, cash or
property of any other person or (iii) 50% or more of the Company's assets
or earning power is sold or transferred, then each holder of a right will
have the right to receive, upon exercise, common stock of the Acquiring
Person having a current market value equal to two times the exercise price
of the right.
(11) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Current Deferred Total
---------- ---------- ----------
Fiscal 1996
Federal $ (5,954) $ (756) $ (6,710)
State 297 (105) 192
---------- ---------- ----------
Total $ (5,657) $ (861) $ (6,518)
========== ========== ==========
Fiscal 1995
Federal $ 4,327 $ (5,539) $ (1,212)
State 1,139 (1,376) (237)
---------- ---------- ----------
Total $ 5,466 $ (6,915) $ (1,449)
=========== ========= ==========
Fiscal 1994
Federal $ 19,011 $ (5,923) $ 13,088
State 1,109 (344) 765
---------- ---------- ----------
Total $ 20,120 $ (6,267) $ 13,853
=========== ========= ==========
<PAGE>
Deferred income tax balances, and the deferred component of the provision
for income taxes, relate to the following cumulative temporary differences:
February 1, February 3,
1997 1996
----------- -----------
Inventory $ 4,452 $ 8,377
Accounts receivable reserves 5,772 5,316
Acquisition accruals 9,362 10,034
Employee benefits 2,385 3,378
Depreciation 413 653
Litigation and related contingencies 1,683 3,297
Net operating loss carryforwards 24,933 15,236
Other accruals 8,196 4,850
----------- -----------
57,196 51,141
Valuation allowance (27,575) (22,381)
----------- -----------
Deferred tax asset $ 29,621 $ 28,760
=========== ===========
The Company has available approximately $63,000 of net operating loss
carryforwards that expire in various years ranging from 2008 to 2012.
Utilization of certain of these losses is subject to an annual limit. A
valuation allowance has been provided to the extent the Company has
estimated that it is more likely than not that a portion of the gross
deferred tax asset will not be realized. In the event that the tax
benefits related to the acquisition of FNOW are subsequently realized, in
excess of previously recorded amounts, the benefit will be recorded as a
credit to goodwill.
The long-term portion of the deferred tax asset ($17,760 at February 1,
1997 and $12,719 at February 3, 1996) is recorded in other assets on the
Consolidated Balance Sheets.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
Fiscal Fiscal Fiscal
1996 1995 1994
------- ------- ------
Federal statutory rate (35.0)% (35.0)% 35.0%
State income taxes, net of federal benefit 0.2 (1.5) 1.4
Amortization/write-off of intangibles 20.2 23.9 4.9
Change in valuation allowance 8.7 -- --
Tax-exempt investment income -- (0.8) (2.0)
Other -- (0.8) 0.4
------- ------- ------
(5.9)% (14.2)% 39.7%
<PAGE>
(12) SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes were as follows:
Fiscal Fiscal Fiscal
1996 1995 1994
--------- --------- ---------
Details of acquisitions:
Fair value of assets acquired $ 15,889 $ 245,250 $ 39,501
Liabilities assumed and acquisition-
related accruals 5,655 208,716 400
Details of other financing activities:
Accrual of dividends 120 -- 3,119
Capital leases 1,820 6,927 --
Cash paid during the year for:
Interest 16,234 4,656 1,518
Income taxes 172 2,526 19,865
(13) MAJOR SUPPLIERS
The Company has authorized dealership or distributorship agreements with
various vendors. Products from certain of these vendors comprised the
following percentages of the Company's revenues during fiscal 1996, fiscal
1995 and fiscal 1994:
Fiscal Fiscal Fiscal
1996 1995 1994
------ ------ ------
Hewlett-Packard Company 26% 25% 24%
Compaq Computer Corp. 26% 24% 25%
IBM Corp. 12% 15% 15%
Apple Computer, Inc. 4% 8% 12%
No other vendors' products comprised more than 10% of the Company's
revenues during fiscal 1996, fiscal 1995 or fiscal 1994.
(14) EMPLOYEE BENEFIT PLAN
The Company 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. FNOW also had a 401(k) tax deferred savings
plan prior to the acquisition. These plans were merged on January 1, 1996.
The Company matches $0.50 for each dollar contributed by participants
subject to certain limitations. The Company's contributions under the Plan
for fiscal 1996, fiscal 1995 and fiscal 1994 were $1,422, $722 and $426,
respectively.
<PAGE>
(15) COMMITMENTS
The Company and its subsidiaries have arrangements with six finance
companies which provide inventory financing facilities for its Network.
The Company monitors the financial stability of the finance companies and
requires payment within two days of product shipment. If these
arrangements are terminated, the Company would have to develop alternative
financing arrangements. In conjunction with these arrangements, the
Company 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.
(16) CONTINGENCIES
In December 1994, several 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 the
Company and certain directors and officers; these lawsuits were
consolidated with a class action lawsuit filed in 1992 against the Company,
certain directors and officers, and the Company's auditor's in the United
States District Court for the Eastern District of Pennsylvania (Civil
Action No. 92-CV-1905). A derivative lawsuit was also filed in December
1994 in the Court of Common Pleas of Philadelphia County (No. 803) against
the Company and certain of its directors and officers. These lawsuits
alleged 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 sought damages in unspecified amounts as well as other monetary
and equitable relief. The Company has reached a tentative settlement of
the class and derivative actions, without admitting any liability, under
which the class and derivative plaintiffs will receive a total of $10
million. Of the $10 million, the Company will be contributing $3.8 million
and the balance will be funded by insurance. The settlements are subject
to court approval. Management cannot predict when the final settlements
will be approved. The amount required to be paid by the Company had been
accrued in fiscal 1994.
In addition, the Company is involved in various litigation and arbitration
matters in the ordinary course of business. The Company believes that it
has meritorious defenses in and is vigorously defending against all such
matters. Management believes the resolution of these matters will not have
a material adverse effect on the Company's financial position or results of
operations.
<PAGE>
(17) SEGMENT INFORMATION
Commencing with the acquisition of FNOW, the Company began operating in two
segments: sales of computer-related products primarily to its Network
("Indirect Business") and sales and services of computer-related products
to end-users ("Direct Business").
The following summarizes certain financial data by industry segment.
Indirect Direct Elimi-
Fiscal 1996 Business Business nations Total
- ----------------------- ---------- -------- --------- ----------
Sales to unaffiliated
customers $2,569,793 $776,764 $ -- $3,346,557
Inter-segment sales 516,469 2,878 (519,347) --
---------- -------- --------- ----------
Total revenues (1) 3,086,262 779,642 (519,347) 3,346,557
Operating loss (63,752) (34,281) -- (98,033)
Identifiable assets 452,525 246,556 -- 699,081
Capital expenditures 12,026 5,517 -- 17,543
Depreciation
and amortization 16,265 11,313 -- 27,578
Indirect Direct Elimi-
Fiscal 1995 Business Business nations Total
- ----------------------- ---------- -------- --------- ----------
Sales to unaffiliated
customers $3,121,723 $466,376 $ -- $3,588,099
Inter-segment sales 277,417 2,890 (280,307) --
---------- -------- --------- ----------
Total revenues (1) 3,399,140 469,266 (280,307) 3,588,099
Operating loss (2,914) (2,609) -- (5,523)
Identifiable assets 530,300 309,049 -- 839,349
Capital expenditures 31,443 2,994 -- 34,437
Depreciation
and amortization 14,418 5,663 -- 20,081
(1) Total revenues for the Indirect Business include transfers to the
Direct Business at cost plus a fee for handling, distribution and other
services.
<PAGE>
(18) QUARTERLY FINANCIAL DATA (unaudited)
Selected quarterly financial data for fiscal 1996 and fiscal 1995, are as
follows:
First Second Third Fourth Fiscal
Fiscal 1996 Quarter Quarter Quarter(1) Quarter Year
- -------------- --------- --------- --------- --------- -----------
Revenues $ 877,939 $ 866,700 $ 861,986 $ 739,932 $ 3,346,557
Gross profit 45,584 44,715 30,018 35,557 155,874
Net loss (3,194) (2,376) (93,440) (5,164) (104,174)
Loss per share $ (0.09) $ (0.07) $ (2.68) $ (0.14) $ (2.98)
First Second Third Fourth Fiscal
Fiscal 1995 Quarter Quarter(2) Quarter(3) Quarter Year
- -------------- --------- --------- --------- --------- -----------
Revenues $ 827,439 $ 881,614 $ 944,223 $ 934,823 $ 3,588,099
Gross profit 37,675 27,038 48,427 42,697 155,837
Net income (loss) 4,890 (5,934) (13,533) (4,911) (19,488)
Income (loss)
per share $ 0.16 $ (0.19) $ (0.40) $ (0.14) $ (0.59)
(1) During the third quarter of fiscal 1996, the Company recorded
impairment losses of $61.6 million (See Note 7), branch closure costs of
$9.8 million (See Note 8), and other charges totaling $21.7 million (See
Note 9) which consisted of charges to cost of goods sold of $15.7 million,
the establishment of reserves for certain accounts receivable of $2.2
million, and write-offs for unutilized property and equipment and
miscellaneous accruals totaling $3.8 million.
(2) During the second quarter of fiscal 1995, the Company recorded an
inventory-related charge of approximately $10.2 million in connection with
warehouse consolidations. This charge reflected current estimates of
inventory obsolescence, damaged merchandise and inventory losses.
(3) During the third quarter of fiscal 1995, the Company incurred charges
of approximately $14 million consisting primarily of severance costs in
connection with a reduction in the Company's workforce and a charge related
to certain management information systems projects reevaluated and
realigned following the acquisition of FNOW.
The sum of the quarterly net income (loss) 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 the respective weighted
average common shares outstanding.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained in the sections titled "Election of
Directors" in the Proxy Statement for the 1997 Annual Shareholders' Meeting
(the "Proxy Statement"), with respect to directors of the Company, and the
information contained in the section titled "Item 1. Business - Executive
Officers of the Company" in Part I of this Form 10-K, with respect to
executive officers of the Company, are incorporated herein by reference in
response to this item.
Item 11. EXECUTIVE COMPENSATION
The information contained in the section titled "Executive
Compensation" in the Proxy Statement (other than the portion thereof
contained under the headings "Stock Performance Chart" and "Compensation
and Stock Option Committee Report on Executive Compensation"), with respect
to executive compensation and the information contained in the section
titled "Director Compensation" in the Proxy Statement with respect to
Director compensation are incorporated herein by reference in response to
this item.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section titled "Principal
Shareholders and Holdings of Officers and Directors" in the Proxy
Statement, with respect to security ownership of certain beneficial owners
and management, is incorporated herein by reference in response to this
item.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section titled "Certain
Relationships and Related Transactions" in the Proxy Statement, with
respect to certain relationships and related transactions, is incorporated
herein by reference in response to this item.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report :
(1) Financial statements:
Report of Independent Accountants
Consolidated Balance Sheets, February 1, 1997
and February 3, 1996
Consolidated Statements of Operations, Years
ended February 1, 1997, February 3, 1996 and January 28, 1995
Consolidated Statements of Shareholders'
Equity, Years ended February 1, 1997, February 3, 1996 and
January 28, 1995
Consolidated Statements of Cash Flows,
Years ended February 1, 1997, February 3, 1996 and January 28,
1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
and Reserves
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes
thereto.
<PAGE>
(a) (3) Exhibits:
* 3.1 Articles of Incorporation of the Company, as amended. (Exhibit
3.1 of the Company's Registration Statement No. 33-14436 filed
on May 20, 1987 [the "1987 Registration Statement"].)
* 3.2 Amendment to the Articles of Incorporation of the Company
effective June 22, 1987. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1987
[the "1987 Form 10-K"].)
* 3.3 By-Laws of the Company. (Exhibit 3.3 to the 1987 Registration
Statement.)
* 3.4 Specimen Certificate of Common Stock, $.01 par value. (Exhibit
3.4 to the 1987 Registration Statement.)
* 3.5 Amendments to By-Laws of the Company effective June 2, 1987.
(Exhibit 3.5 to the 1987 Form 10-K.)
* 3.6 Amendments to By-Laws of the Company effective March 28, 1990.
(Exhibit 3.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1990 [the "1990 Form 10-K"].)
* 3.7 Amendments to By-Laws of the Company effective July 4, 1990.
(Exhibit 3.7 to the 1990 Form 10-K.)
* 3.8 Articles of Amendment to the Articles of Incorporation of the
Company filed on April 9, 1990. (Exhibit 3.8 to the 1990 Form
10-K.)
* 3.9 Statement with Respect to Shares of the Company, filed with the
Pennsylvania Secretary of State on October 16, 1996 (Exhibit
99.2 to the Company's Report on Form 8-K dated October 16,
1996.)
* 4 Rights Agreement dated as of March 22, 1996, between the Company
and Chemical Mellon Shareholder Services L.L.C., including Form
of Series A Rights Certificate (Exhibit A), Form of Certificate
of Designation (Exhibit B), and Form of Summary of Rights
(Exhibit C). (Exhibit 4.1 to the Company's Report on Form 8-K
dated March 8, 1996.)
*10.1 Amended and Restated Non-Qualified Stock Option Plan for
Employees and Directors. (Exhibit 10.1 to the 1990 Form 10-K.) **
*10.2 Amended and Restated Non-Qualified Stock Option Plan for
Franchisees. (Exhibit 10.2 to the 1990 Form 10-K.)
*10.3 IBM Personal Computer Agreement between the Company and IBM, as
amended. (Exhibit 10.5 to the 1987 Registration Statement.)
*10.4 COMPAQ Computer Corporation United States Central Purchase
Agreement among the Company, TCBC and COMPAQ. (Exhibit 10.5 to
the Company's Registration Statement No. 33-27573 filed on March
16, 1989 [the "1989 Registration Statement"].)
*10.5 Lease Agreement dated January 20, 1989 between the Company and
Hankin/Crow Associates. (Exhibit 10.13 to the 1989 Registration
Statement.)
*10.6 IBM Personal Computer Agreement between Entre and IBM. (Exhibit
10.14 to the 1989 Registration Statement.)
*10.7 COMPAQ Computer Corporation Central Purchase Agreement between
Entre and COMPAQ. (Exhibit 10.15 to the 1989 Registration
Statement.)
*10.8 IBM Personal Computer Agreement between CPA and IBM. (Exhibit
10.24 to the 1989 Registration Statement.)
*10.9 Dealer Sales Agreement between CPA and Apple. (Exhibit 10.25 to
the 1989 Registration Statement.)
<PAGE>
*10.10 Addendum to Dealer Sales Agreement between CPA and IBM (and
related documents). (Exhibit 10.29 to the 1989 Registration
Statement.)
*10.11 Richard D. Sanford Deferred Compensation Agreement. (Exhibit
10.33 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended July 30, 1994.) **
*10.12 Lease Agreement between Harbin Group, L.P. and the Company
dated May 17, 1994. (Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended January 28, 1995 [the
1994 Form 10-K"].)
*10.13 Lease Agreement between Quebec Court Joint Venture No. 2 and
the Company dated June 3, 1995. (Exhibit 10.17 to the 1994 Form
10-K.)
<PAGE>
*10.14 Agreement and Plan of Merger dated as of April 28, 1995 among
the Company, IE Ohio Acquisition Corp. and The Future Now, Inc.
(Exhibit 2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 29, 1995.)
*10.15 1995 Long-Term Incentive Plan (Exhibit 4.1 of the Company's
Registration Statement No. 33-60771 filed on June 30, 1995 [the
"1995 Registration Statement"].) **
*10.16 1995 Employee Stock Purchase Plan (Exhibit 4.2 to the 1995
Registration Statement.) **
*10.17 Amendment No. 1 to Agreement and Plan of Merger dated July 6,
1995 (Exhibit 2.2 of the Company's Registration Statement No.
33-61605 filed on August 4, 1995)
*10.18 Amended and Restated Inventory and Working Capital Financing
Agreement dated as of April 5, 1996 by and among the Company
and IBM Credit Corporation (Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 4,
1996.)
10.19 Letter Agreement between Michael Norris and the Company dated
August 8, 1996.**
10.20 Stock Purchase Agreement between Ingram Micro, Inc. and the
Company dated April 29, 1997.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
* Incorporated by reference
** Management contract or compensatory plan or arrangement
(b) Reports filed on Form 8-K during last fiscal quarter of 1996.
The Company filed a Current Report on Form 8-K dated October 16, 1996 (the
"Form 8-K") reporting, under Item 5, the sale by the Company of 5,000
shares of Series B Convertible Preferred Stock and warrants to purchase
225,000 shares of Common Stock (See Note 10 to the Consolidated Financial
Statements), and the initial public offering of shares of common stock of
XLConnect Solutions, Inc., a subsidiary of the Company. The Company filed
an amendment to the Form 8-K on January 21, 1997 reporting, under Item 5,
the sale by the Company of 10,000 additional shares of Series B Convertible
Preferred Stock and warrants to purchase an additional 225,000 shares of
Common Stock (See Note 10 to the Consolidated Financial Statements).
<PAGE>
Schedule II
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Valuation and Qualifying Accounts and Reserves
Years ended January 28, 1995, February 3, 1996 and February 1, 1997
<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
- ------------------------------------- ----------- ----------- ------------ ----------- -----------
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
Year ended January 28, 1995 $398,000 $336,000 -- ($436,000) $298,000
========== ========== ========== ========== ==========
Year ended February 3, 1996 $298,000 $3,875,000 $5,748,000 * ($1,012,000) $8,909,000
========== ========== ========== ========== ==========
Year ended February 1, 1997 $8,909,000 $4,721,000 -- ($5,529,000) $8,101,000
========== ========== ========== ========== ==========
</TABLE>
* Allowance for doubtful accounts acquired as part of the acquisition of
The Future Now, Inc.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTELLIGENT ELECTRONICS, INC.
Date: May 1, 1997 /s/ Richard D. Sanford
------------------------------
Richard D. Sanford,
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: May 1, 1997 /s/ Richard D. Sanford
------------------------------
Chief Executive Officer,
and Chairman of the Board
Date: May 1, 1997 /s/ Michael A. Norris
------------------------------
Michael A. Norris, President,
and Chief Executive Officer
of the Reseller Network
Date: May 1, 1997 /s/ Thomas J. Coffey
------------------------------
Thomas J. Coffey, Chief Financial
Officer, Senior Vice President,
Treasurer and
Principal Accounting Officer
Date: May 1, 1997 /s/ Barry M. Abelson
------------------------------
Barry M. Abelson, Director
Date: May 1, 1997 /s/ Christopher T.G. Fish
------------------------------
Christopher T.G. Fish, Director
Date: May 1, 1997 /s/ Roger J. Fritz
------------------------------
Roger J. Fritz, Director
Date: May 1, 1997 /s/ Arnold S. Hoffman
------------------------------
Arnold S. Hoffman, Director
Date: May 1, 1997 /s/ William E. Johnson
------------------------------
William E. Johnson, Director
Date: May 1, 1997 /s/ John A. Porter
------------------------------
John A. Porter, Director
Date: May 1, 1997 /s/ Gregory A. Pratt
------------------------------
Gregory A. Pratt, Director
Date: May 1, 1997 /s/ William L. Rulon-Miller
------------------------------
William L. Rulon-Miller, Director
<PAGE>
APPENDIX B-2
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED May 3, 1997 .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-15991
Intelligent Electronics, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2208404
----------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 458-5500
----------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 39,166,814 shares of
Common Stock, par value $0.01 per share were outstanding at June 9, 1997.
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
May 3, 1997 and February 1, 1997 3
Consolidated Statements of Operations
Three Months Ended May 3, 1997 and May 4, 1996 4
Consolidated Statements of Cash Flows
Three Months Ended May 3, 1997 and May 4, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
PART I - FINANCIAL INFORMATION FORM 10-Q
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share-related data)
<TABLE>
<CAPTION>
May 3, February 1,
1997 1997
----------- -----------
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 37,997 $ 42,881
Accounts receivable, net 139,673 149,107
Inventory 240,228 311,669
Prepaid expenses and other current assets 4,240 4,834
Deferred income taxes 11,861 11,861
---------- ----------
Total current assets 433,999 520,352
Property and equipment, net 58,409 58,712
Intangible assets, primarily goodwill, net 90,653 91,914
Other assets 27,799 28,103
---------- ----------
Total assets $ 610,860 $ 699,081
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 34,135 $ 3,486
Accounts payable 325,032 430,107
Accrued liabilities 42,089 50,034
Long-term debt reclassified as current 55,000 55,000
---------- ----------
Total current liabilities 456,256 538,627
---------- ----------
Long-term debt 8,051 3,496
Other long-term liabilities 12,238 11,015
Commitments and contingencies
Minority interest 10,643 10,472
Shareholders' equity:
Series B Convertible Preferred stock $50 par value per share:
Authorized 200,000 shares, issued and outstanding:
14,000 and 15,000 shares 700 750
Common stock $.01 par value per share:
Authorized 100,000,000 shares,
issued: 41,723,335 and 41,352,973 shares 417 413
Additional paid-in capital 285,027 284,666
Treasury stock (67,311) (67,311)
Retained earnings (deficit) (95,161) (83,047)
---------- ----------
Total shareholders' equity 123,672 135,471
---------- ----------
Total liabilities and shareholders' equity $ 610,860 $ 699,081
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share data)
(unaudited)
Three months ended
-------------------------
May 3, May 4,
1997 1996
----------- -----------
Revenues $ 668,256 $ 877,939
Cost of goods sold 635,596 832,355
----------- -----------
Gross profit 32,660 45,584
----------- -----------
Operating expenses:
Selling, general and administrative expenses 44,456 42,935
Amortization of intangibles, primarily goodwill 1,261 2,400
----------- -----------
Total operating expenses 45,717 45,335
----------- -----------
Income (loss) from operations (13,057) 249
Other income (expense):
Investment and other income (expense), net 170 (105)
Interest expense (3,805) (3,867)
----------- -----------
Loss before income tax benefit and
and minority interest (16,692) (3,723)
Income tax benefit (4,902) (529)
----------- -----------
Loss before minority interest (11,790) (3,194)
Minority interest (99) -
----------- -----------
Net loss (11,889) (3,194)
Preferred stock dividend 225 -
----------- -----------
Net loss applicable to common shareholders $ (12,114) $ (3,194)
=========== ===========
Net loss per common share applicable
to common shareholders $ (0.34) $ (0.09)
=========== ===========
Weighted average number of common shares
and share equivalents outstanding: 36,066 34,537
See accompanying notes to the consolidated financial statements.
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
---------------------
May 3, May 4,
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,889) $ (3,194)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,361 6,879
Write-down of property and equipment - 1,057
Deferred taxes - (861)
Provision for losses on trade receivables 1,313 803
Provision for write-down of inventory 3,588 2,617
Minority interest in net income of XLConnect 99 -
Changes in assets and liabilities:
Accounts receivable 8,121 (5,381)
Inventory 67,853 11,121
Other current assets 898 770
Accounts payable (105,075) (28,653)
Accrued liabilities (6,982) (2,426)
---------- ---------
Net cash used for operating activities (35,713) (17,268)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net of disposals (4,693) (3,704)
Other - 30
---------- ---------
Net cash used for investing activities (4,693) (3,674)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 5,500 -
Net proceeds from working capital advances 31,200 9,079
Reduction in capital lease obligations (1,178) (893)
---------- ---------
Net cash provided by financing activities 35,522 8,186
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,884) (12,756)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,881 34,618
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,997 $ 21,862
========== =========
See accompanying notes to the consolidated financial statements.
<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,
consisting of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. These financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in Intelligent Electronics, Inc.'s
(the "Company") Annual Report on Form 10-K for the year ended February 1,
1997.
(2) New Accounting Standards
------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No.
128") which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 simplifies the previous standards
for computing earnings per share and requires the disclosure of basic and
diluted earnings per share. For the fiscal year ended February 1, 1997, the
quarter ended May 3, 1997 (the "first quarter of fiscal 1997") and the quarter
ended May 4, 1996, the amount reported as net loss per share applicable to
common shareholders is no different than that which would have been reported
for basic and diluted net loss per share applicable to common shareholders
in accordance with SFAS No. 128.
<PAGE>
(3) Sale of the Reseller Network
The Company provides information technology products, services and
solutions to network integrators and resellers, through its Reseller
Network (the "Indirect Business") and to large and small corporate
customers, educational institutions and governmental agencies in the United
States, primarily through its branch locations (the "Direct Business"). On
April 29, 1997, the Company entered into a definitive agreement with Ingram
Micro Inc. ("Ingram") to sell the stock and related assets and liabilities
of the Indirect Business for $78 million, subject to reduction (but not
below $68 million) depending on the date of closing and also on certain
revenues during the period through closing. The purchase price will be
payable by assumption of liabilities, based on the balance sheet of the
Indirect Business at the time of closing and cash if the purchase price
exceeds such liabilities. The Company will be required, at closing, to pay
to Ingram any amount by which the estimated net assumed liabilities exceed
the adjusted purchase price and to fund a $10 million escrow for final
settlement for any purchase price adjustments and indemnity claims. The
consummation of the transaction is subject to the approval of the Company's
shareholders and required government approvals, as well as other customary
conditions. It is currently anticipated that the transaction will close
during the Company's second quarter of fiscal 1997 or shortly thereafter.
However, there can be no assurance that the sale will be completed. The
Company expects, on a preliminary basis, that the sale of the Indirect
Business will result in a pre-tax gain, subject to reduction depending on
the date of closing and also on certain revenues during the period through
closing. Additionally, pursuant to a separate agreement, Ingram will provide
XLSource, the Company's direct hardware sales organization, with its product
requirements over an initial term of up to three years following the closing.
The agreement requires XLSource to purchase 100% of its requirements of
products available from Ingram and requires minimum annual product purchases
of $600 million (a total of $1.8 billion). In any year in which XLSource
purchases less than the minimum requirement, XLSource can either pay Ingram
liquidated damages in an amount equal to 1.5% of the shortfall or extend
the term of the agreement and defer the amount of the shortfall multiplied
by a factor based on the year in which the shortfall occurred into a fourth
or fifth year. The Company has guaranteed to Ingram performance by XLSource
of its obligations under the agreement. On May 14, 1997, pursuant to the
definitive agreement, the Company obtained an irrevocable letter of credit
in the amount of $5 million to secure the Company's obligation to make
certain payments to Ingram in the event the definitive agreement is
terminated under certain circumstances.
As a result of the definitive agreement, the Company has been advised that
it is unlikely that a spin-off of XLConnect Solutions, Inc. ("XLConnect"),
would qualify as a tax-free distribution of stock. Accordingly, the
Company does not currently intend to effect the spin-off of XLConnect.
The Company is continuing to explore its strategic alternatives relative to
XLSource, including the sale of all or a portion of XLSource, and is
currently in negotiations with an unaffiliated third party for the sale of
a substantial portion of XLSource (representing approximately 60% of the
Company's Direct Business' revenues during the first quarter of fiscal
1997). There can be no assurance that any such sale will be completed.
<PAGE>
(4) Credit Facilities
-----------------
In April 1996, the Company signed a financing agreement, which has a
rolling eighteen month term and is renewable for six-month periods with the
consent of the lender and allows for total borrowings of up to $225
million, subject to a borrowing base formula. The facility can be used for
inventory financing, equipment financing and working capital purposes.
This facility imposes certain financial covenants relating to the Company's
current ratio, working capital, and tangible net worth. The Company was in
compliance with these covenants as of May 3, 1997 and believes that it will
remain in compliance during fiscal 1997, if the sale of the Indirect
Business is completed and the operating plans to improve XLSource are
successfully implemented. Until necessary shareholder approval for the
sale of the Indirect Business is obtained, the $55 million long-term portion
of the facility (due October 5, 1998) will be classified as a current
liability on the Company's Consolidated Balance Sheets. Notwithstanding
such classification, the lender has agreed that this long-term portion will
not be treated as short-term debt for purposes of the financing agreement.
The Company had borrowings of $31.2 million under this financing agreement
for working capital purposes, which are classified as short-term debt on
the Company's Consolidated Balance Sheets as of May 3, 1997. All other
borrowings under this agreement (other than the $55 million long-term
portion indicated above) are included in accounts payable on the Company's
Consolidated Balance Sheets. As of May 3, 1997, $6.9 million was available
after considering the borrowing base formula and trade payables principally
outstanding to a vendor related to the lender.
In March 1997, the financing agreement was amended to delete the assets of
XLConnect, the Company's 80%-owned professional services subsidiary, and
XLConnect's subsidiaries from the borrowing base, which in effect reduces
the amount the Company can borrow under this agreement by $20 million. In
conjunction with the March 1997 amendment, XLConnect entered into a
separate secured credit agreement with this lender in the amount of $25
million, which the Company has guaranteed.
On May 14, 1997, pursuant to the definitive agreement for the sale of the
Indirect Business, the Company obtained an irrevocable letter of credit from
the above lender in the amount of $5 million to secure the Company's obligation
to make certain payments to Ingram, in the event the definitive agreement is
terminated under certain circumstances. A portion of the financing agreement
has been reserved for the letter of credit and will be subtracted from the
borrowing base.
On May 15, 1997, the Company through XLSource, pledged its 80% ownership
of XLConnect's common stock to the above lender as security for the
Company's obligations to such lender. The Company can borrow under the
financing agreement up to 50% of the market value (calculated daily) of the
XLConnect pledged stock.
<PAGE>
On February 28, 1997, XLConnect entered into a transaction with a third
party whereby the third party agreed to provide an unsecured loan of up to
$11 million (the "Loan") to be used for specific business purposes. Up to
$5.5 million is available to be drawn prior to August 28, 1997. The
remaining amount may be drawn after August 28, 1997 and prior to February
28, 1998, subject to XLConnect satisfying certain financial criteria.
Interest is payable at an initial annual rate of 4% for the first two
years, adjusts to 5% for the next two years and then adjusts to 6% for the
remaining term. Principal payments of $0.75 million will be made quarterly
beginning in August 1999 with a final payment of $1.25 million due on
August 28, 2002. As of May 3, 1997, $5.5 million was outstanding under the
Loan. In connection with the Loan, XLConnect issued to the third party a
warrant to purchase up to 325,000 shares of XLConnect's common stock, which
becomes exercisable on February 28, 1998, August 28, 1998 or February 28,
2002, depending on the occurrence of certain events, at a per share
exercise price of $6.65, and expires on February 27, 2007. After
considering the effects of the issuance of the warrant and the resultant
discounting of the Loan, the effective interest rate is 7.4%.
(5) Preferred Stock
---------------
On April 30, 1997, 1,000 shares of the Company's Series B Convertible
Preferred Stock were converted into 370,362 shares of the Company's Common
Stock.
From May 16, 1997 through June 9, 1997, an additional 7,000 shares of the
Company's Series B Convertible Preferred Stock were converted into
2,746,811 shares of Common Stock.
(6) Supplemental Cash Flow Information
----------------------------------
Cash payments during the three-month periods ended May 3, 1997 and May 4,
1996 included interest of $2,982 and $5,272, respectively, and income taxes
of $120 and $3, respectively.
(7) Contingencies
-------------
On May 14, 1997, pursuant to the definitive agreement for the sale of the
Indirect Business, the Company obtained an irrevocable letter of credit in
the amount of $5 million to secure the Company's obligation to make certain
payments to Ingram in the event the definitive agreement is terminated under
certain circumstances.
<PAGE>
In December 1994, several 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 the
Company and certain directors and officers. These lawsuits were
consolidated with a class action lawsuit filed in 1992 against the Company,
certain directors and officers, and the Company's auditor's in the United
States District Court for the Eastern District of Pennsylvania (Civil
Action No. 92-CV-1905). A derivative lawsuit was also filed in December
1994 in the Court of Common Pleas of Philadelphia County (No. 803) against
the Company and certain of its directors and officers. These lawsuits
alleged 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 sought damages in unspecified amounts as well as other monetary
and equitable relief. The Company has reached a tentative settlement of
the class and derivative actions, without admitting any liability, under
which the class and derivative plaintiffs will receive a total of $10
million. Of the $10 million, the Company will be contributing $3.8 million
and the balance will be funded by insurance. The settlements are subject
to court approval. Management cannot predict when the final settlements
will be approved. The amount required to be paid by the Company was accrued
in fiscal 1994.
In addition, the Company is involved in various litigation and arbitration
matters in the ordinary course of business. The Company believes that it
has meritorious defenses in and is vigorously defending against all such
matters. Management believes the resolution of these matters will not have
a material adverse effect on the Company's financial position or results of
operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The following table shows revenues and gross margins as a percentage of
revenues, by business segment, for the quarter ended May 3, 1997 (the
"first quarter of fiscal 1997") and for the quarter ended May 4, 1996 (the
"first quarter of fiscal 1996") (dollars in millions).
<TABLE>
<CAPTION>
1st Quarter of Fiscal 1997 1st Quarter of Fiscal 1996
Gross Gross
Revenues Margin Revenues Margin
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Indirect Business $ 590 1.3% $ 814 2.8%
Direct Business 203 12.2% 189 11.5%
Intercompany eliminations * (125) -- (125) --
-------- -------- -------- --------
Totals $ 668 4.9% $ 878 5.2%
======== ======== ======== ========
</TABLE>
* Intercompany eliminations consist primarily of sales from the Indirect
Business to the Direct Business.
Revenues in the Indirect Business declined 27.5% in the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996 as a result of
continued competitive pressures throughout the industry primarily due to
open sourcing and the uncertainty regarding the future of the Indirect
Business. The Indirect Business has experienced a trend of declining sales
in recent quarters caused by the Company's inability to retain and attract
customers resulting from a number of factors. These factors include: fewer
product lines offered by the Company compared to its larger competitors; a
less favorable allocation of constrained products (which can command a
higher gross margin) compared to the prior year; increased competition due
to open sourcing; and continued consolidation in the reseller channel.
The decrease in the gross profit percentage in the Indirect Business in the
first quarter of fiscal 1997 from the first quarter of fiscal 1996 was due
primarily to the pricing structure adopted by the Company to retain
business, which was caused by the uncertainty regarding the future of the
Indirect Business, a less favorable allocation of constrained products and
continued competitive pressures in the industry.
Revenues in the Direct Business increased 7.4% in the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996. The majority of
the increase was due to increased revenues from XLConnect, which is the
services sector of the Direct Business.
The increase in the gross margin percentage for the Direct Business in the
first quarter of fiscal 1997 compared to the first quarter of fiscal 1996
was attributable to a higher proportion of revenues from XLConnect, which
generates a higher gross margin percent than direct hardware sales.
<PAGE>
Selling, general and administrative expenses ("SG&A") increased 3.5% or
$1.5 million in the first quarter of fiscal 1997 (6.7% of revenues) as
compared to the first quarter of fiscal 1996 (4.9% of revenues). The
increase was due to increased SG&A at XLConnect, partially offset by
decreased SG&A in the Indirect Business and at XLSource. XLConnect's SG&A
increased $3.9 million due to higher overhead costs to support XLConnect's
growth and enable it to operate as a separate public company, as well as
the continued development of XLConnect's direct sales force combined with
an increase in marketing programs.
Amortization of intangibles decreased in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996 due to the write-off in the
third quarter of fiscal 1996 of approximately $55.5 million of goodwill
related to the Indirect Business.
The Company's effective tax rate for the first quarter of fiscal 1997 was a
29.4% benefit compared to a 14.2% benefit for the first quarter of fiscal
1996. The increase in the effective tax rate was due primarily to a lower
proportion of non-deductible goodwill amortization compared to the taxable
loss.
Liquidity Outlook
During fiscal 1996 and the first quarter of fiscal 1997, both of the
Company's segments incurred operating losses. Management has been
exploring the Company's strategic alternatives, and in connection
therewith, on April 29, 1997, the Company entered into a definitive
agreement with Ingram to sell the stock and related assets and liabilities
of the Indirect Business for $78 million, subject to reduction (but not
below $68 million) depending on the date of closing and also on certain
revenues during the period through closing. The purchase price will be
payable by assumption of liabilities, based on the balance sheet of the
Indirect Business at the time of closing and cash if the purchase price
exceeds such liabilities. The Company will be required, at closing, to pay
to Ingram any amount by which the estimated net assumed liabilities exceed
the adjusted purchase price and to fund a $10 million escrow for final
settlement for any purchase price adjustments and indemnity claims. The
consummation of the transaction is subject to the approval of the Company's
shareholders and required government approvals, as well as other customary
conditions. It is currently anticipated that the transaction will close
during the Company's second quarter of fiscal 1997 or shortly thereafter.
However, there can be no assurance that the sale will be completed. The
Company expects, on a preliminary basis, that the sale of the Indirect
Business will result in a pre-tax gain, subject to reductions depending on
the date of closing and also on certain revenues during the period through
closing. On May 14, 1997, pursuant to the definitive agreement for the sale
of the Indirect Business, the Company obtained an irrevocable letter of credit
in the amount of $5 million to secure the Company's obligation to make certain
payments to Ingram in the event the definitive agreement is terminated under
certain circumstances. In the event the transaction is not consummated,
and management's operating plans are not achieved, the Company's operating
results will continue to adversely affect cash flows and liquidity.
<PAGE>
The Company is continuing to explore its strategic alternatives with respect
to XLSource, including the implementation of operating plans to improve its
results and the possible sale of all or a part of XLSource. The Company is
currently in negotiations with an unaffiliated third party for the sale of
a substantial portion of XLSource (representing approximately 60% of the
Company's Direct Business' revenues during the first quarter of 1997).
There can be no assurance that such results will improve or that any such
sale will be completed. In the event management's plans relative to XLSource
are not achieved, the Company's operating results will continue to adversely
affect cash flows and liquidity.
The Company believes it will be in compliance with all of the financial
covenants of its $225 million financing agreement throughout fiscal 1997,
if the sale of the Indirect Business is completed and the operating plans
to improve XLSource are successfully implemented. Until necessary
shareholder approval is obtained for such sale, the $55 million long-term
portion of the agreement will be classified as a current liability on the
Company's Consolidated Balance Sheets. Notwithstanding such classification,
the lender has agreed that the long-term debt, which is due October 5, 1998,
will not be treated as short-term debt for purposes of the financing agreement.
Liquidity and Capital Resources
- -------------------------------
The Company 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,
invest in systems technology, and pay cash dividends.
As of May 3, 1997, the Company had cash and cash equivalents of $38.0
million compared to $42.9 million at February 1, 1997. Working capital was
negative $22.3 million at May 3, 1997 compared to negative working capital
of $18.3 million at February 1, 1997. The reason for the negative working
capital is the reclassification of $55 million of long-term debt to a
current liability, as discussed above in 'Liquidity Outlook'. Without this
reclassification, the Company would have had positive working capital of
$32.7 million as of May 3, 1997 and $36.7 million as of February 1, 1997.
During the first quarter of fiscal 1997, cash used for operating activities
totaled $35.7 million compared to $17.3 million of cash used for operating
activities during the first quarter of fiscal 1996. The increase in the
cash used for operating activities can be attributed to increased operating
losses plus the increase in the net usage of cash for working capital
purposes (accounts receivable, inventory and accounts payable).
<PAGE>
As of May 3, 1997, the Company had a $225 million financing agreement, of
which $6.9 million was available after considering the borrowing base
formula and trade payables principally outstanding to a vendor related to
the lender. The Company had borrowings of $31.2 million under this
agreement for working capital purposes as of May 3, 1997, which are
classified as short-term debt on the Company's Consolidated Balance Sheets.
The Company believes it will be in compliance with all of the financial
covenants of its financing agreement throughout fiscal 1997, if the sale of
the Indirect Business is completed and the operating plans to improve
XLSource are successfully implemented. Until necessary shareholder
approval is obtained for such sale, the $55 million long-term portion of
the agreement will be classified as a current liability in the Company's
Consolidated Balance Sheets. Notwithstanding such classification, the
lender has agreed that the long-term debt, which is due October 5, 1998,
will not be treated as short-term debt for purposes of the financing agreement.
In March 1997, the financing agreement was amended to delete the assets of
XLConnect, the Company's 80%-owned professional services subsidiary, and
XLConnect's subsidiaries from the borrowing base, which in effect reduces
the amount the Company can borrow under this agreement by $20 million. In
conjunction with the March 1997 amendment, XLConnect entered into a
separate secured credit agreement with this lender in the amount of $25
million, which the Company has guaranteed.
On May 14, 1997, pursuant to the definitive agreement for the sale of the
Indirect Business, the Company obtained an irrevocable letter of credit
from the above lender in the amount of $5 million to secure the Company's
obligation to make certain payments to Ingram in the event the definitive
agreement is terminated under certain circumstances. A portion of the
financing agreement has been reserved for the letter of credit and will
be subtracted from the borrowing base.
On May 15, 1997, the Company through XLSource, pledged its 80% ownership
of XLConnect's common stock to the above lender as security for the
Company's obligations to such lender. The Company can borrow under the
financing agreement up to 50% of the market value (calculated daily) of the
XLConnect pledged stock.
Based on the Company's expected level of operations, including plans to
reduce the operating losses of XLSource, and capital expenditure
requirements, management believes that the Company's cash, internally
generated funds and available financing arrangements, will be sufficient to
meet the Company's cash requirements at least through the end of fiscal
1997. However, if the Company is unable to complete the transaction with
Ingram, or continues to experience losses and negative operating cash
flows, the Company's vendors could elect to restrict product availability
and modify credit terms, which could have a material adverse effect on the
Company's liquidity position. In such circumstances, there can be no
assurance that alternative sources of financing could be obtained.
Inflation and Seasonality
- -------------------------
The Company believes that inflation has not had a material impact on its
operations or liquidity to date. The Company's financial performance does
not exhibit significant seasonality, although certain computer product
lines and the Direct Business follow a seasonal pattern with peaks
occurring near the end of the calendar year.
<PAGE>
Intelligent Electronics, Inc. and Subsidiaries
Part II - Other Information
Item 2. Changes in Securities
---------------------
(c) During the first quarter of fiscal 1997, the holder of the
Company's Series B Convertible Preferred Stock ("Preferred
Stock") converted 1,000 shares of Preferred Stock having a
stated value of $1,000,000, together with the accrued premium
thereon of $32,384, into 370,362 shares of Common Stock. The
sale of the shares of Common Stock was exempt from the
registration provisions of the Securities Act (the "Act")
pursuant to Section 3(a)(9) for exchanges with existing security
holders. A registration statement covering the resale of the
Common Stock issued upon conversion of the Preferred Stock has
been declared effective under the Act.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10. Volume Purchase Agreement dated April 29, 1997 between
XLSource, Inc. (a wholly-owned subsidiary) and Ingram Micro
Inc. *
(b) Reports filed on Form 8-K.
The Company's Report on Form 8-K dated February 10, 1997
relating to the approval by the Board of Directors of the
distribution of 13,325,000 shares of XLConnect Solutions, Inc.
in a spin-off to the Company's shareholders.
* Portions of this Agreement have been omitted pursuant to a request
for confidential treatment.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligent Electronics, Inc.
/s/ Thomas J. Coffey
-------------------------------------
Thomas J. Coffey
Senior Vice President, Chief
Financial Officer and
Chief Accounting Officer
Date: June 16, 1997
<PAGE>
APPENDIC C
STOCK PURCHASE AGREEMENT
dated as of
April 29, 1997
among
INGRAM MICRO INC. as Buyer,
INTELLIGENT ELECTRONICS, INC. as Seller
and
XLSOURCE, INC. as Guarantor
relating to the purchase and sale
of
100% of the outstanding Capital Stock
of
each of
RND, INC.
INTELLIGENT ADVANCED SYSTEMS, INC.
INTELLIGENT DISTRIBUTION SERVICES, INC.
INTELLIGENT EXPRESS, INC.
INTELLIGENT SP, INC.
constituting
THE RESELLER NETWORK
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
ARTICLE 1 DEFINITIONS
SECTION 1.01. Definitions 1
ARTICLE 2 PURCHASE AND SALE
SECTION 2.01. Purchase and Sale 5
SECTION 2.02. Closing 6
SECTION 2.03. Certain Adjustments 6
SECTION 2.04. Closing Balance Sheet 6
SECTION 2.05. Adjustment of Purchase Price 8
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER
SECTION 3.01. Corporate Existence and Power 10
SECTION 3.02. Corporate Authorization 11
SECTION 3.03. Governmental Authorization 11
SECTION 3.04. Noncontravention 11
SECTION 3.05. Required and Other Consents 11
SECTION 3.06. Capitalization 12
SECTION 3.07. Ownership of Shares and Seller RN Assets 12
SECTION 3.08. Financial Statements 13
SECTION 3.09. Absence of Certain Changes 13
SECTION 3.10. No Undisclosed Material Liabilities 15
SECTION 3.11. Intercompany Accounts 15
SECTION 3.12. Material Contracts 16
SECTION 3.13. Litigation 17
SECTION 3.14. Compliance with Laws and Court Orders 18
SECTION 3.15. Properties 18
SECTION 3.16. Intellectual Property 19
SECTION 3.17. Insurance Coverage 20
SECTION 3.18. Licenses and Permits 21
SECTION 3.19. Inventories 21
SECTION 3.20. Receivables 22
SECTION 3.21. Product Liability; Product Warranty 22
SECTION 3.22. Selling Documents 23
SECTION 3.23. Finders' Fees 23
SECTION 3.24. Employees 23
SECTION 3.25. Labor Matters 23
SECTION 3.26. Environmental Matters 24
SECTION 3.27. Bank Accounts 26
SECTION 3.28. Suppliers and Licensors 26
SECTION 3.29. Reseller Loans 26
SECTION 3.30. Seller Proxy Materials 26
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF XLSOURCE
SECTION 4.01. Corporate Existence and Power 27
SECTION 4.02. Corporate Authorization 27
SECTION 4.03. Government Authorization 27
SECTION 4.04. Noncontravention 27
<PAGE>
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER
SECTION 5.01. Corporate Existence and Power 28
SECTION 5.02. Corporate Authorization 28
SECTION 5.03. Governmental Authorization 28
SECTION 5.04. Noncontravention 29
SECTION 5.05. Financing 29
SECTION 5.06. Purchase for Investment 29
SECTION 5.07. Litigation 29
SECTION 5.08. Finders' Fees 29
ARTICLE 6 COVENANTS OF SELLER
SECTION 6.01. Conduct of Reseller Network and Each Company 30
SECTION 6.02. Access to Information; Confidentiality 30
SECTION 6.03. Notices of Certain Events 32
SECTION 6.04. Resignations 32
SECTION 6.05. Noncompetition 32
SECTION 6.06. Intercompany Accounts 34
SECTION 6.07. Stockholder Meeting; Proxy Materials 35
SECTION 6.08. Other Offers 35
SECTION 6.09. Transfer of Intelevest 36
SECTION 6.10. Transfer of Seller RN Assets and Liabilities 36
SECTION 6.11. Consents 37
SECTION 6.12. Capital Contribution 37
ARTICLE 7 COVENANTS OF SELLER AND XLSOURCE
SECTION 7.01. Guarantee of Guaranteed Obligations 38
SECTION 7.02. Guarantee Unconditional 38
SECTION 7.03. Waivers 39
SECTION 7.04. Discharge; Reinstatement in Certain Circumstances 39
SECTION 7.05. Subrogation 39
SECTION 7.06. Limit of Liability 39
ARTICLE 8 COVENANTS OF BUYER
SECTION 8.01. Access 40
SECTION 8.02. Seller Guarantees 40
SECTION 8.03. Other Matters 40
<PAGE>
ARTICLE 9 COVENANTS OF BUYER, SELLER AND XLSOURCE
SECTION 9.01. Commercially Reasonable Efforts; Further Assurances 41
SECTION 9.02. Certain Filings 41
SECTION 9.03. Public Announcements 41
SECTION 9.04. Confidentiality 41
SECTION 9.05. Segregation of Certain Sales Proceeds 42
SECTION 9.06. Supply Agreement 43
SECTION 9.07. Certain Litigation 44
ARTICLE 10 TAX MATTERS
SECTION 10.01. Tax Definitions 44
SECTION 10.02. Tax Representations 46
SECTION 10.03. Covenants 48
SECTION 10.04. Release From and Termination of Existing Tax
Sharing Agreements 50
SECTION 10.05. State Taxes Resulting from Section 338(h)(10)
Election 50
SECTION 10.06. Cooperation on Tax Matters 50
SECTION 10.07. Tax Indemnification 51
SECTION 10.08. Purchase Price Adjustment and Interest 54
SECTION 10.09. Survival 54
ARTICLE 11 EMPLOYEE BENEFITS
SECTION 11.01. Employee Benefits Definitions 54
SECTION 11.02. Employee Benefit Plans Representations 55
SECTION 11.03. Retained and Transferred Employees 57
SECTION 11.04. Severance, COBRA and WARN Obligations 59
SECTION 11.05. 401(k), Option, Stock Purchase and Incentive Plans 60
SECTION 11.06. Certain Employee Services 61
SECTION 11.07. Sharing of Benefits-related Information 61
SECTION 11.08. No Third Party Beneficiaries 61
ARTICLE 12 CONDITIONS TO CLOSING
SECTION 12.01. Conditions to Obligations of Buyer and Seller 61
SECTION 12.02. Conditions to Obligation of Buyer 62
SECTION 12.03. Conditions to Obligation of Seller 64
<PAGE>
ARTICLE 13 SURVIVAL; INDEMNIFICATION
SECTION 13.01. Survival 65
SECTION 13.02. Indemnification 66
SECTION 13.03. Procedures 68
ARTICLE 14 TERMINATION
SECTION 14.01. Grounds for Termination 70
SECTION 14.02. Effect of Termination 71
ARTICLE 15 MISCELLANEOUS
SECTION 15.01. Notices 71
SECTION 15.02. Amendments and Waivers 73
SECTION 15.03. Fees and Expenses 73
SECTION 15.04. Successors and Assigns 75
SECTION 15.05. Governing Law 75
SECTION 15.06. Jurisdiction 75
SECTION 15.07. WAIVER OF JURY TRIAL 75
SECTION 15.08. Counterparts; Third Party Beneficiaries 75
SECTION 15.09. Entire Agreement 76
SECTION 15.10. Definition of Knowledge 76
SECTION 15.11. Specific Performance 76
SECTION 15.12. Captions 76
SELLER DISCLOSURE LETTER SCHEDULES
----------------------------------
3.01 Qualifications as Foreign Corporation
3.03 Other Governmental Authorization
3.05 Required Consents
3.06 Capitalization of the Companies
3.07 Ownership of RN Shares and Seller RN Assets
3.09 Certain Changes
3.10 Liabilities
3.11 Intercompany Accounts
3.12 Material Contracts
3.13 Litigation
3.14 Compliance with Laws and Court Orders
3.15 Liens
3.16 RN Intellectual Property Rights
3.17 Insurance Coverage
3.18 Permits
3.21(a) Product Liability and Warranty Claims
3.21(c) Product Warranties
3.24 Employees
3.25 Labor Matters
3.26 Environmental Matters
3.27 Bank Accounts
3.28 Suppliers
3.29 Reseller Loans
6.02 Potential Buyers
6.11(a) Other Consents
8.02 Seller Guarantees
10.02(a) Tax Matters
10.02(b) Tax Jurisdictions and Returns
11.02(a) Employee Plan
11.02(e) Benefit Arrangements
11.02(j) Other Benefits
15.10 Persons with Knowledge
OTHER SCHEDULES
2.04 Calculation of Net Liabilities Assumed
11.04(a)(i) Certain Reimbursement Obligations relating to Company
Employees and Second Employees
11.04(a)(iii) Certain Reimbursement Obligations relating to Scheduled
Employees
11.06 Certain Employee Transition Services
<PAGE>
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of April 29, 1997 among Ingram Micro Inc., a
Delaware corporation ("Buyer"), Intelligent Electronics, Inc., a
Pennsylvania corporation ("Seller"), and XLSource, Inc., an Arkansas
corporation ("XLSource").
W I T N E S S E T H :
WHEREAS, RND, Inc., a Colorado corporation, Intelligent Advanced
Systems, Inc., a Delaware corporation, Intelligent Distribution Services,
Inc., a Delaware corporation, Intelligent Express, Inc., a Pennsylvania
corporation, and Intelligent SP, Inc., a Colorado corporation, each of
which is a wholly-owned, direct Subsidiary of Seller (each such Subsidiary,
a "Company" and collectively, the "Companies"), collectively constitute,
together with the Seller RN Assets and Liabilities, the Reseller Network
("Reseller Network");
WHEREAS, Seller is the record and beneficial owner of all of the
outstanding capital stock of each Company (collectively, the "RN Shares")
and desires to sell the RN Shares to Buyer, and Buyer desires to purchase
the RN Shares from Seller, upon the terms and subject to the conditions
hereinafter set forth; and
WHEREAS, Seller shall transfer the Seller RN Assets and Liabilities to
one or more of the Companies immediately prior to the Closing;
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
ARTICLE 1
DEFINITIONS
1 DEFINITIONS SECTION 1.1. Definitions (a)
The following terms, as used herein, have the following meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control
with such Person; provided that none of the Companies shall be considered
an Affiliate of Seller.
"Balance Sheet" means the unaudited combined balance sheet of Reseller
Network as of February 1, 1997.
"Balance Sheet Date" means February 1, 1997.
"Buyer Indemnitee" means Buyer, any of its Affiliates and, effective
upon the Closing, each Company.
"Closing Date" means the date of the Closing.
"Escrow Account" means the escrow account set up pursuant to the
Escrow Agreement.
"Escrow Agent" means the Person identified as such in the Escrow
Agreement.
"Escrow Agreement" means an escrow agreement in form and substance
satisfactory to Buyer and Seller.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Intellectual Property Right" means any trademark, service mark, trade
name, patent, copyright, mask work, invention, trade secret, know-how
(including any registrations or applications for registration of any of the
foregoing) or any other similar type of proprietary intellectual property
right.
"Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest or encumbrance. For the purposes
of this Agreement, a Person shall be deemed to own subject to a Lien any
property or asset which it has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or
other title retention agreement relating to such property or asset.
<PAGE>
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets, results of operations
or prospects of Reseller Network taken as whole, other than those resulting
from one or more of the following: (i) a deterioration in sales or margins
or an increase in interest expense of Reseller Network; (ii) the amount of
the severance and retention bonuses paid to the Scheduled Employees or
pursuant to the arrangements listed on Schedule 3.09 of the Seller
Disclosure Letter; (iii) changes in general economic conditions; or (iv)
changes affecting the market for microcomputers and related products
generally which have been reported publicly prior to the date hereof, or
which are otherwise generally known throughout the microcomputer and
related products industry on the date hereof.
"Person" means an individual, corporation, partnership, limited
liability company, association, trust or other entity or organization,
including a government or political subdivision or an agency or
instrumentality thereof.
"SEC" means the Securities and Exchange Commission.
"Seller RN Assets and Liabilities" means certain assets and
liabilities of Seller relating to Reseller Network, including without
limitation the items set forth on Schedule 3.07 of the Seller Disclosure
Letter.
"Subsidiary"of a Person means any other Person of which securities or
other ownership interests having ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions are
at the time directly or indirectly owned by such Person; provided that as
used herein, (i) none of the Companies shall be considered a Subsidiary of
Seller and (ii) Intelevest shall not be considered a Subsidiary of Reseller
Network or any Company.
"Transaction" means the transactions contemplated by this Agreement.
<PAGE>
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
- ---- -------
Accounting Referee 10.07
Acquisition Proposal 6.08
Assumed Employee 11.03
Adjusted Guaranteed Minimum Revenue 9.06
Base Net Liabilities Assumed 2.05
Base Purchase Price 2.01
Benefit Arrangement 11.01
Business 6.05
CERCLA 3.26
Claim Notice 13.02
Closing 2.02
Closing Balance Sheet 2.04
Closing Net Liabilities Assumed 2.04
COBRA Coverage 11.04
Code 10.01
Combined State Tax 10.01
Company Employee 11.03
Company Securities 3.06
Damages 13.02
Designated Percentage 9.05
DOJ 14.01
Employee Plan 11.01
Environmental Laws 3.26
ERISA 11.01
ERISA Affiliate 11.01
Exchange Act 3.03
Federal Tax 10.01
Final Determination 10.01
Final Net Liabilities Assumed 2.05
Financial Statements 3.08
FTC 14.01
Guaranteed Obligations 7.01
Hazardous Substances 3.26
Indemnified Party 13.03
Indemnifying Party 13.03
Information 6.02
Initial Determination 10.03
Intelevest 6.09
Intercompany Payable 6.06
Intercompany Receivable 6.06
Interest Rate 2.05
International Plan 11.01
Legg Mason 3.22
Loss 10.07
Modified Aggregate Deemed Sales Price 10.03
Multiemployer Plan 11.01
Offering Memorandum 3.22
OSHA 3.25
<PAGE>
Term Section
- ---- -------
Other Consents 6.11
PBGC 11.01
Permits 3.18
Post-Closing Tax Period 10.03
Potential Buyer 6.02
Pre-Closing Tax Period 10.01
Price Allocation 10.03
Principal Vendors 3.28
Purchase Price 2.01
Receivables 3.20
Required Consents 3.05
Returns 10.02
RN Intellectual Property Rights 3.16
RN Products 3.21
Scheduled Employee 11.03
Seconded Employee 11.03
Section 338(h)(10) Election 10.03
Section 338 Tax 10.01
Seller Consolidated Group 10.01
Seller Disclosure Letter 3.01
Seller Employees 11.03
Seller Group Allocation Tax Agreement 10.01
Seller Proxy Materials 3.30
Tax 10.01
Tax Asset 10.01
Tax Indemnification Period 10.01
Taxing Authority 10.01
Tax Sharing Agreements 10.01
Title IV Plan 11.01
Transfer Event 9.06
Transferred Employee 11.03
Transferred Percentage 9.06
WARN Obligations 11.04
XLSource Sale 9.05
XLSource Supply Agreement 12.02
<PAGE>
ARTICLE 2
PURCHASE AND SALE
2 PURCHASE AND SALE SECTION 2.1. Purchase and Sale Purchase and Sale.
Upon the terms and subject to the conditions of this Agreement, Seller
agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the RN
Shares at Closing for an aggregate purchase price in cash of $78 million
less the Base Net Liabilities Assumed, after giving effect to any capital
contribution required pursuant to Section 6.12 (the "Base Purchase
Price"), subject to adjustment as provided in Sections 2.03 and 2.05 (the
Base Purchase Price, as so adjusted being hereinafter referred to as the
"Purchase Price"). Except to the extent of the amount delivered to the
Escrow Agent as provided in Section 2.02 and subject to adjustment as
provided in Sections 2.03 and 2.05, the Base Purchase Price shall be paid
at Closing as provided in Section 2.02.
SECTION 2.2. Closing. The closing (the "Closing") of the purchase and
sale of the RN Shares hereunder shall take place at the offices of Davis
Polk & Wardwell, 450 Lexington Avenue, New York, New York, as soon as
possible, but in no event later than 10 business days, after satisfaction
of the conditions set forth in Article 12, or at such other time or place
as Buyer and Seller may agree. At the Closing:
(a) Buyer shall deliver to:
(i) the Escrow Agent, $10 million in immediately available
funds by wire transfer for deposit pursuant to the Escrow
Agreement; and
(ii) Seller, any portion of the Base Purchase Price, as
adjusted pursuant to Section 2.03, remaining after giving effect
to the payment referred to in Section 2.02(a)(i), in immediately
available funds by wire transfer to an account of Seller with a
bank designated by Seller, by notice to Buyer, not later than two
business days prior to the Closing Date (or if not so designated,
then by certified or official bank check payable in immediately
available funds to the order of Seller in such amount).
(b) Seller shall deliver to Buyer certificates for the RN
Shares duly endorsed or accompanied by stock powers duly endorsed in blank,
with any required transfer stamps affixed thereto.
SECTION 2.3. Certain Adjustments Notwithstanding anything herein to
the contrary, the Base Purchase Price shall be reduced by $10 for each $1
that the average daily sales (net of returns) by Reseller Network to all
customers of Reseller Network other than XLSource, during the period of
twenty business days ending on or immediately prior to the Friday
immediately prior to the Closing Date, is less than $6,730,596; provided
that the Base Purchase Price shall not be reduced pursuant to the above
adjustment by more than an aggregate of the sum of (i) $5,000,000 plus
(ii) $1,000,000 for each Monday during the period commencing on July 18,
1997 and ending on the Closing Date (the aggregate amount of any reduction
pursuant to this clause (ii) not to exceed $5,000,000).
<PAGE>
SECTION 2.4. Closing Balance Sheet. (a) As promptly as practicable,
but no later than 60 days, after the Closing Date, Buyer will cause to be
prepared and delivered to Seller the combined balance sheet of Reseller
Network as of the Closing Date (the "Closing Balance Sheet") and a
certificate based on such Closing Balance Sheet setting forth Buyer's
calculation of Closing Net Liabilities Assumed. Buyer will, and will
request its independent accountants to, make available to Seller copies of
all customary accounting workpapers in their respective possession that
were prepared in connection with the preparation of the Closing Balance
Sheet and the calculation of Closing Net Liabilities Assumed. As used
herein, "Closing Net Liabilities Assumed" means the net liabilities of
Reseller Network as of the close of business on the Closing Date, which
net liabilities shall be calculated based on the Closing Balance Sheet and
in the manner set forth in Schedule 2.04. The Closing Balance Sheet shall
(x) fairly present the combined financial position of Reseller Network as
at the close of business on the Closing Date in accordance with generally
accepted accounting principles applied on a basis consistent with those
used in the preparation of the Balance Sheet, (y) include line items
(including the constituent components thereof) consistent with those in
the Balance Sheet and (z) be subject to adjustment as set forth on
Schedule 2.04. The Closing Balance Sheet (i) shall not reflect any
accruals for the disposal of leases of real property, for severance
payments or obligations made or incurred pursuant to agreements or
arrangements disclosed in Schedule 3.09(k) of the Seller Disclosure Letter
or otherwise approved by Buyer, or for obligations with respect to the
Indemnity Agreement with ITT Hartford referred to in the letter agreement
dated February 9, 1996 between Seller, Pacific OnLine Computers, Inc.,
Jeffrey Tietzer and Elizabeth Tietzer and (ii) shall not reflect any
reserves with respect to reseller loans.
(b) If Seller disagrees with Buyer's calculation of
Closing Net Liabilities Assumed delivered pursuant to Section 2.04(a),
Seller may, within 20 days after delivery of the documents referred to in
Section 2.04(a), deliver a notice to Buyer disagreeing with such
calculation and setting forth Seller's calculation of such amount. Any
such notice of disagreement shall specify those items or amounts as to
which Seller disagrees, and Seller shall be deemed to have agreed with all
other items and amounts contained in the Closing Balance Sheet and the
calculation of Closing Net Liabilities Assumed delivered pursuant to
Section 2.04(a). Notwithstanding the foregoing, the 20-day period referred
to in the first sentence of this subsection (b) shall not apply to the
extent that Buyer has not complied with its obligations under Section 8.01
of this Agreement, as it relates to Seller's access to books and records
for the purpose of this Section 2.04.
<PAGE>
(c) If a notice of disagreement shall be duly delivered
pursuant to Section 2.04(b), Buyer and Seller shall, during the 15 days
following such delivery, use their best efforts to reach agreement on the
disputed items or amounts in order to determine, as may be required, the
amount of Closing Net Liabilities Assumed. If, during such period, Buyer
and Seller are unable to reach such agreement, they shall promptly
thereafter cause Deloitte & Touche LLP or such other firm of nationally
recognized independent public accountants as may be agreed by Buyer and
Seller (the "Accounting Referee") promptly to review this Agreement and the
disputed items or amounts for the purpose of calculating Closing Net
Liabilities Assumed. In making such calculation, the Accounting Referee
shall follow the methodologies and procedures described in clauses (x), (y)
and (z) of subsection (a) above and may consider not only those items or
amounts reflected in the Closing Balance Sheet or Buyer's calculation of
Closing Net Liabilities Assumed as to which Seller has disagreed but also
any other items or amounts reflected in the Closing Balance Sheet. The
Accounting Referee shall deliver to Buyer and Seller, as promptly as
practicable, a report setting forth such calculation. Such report shall be
final and binding upon Buyer and Seller. The cost of such review and
report shall be borne equally by Buyer and Seller. As used herein, "Final
Net Liabilities Assumed" means the Closing Net Liabilities Assumed (i) as
shown in Buyer's calculation delivered pursuant to Section 2.04(a), if no
notice of disagreement with respect thereto is duly delivered pursuant to
Section 2.04(b); or (ii) if such a notice of disagreement is delivered,
(A) as agreed by Buyer and Seller pursuant to Section 2.04(c) or (B) in the
absence of such agreement, as shown in the Accounting Referee's calculation
delivered pursuant to Section 2.04(c); provided that in no event shall
Final Net Liabilities Assumed be more than Buyer's calculation of Closing
Net Liabilities Assumed delivered pursuant to Section 2.04(a) or less than
Seller's calculation of Closing Net Liabilities Assumed delivered pursuant
to Section 2.04(b)
(d) Buyer and Seller agree that they will, and will
request their respective independent accountants to, and Buyer will cause
each Company to, cooperate and assist in the preparation of the Closing
Balance Sheet and the calculation of Closing Net Liabilities Assumed and in
the conduct of the audits and reviews referred to in this Section 2.04,
including without limitation, the making available to the extent reasonably
necessary their respective books, records, work papers and personnel.
<PAGE>
SECTION 2.5. Adjustment of Purchase Price. (a) If Final Net
Liabilities Assumed exceeds Base Net Liabilities Assumed, Seller shall owe
to Buyer, as an adjustment to the Purchase Price, the amount of such
excess, which amount shall be payable in the manner and with interest as
provided in Section 2.05(b). If Base Net Liabilities Assumed exceeds Final
Net Liabilities Assumed, Buyer shall owe to Seller the amount of such
excess, which amount shall be payable in the manner and with interest as
provided in Section 2.05(b). As used herein, "Base Net Liabilities
Assumed" means the amount calculated as such in the manner provided in
Schedule 2.04 using information from the unaudited combined balance sheet
of Reseller Network for the fiscal month-end that is most recently
available as of the Closing Date, which balance sheet shall (x) fairly
present the combined financial position of Reseller Network as at the
close of business on the date of such fiscal month-end in accordance with
generally accepted accounting principles applied on a basis consistent
with those used in the preparation of the Balance Sheet, (y) include line
items (including the constituent components thereof) consistent with those
in the Balance Sheet, and (z) be prepared in accordance with accounting
policies and practices consistent with those used in the preparation of
the Balance Sheet. Such balance sheet (i) shall not reflect any accruals
for the disposal of leases of real property, for severance payments or
obligations made or incurred pursuant to agreements or arrangements
disclosed in Schedule 3.09(k) of the Seller Disclosure Letter or otherwise
approved by Buyer, or for obligations with respect to the Indemnity
Agreement with ITT Hartford referred to in the letter agreement dated
February 9, 1996 between Seller, Pacific OnLine Computers, Inc., Jeffrey
Tietzer and Elizabeth Tietzer and (ii) shall not reflect any reserves with
respect to reseller loans.
(b) Any payment pursuant to Section 2.05(a) shall be made
to Buyer or Seller, as the case may be, within 10 days after the Final Net
Liabilities Assumed has been determined, by delivery of immediately
available funds to Buyer or Seller, respectively. If such payment shall be
made to Buyer, it shall be made pursuant to the terms of the Escrow
Agreement out of funds contained in the Escrow Account; provided that, the
amount of such payment to be made out of funds contained in the Escrow
Account shall be limited to an amount so that the remaining balance of the
Escrow Account would not be less than $2 million (plus interest earned
thereon) and the remaining portion of such payment required to be made
pursuant to Section 2.05 shall be made directly by Seller to Buyer or the
Companies, as Buyer may elect. Any amounts in excess of $2 million (plus
interest earned thereon) remaining in the Escrow Account after making such
payment shall be released to Seller, net of the aggregate amount of claims
with respect to which Buyer is seeking indemnification pursuant to Article
10 or 13. If such payment shall be made to Seller, it shall be made
directly by Buyer to Seller and, simultaneously therewith, all of the funds
contained in the Escrow Account, other than an amount equal to $2 million
(plus interest earned thereon), shall be released to Seller pursuant to the
terms of the Escrow Agreement. If the Final Net Liabilities Assumed equals
the Base Net Liabilities Assumed, then the funds contained in the Escrow
Agreement, other than an amount equal to $2 million (plus interest earned
thereon), shall be released to Seller pursuant to the terms of the Escrow
Agreement. The amount of any payment to be made pursuant to this Section
2.05 directly by Buyer or Seller rather than from the Escrow Account shall
bear interest from and including the Closing Date to but excluding the date
of payment at a rate per annum equal to the Interest Rate in effect from
time to time during the period from the Closing Date to the date of
payment. Such interest shall be payable at the same time as the payment to
which it relates and shall be calculated daily on the basis of a year of
365 days and the actual number of days elapsed. As used herein, "Interest
Rate" for any day means (i) the London Interbank Offered Rate for deposits
in U.S. dollars for a 30 day period which is published in the Wall Street
Journal (Eastern Edition) under the caption "Money Rates - London Interbank
Offered Rates (LIBOR)" on such day; or (ii) if the Wall Street Journal does
not publish such rate, the offered rate for deposits in U.S. dollars for a
30 day period which appears on the Reuters Screen LIBO Page as of 10:00
a.m., New York time, on such day; provided that if at least two rates
appear on the Reuters Screen LIBO Page, the "London Interbank Offered Rate"
shall be the arithmetic mean of such rates.
<PAGE>
(c) For purpose of avoidance of doubt, Buyer and Seller
agree that, in the event and to the extent that any payment by Seller
causes or will cause the Purchase Price to be less than zero (0), such
payment shall nonetheless be treated by the parties hereto for all relevant
Tax purposes as an adjustment to the Modified Aggregate Deemed Sales Price
(as defined in Section 10.03(a)) (or, if otherwise required by applicable
law, by treating such payment as a contribution to the capital of the
Companies for such purposes).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
3 REPRESENTATIONS AND WARRANTIES OF SELLERSeller represents and
warrants to Buyer as of the date hereof and as of the Closing Date that:
SECTION 3.1. Corporate Existence and Power. Each of Seller and each
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
corporate powers and all material governmental licenses, authorizations,
permits, consents and approvals required to carry on its business as now
conducted. Each Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for those jurisdictions where failure
to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect. Each jurisdiction in which each Company is duly
qualified to do business as a foreign corporation and is in good standing
is set forth in Schedule 3.01 of the disclosure letter of Seller dated the
date hereof and delivered to Buyer in connection with this Agreement (the
"Seller Disclosure Letter"). Seller has heretofore delivered to Buyer true
and complete copies of the certificate of incorporation and bylaws of
Seller and each Company as currently in effect. The Companies have no
Subsidiaries.
SECTION 3.2. Corporate Authorization. The execution, delivery and
performance by Seller of this Agreement and the Escrow Agreement and the
consummation by Seller of the Transaction and the transactions
contemplated by the Escrow Agreement are within its corporate powers and,
except for any required approval by Seller's stockholders, have been duly
authorized by all necessary corporate action on the part of Seller. This
Agreement constitutes, and when executed and delivered pursuant to its
terms the Escrow Agreement will constitute, a valid and binding agreement
of Seller, enforceable against Seller in accordance with its terms, except
as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, moratorium or other similar laws
affecting the enforcement of creditors' rights generally.
<PAGE>
SECTION 3.3. Governmental Authorization. The execution, delivery and
performance by Seller of this Agreement and the Escrow Agreement and the
consummation by Seller of the Transaction and the transactions
contemplated by the Escrow Agreement require no action by or in respect
of, or filing with, any governmental body, agency or official other than
(i) compliance with any applicable requirements of the HSR Act; (ii)
compliance with any applicable requirements of the Exchange Act; and (iii)
such other matters as are set forth in Schedule 3.03 of the Seller
Disclosure Letter. As used herein, "Exchange Act" means the Securities
Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
SECTION 3.4. Noncontravention. The execution, delivery and
performance by Seller of this Agreement and the Escrow Agreement and the
consummation by Seller of the Transaction and the transactions
contemplated by the Escrow Agreement do not and will not (i) violate the
certificate of incorporation or bylaws of Seller or any Company, (ii)
assuming compliance with the matters referred to in Section 3.03, violate
any law, rule, or regulation applicable to Seller, any Company or Reseller
Network or any, judgment, injunction, order or decree which, expressly by
its terms, is binding upon Seller, any Company or Reseller Network, (iii)
require any consent (except as disclosed in Schedule 3.05 of the Seller
Disclosure Letter or in the list to be delivered pursuant to Section
6.11(b)) or other action by any Person under, constitute a default under,
or give rise to any right of termination, cancellation or acceleration of
any right or obligation of Seller or any Company or to a loss of any
benefit to which Seller or any Company is entitled under any provision of
any agreement or other instrument binding upon Seller or any Company or
(iv) result in the creation or imposition of any Lien on any asset of any
Company.
SECTION 3.5. Required and Other Consents. (a) Schedule 3.05 of the
Seller Disclosure Letter, as such Schedule may be updated pursuant to
Section 6.11(b), sets forth each agreement, contract or other instrument
binding upon any of Seller, Reseller Network or any Company and each
Permit requiring a consent as a result of the execution, delivery and
performance of this Agreement, except such consents as would not,
individually or in the aggregate, have a Material Adverse Effect if not
received by the Closing Date (each such consent, a "Required Consent" and
together, the "Required Consents").
SECTION 3.6. Capitalization. (a) Schedule 3.06 of the Seller
Disclosure Letter sets forth a complete and accurate list of (i) the
number of shares of each type of the authorized capital stock of each
Company and (ii) the number of shares of each such type outstanding as of
the date hereof and to be outstanding as of the Closing Date.
<PAGE>
(b) All outstanding shares of capital stock of each Company
have been duly authorized and validly issued and are fully paid and
non-assessable. Except as set forth in Schedule 3.06 of the Seller
Disclosure Letter, there are no outstanding (i) shares of capital stock or
voting securities of any Company, (ii) securities of any Company
convertible into or exchangeable for shares of capital stock or voting
securities of such Company or any other Company or (iii options or other
rights to acquire from any Company, or other obligation of any Company to
issue, any capital stock, voting securities or securities convertible into
or exchangeable for capital stock or voting securities of such Company or
any other Company (the items in clauses 3.06(b)(i), 3.06(b)(ii) and
3.06(b)(iii) being referred to collectively as the "Company Securities").
There are no outstanding obligations of any Company to repurchase, redeem
or otherwise acquire any Company Securities.
SECTION 3.7. Ownership of Shares and Seller RN Assets. (a) Seller is
the record and beneficial owner of the RN Shares, free and clear of any
Lien and any other limitation or restriction (other than those set forth
on Schedule 3.07 of the Seller Disclosure Letter, but including any
restriction on the right to vote, sell or otherwise dispose of the RN
Shares), and will transfer and deliver to Buyer at the Closing valid title
to the RN Shares free and clear of any Lien and any such limitation or
restriction.
(b) Seller has good title to, or in the case of leased
property has valid leasehold interests in, all of the Seller RN Assets,
free and clear of any Lien and any other limitation or restriction (other
than those set forth on Schedule 3.07 of the Seller Disclosure Letter and
other than those relating to Seller RN Assets that are not, individually or
in the aggregate, material to the business of Reseller Network), and will
transfer and deliver to the Companies prior to Closing marketable title to
the Seller RN Assets free and clear of any Lien and any such limitation or
restriction.
(c) The Seller RN Assets set forth on Schedule 3.07 of the
Seller Disclosure Letter, together with the RN Shares, constitute (or, in
the case of the RN Shares, will convey to Buyer ownership of or the right
to use) all of the property and assets held for use or used in connection
with the business of Reseller Network as currently conducted by Reseller
Network.
<PAGE>
SECTION 3.8. Financial Statements. The unaudited combined balance
sheet as of February 1, 1997, and the unaudited combined statement of
operations for each of the eight fiscal quarters ended February 1, 1997,
and the unaudited interim combined balance sheets as of November 2, 1996
and April 5, 1997 and the related unaudited interim combined statement of
operations for the two fiscal months ended April 5, 1997 of Reseller
Network (collectively, the "Financial Statements") and, to the best
knowledge of Seller, the other financial records and reports of Reseller
Network and each Company provided to Buyer during its due diligence
investigation, represent actual bona fide transactions, have been prepared
from the books and records of the Companies in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved and reflect adequate accruals of all current liabilities, except
for any liabilities with respect to capital stock or currently payable or
deferred income taxes, of Reseller Network to the extent known as of the
date of preparation and to the extent required to be set forth therein in
accordance with generally accepted accounting principles consistently
applied (subject, in the case of interim financial statements, to normal
quarterly adjustments primarily related to accruals for vendor programs,
including special promotions, marketing-development funds, sales-out
objectives and returns incentives). The Financial Statements provided to
Buyer fairly present the combined financial position of Reseller Network
as of the dates thereof and its combined results of operations for the
periods then ended. The books and records of the Companies represent
actual bona fide transactions.
SECTION 3.9. Absence of Certain Changes. Since the Balance Sheet
Date, the business of Reseller Network has been conducted in the ordinary
course consistent with past practices and, except as set forth in Schedule
3.09 of the Seller Disclosure Letter, there has not been:
(a) any event, occurrence, development or state of
circumstances or facts which has had or could reasonably be expected to
have a Material Adverse Effect;
(b) any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital stock
of any Company, or any repurchase, redemption or other acquisition by any
Company of any outstanding shares of capital stock or other securities of,
or other ownership interests in, such Company or any other Company;
(c) any amendment of any material term of any outstanding
security of any Company;
(d) any incurrence, assumption or guarantee by Seller (with
respect to the business of Reseller Network), Reseller Network or any
Company of any indebtedness for borrowed money;
<PAGE>
(e) any creation or other incurrence by Seller (with
respect to the business of Reseller Network), Reseller Network or any
Company of any Lien;
(f) any acquisition by Seller (with respect to the business
of Reseller Network), Reseller Network or any Company of quantities of
inventory that are not reasonably likely to be disposed of in the ordinary
course of business at mark-ups which are consistent with the current
practices of Reseller Network;
(g) any making of any loan, advance or capital
contributions to or investment in any Person, except to a Company;
(h) any damage, destruction or other casualty loss (whether
or not covered by insurance) affecting the business or assets of Seller
(with respect to the business of Reseller Network), Reseller Network or any
Company which, individually or in the aggregate, has had or could
reasonably be expected to have a Material Adverse Effect;
(i) any transaction or commitment made, or any contract or
agreement entered into, by Seller, Reseller Network or any Company relating
to the assets or business of Reseller Network (including the acquisition or
disposition of any assets) or any relinquishment by Seller, Reseller
Network or any Company of any contract or other right, in either case,
material to Reseller Network, taken as a whole, other than transactions and
commitments in the ordinary course of business consistent with past
practices and those contemplated by this Agreement;
(j) any change in any method of accounting or accounting
practice by Seller (with respect to the business of Reseller Network),
Reseller Network or any Company, except for any such change after the date
hereof required by reason of a concurrent change in generally accepted
accounting principles;
(k) any (i) employment, deferred compensation, severance,
retirement or other similar agreement entered into with any director,
officer or employee of any Company (or any amendment to any such existing
agreement), (ii) grant of any severance or termination pay to any director,
officer or employee of any Company, or (iii) change in compensation or
other benefits payable to any director, officer or employee of any Company
pursuant to any severance or retirement plans or policies thereof, other
than raises in the ordinary course of business; or
(l) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or
representative thereof to organize any employees of any Company, which
employees were not subject to a collective bargaining agreement at the
Balance Sheet Date, or any lockouts, strikes, work stoppages or, to the
knowledge of Seller, any slow-downs or threats with respect to any of the
foregoing by or with respect to any employees of any Company.
<PAGE>
SECTION 3.10. No Undisclosed Material Liabilities. There are no
liabilities of Seller (with respect to the business of Reseller Network),
Reseller Network or any Company of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is
no existing condition, situation or set of circumstances which could
reasonably be expected to result in such a liability, other than:
(a) liabilities provided for in the Balance Sheet or
disclosed in the notes thereto;
(b) liabilities disclosed on Schedule 3.10 of the Seller
Disclosure Letter; and
(c) liabilities incurred since the Balance Sheet Date in
the ordinary course of business consistent with past practice, which
liabilities, if not discharged prior to the Closing Date, will appear on
the Closing Balance Sheet, to the extent required by generally accepted
accounting principles (including without limitation the materiality
principles thereof) consistently applied.
SECTION 3.11. Intercompany Accounts. Schedule 3.11 of the Seller
Disclosure Letter contains a complete list of all intercompany balances as
of the Balance Sheet Date between Seller and its Affiliates, on the one
hand, and the Companies, on the other hand. Since the Balance Sheet Date
there has not been any accrual of liability by any Company to Seller or
any of its Affiliates or other transaction between any Company, on the one
hand, and Seller and any of its Affiliates, on the other hand, except,
with respect to the period prior to the date of this Agreement, in the
ordinary course of business of Reseller Network consistent with past
practice, and thereafter, as provided in Schedule 3.11 of the Seller
Disclosure Letter (which Schedule shall identify each category or type of
such transaction and a brief description thereof).
SECTION 3.12. Material ContractsSECTION 3.12. Material Contracts.
(a) Except as disclosed in Schedule 3.12 of the Seller Disclosure Letter,
none of Seller (with respect to the business of Reseller Network), Reseller
Network or any Company is a party to or bound by:
(i) any lease (whether of real or personal property) providing
for annual rentals of $100,000 or more;
(ii) any agreement for the purchase by Reseller Network or one or
more of the Companies of materials, supplies, goods, services, equipment or
other assets (excluding inventory) providing for either (A) annual payments
by Reseller Network or the Companies of $50,000 or more or (B) aggregate
payments by Reseller Network or the Companies of $100,000 or more;
<PAGE>
(iii) any sales, distribution or other similar agreement
(including any bulk sales contracts) providing for the sale by Reseller
Network or one or more of the Companies of materials, supplies, goods,
services, equipment or other assets that provides for either (A) annual
payments to Reseller Network or the Companies of $5,000,000 or more or (B)
aggregate payments to Reseller Network or the Companies of $10,000,000 or
more;
(iv) any partnership, joint venture or other similar agreement or
arrangement;
(v) any agreement relating to the acquisition or disposition of
any portion of Reseller Network or any Company (whether by merger, sale of
stock, sale of assets or otherwise);
(vi) any agreement relating to indebtedness for borrowed money or
the deferred purchase price of property (in either case, whether incurred,
assumed, guaranteed or secured by any asset);
(vii) any option, license, franchise or similar agreement or any
agency, dealer, sales representative, marketing or other similar agreement;
provided that Schedule 3.12(a)(vii) of the Seller Disclosure Letter is not
required to include such agreements with more than the 100 largest
ownership groups, calculated on the basis of sales by Reseller Network;
(viii) any agreement that restricts any Company or Reseller
Network from competing in any line of business or with any Person or in any
area or which would so restrict Reseller Network or any Company after the
Closing Date other than protected territories granted in franchise
agreements, which territories are set forth on Schedule 3.12(a)(viii) of
the Seller Disclosure Letter;
(ix) any agreement or arrangement with (A) Seller or any of its
Affiliates, (B) any Person directly or indirectly owning, controlling or
holding with power to vote, 5% or more of the outstanding voting securities
of Seller or any of its Affiliates, (C) any Person 5% or more of whose
outstanding voting securities are directly or indirectly owned, controlled
or held with power to vote by Seller or any of its Affiliates or (D) any
director or officer of Seller or any of its Affiliates or any "associates"
or members of the "immediate family" (as such terms are respectively
defined in Rule 12b-2 and Rule 16a-1 of the Exchange Act) of any such
director or officer;
(x) any agreement or arrangement with any director or officer of
any Company or with any "associate" or any member of the "immediate family"
(as such terms are respectively defined in Rules 12b-2 and 16a-1 of the
Exchange Act) of any such director or officer; or
<PAGE>
(xi) any other agreement, commitment, arrangement or plan not
made in the ordinary course of business that is material to Reseller
Network, taken as a whole.
(b) Except as set forth on Schedule 3.12(b) of the Seller
Disclosure Letter, each agreement, contract, plan, lease, arrangement or
commitment disclosed in any Schedule to the Seller Disclosure Letter or
required to be disclosed pursuant to this Section is a valid and binding
agreement of Seller, Reseller Network or the Company which is a party
thereto, as the case may be, and is in full force and effect, and none of
Seller, Reseller Network or any such Company is nor, to the knowledge of
Seller, is any other party thereto in default or breach in any material
respect under the terms of any such agreement, contract, plan, lease,
arrangement or commitment, nor, to the knowledge of Seller, has any event
or circumstance occurred that, with notice or lapse of time or both, would
constitute any event of default thereunder. True and complete copies of
each such agreement, contract, plan, lease, arrangement or commitment have
been made available to Buyer.
SECTION 3.13. Litigation. Except as set forth in Schedule 3.13 of the
Seller Disclosure Letter, there is no action, suit, or proceeding pending
against, or to the knowledge of Seller, threatened against or affecting,
Seller, Reseller Network, any Company or any of their respective
properties before any court or arbitrator or any governmental body, agency
or official, nor to the knowledge of Seller, is there any investigation by
any governmental authority of or relating to the operation of the business
of Reseller Network or any Company (i) where the aggregate damages sought
exceed $50,000 (provided that, with respect to Seller, this clause (i)
shall be limited to actions, suits, investigations or proceedings in
connection with the business of the Reseller Network), (ii) which,
individually or in the aggregate, if determined or resolved adversely in
accordance with the plaintiff's demands, could reasonably be expected to
have a Material Adverse Effect or (iii) which in any manner challenges or
seeks to prevent, enjoin, alter or materially delay the Transaction. In no
event will any judgment, order, decree, settlement or other disposition of
Anderson Consulting LLP vs. Intelligent Electronics, Inc. (No. 96CV962645,
District Court, City and County of Denver, Colorado) or Intelligent
Electronics, Inc. vs. Anderson Consulting LLP (No. 9604673, Common Pleas
Court, Chester County, PA) result in any liability to the Companies or
Reseller Network.
<PAGE>
SECTION 3.14. Compliance with Laws and Court Orders. Except as set
forth in Schedule 3.14 of the Seller Disclosure Letter, none of Seller
(with respect to business of Reseller Network), any Company or Reseller
Network is in violation of, or has since January 1, 1994 violated, or to
the knowledge of Seller is under investigation with respect to or has been
threatened to be charged with or given notice of any violation of, any
applicable law, rule, regulation, judgment, injunction, order or decree,
except for violations that have not had and could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect.
SECTION 3.15. Properties. (a) Reseller Network or one or more of the
Companies has good and marketable title to, or in the case of leased
property and assets has valid leasehold interests in, all property and
assets (whether real, personal, tangible or intangible) used in the
business of Reseller Network, all of which property and assets are
reflected on the Balance Sheet (to the extent acquired on or prior to the
Balance Sheet Date and to the extent required to be reflected on the
Balance Sheet by generally accepted accounting principles), except for
properties and assets sold since the Balance Sheet Date in the ordinary
course of business consistent with past practices. None of such property
or assets is subject to any Lien, except:
(i) Liens disclosed in the February 1, 1997 financial statements
referred to in Section 3.08;
(ii) Liens for taxes not yet due or being contested in good faith
(and for which adequate accruals or reserves have been established on the
Balance Sheet);
(iii) Liens which do not materially detract from the value or
materially interfere with any present or intended use of such property or
assets; or
(iv) Liens set forth on Schedule 3.15 of the Seller Disclosure
Letter.
(b) The facilities, buildings, structures and equipment used
by Seller (with respect to the business of Reseller Network), Reseller
Network or one or more of the Companies in the operation of the business of
Reseller Network as currently conducted are in all material respects
adequate and suitable for their current uses in the ordinary course of
business as conducted by Reseller Network. The equipment used by Reseller
Network or one or more of the Companies in the operation of the business of
Reseller Network as currently conducted has no material defects, is in good
operating condition and repair and has been reasonably maintained
consistent with standards generally followed in the industry (giving due
account to the age and length of use of same, ordinary wear and tear
excepted).
<PAGE>
(c) The Seller RN Assets, and the property and assets owned
or leased by Reseller Network or one or more of the Companies, constitute
all of the property and assets used or held for use in connection with the
businesses of Reseller Network.
(d) None of Seller (with respect to the business of
Reseller Network), Reseller Network or any Company owns (or holds other
than pursuant to a lease set forth on Schedule 3.12(a)(i) of the Seller
Disclosure Letter) any real property.
SECTION 3.16. Intellectual Property. (a) Schedule 3.16 of the Seller
Disclosure Letter contains a list of all Intellectual Property Rights
owned or licensed and used or held for use by Seller (with respect to the
business of Reseller Network), Reseller Network or any Company which are
material to the operation of the business of Reseller Network as currently
conducted, but excluding any Intellectual Property of manufacturers of
products sold by Reseller Network ("RN Intellectual Property Rights"),
specifying as to each, if applicable: (i) the nature of such Intellectual
Property Right, (ii) the owner or licensor of such Intellectual Property
Right, (iii) if owned, the jurisdictions by or in which such Intellectual
Property Right has been issued or registered or in which an application
for such issuance or registration has been filed, (iv) if owned, the
registration or application numbers and (v) if owned, the termination or
expiration dates.
(b) Schedule 3.16 of the Seller Disclosure Letter sets forth
a list of all licenses, sublicenses and other agreements as to which Seller
(with respect to the business of Reseller Network), Reseller Network or any
Company is a party and pursuant to which any Person is authorized to use
any RN Intellectual Property Right (excluding the right to use RN
Intellectual Property Rights pursuant to franchise agreements or program
agreements, including any renewals thereof or successor agreements
thereto), including (i) the identity of all parties thereto, (ii) a
description of the nature and subject matter thereof, (iii) the applicable
royalty and (iv) the term thereof.
<PAGE>
(c) (i) Since January 1, 1994, neither Seller (with
respect to the business of Reseller Network), Reseller Network nor any
Company has been a defendant in any action, suit or proceeding or, to the
knowledge of Seller, any investigation relating to, or otherwise has been
notified of, any alleged claim of infringement of any Intellectual Property
Right, and Seller has no knowledge of any other such infringement by Seller
(with respect to the business of Reseller Network), Reseller Network or any
Company and (ii) except as set forth in Schedule 3.16 of the Seller
Disclosure Letter, neither Seller nor any Company has an outstanding claim
or suit for, and Seller has no knowledge of, any continuing infringement by
any other Person of any RN Intellectual Property Rights. No RN
Intellectual Property Right is subject to any outstanding judgment,
injunction, order, decree or agreement restricting the use thereof by
Reseller Network or any Company or restricting the licensing thereof by
Reseller Network or any Company to any Person. Except as set forth in
Schedule 3.16 of the Seller Disclosure Letter, neither Reseller Network nor
any Company has entered into any agreement to indemnify any other Person
against any charge of infringement of any Intellectual Property Right other
than pursuant to a vendor agreement entered into in the ordinary course of
business.
(d) None of the processes and formulae, research and
development results and other know-how of Seller (with respect to the
business of Reseller Network), Reseller Network or any Company, the value
of which to Seller (with respect to the business of Reseller Network),
Reseller Network or any Company is contingent upon maintenance of the
confidentiality thereof, has been disclosed by Reseller Network or any
Company or any of its Affiliates to any Person other than employees,
representatives and agents of Reseller Network or any Company, all of whom
are bound by written confidentiality provisions set forth in the employee
handbook used by the Reseller Network, a copy of which was previously
provided to Buyer.
SECTION 3.17. Insurance Coverage. Seller has furnished to Buyer a
list of, and true and complete copies of, all insurance policies and
fidelity bonds relating to the assets, business, operations, employees,
officers or directors of Reseller Network or any Company. Except as set
forth on Schedule 3.17 of the Seller Disclosure Letter, there is no claim
by Seller (with respect to the business of Reseller Network), Reseller
Network or any Company pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds or in respect of which such underwriters have
reserved their rights. All premiums payable under all such policies and
bonds have been timely paid and Seller, Reseller Network and each Company
have otherwise complied in all material respects with the terms and
conditions of all such policies and bonds. Such policies of insurance and
bonds (or other policies and bonds providing substantially similar
insurance coverage) have been in effect since January 1, 1994 and remain
in full force and effect. Such policies and bonds are of the type and in
amounts customarily carried by Persons conducting businesses similar to
those of Reseller Network. Seller does not know of any threatened
termination of, premium increase with respect to, or material alteration
of coverage under, any of such policies or bonds. Except as disclosed in
Schedule 3.17 of the Seller Disclosure Letter, Reseller Network and each
Company shall after the Closing continue to have coverage under such
policies and bonds with respect to events occurring prior to the Closing.
<PAGE>
SECTION 3.18. Licenses and Permits. Schedule 3.18 of the Seller
Disclosure Letter correctly describes each license, franchise, permit,
certificate, approval or other similar authorization affecting, or
relating in any way to, the assets or business of Reseller Network or any
Company and the absence of which would have a Material Adverse Effect (the
"Permits") together with the name of the government agency or entity
issuing such Permit. Except as set forth on Schedule 3.18 of the Seller
Disclosure Letter, (i) the Permits are valid and in full force and effect,
(ii) neither Reseller Network nor any Company is in default under, and no
condition exists that with notice or lapse of time or both would
constitute a default under, the Permits and (iii) none of the Permits will
be terminated or become terminable, in whole or in part as a result of the
Transaction.
SECTION 3.19. Inventories. (a) All inventory owned by Seller (with
respect to the business of Reseller Network), Reseller Network or any
Company reflected on the Balance Sheet or to be reflected on the Closing
Balance Sheet are in the original packaging of the supplier. Each item of
inventory reflected on the Balance Sheet is, and each item of inventory to
be reflected on the Closing Balance Sheet is required to be, so reflected
on the basis of a complete physical count and is valued at the lesser of
cost or fair market value in accordance with generally accepted accounting
principles consistently applied.
(b) The items referred to in Section 3.19(a) are in good
condition and saleable in the ordinary course of business of Reseller
Network as currently conducted. None of the items referred to in Section
3.19(a) is obsolete, discontinued, damaged, overaged or of below standard
quality or merchantability, except for items that have been written down to
realizable market value or for which adequate reserves have been provided.
SECTION 3.20. Receivables. All accounts, notes receivable, employee
advances, accrued interest receivable, amounts due from vendors and other
receivables ("Receivables") (other than receivables collected since the
Balance Sheet Date) reflected on the Balance Sheet are, and all
Receivables arising from or otherwise relating to the business of Reseller
Network as of the Closing Date will be, valid and genuine. All Receivables
arising out of or relating to such business of Reseller Network as of the
Balance Sheet Date have been included in the Balance Sheet, in accordance
with generally accepted accounting principles applied on a consistent
basis.
<PAGE>
SECTION 3.21. Product Liability; Product Warranty. (a) Except as set
forth in Schedule 3.21(a) of the Seller Disclosure Letter, there are no
claims, actions, suits, inquiries or proceedings by or before any court or
governmental or other regulatory or administrative authority, agency or
commission asserted, pending or, to the best knowledge of Seller,
threatened against, or to the knowledge of Seller any investigations,
involving Seller (to the extent related to the business of Reseller
Network), Reseller Network or any Company that (i) relate to the
ownership, possession or use of any product alleged to have been
manufactured, assembled, configured, distributed or sold by Seller (to the
extent related to the business of Reseller Network), Reseller Network or
any Company (the "RN Products") and alleged to have been defective or
improperly designed or manufactured, (ii) state a claim under any
warranty, guarantee or indemnification made by Seller, Reseller Network or
any Company or (iii) arise from or are alleged to arise from actual or
alleged injury to Persons or property as a result of the conduct of Seller
(to the extent related to the business of Reseller Network), Reseller
Network or any Company.
(b) To the best knowledge of Seller, there are no recalls pending
or threatened with respect to any of the RN Products. No filing has been
made by Seller (to the extent related to the business of Reseller Network),
Reseller Network or any Company under any applicable rule, regulation or
statute with respect to any product defects or hazards in connection with
any of the RN Products and there have been, to the best knowledge of
Seller, no material recurring defects therein which create such a defect or
hazard.
(c) Schedule 3.21(c) of the Seller Disclosure Letter sets forth
the standard forms of product warranties issued by Seller (to the extent
related to the business of Reseller Network), Reseller Network or any
Company and copies of all other material product warranties issued by
Seller (to the extent related to the business of Reseller Network),
Reseller Network or any Company. Except as set forth in Schedule 3.21(c)
of the Seller Disclosure Letter or reflected or reserved for in the Balance
Sheet, since January 1, 1992, no product warranty or similar claims have
been made against Seller (to the extent related to the business of Reseller
Network), Reseller Network or any Company, except claims as to which in the
aggregate losses and expenses in respect of repair or replacement of
products have not exceeded $50,000.
<PAGE>
SECTION 3.22. Selling Documents. None of the information (other than
financial projections and other than the financial statements as to which
representations are made in Section 3.08) contained in the Confidential
Descriptive Memorandum (the "Offering Memorandum") dated as of February
1997, prepared by Legg Mason Wood Walker Incorporated ("Legg Mason") in
connection with the sale of Reseller Network, contains any untrue
statement of a material fact or omits to state a material fact necessary
in order to make the statements contained therein not misleading. The
financial projections relating to Reseller Network delivered to Buyer were
made in good faith and were based upon assumptions that were reasonable at
the time such projections were delivered to Buyer. Without limiting the
representations and warranties made in Section 3.08, Seller has disclosed
to Buyer the financial results of Reseller Network up to and including
April 5, 1997 which are materially different from those set forth in such
projections.
SECTION 3.23. Finders' Fees. Except for Legg Mason whose fees will be
paid by Seller, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf
of Seller, Reseller Network or any Company who might be entitled to any
fee or commission in connection with the Transaction.
SECTION 3.24. Employees. Schedule 3.24 of the Seller Disclosure
Letter sets forth a true and complete list of (a) the names, titles,
annual salaries and other compensation of all officers of each Company and
all other employees of each Company whose annual base salary exceeds
$100,000 and (b) the wage rates and number of employees of each Company
(by classification).
SECTION 3.25. Labor Matters. (a) Seller (with respect to the business
of Reseller Network), Reseller Network and each Company are in compliance
with all currently applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and are
not engaged in any unfair labor practice, failure to comply with which or
engagement in which, as the case may be, would reasonably be expected to
have a Material Adverse Effect. There is no unfair labor practice
complaint pending or, to the knowledge of Seller, threatened against
Reseller Network or any Company before the National Labor Relations Board.
(b) except as set forth in Schedule 3.25 of the Seller
Disclosure Letter, there is no pending or, to the knowledge of Seller,
Reseller Network or any Company, threatened labor dispute, strike or
lockout, or work stoppage, unfair labor practice complaint, grievance
procedure or arbitration proceeding, nor to the knowledge of Seller is
there any slowdown, relating to Seller, Reseller Network or any Company.
No employees of Seller, Reseller Network or any Company are subject to any
collective bargaining agreement or labor contracts. No question now exists
respecting proposed union representation of the employees of any Company
and no collective bargaining agreement is currently being negotiated.
<PAGE>
(c) Each Company and Reseller Network have made available to
Buyer copies of all Occupational Safety and Health Administration ("OSHA")
reports having to do with any Company or Reseller Network, their operations
or their business and received by Seller, Reseller Network or any Company.
No other oral or written complaints or notices have been received from
OSHA, or any other regulatory agencies or offices having jurisdiction over
health or safety matters relating to Seller, Reseller Network or any
Company. All matters noticed in such reports have been resolved or cured.
SECTION 3.26. Environmental Matters. (a) The following terms, as used
herein, have the following meanings:
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, and the rules and regulations
promulgated thereunder.
"Environmental Laws" means any federal, state, local or foreign law
(including, without limitation, common law), treaty, regulation, rule,
judgment, order, injunction, permit or governmental restriction or
requirement or any agreement with any governmental authority, whether now
or hereafter in effect, relating to human health and safety, the
environment or to pollutants, contaminants, wastes or chemicals or any
hazardous substances, wastes or materials.
"Hazardous Substances" means any pollutant, contaminant, waste or chemical
or any toxic, radioactive, ignitable, corrosive, reactive or otherwise
hazardous substance, waste or material, or any substance, waste or material
having any constituent elements displaying any of the foregoing
characteristics, including, without limitation, petroleum, its derivatives,
by-products and other hydrocarbons, and any substance, waste or material
regulated under any Environmental Law.
(b) Except as disclosed on Schedule 3.26 of the Seller
Disclosure Letter,
(i) there are no liabilities of or relating to the business of
Reseller Network or any Company of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, arising under
or relating to any Environmental Law, and there are no facts, conditions,
situations or set of circumstances which could reasonably be expected to
result in or be the basis for any such liability;
(ii) no notice, notification, demand, request for information,
citation, summons, order or complaint has been received, no penalty has
been assessed and no action, suit or proceeding is pending, or to Seller's
knowledge, threatened (nor to Seller's knowledge is there any investigation
or review pending) by any governmental entity or other Person with respect
to any matters relating to Seller (with respect to the business of Reseller
Network), Reseller Network or any Company and relating to or arising out of
any Environmental Law;
<PAGE>
(iii) no polychlorinated biphenyls, radioactive material, lead,
asbestos-containing material, incinerator, landfill, septic, wastewater
treatment or other disposal system or underground storage tank (active or
inactive) is or has been present at, on or under any property now or
previously owned, leased or operated by Seller (with respect to the
business of Reseller Network), Reseller Network or any Company;
(iv) no Hazardous Substance has been discharged, disposed of,
deposited, spilled, leaked or released at, on or under any property now or
previously owned, leased or operated by Seller (with respect to the
business of Reseller Network), Reseller Network or any Company; and
(v) no property now or previously owned, leased or operated by
Seller (with respect to the business of Reseller Network), Reseller Network
or any Company or any property to which Reseller Network or any Company has
transported or arranged for the transportation of any Hazardous Substances
is listed or, to Seller's knowledge, proposed for listing, on the National
Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in
CERCLA) or on any similar federal, state or foreign list of sites requiring
investigation or clean-up.
(c) There has been no environmental investigation, study,
audit, test, review or other analysis conducted which Seller has in its
possession in relation to the current or prior business of Reseller Network
or any Company or any property or facility now or previously owned, leased
or operated by Reseller Network or any Company which has not been made
available to Buyer at least ten days prior to the date hereof.
SECTION 3.27. Bank Accounts. Set forth on Schedule 3.27 of the Seller
Disclosure Letter hereof is the name and address of each bank in which
Seller (to the extent related to the business of Reseller Network),
Reseller Network or any Company has an account or a safe deposit box, the
account numbers and the names of all Persons authorized to draw on such
accounts or to have access thereto.
SECTION 3.28. Suppliers and Licensors. Schedule 3.28 of the Seller
Disclosure Letter (i) lists the suppliers of inventory of Reseller Network
and the Companies by purchase volume for the year ended February 1, 1997
and the two fiscal month period ended April 5, 1997 and (ii) identifies
each contract or agreement with each such supplier that is currently in
effect, other than letters periodically received from vendors, including
but not limited to those addressing special promotions,
marketing-development funds, sales-out objectives and returns incentives.
The five largest such suppliers so listed by purchase volume shall
collectively be referred to herein as the "Principal Vendors" and each
such supplier, a "Principal Vendor". Except as indicated in Schedule 3.28
of the Seller Disclosure Letter, no such supplier has any right to
terminate its contract with Seller (with respect to the business of
Reseller Network), Reseller Network or any Company due to the consummation
of the Transaction.
<PAGE>
SECTION 3.29. Reseller Loans. Schedule 3.29 of the Seller Disclosure
Letter sets forth the name of each reseller to which Seller or any Company
has made an outstanding loan in connection with the business of Reseller
Network. A true and complete copy of each loan agreement related to such
reseller loans has been made available to Buyer prior to the date hereof.
To the best knowledge of Seller based on information of which it is
currently aware, all of such reseller loans are fully collectible.
SECTION 3.30. Seller Proxy Materials. Each document filed by Seller
with the SEC in connection with the meeting of the stockholders of Seller
referred to in Section 12.01(d) including, without limitation, the proxy
or information statement of Seller and any amendments or supplements
thereto (the "Seller Proxy Materials") will, when filed, comply as to form
in all material respects with the applicable requirements of the Exchange
Act. Each time any Seller Proxy Materials are distributed to stockholders
of Seller or any other solicitation of stockholders of Seller is made by
or on behalf of Seller or any Affiliate of Seller, and at the time such
stockholders vote on approval of the Transaction, the Seller Proxy
Materials (as supplemented and amended, if applicable), in the light of
the circumstances under which the statements contained in the Seller Proxy
Materials or any other solicitations are made, will not contain an untrue
statement of a material fact or omit to state any material fact necessary
(i) in order to make the statements made therein not false or misleading,
or (ii) to correct any statement in any earlier communication with respect
to the solicitation of a proxy for the same meeting or subject matter
which has become false or misleading. The representations and warranties
contained in this Section will not apply to statements or omissions
included in the Seller Proxy Materials based upon information furnished to
Seller in writing by Buyer specifically for use therein.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF XLSOURCE
4 REPRESENTATIONS AND WARRANTIES OF XLSOURCE XLSource represents and
warrants to Buyer as of the date hereof and as of the Closing Date that:
SECTION 4.1. Corporate Existence and Power. XLSource is a corporation
duly incorporated, validly existing and in good standing under the laws of
its jurisdiction of incorporation and has all corporate powers and all
material governmental licenses, authorizations, permits, consents and
approvals required to carry on its business as now conducted. XLSource has
heretofore made available to Buyer true and complete copies of its
certificate of incorporation and bylaws as currently in effect.
<PAGE>
SECTION 4.2. Corporate Authorization. The execution, delivery and
performance by XLSource of this Agreement and the XLSource Supply
Agreement and the consummation by XLSource of the Transaction and the
transactions contemplated by the XLSource Supply Agreement are within its
corporate powers and have been duly authorized by all necessary corporate
action on the part of XLSource. Each of this Agreement and the XLSource
Supply Agreement constitutes a valid and binding agreement of XLSource,
enforceable against XLSource in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, moratorium or other similar laws affecting the
enforcement of creditors' rights generally.
SECTION 4.3. Government Authorization. The execution, delivery and
performance by XLSource of this Agreement and the XLSource Supply
Agreement and the consummation of the Transaction and the transactions
contemplated by the XLSource Supply Agreement require no action by or in
respect of, or filing with, any governmental body, agency or official.
SECTION 4.4. NONCONTRAVENTION Section 4.4. NONCONTRAVENTION. THE
EXECUTION, DELIVERY AND PERFORMANCE BY XLSOURCE OF THIS AGREEMENT AND THE
XLSOURCE SUPPLY AGREEMENT AND THE CONSUMMATION BY XLSOURCE OF THE
TRANSACTION AND THE TRANSACTIONS CONTEMPLATED BY THE XLSOURCE SUPPLY
AGREEMENT DO NOT AND WILL NOT VIOLATE ITS CERTIFICATE OF INCORPORATION OR
BYLAWS, VIOLATE ANY APPLICABLE LAW, RULE, REGULATION, JUDGMENT,
INJUNCTION, ORDER OR DECREE OR REQUIRE ANY CONSENT OR OTHER ACTION BY ANY
PERSON UNDER, CONSTITUTE A DEFAULT UNDER, OR GIVE RISE TO ANY RIGHT OF
TERMINATION, CANCELLATION OR ACCELERATION OF ANY RIGHT OR OBLIGATION OF
XLSOURCE OR TO A LOSS OF ANY BENEFIT TO WHICH XLSOURCE IS ENTITLED UNDER
ANY PROVISION OF ANY AGREEMENT OR OTHER INSTRUMENT BINDING UPON XLSOURCE.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date hereof and as of the
Closing Date that:
SECTION 5.1. Corporate Existence and Power. Buyer is a corporation
duly incorporated, validly existing and in good standing under the laws of
Delaware and has all corporate powers and all material governmental
licenses, authorizations, permits, consents and approvals required to
carry on its business as now conducted.
<PAGE>
SECTION 5.2. Corporate Authorization. The execution, delivery and
performance by Buyer of this Agreement, the Escrow Agreement and the
XLSource Supply Agreement and the consummation of the Transaction and the
transactions contemplated by the Escrow Agreement and the XLSource Supply
Agreement are within the corporate powers of Buyer and have been duly
authorized by all necessary corporate action on the part of Buyer. Each of
this Agreement and the XLSource Supply Agreement constitutes and, when
executed and delivered pursuant to its terms the Escrow Agreement will
constitute, a valid and binding agreement of Buyer, enforceable against
Buyer in accordance with its terms, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, fraudulent conveyance,
moratorium or other similar laws affecting the enforcement of creditors'
rights generally.
SECTION 5.3. Governmental Authorization. The execution, delivery and
performance by Buyer of this Agreement, the Escrow Agreement and the
XLSource Supply Agreement and the consummation of the Transaction and the
transactions contemplated by the Escrow Agreement and the XLSource Supply
Agreement require no material action by or in respect of, or material
filing with, any governmental body, agency or official other than (i)
compliance with any applicable requirements of the HSR Act and (ii)
compliance with any applicable requirements of the Exchange Act.
SECTION 5.4. Noncontravention. The execution, delivery and
performance by Buyer of this Agreement, the Escrow Agreement and the
XLSource Supply Agreement and the consummation of the Transaction and the
transactions contemplated by the Escrow Agreement and the XLSource Supply
Agreement do not and will not (i) violate the certificate of incorporation
or bylaws of Buyer, (ii) assuming compliance with the matters referred to
in Section 5.03, violate any applicable material law, rule, regulation,
judgment, injunction, order or decree or (iii) require any consent or
other action by any Person under any provision of any agreement or other
instrument binding upon Buyer.
SECTION 5.5. Financing. Buyer has sufficient cash, available lines of
credit or other sources of immediately available funds to enable it to
make payment of the Purchase Price and any other amounts to be paid by it
hereunder.
SECTION 5.6. Purchase for Investment. Buyer is purchasing the RN
Shares for investment for its own account and not with a view to, or for
sale in connection with, any distribution thereof. Buyer (either alone or
together with its advisors) has sufficient knowledge and experience in
financial and business matters so as to be capable of evaluating the
merits and risks of its investment in the RN Shares and is capable of
bearing the economic risks of such investment.
<PAGE>
SECTION 5.7. LitigationSECTION 5.7. Litigation. There is no
action, suit, investigation or proceeding pending against, or to the
knowledge of Buyer threatened against or affecting, Buyer before any court
or arbitrator or any governmental body, agency or official which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay
the Transaction.
SECTION 5.8. Finders' Fees. Except for Morgan Stanley & Co.
Incorporated whose fees will be paid by Buyer, there is no investment
banker, broker, finder or other intermediary which has been retained by or
is authorized to act on behalf of Buyer who might be entitled to any fee
or commission from Seller or any of its Affiliates upon consummation of
the Transaction.
ARTICLE 6
COVENANTS OF SELLER
Seller agrees that:
SECTION 6.1. Conduct of Reseller Network and Each Company. From the
date hereof until the Closing Date, Seller shall cause Reseller Network
and each Company to conduct its businesses in the ordinary course
consistent with past practice and to use its commercially reasonable
efforts to preserve intact its business organizations, relationships with
third parties and, except as set forth on Schedule 3.09(k) of the Seller
Disclosure Letter, to keep available the services of its present officers
and employees. Without limiting the generality of the foregoing, from the
date hereof until the Closing Date, Seller will not permit Reseller
Network or any Company to:
(a) adopt or propose any change in the certificate of
incorporation or bylaws of any Company;
(b) merge or consolidate with any other Person or, except
for purchases of inventory in the ordinary course of business consistent
with past practices, acquire a material amount of assets from any other
Person;
(c) sell, lease, license or otherwise dispose of any assets
or property except (i) pursuant to existing contracts or commitments and
(ii) in the ordinary course consistent with past practice; or
(d) agree or commit to do any of the foregoing.
Seller will not, and will not permit Reseller Network or any Company to,
(i) take or agree or commit to take any action that would make any
representation and warranty of Seller hereunder inaccurate in any respect
at, or as of any time prior to, the Closing Date or (ii) knowingly omit or
agree or commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any respect at any such
time.
<PAGE>
SECTION 6.2. Access to Information; Confidentiality. (a) From the
date hereof until the Closing Date, Seller will (i) give, and will cause
Reseller Network and each Company to give, Buyer, its counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and records of Reseller Network and each
Company and to the books and records of Seller and each Company relating
to Reseller Network, (ii) furnish, and will cause Reseller Network and
each Company to furnish, to Buyer, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating
data and other information relating to Reseller Network and each Company
as such Persons may reasonably request, (iii) instruct the employees,
counsel and financial advisors of Seller, Reseller Network and each
Company to cooperate with Buyer in its investigation of Reseller Network
and (iv) allow Buyer and its representatives to be present during any
physical count of inventory performed. Any investigation pursuant to this
Section shall be conducted in such manner as not to interfere unreasonably
with the conduct of the business of Reseller Network, Seller or any
Company. No investigation by Buyer or other information received by Buyer
shall operate as a waiver or otherwise affect any representation, warranty
or agreement given or made by Seller hereunder.
(b) Schedule 6.02 of the Seller Disclosure Letter sets forth
(to the extent that Seller is permitted to do so consistent with its
contractual obligations to third parties) the name of each Potential Buyer.
Seller shall promptly request that each Potential Buyer either return all
of such Information (and copies thereof) to Seller or destroy all of such
Information (and copies thereof) and deliver a written certification of
such destruction to Seller. Seller shall use its best efforts to cause
each such Potential Buyer to comply with such request and shall notify
Buyer promptly following compliance by each Potential Buyer with such
request. As used herein, "Potential Buyer" means each Person (other than
Buyer) to whom any confidential documents or information (including but not
limited to the Offering Memorandum) concerning Seller (to the extent
related to the business of Reseller Network), Reseller Network or any
Company ("Information") was disclosed by Seller or any agent acting on
Seller's behalf since January 1, 1997 for the purpose of discussing a
possible change in control transaction for Reseller Network.
(c) Seller hereby assigns to Buyer, effective as of the
Closing Date, its rights to enforce the confidentiality provisions
contained in any and all confidentiality agreements which Seller has
entered into with, or received from, each Potential Buyer, but solely to
the extent that it relates to information with respect to the business of,
or solicitation of employees of, Reseller Network and the Companies. To
the extent such rights are not assignable, Seller shall, at Buyer's
request, enforce such rights at Buyer's expense.
<PAGE>
(d) After Closing, Seller and its Affiliates will hold, and
will use their commercially reasonable efforts to cause their respective
officers, directors, employees, accountants, counsel, consultants, advisors
and agents to hold, in confidence, unless compelled to disclose by judicial
or administrative process or by other requirements of law, all confidential
documents and information concerning Reseller Network or any Company,
except to the extent that such information can be shown to have been (i)
previously known on a nonconfidential basis by Seller, (ii) in the public
domain through no fault of Seller or its Affiliates or (iii) later lawfully
acquired by Seller from sources other than those related to its prior
ownership of Reseller Network. The obligation of Seller and its Affiliates
to hold any such information in confidence shall be satisfied if they
exercise the same care with respect to such information as they would take
to preserve the confidentiality of their own similar information.
(e) On and after the Closing Date, Seller will afford
promptly to Buyer and its agents reasonable access to its books of account,
financial and other records and information in the possession of Seller
relating to Reseller Network and the Companies and to Seller's employees,
and will request that its auditors provide to Buyer and its agents
reasonable access to its employees and workpapers relating to Reseller
Network and the Companies, in each case to the extent necessary or useful
for Buyer in connection with any audit, investigation, dispute or
litigation relating to Reseller Network or any of the Companies or any
other reasonable business purpose relating to Reseller Network; provided
that any such access by Buyer shall not unreasonably interfere with the
conduct of the business of Seller; and provided further, in no event shall
Seller be required to disclose any information which would waive an
attorney-client privilege.
SECTION 6.3. Notices of Certain Events. Seller shall promptly notify
Buyer of:
(a) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the Transaction;
(b) any notice or other communication from any governmental
or regulatory agency or authority in connection with the Transaction; and
(c) any actions, suits, claims or proceedings commenced or,
to its knowledge threatened (or, to its knowledge, any investigations)
against, relating to or involving or otherwise affecting Seller (to the
extent related to the business of Reseller Network), Reseller Network or
any Company that, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 3.13 or that relate to
the consummation of the Transaction.
<PAGE>
SECTION 6.4. Resignations. At or prior to the Closing Date, Seller
will deliver to Buyer the resignations of all corporate officers and
directors of each Company who will be officers, directors or employees of
Seller or any of its Affiliates after the Closing Date from their
positions with such Company.
SECTION 6.5. Noncompetition. (a) Seller agrees that for a period of
three (3) full years from the Closing Date, neither it nor any of its
Subsidiaries shall engage, either directly or indirectly, as a principal
or for its own account or solely or jointly with others, or as
stockholders or equity owners in any Person, manage, operate, join, lend
money or render financial or other assistance to, or participate (as a
director, officer, employee, partner, stockholder, founder, consultant or
otherwise), in any business that competes with either of the following
businesses (the "Business") as they exist on the Closing Date within the
United States, Canada and Mexico:
(i) any business that distributes and sells to resellers
(both retail and otherwise) branded microcomputers and related
equipment; or
(ii) any business that, in connection with the distribution
and sale to resellers (both retail and otherwise) of branded
microcomputers and related equipment, (x) offers to such resellers
value-added services, including but not limited to product selection,
technical support, cost-efficient marketing programs and promotions,
national service network, SKU-able services, financing programs and
product delivery services and (y) performs "built-to-order"
configuring of branded microcomputers and related equipment and light
manufacturing in connection therewith.
Notwithstanding anything herein to the contrary, nothing in this Section
6.05(a) shall prohibit Seller or any of its Subsidiaries from (1) making
isolated sales of branded microcomputers and related equipment to such
resellers to the extent and in the circumstances such sales are currently
made by Seller's Subsidiaries, (2) providing information technology
services in the areas of (i) internetworking (the consulting, design and
implementation of local area networks and wide area networks), (ii)
applications development (the customization and adaption of proven software
as well as training and education to support applications and
internetworking solutions), (iii) telecommunications (including data, video
and voice transmission) or (iv) managed services (such as install, add,
move and change services, break fix, help desk, network management and
asset management), (3) manufacturing, assembling or configuring
microcomputers if the XLSource Supply Agreement has been terminated due to
Buyer's breach of the performance standards contained therein, (4)
acquiring a diversified company having not more than 5% of its sales (based
on its latest published annual audited financial statements) attributable
to the Business or (5) owning, individually or in the aggregate, less than
1% of a company listed or traded on a national securities exchange or in an
over-the-counter securities market.
<PAGE>
(b) Seller agrees that for a period of three (3) full years
from the Closing Date, neither it nor any of its Subsidiaries shall without
Buyer's consent, knowingly employ or solicit (other than through general
advertisement), or knowingly receive or accept the performance of services
by any then current employee of Reseller Network or any Company, or any
then current employee of Buyer or its Affiliates employed by Reseller
Network or any Company as of the date hereof or as of the Closing Date.
(c) If any provision contained in this Section shall for
any reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Section, but this Section shall be construed as if such
invalid, illegal or unenforceable provision had never been contained
herein. It is the intention of the parties that if any of the restrictions
or covenants contained herein is held to cover a geographic area or to be
for a length of time which is not permitted by applicable law, or in any
way construed to be too broad or to any extent invalid, such provision
shall not be construed to be null, void and of no effect, but to the extent
such provision would be valid or enforceable under applicable law, a court
of competent jurisdiction shall construe and interpret or reform this
Section to provide for a covenant having the maximum enforceable geographic
area, time period and other provisions (not greater than those contained
herein) as shall be valid and enforceable under such applicable law.
Seller acknowledges that Buyer would be irreparably harmed by any breach of
this Section and that there would be no adequate remedy at law or in
damages to compensate Buyer for any such breach. Seller agrees that Buyer
shall be entitled to injunctive relief requiring specific performance by
Seller of this Section, and Seller consents to the entry thereof.
SECTION 6.6. Intercompany Accounts. (a) If the aggregate amount of
the payables (collectively, the "Intercompany Payable") owing by the
Companies to Seller or its Subsidiaries is less than $10 million greater
than the aggregate amount of the receivables (collectively, the
"Intercompany Receivable") owing to the Companies by Seller or its
Subsidiaries, Seller shall, and shall cause its Subsidiaries to, increase
the amount of the Intercompany Payable or decrease the Intercompany
Receivable (in either event through one or more cash transactions) on or
immediately prior to the Closing Date such that, after giving effect to
such increase or decrease, the amount of the Intercompany Payable shall be
at least $10 million more than the amount of the Intercompany Receivable.
For purposes of this Section, the Intercompany Receivable and the
Intercompany Payable each shall be calculated as closely as reasonably
possible to the Closing Date, but in any event not earlier than the Friday
immediately prior to the Closing Date.
<PAGE>
(b) Subject to Section 6.06(c) and Section 6.06(d), effective at
the Closing the Intercompany Payable and the Intercompany Receivable as
determined pursuant to Section 6.06(a) shall be settled in cash and none
shall be outstanding and (except as the parties may otherwise agree) any
agreements relating to the Intercompany Payable and Intercompany Receivable
shall have been terminated and neither Reseller Network nor any Company
shall have any obligation with respect to the Intercompany Payable on or
after the Closing.
(c) Notwithstanding anything in this Agreement to the contrary,
if, as a result of any reconciliation or adjustment performed during the
preparation of the Closing Balance Sheet, the Closing Balance Sheet
includes any amounts that would constitute an Intercompany Receivable or an
Intercompany Payable, such amounts shall be reflected in the Closing Net
Liabilities Assumed in the manner set forth in Schedule 2.04.
(d) Notwithstanding anything in this Agreement to the contrary,
to the extent that the Base Purchase Price, as adjusted pursuant to Section
2.03, is less than $10 million, that portion of the payment made by Buyer
pursuant to Section 2.02(a)(i) shall be made in full satisfaction of any
obligation of Buyer pursuant to Section 6.06(b) with respect to a
corresponding portion of the Intercompany Payable.
SECTION 6.7. Stockholder Meeting; Proxy Materials. Seller shall use
its best efforts to cause a meeting of its stockholders to be duly called
and held as soon as reasonably practicable for the purpose of approving
the Transaction. The board of directors of Seller shall, subject to its
fiduciary duties under applicable law as advised by counsel, recommend
approval of the Transaction by Seller's stockholders. In connection with
such meeting Seller (i) will promptly prepare and file with the SEC, will
use its best efforts to have cleared by the SEC and will thereafter mail
to its stockholders as promptly as practicable a proxy statement and all
other Seller Proxy Materials for such meeting as may be required under
applicable law, (ii) will use its best efforts to obtain the necessary
approval of the Transaction by its stockholders and (iii) will otherwise
comply with all legal requirements applicable to such meeting.
<PAGE>
SECTION 6.8. Other Offers. Seller, its Affiliates, the Companies, and
the officers, directors, employees and other agents of Seller, its
Affiliates or the Companies, will not, directly or indirectly, (i) take
any action to solicit, initiate or encourage an Acquisition Proposal or
(ii) except for actions as may be required to discharge the fiduciary
duties of their boards of directors under applicable law based upon
written advice of counsel, engage in negotiations with, or disclose any
nonpublic information relating to Reseller Network or any of the Companies
or afford access to the properties, books or records of Seller (with
respect to the business of Reseller Network), Reseller Network or any of
the Companies to, any Person that Seller has reason to believe may be
considering making, or has made, an Acquisition Proposal. Seller will
promptly notify Buyer after receipt by Seller, its Affiliates or any
Company of any Acquisition Proposal or any indication that any Person is
considering making an Acquisition Proposal or any request for nonpublic
information relating to Seller (with respect to the business of Reseller
Network), Reseller Network or any Company or for access to the properties,
books or records of Seller (with respect to the business of Reseller
Network), Reseller Network or any Company by any Person that Seller has
reason to believe may be considering making, or has made, an Acquisition
Proposal, and Seller will keep Buyer fully informed of the status and
details of such Acquisition Proposal, indication or request. As used
herein, "Acquisition Proposal" means any offer or proposal for, or any
indication of interest in, any transaction involving the transfer (by way
of merger, sale, other business combination or otherwise) of a material
portion of the business of Reseller Network or the Companies (including
any capital stock of the Companies or any material portion of the assets
of the Companies or Reseller Network).
SECTION 6.9. Transfer of Intelevest. Prior to the Closing, Seller
shall cause Intelevest to be transferred to Seller or one of its
Affiliates on terms reasonably satisfactory to Buyer. As used herein,
"Intelevest" means Intelevest Holdings, Inc., a Delaware corporation,
which is a wholly-owned indirect Subsidiary of Seller and a wholly-owned
direct Subsidiary of Intelligent Distribution Services, Inc.
SECTION 6.10. Transfer of Seller RN Assets and Liabilities. (a)
Seller shall sell, transfer, assign and deliver, or cause to be sold,
transferred, assigned and delivered, to the Companies prior to the
Closing, free and clear of all Liens, other than Liens referred to in
clauses (i) through (iv) of Section 3.15(a), all of Seller's right, title
and interest in, to and under the Seller RN Assets. Seller agrees to cause
the Companies to assume the Seller RN Liabilities prior to the Closing.
<PAGE>
(b) In connection with the transfer of the Seller RN Assets
and the assumption of the Seller RN Liabilities referred to in Section
6.10(a), Seller and the Companies shall enter into one or more Assignment
and Assumption Agreements in form and substance reasonably acceptable to
Buyer, and, subject to the provisions hereof, Seller shall deliver to the
Companies such bills of sale, endorsements, consents, assignments and other
good and sufficient instruments of conveyance and assignment as the parties
and Buyer shall deem reasonably necessary or appropriate to vest in the
Companies all right, title and interest in, to and under the Seller RN
Assets.
(c) Anything in this Agreement to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign
any Seller RN Asset or any claim or right or any benefit arising thereunder
or resulting therefrom if an attempted assignment thereof, without the
consent of a third party thereto, would constitute a breach or other
contravention thereof or in any way adversely affect the rights of the
Companies or Seller thereunder. Seller will use its commercially
reasonable efforts to obtain the consent of the other parties to any such
Seller RN Asset or any claim or right or any benefit arising thereunder for
the assignment thereof to the Companies as Buyer may request. If such
consent is not obtained, or if an attempted assignment thereof would be
ineffective or would adversely affect the rights of Seller thereunder so
that the Companies would not in fact receive all such rights, Seller and
Buyer will cooperate in a mutually agreeable arrangement under which Buyer
or the Companies would obtain the benefits and assume the obligations
thereunder in accordance with this Agreement, including sub-contracting,
sub-licensing, or sub-leasing to Buyer or the Companies, or under which
Seller would enforce for the benefit of Buyer or the Companies. Seller
will promptly pay to Buyer when received all monies received by Seller
under any Seller RN Asset or any claim or right or any benefit arising
thereunder.
SECTION 6.11. Consents. (a) As promptly as practicable, but in no
event later than 10 business days following the date hereof, Seller shall
deliver to Buyer a list setting forth every consent other than the
Required Consents (each such consent, an "Other Consent" and together, the
"Other Consents") under such agreements, contracts or other instruments or
such Permits that is necessary with respect to the execution, delivery and
performance of this Agreement.
(b) Notwithstanding anything in this Agreement to the
contrary, Buyer may notify Seller in writing, within 15 days following its
receipt of the list referred to in Section 6.11(a), that Buyer has made a
reasonable good faith determination that one or more of the Other Consents
described on such list satisfy the criteria in Section 3.05 for Required
Consents. Such notice shall state in reasonable detail the basis for such
good faith determination. In such event, such Other Consents shall be
deemed Required Consents for all purposes of this Agreement.
<PAGE>
SECTION 6.12. Capital Contribution. At or immediately prior to the
Closing, Seller shall make a capital contribution to the Companies
(whether through the forgiveness of part of the Intercompany Payable or
otherwise) in an amount at least equal to the amount by which the Base Net
Liabilities Assumed is greater than $78 million, as adjusted pursuant to
Section 2.03.
ARTICLE 7
COVENANTS OF SELLER AND XLSOURCE
Each of Seller and XLSource agrees that:
SECTION 7.1. Guarantee of Guaranteed Obligations. Seller hereby
irrevocably and unconditionally guarantees to Buyer the prompt and full
discharge by XLSource of all of XLSource's covenants, agreements,
obligations and liabilities contained in the XLSource Supply Agreement and
in Section 9.06 of this Agreement, including without limitation the due
and punctual payment of all amounts which may become due and payable by
XLSource under such agreement and such Section when and as the same shall
become due and payable. XLSource hereby irrevocably and unconditionally
guarantees to Buyer the prompt and full discharge by Seller of all of
Seller's covenants, agreements, obligations and liabilities under this
Agreement, including without limitation the due and punctual payment of
all amounts which may become due and payable by Seller hereunder when and
as the same shall become due and payable. The obligations of each of
Seller and XLSource guaranteed by XLSource and Seller, respectively,
referred to in the two preceding sentences shall be hereinafter referred
to collectively as the "Guaranteed Obligations" of XLSource and Seller,
respectively; provided that the Guaranteed Obligations of Seller shall be
reduced, in connection with each XLSource Sale to a Person approved by
Buyer pursuant to the provisions of the XLSource Supply Agreement, by an
amount equal to the Designated Percentage applicable to such XLSource
Sale. Each of Seller and XLSource agrees that, with respect to all of its
Guaranteed Obligations to pay money, such guarantee shall be a guarantee
of payment and performance and not of collection.
<PAGE>
SECTION 7.2. Guarantee Unconditional. The obligations of each of
Seller and XLSource under this Article7 are unconditional and absolute
and, without limiting the generality of the foregoing, shall not be
affected by any amendment, modification or waiver of the obligations of
XLSource or of Seller and its Affiliates under this Agreement, except in
accordance with the terms of such amendment, modification or waiver, any
change in the corporate existence of XLSource or Seller, respectively, or
any of their respective Affiliates or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting XLSource or Seller,
respectively, or any of their respective Affiliates or their respective
assets or resulting in any release or discharge of any obligations of
XLSource or Seller, respectively, or their respective Affiliates under the
XLSource Supply Agreement or this Agreement, the existence of any claim,
set-off or other right which Seller or XLSource may have at any time
against one another, any of such other's Affiliates, Buyer or any Person
(provided that nothing herein shall prevent the assertion of any such
claim by separate suit or compulsory counterclaim) or any other act or
omission to act or delay of any kind by such other Person, any of its
Affiliates, Buyer or any other Person or any other circumstance which
might, but for the provisions of this paragraph, constitute a legal or
equitable discharge of the obligations of Seller or of XLSource under this
Article 7.
SECTION 7.3. Waivers. Each of Seller and XLSource hereby waives any
right, whether legal or equitable, statutory or non-statutory, to require
Buyer to proceed against or take any action against or pursue any remedy
with respect to XLSource or Seller, respectively, or any other Person or
make presentment or demand for performance or give any notice of
nonperformance before Buyer may enforce its rights hereunder against
Seller or XLSource, respectively.
SECTION 7.4. Discharge; Reinstatement in Certain Circumstances. The
obligations of XLSource under this Article 7 shall remain in full force
and effect until the earlier of (i) the time that its Guaranteed
Obligations shall have been performed in full and (ii) the sale by Seller
of all of the equity securities of XLSource to a Person other than an
Affiliate of Seller or XLSource; provided that the obligations of XLSource
hereunder shall terminate if, prior to the Closing, Seller shall obtain
for the benefit of Buyer an irrevocable letter of credit, in the amount of
$7,500,000 and otherwise reasonably satisfactory to Buyer, for the purpose
of securing the payment of the Guaranteed Obligations hereunder. Any such
letter of credit shall remain in full force and effect until (i) the third
anniversary of the Closing Date or (ii) the second anniversary of the
Closing Date if, prior to such anniversary, all of the equity securities
of XLSource have been sold in one or more XLSource Sales. Except as
provided in the immediately preceding sentence with respect to the
obligation of Seller to provide a letter of credit, the obligations of
Seller under this Article 7 shall remain in full force and effect until
the time that its Guaranteed Obligations shall have been performed in
full. If, at any time, any performance by any Person of any Guaranteed
Obligation is rescinded or must be otherwise restored or returned, whether
upon the insolvency, bankruptcy or reorganization of Seller, XLSource or
otherwise, the obligations of Seller or XLSource hereunder with respect to
such Guaranteed Obligation shall be reinstated at such time as though such
Guaranteed Obligation had become due and had not been performed.
<PAGE>
SECTION 7.5. Subrogation. Upon performance by Seller or XLSource of
any of its Guaranteed Obligations, Seller and XLSource, respectively,
shall be subrogated to the rights of Buyer against XLSource, in the case
of Seller, or against Seller, in the case of XLSource, with respect to
such Guaranteed Obligations; provided that neither Seller nor XLSource
shall enforce any of its Guaranteed Obligations by way of subrogation
against one another while any Guaranteed Obligation is due and unperformed
by such other party.
SECTION 7.6. Limit of Liability. The obligations of each of XLSource
and Seller under this Article 7 shall be limited to an aggregate amount
equal to the largest amount that would not render its obligations
hereunder subject to avoidance under Section 548 of the United States
Bankruptcy Code or any comparable provisions of any applicable state law.
ARTICLE 8
COVENANTS OF BUYER
Buyer agrees that:
SECTION 8.1. Access. On and after the Closing Date, Buyer will give,
and will cause Reseller Network and each Company to give, Seller, and it
agents reasonable access to its books of account, financial and other
records, information and employees, and will request that its independent
accountants provide to Seller and its agents reasonable access to its
employees and workpapers, and the right to be present during any
reconciliation of the physical count of inventory performed in connection
with the preparation of the Closing Balance Sheet, in each case to the
extent necessary or useful for Seller in connection with any audit,
investigation, dispute or litigation relating to Reseller Network or any
other reasonable business purpose relating to Reseller Network; provided
that any such access by, or right to be present of, Seller shall not
unreasonably interfere with the conduct of the business of Buyer.
SECTION 8.2. Seller Guarantees. Buyer and its Affiliates will use
commercially reasonable efforts to cause Seller to be released in full
from its obligations under and pursuant to the liabilities, agreements and
guarantees set forth on Schedule 8.02 of the Seller Disclosure Letter to
the extent, and only to the extent, that such liabilities, agreements and
guarantees were entered into directly and solely for the benefit of the
Companies or Reseller Network.
<PAGE>
SECTION 8.3. Other Matters. If any final judgment, order or
adjudication determines that any Damages incurred by a Buyer Indemnitee or
by Seller or any of its Affiliates that are referred to in Section
13.02(b)(ii) were so incurred as a result of an action taken by Buyer or
its Subsidiaries (other than any action taken by any Company prior to the
Closing), Buyer will promptly reimburse Seller for the amount of any final
judgment, order or adjudication (within the meaning of Section
13.02(b)(ii)) rendered in such matter against Seller or any Affiliate of
Seller in connection with any such action, suit, investigation or
proceeding.
ARTICLE 9
COVENANTS OF BUYER, SELLER AND XLSOURCE
Each party agrees that:
SECTION 9.1. Commercially Reasonable Efforts; Further Assurances.
Subject to the terms and conditions of this Agreement, such party will use
its commercially reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary or desirable
under applicable laws and regulations to consummate the Transaction. Each
party agrees, and Seller, prior to the Closing, and Buyer, after the
Closing, agree, to cause each Company to execute and deliver such other
documents, certificates, agreements and other writings and to take such
other actions as may be necessary or desirable in order to consummate or
implement expeditiously the Transaction.
SECTION 9.2. Certain Filings. Seller and Buyer shall cooperate with
one another (i) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority is
required, or any actions, consents, approvals or waivers are required to
be obtained from parties to any material contracts, in connection with the
consummation of the Transaction and (ii) in taking such actions or making
any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or
waivers.
SECTION 9.3. Public Announcements. The parties agree to consult with
each other before issuing any press release or making any public statement
with respect to this Agreement or the Transaction and, except as may be
required by applicable law or any listing agreement with any national
securities exchange, will not issue any such press release or make any
such public statement prior to such consultation.
<PAGE>
SECTION 9.4. Confidentiality. The parties agree that (i) the
Confidentiality Letter Agreement dated February 7, 1997 between Seller and
Buyer shall remain in full force and effect prior to the Closing Date and
after any termination of this Agreement (it being understood that
confidential information provided to Buyer pursuant to Section 6.02(a) or
6.02(e) shall be deemed "Proprietary Information" within the meaning of
such Confidentiality Letter Agreement) and (ii) such Confidentiality
Letter Agreement shall terminate as of the Closing Date without further
action by any party; provided, that such Confidentiality Letter Agreement
shall remain in full force and effect in accordance with its terms as to
any information relating to the Seller and its Affiliates (other than
information relating to Reseller Network or any Company).
SECTION 9.5. Segregation of Certain Sales Proceeds. (a) In
connection with each XLSource Sale that occurs prior to the termination in
full of the obligations of XLSource pursuant to Article 7, Seller and
XLSource will enter into arrangements reasonably satisfactory to Buyer
pursuant to which an amount in cash equal to the product of the Designated
Percentage and $7,500,000 will be deposited prior to or in conjunction
with the consummation of such XLSource Sale for the benefit of Buyer in a
segregated account for the purposes specified in Section9.05(c).
Notwithstanding anything herein to the contrary, in no event shall the
aggregate amount so segregated in connection with one or more XLSource
Sales exceed $7,500,000.
(b) In lieu of segregating any amounts pursuant to Section
9.05(a) in connection with an XLSource Sale, Seller and XLSource may elect
to obtain for the benefit of Buyer an irrevocable letter of credit in an
amount equal to the product of the Designated Percentage and $7,500,000 and
otherwise reasonably satisfactory to Buyer for the purposes specified in
Section 9.05(c).
(c) Without limiting the obligations of Seller or XLSource
under this Agreement or the XLSource Supply Agreement, any amounts that are
segregated pursuant to Section 9.05 and any letter of credit obtained
pursuant to such Section shall be used by Seller and/or XLSource to secure
and satisfy the repayment of obligations of Seller and/or XLSource that are
owing to Buyer pursuant to the terms of this Agreement and the XLSource
Supply Agreement.
(d) The obligations of Seller and XLSource pursuant to this
Section 9.05 shall terminate and be of no further force or effect on (i)
the third anniversary of the Closing Date or (ii) the second anniversary of
the Closing Date if, prior to such anniversary, all of the equity
securities of XLSource have been sold in one or more XLSource Sales and
funds have been segregated, or letters of credit have been obtained, in
connection with such XLSource Sales pursuant to this Section 9.05. On the
date of such termination, any amounts so segregated, net of the aggregate
amount of claims with respect to which Buyer is seeking indemnification
pursuant to Article 10 or 13, may be released from such account.
<PAGE>
(e) As used herein, the following words shall have the
following meanings:
"Designated Percentage", with respect to any XLSource Sale, means the
greatest of the following percentages:
(i) the percentage of the aggregate revenues of XLSource for
the four full fiscal quarters immediately preceding the date of such
XLSource Sale generated by or attributable to the assets or business
being sold in such XLSource Sale;
(ii) the percentage of the aggregate book value of the
assets of XLSource represented by the book value of the assets sold in
such XLSource Sale; or
(iii) the percentage of the outstanding capital stock of
XLSource sold in such XLSource Sale.
"XLSource Sale" means any sale, transfer, conveyance or disposition
(directly or indirectly, in one transaction or a series of related
transactions, by operation of law or otherwise), to a Person other than an
Affiliate of Seller or XLSource, of (i) any of the assets of XLSource or
(ii) any of the equity securities of XLSource other than in the ordinary
course of business.
SECTION 9.6. Supply Agreement. (a) Upon the consummation of an
XLSource Sale of the type described in clause (i) of the definition
thereof, the purchase commitment of XLSource contained in Paragraph 4 of
the XLSource Supply Agreement shall be reduced by an amount equal to the
Transferred Percentage.
(b) Upon the occurrence of a Transfer Event, XLSource shall
pay to Buyer, no later than five business days following such Transfer
Event, an amount in immediately available funds equal to 1% of the present
value (discounted annually to the date of such payment at a rate of 10%) of
the aggregate Adjusted Guaranteed Minimum Revenue for the period commencing
on the effective date of such Transfer Event and ending on the last day of
the term of the XLSource Supply Agreement (as such term may be extended
pursuant to the provisions thereof). Each party agrees that (i) the amount
set forth in this Section 9.06 is the estimate by the parties of the
damages that Buyer would suffer as a result of the occurrence of a Transfer
Event, (ii) it would be difficult for the parties to prove the actual
amount of such damages, (iii) such amount is not a penalty and (iv) such
amount shall be the full and liquidated damages of Buyer arising as a
result of such Transfer Event.
<PAGE>
(c) The following terms, as used herein, have the following
meanings:
"Adjusted Guaranteed Minimum Revenue" means, with respect to any XLSource
Sale resulting in a Transfer Event, the product of (A) the sum of (x) the
remainder of the "Guaranteed Minimum Revenue" and (y) the "Remaining
Guaranteed Minimum Revenue" (each as defined in the XLSource Supply
Agreement) in each case as of the date of such Transfer Event and (B) the
Transferred Percentage applicable to such Transfer Event.
"Transfer Event" means the consummation of any XLSource Sale of the type
described in clause (i) of the definition thereof, other than any such
XLSource Sale to a Person approved by Buyer.
"Transferred Percentage" means, with respect to any XLSource Sale, the
percentage of the aggregate revenues of XLSource for the four full fiscal
quarters immediately preceding the date of such XLSource Sale generated by
or attributable to the assets being sold in such XLSource Sale.
SECTION 9.7. Certain Litigation. The parties hereby agree that Seller
will control the prosecution of any action, suit or proceeding (whether or
not such action, suit or preceding is referred to on Schedule 3.13 of the
Seller Disclosure Letter) instituted prior to the Closing Date by Seller
(with respect to the business of Reseller Network) or any Company. Buyer
agrees, and agrees to cause the Companies to, cooperate with Seller in
connection with the matters referred to in this Section 9.07. The
Companies hereby assign to Seller, effective as of the Closing Date, all
of their right, title and interest in and to any such action, suit or
proceeding, including without limitation any recoveries in respect
thereof. Notwithstanding anything contained in Section 2.04, no amount
relating to the actions, suits and proceedings referred to above shall
appear as an asset on the Closing Balance Sheet.
<PAGE>
ARTICLE 10
TAX MATTERS
SECTION 10.1. Tax Definitions.
The following terms, as used herein, have the following meanings:
"Code" means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
"Combined State Tax" means, with respect to each such state or any local
taxing jurisdiction, any income, franchise or other Tax payable to any
state or any local taxing jurisdiction in which any Company files Returns
with a member of the Seller Consolidated Group on a consolidated, combined
or unitary basis for purposes of such income, franchise or other Tax.
"Federal Tax" means any Tax imposed under Subtitle A of the Code.
"Pre-Closing Tax Period" means any Tax period (or portion thereof) ending
on or before the close of business on the Closing Date.
"Return" is defined in Section 10.02(a).
"Section 338(h)(10) Election" is defined in Section 10.03(a).
"Section 338 Tax" means any Tax of any Company resulting from any income,
gain, deduction, deferred gain or recapture of deductions or credits
against Tax which would not have been due but for the making of the Section
338(h)(10) Election or as a consequence of Section 338 as applied by any
state, local or foreign jurisdiction.
"Seller Consolidated Group" means, with respect to Federal Taxes, the
affiliated group of corporations (as defined in Section 1504(a) of the
Code) of which Seller is the common parent, and with respect to Combined
State Taxes, the consolidated, combined or unitary group of which Seller or
any of its Affiliates is a member.
<PAGE>
"Tax" means (i) any tax imposed under Subtitle A of the Code and any net
income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, profits, license,
withholding on amounts paid to or by any Company, payroll, employment,
excise, severance, stamp, capital stock, occupation, property,
environmental or windfall profit tax, premium, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty, addition to tax or additional amount
imposed by any governmental authority (a "Taxing Authority") responsible
for the imposition of any such tax, (ii) liability of any Company for the
payment of any amounts of the type described in clause (i) above as a
result of being a member of an affiliated, consolidated, combined or
unitary group, and (iii) liability of any Company for the payment of any
amounts as a result of being party to any Tax Sharing Agreement or with
respect to the payment of any amounts of the type described in clause (i)
or (ii) above as a result of any express or implied obligation to indemnify
any other Person, provided, however, that with respect to this clause
(iii), the amount of any such liability shall be reduced by the actual Tax
benefit, if any, received by the payor as a result of paying such
liability.
"Tax Asset" means any net operating loss, net capital loss, investment tax
credit, foreign tax credit, charitable deduction or any other credit or tax
attribute which could reduce Taxes (including without limitation deductions
and credits related to alternative minimum Taxes).
"Tax Indemnification Period", means (i) with respect to any Tax described
in clause (i) of the definition of "Tax", any Pre-Closing Tax Period of any
Company, (ii) with respect to any Tax described in clause (ii) of the
definition of "Tax", any Pre-Closing Tax Period of any Company and the Tax
year of any member of a group described in such clause (ii) which includes
(but does not end on) the Closing Date, and (iii) with respect to any Tax
described in clause (iii) of the definition of "Tax", the survival period
of the obligation under the applicable contract or arrangement.
"Tax Sharing Agreements" means all agreements or arrangements (whether or
not written) that relate to the allocation or sharing of liabilities for
Taxes and that bind any Company (including without limitation the Tax
Allocation Agreement among Seller, the Companies and certain other
Subsidiaries of Seller effective as of January 29, 1995) (the "Seller Group
Tax Allocation Agreement").
SECTION 10.2. Tax Representations. Seller represents and warrants to
Buyer as of the date hereof and as of the Closing Date that:
<PAGE>
(a) except as set forth on Schedule 10.02(a) of the Seller
Disclosure Letter, (i) all Tax returns, statements, reports and forms
(including estimated tax or information returns and reports) required to be
filed with any Taxing Authority with respect to any Pre-Closing Tax Period
by or on behalf of any Company (each a "Return" and collectively, the
"Returns"), have, to the extent required to be filed on or before the date
hereof, been filed when due (taking into account any permitted extension
under applicable law) in accordance with all applicable laws; (ii) as of
the time of filing, the Returns correctly reflected the facts regarding the
income, business, assets, operations, activities and status of each Company
and any other information required to be shown therein, except to the
extent that the failure to correctly reflect any such facts or information
will not have a Material Adverse Effect; (iii) all Taxes shown as due and
payable on the Returns that have been filed have been timely paid, or
withheld and remitted to the appropriate Taxing Authority; (iv) the
accruals and reserves for Taxes with respect to each Company for any
Pre-Closing Tax Period (including any Pre-Closing Tax Period for which no
Return has yet been filed) reflected on the books of each Company and on
the Balance Sheet and which will appear on the Closing Balance Sheet
(excluding any provision for deferred income taxes) are adequate under
generally accepted accounting principles to cover such Taxes except for any
Taxes arising from the Section 338 Election; (v) no Company is delinquent
in the payment of any Tax or has requested any extension of time within
which to file any Return and has not yet filed such Return; (vi) no Company
(or any member of any affiliated, consolidated, combined or unitary group
of which such Company is or has been a member) has granted any extension or
waiver of the statute of limitations period applicable to any Return, which
period (after giving effect to such extension or waiver) has not yet
expired; (vii) there is no claim, audit, action, suit, proceeding, or
investigation now pending or threatened against or with respect to (a) any
Company in respect of any Tax or Tax Asset or (b) Seller or any other
member of the Seller Consolidated Group in respect of any Tax for which the
Company is or could become liable in any manner (including primarily,
secondarily or otherwise); (viii) there are no requests for rulings or
determinations in respect of any Tax or Tax Asset pending between any
Company and any Taxing Authority; (ix) no Company owns any interest in real
property in the State of New York or in any other jurisdiction in which a
Tax is imposed on the transfer of a controlling interest in an entity that
owns any interest in real property; (x) none of the property owned or used
by any Company is subject to a tax benefit transfer lease executed in
accordance with Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended; (xi) none of the property owned or used by any Company is subject
to a lease, other than a "true" lease for federal income tax purposes;
(xii) none of the property owned by any Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code; (xiii) neither
Seller nor any Company, nor any other Person on behalf of any Company, has
entered into nor will it enter into any agreement or consent pursuant to
Section 341(f) of the Code; (xiv) there are no Liens for Taxes upon the
assets of any Company except Liens for current Taxes not yet due; (xv)
Seller is not subject to withholding under Section 1445 of the Code with
respect to any transaction contemplated hereby; (xvi) no Company has been a
member of an affiliated, consolidated, combined or unitary group other than
a Seller Consolidated Group, and no Company has filed Returns separately
from the Returns filed by Seller for the respective Seller Consolidated
Group; and (xvii) except with respect to the Seller Group Tax Allocation
Agreement, no Company is currently under any contractual obligation to pay
any amounts of the type described in clause (ii) or (iii) of the definition
of "Tax" or is or has been a party to any Tax Sharing Agreement other than
the Seller Group Tax Allocation Agreement.
<PAGE>
(b) Schedule 10.02(b) of the Seller Disclosure Letter
contains (i) a list of all jurisdictions to which any Tax is properly
payable by any Company , and (ii) a list of all federal, state, local and
foreign income tax Returns filed with respect to each Company for taxable
periods ended on or after January 29, 1994, which list indicates those
Returns that have been examined and closed or are Returns with respect to
which the applicable period for assessment under applicable law, after
given effect to extensions or waivers, has expired, and indicates those
Returns that currently are the subject of examination or audit. The
applicable period for assessment under applicable law, after giving effect
to extensions or waivers, has expired with respect to all federal, state,
local and foreign income tax Returns with respect to every Company for
taxable periods ending prior to January 29, 1994.
SECTION 10.3. Covenants. (a) Seller agrees to make a timely,
effective and irre vocable election under Section 338(h)(10) of the Code
and under any comparable statutes in any other jurisdiction with respect
to each Company (the "Section 338(h)(10) Election"), and to file such
election in accordance with applicable regulations. The Section 338(h)(10)
Election shall properly reflect the Price Allocation (as hereinafter
defined). Within 90 days after the determination of Final Net Liabilities
Assumed pursuant to Section 2.04, Buyer shall provide to Seller a written
statement setting forth (i) Buyer's determination of the modified ADSP (as
such term is defined in Treasury Regulations Section 1.338(h)(10)-1) (the
"Modified Aggregate Deemed Sales Price"), and (ii) the allocation of the
Modified Aggregate Deemed Sales Price to the assets of the Companies in
accordance with the Treasury regulations promulgated under Section
338(h)(10) (the "Initial Determination"). Buyer shall provide or make
available to Seller such workpapers, appraisals and other documents, if
any, used by Buyer in preparing the Initial Determination as Seller may
reasonably request. Such Initial Determination shall be a final
determination binding and conclusive on Buyer and Seller unless Seller
objects by written notice to Buyer within 30 days of receipt of the
Initial Determination, which notice shall state with reasonable
particularity Seller's objections to such Initial Determination and the
basis therefor. If Seller so objects, Buyer and Seller shall negotiate in
good faith to resolve such objections, but if no agreement is reached
within 15 days after Seller provides such notice, Buyer and Seller shall
retain the Accounting Referee to resolve any such objections on which
Buyer and Seller have been unable to reach agreement. The costs of
engaging the Accounting Referee for such purpose shall be borne equally by
Buyer and Seller. The determination of the Accounting Referee shall be a
final determination binding and conclusive on Buyer and Seller. Such final
determination (whether by agreement or as determined by the Accounting
Referee) shall be the "Price Allocation" and shall be binding on the
parties hereto. Seller and Buyer agree to act in accordance with the Price
Allocation in the preparation, filing and audit of any Tax return. Buyer
and Seller agree that each will provide to the other, upon request
(including prior to filing), the portions of any Tax return for the Tax
period that includes the Closing Date that reflect or are based on the
Price Allocation.
<PAGE>
(b) Seller agrees that, without the prior written consent of
Buyer (which shall not be unreasonably withheld), neither Seller nor any
Company, or any Affiliate of Seller shall, to the extent it may affect or
relate to any Company, (i) make any new Tax election (other than the
Section 338(h)(10) Election), (ii) change any Tax election, (iii) change an
annual tax accounting period, (iv) adopt or change any method of Tax
accounting, (v) file any amended Tax return, (vi) enter into any closing
agreement, (vii) settle any Tax claim or assessment, (viii) surrender any
right to claim a Tax refund, (ix) consent to any extension or waiver of the
limitations period applicable to any Tax claim or assessment or (x) take or
omit to take any other action, if, in the case of any such action or
omission described in clauses (i) through (x), such action or omission
would have or could reasonably be expected to have the effect of increasing
the Tax liability or reducing any Tax Asset of any Company, Buyer or any
Affiliate of Buyer in any Post-Closing Tax Period (as defined in Section
10.03(c)).
(c) If, as a result of any adjustment with respect to the
Tax liability of any Company for any Pre-Closing Tax Period, (i) any
deduction, amortization, exclusion from income or other allowance becomes
allowable to Buyer, any of its Affiliates or, effective upon the Closing,
any Company in any Tax period (or portion thereof) beginning after the
Closing Date (a "Post-Closing Tax Period") which would not, but for such
adjustment, be allowable, Buyer shall pay to Seller the amount of the Tax
benefit actually received by Buyer, any of its Affiliates, or, effective
upon the Closing, any Company from such deduction, amortization, exclusion
or allowance in any Post-Closing Tax Period within 10 days after the date
such Tax benefit is actually received, and (ii) any deduction,
amortization, exclusion from income or other allowance ceases to become
available to Buyer, any of its Affiliates, or, effective upon Closing, any
Company in any Post-Closing Tax Period which would have, but for such
adjustment, been allowable, Seller shall pay to Buyer the amount of the Tax
benefit that would otherwise have been received by Buyer, any of its
Affiliates or, effective upon the Closing, any Company in any Post-Closing
Tax Period.
(d) All Tax returns not required to be filed on or before
the date hereof (i) will be filed when due (taking into account any
permitted extension under applicable law) in accordance with all applicable
laws and (ii) as of the time of filing, will correctly reflect in all
material respects the facts regarding the income, business, assets,
operations, activities and status of the Companies and any other
information required to be shown therein.
(e) Seller shall include the Companies in its consolidated
Federal Tax return and in any Combined State Tax return through the close
of business on the Closing Date.
<PAGE>
(f) Seller agrees that no Company shall reserve any amount
for or make any payment of Taxes to any Person or any Taxing Authority,
except for such Taxes as are due or payable or have been properly estimated
in accordance with applicable law as applied in a manner consistent with
the past practice of such Company.
(g) All transfer, documentary, sales, use, stamp,
registration, value added and other such Taxes and fees (including any
penalties and interest) incurred in connection with this Agreement
(including any real property transfer Tax and any similar Tax) shall be
paid by Seller when due, and Seller will, at its own expense, file all
necessary Tax returns and other documentation with respect to all such
Taxes and fees, and, if required by applicable law, Buyer will, and will
cause its Affiliates to, join in the execution of any such Tax returns and
other documentation.
SECTION 10.4. Release From and Termination of Existing Tax Sharing
Agreements. The Companies shall be released from any and all existing Tax
Sharing Agreements, and any and all existing Tax Sharing Agreements shall
be terminated with respect to the Companies, as of the Closing Date. After
the Closing Date, no Company shall have any further rights or liabilities
thereunder.
SECTION 10.5. State Taxes Resulting from Section 338(h)(10) Election.
With respect to any state Tax that would not be borne by Buyer or any of
its Affiliates (including, after the Closing Date, the Companies) but for
the Section 338(h)(10) Election made pursuant to Section 10.03(a) hereof,
Seller shall estimate the amount of each such Tax and shall pay such
amount to the relevant Company immediately prior to Closing. The amount
paid pursuant to the preceding sentence shall be adjusted to reflect the
actual amounts of such Taxes paid by Buyer or any of its Affiliates within
10 days after Buyer or such Affiliate (as the case may be) files the
relevant return and Seller shall pay Buyer, or Buyer shall pay Seller, as
appropriate, the amount of any underpayment or overpayment. Buyer shall
deliver to Seller a copy of each relevant return within 10 days of the
date on which Buyer or any of its Affiliates (as the case may be) files
the relevant return.
<PAGE>
SECTION 10.6. Cooperation on Tax Matters. (a) Buyer and Seller shall
cooperate fully, as and to the extent reasonably requested by the other
party, in connection with the preparation and filing of any Tax or
information return, statement, report or form (including any report
required pursuant to Section 6043 of the Code and all Treasury Regulations
promulgated thereunder), any audit, litigation or other proceeding with
respect to Taxes. Such cooperation shall include the retention and (upon
the other party's request) the provision of records and information which
are reasonably relevant to any such audit, litigation or other proceeding
and making employees available on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder.
After the Closing, each Company and Seller agree (i) to retain all books
and records (including accounting records) either in the possession of
such Company or Seller, as the case may be, at the Closing Date or that
thereafter come into the possession of a Company or Seller, as the case
may be, in the ordinary course of business with respect to Tax matters
pertinent to the Companies relating to any Pre-Closing Tax Period, and to
abide by all record retention agreements entered into with any Taxing
Authority, and (ii) to give the other party reasonable written notice
prior to destroying or discarding any such books and records and, if the
other party so requests, each Company or Seller, as the case may be, shall
allow the other party to take possession of such books and records.
(b) Buyer and Seller further agree that each of them, upon
request from the other party, shall use all reasonable efforts to obtain
any certificate or other document from any governmental authority or
customer of any Company as may be necessary to mitigate, reduce or
eliminate any Tax that could be imposed (including but not limited to with
respect to the Transaction).
SECTION 10.7. Tax Indemnification. (a) Seller hereby indemnifies each
Buyer Indemnitee against and agrees to hold each Buyer Indemnitee harmless
from any (w) Tax of any Company related to the Tax Indemnification Period,
(x) Tax of any Company resulting from a breach of any covenant of Seller
contained in this Article 10, (y) Section 338 Tax, and (z) costs, fees and
expenses (including reasonable attorneys and accounting fees and expenses)
incurred in the contest in good faith in appropriate proceedings relating
to the imposition, assessment or assertion of any such Tax prior to the
assumption, if any, by Seller of the defense of such contest in accordance
with Section 10.07(e) and any liability as transferee (the sum of clauses
(w), (x), (y), and (z) above being referred to herein as a "Loss").
<PAGE>
(b) For purposes of this Section 10.07, in the case of any
Taxes that are imposed on a periodic basis and are payable for a Tax period
that includes (but does not end on) the Closing Date, the portion of such
Tax related to the portion of such Tax period ending on and including the
Closing Date shall (x) in the case of any Taxes other than gross receipts,
sales or use Taxes and Taxes based upon or related to income, be deemed to
be the amount of such Tax for the entire Tax period multiplied by a
fraction the numerator of which is the number of days in the Tax period
ending on and including the Closing Date and the denominator of which is
the number of days in the entire Tax period, and (y) in the case of any Tax
based upon or related to income or gross receipts, sales or use Taxes, be
deemed equal to the amount which would be payable if the relevant Tax
period ended on and included the Closing Date. The portion of any credits
relating to a Tax period that begins before and ends after the Closing Date
shall be determined as though the relevant Tax period ended on and included
the Closing Date. All determinations necessary to give effect to the
foregoing allocations shall be made in a manner consistent with prior
practice of the Companies.
(c) Subject to the provisions of this Section 10.07, upon
payment or incurrence by any Buyer Indemnitee of any Loss, Seller shall
discharge its obligation to indemnify the Buyer Indemnitee against such
Loss by paying to Buyer an amount equal to the amount of such Loss.
(d) Any payment pursuant to this Section 10.07 shall be made
not later than 30 days after receipt by Seller of written notice from Buyer
stating that any Loss has been paid by a Buyer Indemnitee and the amount
thereof and of the indemnity payment requested.
(e) Buyer agrees to give prompt written notice to Seller of
any Loss or the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which Buyer reasonably believes
indemnity may be sought under this Section 10.07 (specifying with
reasonable particularity the basis therefor) and will give Seller such
information with respect thereto as Seller may reasonably request. Except
as otherwise provided by Section 10.07(f), following receipt of written
notice from Seller, Buyer shall permit Seller to assume, manage and control
the defense of such suit, action or proceeding (including any Tax audit) as
it relates to any issue or item in respect of which indemnity may be sought
under this Section 10.07; provided that (x) Seller's counsel is reasonably
satisfactory to Buyer, (y) Seller shall thereafter consult with Buyer upon
Buyer's reasonable request for such consultation from time to time with
respect to such suit, action or proceeding (including any Tax audit) and
shall provide Buyer with copies of all written correspondence relating
thereto and (z) Seller shall not, without Buyer's consent (which shall not
be unreasonably withheld), agree to any settlement with respect to any Tax
if such settlement could adversely affect the Tax liability of Buyer, any
of its Affiliates or, upon the Closing, any Company. If Seller assumes such
defense, (i) Buyer shall have the right (but not the duty) to participate
in the defense thereof and to employ counsel, at its own expense,
reasonably satisfactory to Seller separate from the counsel employed by
Seller and (ii) Seller shall not assert that the Loss, or any portion
thereof, with respect to which Buyer seeks indemnification is not within
the ambit of this Section 10.07. If Seller elects not to assume such
defense, Buyer may pay, compromise or contest the Tax at issue; provided
that Buyer shall not settle any contest relating to such Tax without
Seller's prior written consent (which shall not be unreasonably withheld);
provided further that (i) Seller's prior written consent shall not be
required with respect to any such settlement unless Seller agrees not to
assert that the Loss, or any portion thereof, with respect to which Buyer
seeks indemnification is not within the ambit of this Section 10.07, and
(ii) in any case in which Seller provides such written consent, Seller
shall be deemed to have agreed that it will not assert that any Loss, or
any portion thereof, with respect to which Buyer seeks indemnification is
not within the ambit of this Section 10.07. Seller shall be liable for the
fees and expenses of counsel employed by Buyer for any period during which
Seller has not assumed the defense thereof. Whether or not Seller chooses
to defend or prosecute any claim, all of the parties hereto shall cooperate
in the defense or prosecution thereof, including by providing upon
reasonable request all necessary books and records then in such party's
possession on a timely basis. Notwithstanding anything in this Agreement
to the contrary, Seller shall not be entitled to assume or maintain control
of the defense of any claim, litigation or proceeding in respect of any
claim, litigation or proceeding in respect of which indemnification may be
sought under Section 10.07 if (i) such claim, litigation or proceeding
relates to or arises in connection with any criminal proceeding, action,
indictment, allegation or investigation, (ii) such claim, litigation or
proceeding seeks an injunction or equitable relief against Seller, (iii)
Seller has failed or is failing to prosecute or defend vigorously such
claim, litigation or proceeding or (iv) Seller (x) makes a general
assignment for the benefit of creditors, (y) commences any case, proceeding
or other action seeking to have an order for relief entered on its behalf
as a debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all of any
substantial part of its property, or (z) become the subject of any
proceeding referred to in clause (x) or (y) which is not dismissed within
60 days of its filing or entry.
<PAGE>
(f) Buyer shall control the defense of any claim that
relates to Taxes described in Section 10.07(b).
(g) Seller shall not be liable under this Section 10.07 with
respect to any Tax resulting from (i) a claim or demand the defense of
which Seller was not offered the opportunity to assume as provided under
Section 10.07(e) or (ii) a breach by any Company of its covenant in the
third sentence of Section 10.06(a), in each case to the extent Seller's
liability under this Section 10.07 is adversely affected as a result
thereof. No investigation by Buyer or any of its Affiliates at or prior to
the Closing Date shall relieve Seller of any liability hereunder.
(h) Any claim of any Buyer Indemnitee (other than Buyer)
under this Section may be made and enforced by Buyer on behalf of such
Buyer Indemnitee.
(i) With respect to all suits, actions or proceedings
(including any Tax audits) relating to the Tax liability of any Company in
existence as of the date hereof, Buyer shall be deemed to have (i) provided
written notice of such suits, actions or proceedings to Seller in
accordance with Section 10.07(e), and (ii) permitted Seller to assume,
manage and control the defense of such suits, actions or proceedings in
accordance with and subject to Section 10.07(e).
(j) Except insofar as it relates to any claim the defense
of which Buyer is in control pursuant to Section 10.07(f), Buyer shall not
extend the statute of limitations with respect to any Company for any Pre-
Closing Tax Period without the written consent of Seller (which consent
shall not be unreasonably withheld).
SECTION 10.8. Purchase Price Adjustment and Interest. Buyer and
Seller agree that any amount paid by Seller or Buyer under this Article 10
or Article 13 shall be treated as an adjustment to the Modified Aggregate
Deemed Sales Price unless otherwise required by applicable law. Any
payment required to be made by Buyer or Seller under this Article 10 that
is not made when due shall bear interest at the rate per annum determined,
from time to time, under the provision of Section 6621(a)(2) of the Code
for each day until paid.
SECTION 10.9. Survival. Notwithstanding anything in this Agreement to
the contrary, the provisions of this Article 10 shall survive until six
months following the end of the applicable statutes of limitations (giving
effect to any waiver, mitigation or extension thereof).
<PAGE>
ARTICLE 11
EMPLOYEE BENEFITS
SECTION 11.1. Employee Benefits Definitions. The following terms, as
used herein, have the following meanings:
"Benefit Arrangement" means any employment, severance or similar contract
or arrangement (whether or not written) or any plan, policy, fund, program,
arrangement or contract(whether or not written) providing for compensation,
bonus, profit-sharing, stock option or other stock related rights or other
forms of incentive or deferred compensation, vacation benefits, insurance
coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, worker's compensation, supplemental
unemployment benefits, severance benefits and post-employment or retirement
benefits (including compensation, pension, health, medical or life
insurance or other benefits) that (i) is not an Employee Plan, (ii) is
entered into, maintained, administered or contributed to, as the case may
be, by Seller, any of its Affiliates or any Company and (iii) covers any
employee or former employee of any Company employed in the United States.
"Employee Plan" means any "employee benefit plan", as defined in Section
3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to, as the case may be, by Seller,
any of its Affiliates or any Company and (iii) covers any employee or
former employee of any Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" of any entity means any other entity which, together with
such entity, would be treated as a single employer under Section 414 of the
Code.
"International Plan" means any employment, severance or similar contract or
arrangement (whether or not written) or any plan, policy, fund, program, or
arrangement or contract (whether or not written) that (i) is not an
Employee Plan or a Benefit Arrangement, (ii) is entered into, maintained,
administered or contributed to, as the case may be, by Seller, any of its
Affiliates or any Company and (iii) covers any employee or former employee
of any Company.
"Multiemployer Plan" means each Employee Plan that is a multiemployer plan,
as defined in Section 3(37) of ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Title IV Plan" means an Employee Plan subject to Title IV of ERISA other
than any Multiemployer Plan.
<PAGE>
SECTION 11.2. Employee Benefit Plans Representations. Seller
represents and warrants to Buyer as of the date hereof and as of the
Closing Date that:
(a) Schedule 11.02(a) of the Seller Disclosure Letter
identifies each Employee Plan that any Company has at any time sponsored,
maintained or contributed (or been obligated to sponsor, maintain or
contribute to). Seller has furnished to Buyer copies of such Employee
Plans (and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof together with the three most
recent annual reports (Form 5500 including, if applicable, Schedule B
thereto) and the most recent actuarial valuation report prepared in
connection with any such Employee Plan. Schedule 11.02(a) of the Seller
Disclosure Letter identifies each such Employee Plan which is maintained in
connection with any trust described in Section 501(c)(9) of the Code.
(b) No Employee Plan is a Title IV Plan, Multiemployer Plan
or International Plan and neither Seller, Reseller Network nor any Company
has at any time sponsored, maintained or contributed to or been under any
obligation to sponsor, maintain or contribute to a Title IV Plan,
Multiemployer Plan or International Plan.
(c) No transaction prohibited by Section 406 of ERISA or
Section 4975 of the Code has occurred with respect to any employee benefit
plan or arrangement which is covered by Title I of ERISA, which transaction
has caused or will cause any of the Companies to incur any liability under
ERISA, the Code or otherwise, excluding transactions effected pursuant to
and in compliance with a statutory or administrative exemption.
(d) Each Employee Plan listed on Schedule 11.02(a) of the
Seller Disclosure Letter that is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the
period since its adoption; each trust created under any such Plan is exempt
from tax under Section 501(a) of the Code and has been so exempt since its
creation. Seller has provided Buyer with the most recent determination
letter of the Internal Revenue Service relating to each such Employee Plan.
Each such Employee Plan has been maintained in substantial compliance with
its terms and with the requirements prescribed by any and all applicable
statutes, orders, rules and regulations, including but not limited to ERISA
and the Code.
(e) Schedule 11.02(e) of the Seller Disclosure Letter
identifies each Benefit Arrangement that any Company has at any time
sponsored, maintained or contributed to (or been obligated to sponsor,
maintain or contribute to). Seller has furnished to Buyer copies or
descriptions of each such Benefit Arrangement (and, if applicable, related
trust agreements) and all amendments thereto and written interpretations
thereof. Each such Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and
all applicable statutes, orders, rules and regulations and has been
maintained in good standing with applicable regulatory authorities.
<PAGE>
(f) Except as set forth on Schedule 11.02(f) of the Seller
Disclosure Letter, neither Reseller Network nor any Company has any current
or projected liability in respect of post-employment or post-retirement
health or medical or life insurance benefits for retired, former or current
employees of Reseller Network or any Company, except as required to avoid
excise tax under Section 4980B of the Code.
(g) All contributions and payments accrued under each
Employee Plan and Benefit Arrangement (each as disclosed in Schedules
11.02(a) and 11.02(e), respectively, of the Seller Disclosure Letter),
determined in accordance with prior funding and accrual practices, as
adjusted to include proportional accruals for the period ending on the
Closing Date, will be discharged and paid on or prior to the Closing Date
except to the extent reflected as a liability on the Closing Balance Sheet
or retained by Seller. Except as set forth on Schedule 11.02(f) of the
Seller Disclosure Letter, there has been no amendment to, written
interpretation of or announcement (whether or not written) by the Seller or
any of its Affiliates or Reseller Network or any Company relating to, or
change in employee participation or coverage under, any such Employee Plan
or such Benefit Arrangement that would increase materially the expense of
maintaining such Employee Plan or Benefit Arrangement above the level of
the expense incurred in respect thereof for the most recent fiscal year
ended prior to the date hereof.
(h) There is no contract, plan or arrangement (written or
otherwise) covering any employee or former employee of Reseller Network or
any Company that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to the terms of
Section 280G of the Code.
(i) There has been no material failure of a group health
plan (as defined in Section 5000(b)(1) of the Code) to meet the
requirements of Code Section 4980B(f) with respect to a qualified
beneficiary (as defined in Section 4980B(g)). To the best knowledge of
Seller, neither Reseller Network nor any Company has contributed to a
nonconforming group health plan (as defined in Section 5000(c)) and no
ERISA Affiliate of Reseller Network or any Company has incurred a tax under
Section 5000(a) which is or could become a liability of Reseller Network or
any Company.
(j) Except as set forth in Schedule 11.02(j) of the Seller
Disclosure Letter, no employee or former employee of Reseller Network or
any Company will become entitled to any bonus, retirement, severance, job
security or similar benefit or enhanced such benefit (including
acceleration of vesting or exercise of an incentive award) as a result of
the Transaction.
<PAGE>
SECTION 11.3. Retained and Transferred Employees. (a) For purposes of
this Article 11 (i) "Company Employee" shall mean each individual, other
than individuals subsequently identified by Buyer as Transferred
Employees, Scheduled Employees or Seconded Employees as hereinafter
provided, who, on the Closing Date is, or would be but for subsection
11.03(b) below, actively employed by Seller or any Subsidiary of Seller
(in each case with respect to the business of Reseller Network), Reseller
Network or any Company, on short-term or long-term disability leave,
authorized or unauthorized leave or absence, including leave under the
Family and Medical Leave Act, military service or lay-off with recall
rights as of the Closing Date, including any other inactive or former
employee or any individual who as of the Closing Date is no longer
employed by Seller or any Subsidiary of Seller (in each case with respect
to the business of Reseller Network), Reseller Network or a Company for
any reason including, without limitation, death, disability or retirement;
(ii) "Transferred Employee" shall mean each individual identified as such
by Buyer on a list to be provided by Buyer to Seller not less than five
business days prior to the Closing Date who has accepted an offer to
become an employee of Buyer and is expected to report for work with Buyer
or any of its Subsidiaries immediately following the Closing Date; (iii)
"Scheduled Employee" shall mean each individual identified as such on a
list to be agreed upon by Buyer and Seller; (iv) "Seconded Employee" shall
mean each individual identified as such by Buyer on a list to be provided
by Buyer to Seller, not less than five business days prior to the Closing
Date who is expected to be available to provide transition services to
Buyer pursuant to Section 11.06 hereof; and (v) "Assumed Employee" shall
mean each individual identified as such by Buyer on a list to be provided
by Buyer to Seller from time to time not more than 90 days following the
Closing Date. It is intended that Assumed Employees shall be selected from
Seconded Employees and Scheduled Employees prior to their actual
termination date. If an Assumed Employee or Seconded Employee is
terminated prior to hire by Buyer, Buyer shall reimburse Seller for all
costs associated with such termination to the extent provided in Section
11.04(a) hereof. Company Employees, Transferred Employees, Scheduled
Employees, Seconded Employees and Assumed Employees are hereinafter
collectively referred to as "Seller Employees". Seller will not take and
will cause each Company not to take any action which would impede, hinder,
interfere or otherwise compete with Buyer's effort to interview or
otherwise determine those Seller Employees that Buyer may identify as
Transferred Employees, Seconded Employees or Assumed Employees; provided,
however, that Buyer's efforts hereunder will not materially interfere with
the operations of Seller's business or the business of the Companies prior
to the Closing Date, and that any offers of employment to any of the
Seller Employees shall be contingent upon the Closing and shall not become
effective until the Closing Date.
(b) (i) Seller will, and will cause each Company to, take
such action as is required to ensure that prior to the Closing Date (i) all
Seller Employees will be employees of a Subsidiary of Seller and (ii) none
of the Companies shall have any employees.
<PAGE>
(ii) When and if Buyer has or is expected to have any
obligation to reimburse Seller for any employment-related expense to the
extent provided in Sections 11.03(a), 11.04, and 11.06 hereof, Seller shall
give reasonable notice to Buyer of the date that such expense is expected
to be incurred, and of the amount thereof, itemized and otherwise
substantiated as Buyer may reasonably request. Buyer shall deposit the
required amount in a checking account to be established for such purpose in
the name of such Subsidiary (as described in paragraph (i)), which checking
account shall be used solely for the purpose of paying wages and benefits
to or on behalf of Seller Employees hereunder. Buyer shall, in its sole
discretion, have the right to (x) review such information as Seller
provides, (y) request such supporting documentation in respect thereof and
(z) undertake such commercially reasonable verification procedures as Buyer
shall determine and Seller shall cooperate fully with Buyer with respect
thereto.
(c) Except as expressly set forth herein, Seller shall
retain all obligations and liabilities to or in respect of Seller
Employees. Buyer shall not assume any assets or liabilities under any
Employee Plan or Benefit Arrangements.
(d) With respect to each Transferred Employee and Assumed
Employee, service with Seller, any of its Subsidiaries or the Companies
shall be counted for purposes of determining any period of eligibility to
participate or to vest in benefits under Buyer's benefit plans to the same
extent such service was counted under any similar type of Employee Plan
under which such Transferred Employee or Assumed Employee was covered
immediately prior to the Closing Date. Buyer, for purposes of deductible
limits and out-of-pocket annual and lifetime maximums under its welfare
plans, shall credit each Transferred Employee and Assumed Employee with the
amounts so credited with respect to the portion of the calendar year
preceding the Closing Date under the same type of Employee Plan in which
such Transferred Employee or Assumed Employee is participating as of the
Closing Date. With respect to each Transferred Employee and Assumed
Employee, Buyer's group health plans shall not exclude coverage for pre-
existing conditions that were not excluded under similar Employee Plans in
which such Transferred Employee or Assumed Employee is participating as of
the Closing Date.
SECTION 11.4. Severance, COBRA and WARN Obligations. (a)(i) Buyer
shall reimburse Seller to the extent set forth in Schedule 11.04(a)(i)
hereto in respect of Company Employees and Seconded Employees employed
immediately prior to the Closing Date for (x) actual severance payments
triggered or incurred on or after the Closing Date and (y) the actual out
of pocket costs incurred by Seller for the period beginning on the Closing
Date and ending 65 days following the date of the Buyer notice referred to
in Section 11.04(b) below in giving all notices required by, and for
compliance with the applicable requirements of, the Worker Adjustment and
Retraining Notification Act of 1988 ("WARN Obligations"). Seller shall be
responsible for all severance liabilities in respect of Company Employees
and Seconded Employees triggered or incurred prior to the Closing Date;
provided that if a Scheduled Employee is terminated by Seller after the
signing of this Agreement but before the Closing Date, and the costs
described in (x) and (y) above in respect of such terminated Scheduled
Employee are equal to or less than they would have been had the Company
Employee or Seconded Employee been retained to the Closing Date, Buyer
shall reimburse Seller as set forth herein, contingent only upon the
Closing.
<PAGE>
(ii) Buyer shall not be responsible for any severance payments
or costs incurred by Seller in providing continuation coverage (within the
meaning of Section 4980B of the Code) ("COBRA Coverage") (x) in respect of
all Transferred Employees who accept employment with Buyer or any of its
Subsidiaries and report for work with Buyer or any of its Subsidiaries
immediately following the Closing Date and (y) in respect of all Assumed
Employees who after the Closing Date accept and report for employment with
Buyer or any of its Subsidiaries.
(iii) On and after the Closing Date, Buyer and Seller shall be
responsible to the extent set forth in Schedule 11.04(a)(iii) hereto for
the cost of all severance payments and liabilities to or in respect of
Scheduled Employees and Buyer shall reimburse Seller to the extent set
forth in Schedule 11.04(a)(iii) hereto for the actual out-of-pocket costs
incurred by Seller in providing COBRA Coverage in respect of Scheduled
Employees. This paragraph (iii) will continue to apply (notwithstanding
paragraph (ii) above) if a Scheduled Employee becomes a Transferred
Employee or Assumed Employee, and later becomes entitled to severance
and/or COBRA coverage from Seller under the severance plans and
arrangements listed on Schedule 11.02(a), (e), (f), and (j) of the Seller
Disclosure Letter as a result of subsequent termination of employment with
the Buyer or any of its Subsidiaries.
(b) Buyer shall endeavor to give prior written notice to
Seller, in a commercially reasonable manner, of the date Buyer will no
longer require the services of Seconded Employees as provided in Section
11.06 hereof. Subject to Section 11.04(a)(i) hereof, Seller shall be
responsible for all WARN Obligations in respect of Company Employees,
Scheduled Employees and Seconded Employees in connection with the
Transaction.
SECTION 11.5. 401(k), Option, Stock Purchase and Incentive Plans.
Seller shall retain all obligations and liabilities for, and Buyer shall
have no obligation or liability in respect of the Seller's 401(k) Tax
Deferred Savings Plan, Supplemental 401(k) Plan, Non-qualified Stock
Option Plan for Employees and Directors, Non-qualified Stock Option Plan
for Franchisees, 1995 Long-Term Incentive Plan, 1995 Employee Stock
Purchase Plan and any other Employer Plan or Benefit Arrangement.
SECTION 11.6. Certain Employee Services. Subject to Section 11.04(b),
during the period beginning on the Closing Date and ending 90 days
thereafter Seller shall make available to Buyer the Seconded Employees for
the purpose of providing to Buyer, on the terms set forth on Schedule
11.06, such services as Buyer may reasonably require from time to time to
operate the business of Reseller Network and to assist in the integration
of Reseller Network into the operations of Buyer and its Subsidiaries. All
Seconded Employees and Company Employees shall for all purposes be
employees of Seller. Subject to Section 11.04(b), Buyer shall reimburse
Seller for all salaries, wages, contributions, premiums, taxes,
out-of-pocket costs and third party administrative fees reasonably paid by
Seller in respect of such Seconded Employees as provided by Schedule 11.06
hereto.
<PAGE>
SECTION 11.7. Sharing of Benefits-related Information. Buyer and
Seller will cooperate in providing at their own expense employee-related
and plan-related data to facilitate accomplishment of the provisions of
this Article 11.
SECTION 11.8. No Third Party Beneficiaries. Without limiting the
generality of Section 15.08, no provision of this Article 11 shall create
any third party beneficiary or other rights in any Seller Employee
(including any beneficiary or dependent thereof) in respect of continued
employment (or resumed employment) with either Buyer, the Companies or
Seller or any of their Affiliates and no provision of this Article 11
shall create any such rights in any such Person in respect of any benefits
that may be provided, directly or indirectly, under any Employee Plan or
Benefit Arrangement or any plan or arrangement which may be established by
Buyer or any of its Affiliates. No provision of this Agreement shall
constitute a limitation on rights to amend, modify or terminate after the
Closing Date any such plans or arrangements of Buyer or any of its
Affiliates.
ARTICLE 12
CONDITIONS TO CLOSING
SECTION 12.1. Conditions to Obligations of Buyer and Seller. The
obligations of Buyer and Seller to consummate the Closing are subject to
the satisfaction of the following conditions:
(a) Any applicable waiting period under the HSR Act
relating to the Transaction shall have expired or been terminated.
(b) No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of
the Transaction.
(c) All actions by or in respect of or filings with any
governmental body, agency, official or authority required to permit the
consummation of the Closing shall have been taken, made or obtained.
(d) Seller shall have received the requisite approval of its
stockholders in connection with the consummation of the Transaction.
SECTION 12.2. Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the Closing is subject to the satisfaction of the
following further conditions:
<PAGE>
(a) (i) Each of Seller and XLSource shall have performed in
all material respects all of its obligations hereunder required to be
performed by it on or prior to the Closing Date, (ii) the representations
and warranties of each of Seller and XLSource contained in this Agreement
and in any certificate or Schedule delivered by each of Seller and XLSource
pursuant hereto shall be true at and as of the Closing Date, as if made at
and as of such date, (iii) the representations and warranties of Seller
contained in this Agreement, disregarding all qualifications and exceptions
contained therein relating to materiality or Material Adverse Effect, shall
be true and correct with only such exceptions as would not in the aggregate
reasonably be expected to have a Material Adverse Effect and (iv) Buyer
shall have received a certificate signed by the President or any Senior
Vice President of Seller and the President or the Vice President and
Treasurer of XLSource to the foregoing effect.
(b) There shall not be any action or proceeding instituted
or pending by any Person (or threatened by any government or any
governmental authority or agency) before any court or governmental
authority or agency, domestic or foreign, (i) seeking to restrain or
prohibit or otherwise interfere with the ownership or operation by Buyer or
any of its Affiliates of any material portion of the business or assets of
Reseller Network or of Buyer or any of their Affiliates or to compel Buyer
or any of its Affiliates to dispose of any material portion of the business
or assets of Reseller Network or of Buyer or any of their Affiliates,
(ii) seeking to impose or confirm limitations on the ability of Buyer or
any of its Affiliates effectively to exercise full rights of ownership of
any RN Shares, including without limitation, the right to vote any RN
Shares acquired or owned by Seller or any of its Affiliates on all matters
properly presented to the stockholders of any Company or (iii) seeking to
require divestiture by Buyer or any of its Affiliates of any RN Shares.
(c) There shall not be any action taken, or any statute,
rule, regulation, injunction, order or decree proposed, enacted, enforced,
promulgated, issued or deemed applicable to the purchase of the RN Shares,
by any court, government or governmental authority or agency, domestic or
foreign, other than the application of the waiting period provisions of the
HSR Act to the purchase of the RN Shares, that, in the reasonable judgment
of Buyer, could result in any of the consequences referred to in clauses
12.02(b)(i) through 12.02(b)(iii) above.
(d) Buyer shall have received an opinion of (i) Pepper
Hamilton & Scheetz LLP, special counsel to Seller, dated the Closing Date
as to the matters specified in Sections 3.01, 3.02, 3.03, 3.06 and 3.13 in
form and substance reasonably satisfactory to Buyer, and (ii) Steven A.
Kawalick, General Counsel of Seller, dated the Closing Date as to the
matters specified in Section 3.04 in form and substance reasonably
satisfactory to Buyer.
<PAGE>
(e) Buyer shall have received an opinion of (i) Pepper,
Hamilton & Scheetz LLP, special counsel to XLSource, dated the Closing Date
to the effect specified in Sections 4.01, 4.02 (first sentence only) and
4.03 in form and substance reasonably satisfactory to Buyer, and (ii)
Steven A. Kawalick, General Counsel of Seller, dated the Closing Date as to
the matters specified in Section 4.04 in form and substance reasonably
satisfactory to Buyer.
(f) Seller shall have received all Required Consents, in
each case in form and substance reasonably satisfactory to Buyer, and no
such consent, authorization or approval shall have been revoked.
(g) Seller shall have made a capital contribution to the
Companies (whether through the forgiveness of part of the Intercompany
Payable or otherwise) in an amount at least equal to the amount by which
the Base Net Liabilities Assumed is greater than $78 million, as adjusted
pursuant to Section 2.03.
(h) XLSource shall have executed the long-term supply
agreement with Buyer in the form of Exhibit A hereto (the "XLSource Supply
Agreement") and, assuming due execution and delivery by Buyer, the XLSource
Supply Agreement shall be in full force and effect.
(i) Buyer shall have received from XLSource confirmation
that XLSource shall have entered into arrangements, in form and substance
reasonably satisfactory to Buyer, with floor plan finance companies.
(j) Buyer shall have received from each Principal Vendor
confirmation, in form and substance satisfactory to Buyer, that after
Closing such Principal Vendor will (i) continue to supply Buyer, Reseller
Network and each Company on terms and conditions which are the same as or
substantially similar to the terms and conditions under which such
Principal Vendor supplied Reseller Network and each Company during the one-
year period prior to Closing and (ii) maintain inventory allocations by
major product segment at least the same levels as such Principal Vendor
supplied Buyer, Reseller Network and each Company during the six-month
period prior to Closing.
(k) Buyer shall have received all documents it may
reasonably request relating to the existence of Seller, XLSource and each
Company and the authority of Seller and XLSource for this Agreement, all in
form and substance reasonably satisfactory to Buyer.
(l) Buyer shall have received a certificate signed by Seller
and reasonably acceptable to Buyer to the effect that Seller is not a
"foreign person" as defined in Section 1445 of the Code.
<PAGE>
(m) Seller shall have executed an effective, irrevocable
election under Section 338(h)(10) of the Code in form and substance
satisfactory to Buyer and Seller shall have delivered all documents in
connection therewith as the Buyer may reasonably request.
(n) Seller shall have executed and delivered the Escrow
Agreement and, assuming due execution and delivery by Buyer, the Escrow
Agreement shall be in full force and effect.
(o) Seller shall have obtained from each lender listed on
Schedule 3.09(d) of the Seller Disclosure Letter an unconditional release
in form and substance satisfactory to Buyer of the obligations of the
Companies under the credit facilities referred to on such Schedule.
(p) Either (i) 100% of the capital stock of TFN, Inc., RCK
Computers, Inc. and E-C Computer Technical Services, Inc. shall have been
transferred or contributed to XLSource in a manner reasonably satisfactory
to Buyer such that such Affiliates of Seller shall be wholly owned
Subsidiaries of XLSource or (ii) this Agreement and the XLSource Supply
Agreement shall have been amended, in a manner reasonably satisfactory to
Buyer, to add such Affiliates as parties to this Agreement and the XLSource
Supply Agreement for the purpose (in the case of this Agreement) of
guaranteeing, on a joint and several basis together with XLSource, the
obligations of Seller hereunder.
SECTION 12.3. Conditions to Obligation of Seller. The obligation of
Seller to consummate the Closing is subject to the satisfaction of the
following further conditions:
(a) (i) Buyer shall have performed in all material respects
all of its obligations hereunder required to be performed by it at or prior
to the Closing Date, (ii) the representations and warranties of Buyer
contained in this Agreement and in any certificate or Schedule delivered by
Buyer pursuant hereto shall be true at and as of the Closing Date, as if
made at and as of such date and (iii) Seller shall have received a
certificate signed by any one of the following officers of Buyer to the
foregoing effect: the Worldwide Chief Financial Officer, the Chief
Financial Officer (Ingram Micro US), the Worldwide Chief Operating Officer
or the President (Ingram Micro US).
(b) Buyer shall have received all consents, authorizations
or approvals from governmental agencies referred to in Section 5.03, in
each case in form and substance reasonably satisfactory to Seller, and no
such consent, authorization or approval shall have been revoked.
(c) Seller shall have received all documents it may
reasonably request relating to the existence of Buyer and the authority of
Buyer for this Agreement, all in form and substance reasonably satisfactory
to Seller.
<PAGE>
(d) Seller shall have received an opinion of Davis Polk &
Wardwell, special counsel to Buyer, dated the Closing Date, to the effect
specified in Section 5.01(as to due incorporation, valid existence and good
standing only) and Section 5.02 (as to this Agreement and the Escrow
Agreement only) in form and substance reasonably satisfactory to Seller.
(e) Buyer shall have executed and delivered the Escrow
Agreement and the XLSource Supply Agreement and, assuming due execution
and delivery by Seller and XLSource, respectively, the Escrow Agreement and
the XLSource Supply Agreement shall be in full force and effect.
ARTICLE 13
SURVIVAL; INDEMNIFICATION
SECTION 13.1. Survival. The representations and warranties of the
parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive
the Closing until 5:00 p.m. Pacific Time on the second anniversary of the
Closing Date; provided that (i) the representations and warranties
contained in Article 10 shall survive for the period set forth in Section
10.09, (ii) the representations and warranties contained in Section 3.26
shall survive until six months following the end of the applicable statute
of limitations (after giving effect to any waiver, mitigation or extension
thereof), (iii) the representations and warranties contained in Section
3.07 shall survive indefinitely and (iv) the representations and
warranties contained in Section 3.19(b) shall not survive the Closing. The
covenants and agreements contained in this Agreement or in any other
certificate, Schedule or Exhibit delivered pursuant hereto shall survive
in accordance with their terms (or if no survival period is specified,
until six months following the end of the applicable statute of
limitations (after giving effect to any waiver, mitigation or extension
thereof). Notwithstanding the preceding sentences, any covenant,
agreement, representation or warranty in respect of which indemnity may be
sought under this Agreement shall survive the time at which it would
otherwise terminate pursuant to the preceding sentences, if notice of the
inaccuracy or breach thereof giving rise to such right of indemnity shall
have been given to the party against whom such indemnity may be sought
prior to such time.
<PAGE>
SECTION 13.2. Indemnification. (a) Seller hereby indemnifies each
Buyer Indemnitee, without duplication, against and agrees to hold each
Buyer Indemnitee harmless from any and all damage, loss, liability and
expense (including, without limitation, reasonable expenses of
investigation and reasonable attorneys' fees and expenses in connection
with any action, suit or proceeding) ("Damages") incurred or suffered by
each such Buyer Indemnitee arising out of (i) any misrepresentation or
breach of warranty (provided that for purposes of this clause (i), any
representation or warranty contained in Article 11 shall be deemed made
without any qualification for "materiality" or "Material Adverse Effect")
made by Seller pursuant to this Agreement (other than pursuant to Article
10) or (ii) any covenant or agreement to be performed by Seller pursuant
to this Agreement (other than pursuant to Article 10); provided that (x)
Seller shall not be liable under clause (i) of this Section 13.02(a)
unless the aggregate amount of Damages with respect to all matters
referred to in clause (i) of this Section 13.02(a) (determined without
regard to any materiality qualification contained in any representation,
warranty or covenant giving rise to the claim for indemnity hereunder)
exceeds $500,000, and then only to the extent of such excess; and (y)
Seller's maximum liability under clause (i) of this Section 13.02(a) shall
not exceed $10,000,000.
(b) Notwithstanding anything to the contrary in this
Agreement, Seller hereby indemnifies each Buyer Indemnitee, without
duplication, against and agrees to hold each Buyer Indemnitee harmless from
any and all Damages incurred or suffered by each such Buyer Indemnitee
which arise out of or relate to any of the following:
(i) any action, suit, investigation or proceeding (whether or
not such action, suit, investigation or proceeding is referred to on
Schedule 3.13 of the Seller Disclosure Letter) instituted prior to the
Closing Date against Seller (with respect to the business of Reseller
Network), Reseller Network, any Company or any of their respective
properties before any court or arbitrator or any governmental body, agency
or official; or
(ii) any action, suit, investigation or proceeding arising out of
any claim (made at any time, whether prior to or following the Closing
Date) alleging discrimination, harassment or similar charges, which claim
is made by an individual who works or has worked at Reseller Network's
facility in Memphis, Tennessee; provided that no final judgment, order or
adjudication has been obtained which determines that the Damages incurred
by such Buyer Indemnitee as a result of such action, suit, investigation or
proceeding were so incurred primarily as a result of any action taken by
Buyer or its Subsidiaries (other than any action taken by any Company prior
to the Closing). A judgment, order or adjudication shall not be deemed to
be final until the time within which an appeal may be taken therefrom has
expired and no appeal has been taken, or until the entry of a judgment or
order from which no appeal may be taken.
<PAGE>
(c) Buyer hereby indemnifies Seller and its Affiliates
against and agrees to hold each of them harmless from any and all Damages
incurred or suffered by Seller or any of its Affiliates arising out of (i)
any misrepresentation or breach of warranty made by Buyer pursuant to this
Agreement (other than pursuant to Article 10) or (ii) any covenant or
agreement to be performed by Buyer pursuant to this Agreement (other than
pursuant to Article 10); provided that (x) Buyer shall not be liable under
clause (i) of this Section 13.02(c) unless the aggregate amount of Damages
with respect to all matters referred to in clause (i) of this Section
13.02(c) (determined without regard to any materiality qualification
contained in any representation, warranty or covenant giving rise to the
claim for indemnity hereunder) exceeds $500,000, and then only to the
extent of such excess; and (y) Buyer's maximum liability under clause (i)
of this Section 13.02(c) shall not exceed $10,000,000.
(d) Buyer hereby indemnifies Seller and its Affiliates
against and agrees to hold each of them harmless from any and all Damages
incurred or suffered by Seller or any of its Affiliates which arise out of
or relate to any of the following:
(i) the liabilities, agreements and guarantees set forth on
Schedule 8.02 of the Seller Disclosure Letter; or
(ii) any action, suit, investigation or proceeding arising out of
any claim made by an individual who works or has worked at Reseller
Network's facilities in Denver, Colorado alleging discrimination,
harassment (to the extent such harassment is alleged to be part of a
pattern of harassment) or similar charges either (x) in connection with the
designation of individuals as Transferred Employees, Seconded Employees and
Assumed Employees or (y) in connection with such individual's employment
by, or provision of services for, Buyer or its Subsidiaries after the
Closing Date.
(e) Notwithstanding anything to the contrary in this
Agreement, Seller hereby indemnifies each Buyer Indemnitee (other than the
Companies), without duplication, against and agrees to hold each such Buyer
Indemnitee harmless from any and all Damages incurred or suffered by each
such Buyer Indemnitee which arise out of or relate to item 1 or 2 listed on
Schedule 3.12(a)(viii) of the Seller Disclosure Letter. In addition,
Seller agrees to promptly reimburse each Company for the full amount of any
legal fees and expenses incurred in connection with any matter arising out
of or relating to such scheduled items.
(f) No investigation by Buyer or any of its Affiliates at or
prior to the Closing Date shall relieve Seller of any liability hereunder.
(g) After the Closing, except as provided pursuant to
Section 15.11 or Article 10, Section 13.02 will provide the exclusive
remedy for any breach of any representation, warranty, covenant or other
agreement or other claim made or to be performed pursuant to this Agreement
and Article 10 will provide the exclusive remedy for any breach of any
representation, warranty covenant or other agreement or other claim made or
to be performed pursuant to Article 10.
<PAGE>
SECTION 13.3. Procedures. (a) The party seeking indemnification under
Section 13.02 (the "Indemnified Party") agrees to give notice (but not, in
the case of indemnification sought pursuant to clause (i) of Section
13.02(a) or 13.02(c), until the alleged, expected or actual Damages for
which indemnification is sought, individually or in the aggregate, under
such provisions exceed $500,000) to the party against whom indemnity is
sought (the "Indemnifying Party") of the assertion of any claim, or the
commencement of any suit, action or proceeding in respect of which
indemnity may be sought under such Section (a "Claim Notice"). The failure
to provide such Claim Notice to the Indemnifying Party shall not relieve
the Indemnifying Party of its obligations hereunder, except to the extent
such failure shall have materially and adversely prejudiced the
Indemnifying Party. The Indemnifying Party may, at its option, participate
in and, except as provided in Section 13.03(b), control the defense of any
such suit, action or proceeding at its own expense with counsel reasonably
satisfactory to the Indemnified Party; provided that such participation
may not extend beyond 120 days after receipt of the Claim Notice unless
the Indemnifying Party shall have waived its right to contest its
obligation to indemnify the Indemnified Party pursuant to this Article 13
for all Damages with respect to such claim (and any such participation
beyond such time shall be deemed to be such a waiver). The Indemnified
Party shall be entitled to participate in the defense of any claim,
litigation or proceeding in respect of which indemnification may be sought
under Section 13.02 and to employ counsel of its choice for such purpose.
The fees and expenses of such separate counsel shall be borne by the
Indemnified Party; provided that the Indemnifying Party shall pay the fees
and expenses of such separate counsel incurred by the Indemnified Party
(i) during the 120-day period following the delivery of such Claim Notice
or, if sooner, (ii) until such time as the Indemnifying Party has notified
the Indemnified Party that it has waived its right to contest its
obligation to indemnify the Indemnified Party pursuant to this Article 13
for all Damages with respect to such claim. Subject to the foregoing, if
the Indemnifying Party shall fail to advise the Indemnified Party that it
will assume such defense within 10 business days after receipt of such
Claim Notice, then the Indemnified Party shall have the right to assume
the defense with counsel of its own choosing at the sole cost of the
Indemnifying Party. The Indemnifying Party shall not be liable under
Section 13.02 for any settlement effected without its consent of any
claim, litigation or proceeding in respect of which indemnity may be
sought hereunder; provided that (i) consent of the Indemnifying Party
shall not be required with respect to any such settlement unless the
Indemnifying Party agrees not to assert that the Damages with respect to
which indemnification is sought under Section 13.02 is not within the
ambit of Section 13.02, and (ii) in any case in which the Indemnifying
Party provides such written consent, the Indemnifying Party shall be
deemed to have agreed that it will not assert that any Damages with
respect to which indemnification is sought under Section 13.02 is not
within the ambit of Section 13.02. The Indemnifying Party shall not enter
into or consent to any settlement with respect to which indemnification is
sought under Section 13.02 without the prior written consent of the
Indemnified Party, unless such settlement involves only the payment of
money damages concurrently with such settlement, does not impose any
injunction or other equitable relief upon the Indemnified Party, does not
require any admission or acknowledgment of liability or fact of the
Indemnified Party and contains an unconditional release of the Indemnified
Party in respect of such claim.
<PAGE>
(b) Notwithstanding anything in this Agreement to the contrary,
the Indemnifying Party shall not be entitled to assume or maintain control
of the defense of any claim, litigation or proceeding in respect of which
indemnification may be sought under Section 13.02 if (i) such claim,
litigation or proceeding relates to or arises in connection with any
criminal proceeding, action, indictment, allegation or investigation, (ii)
such claim, litigation or proceeding seeks an injunction or equitable
relief against the Indemnified Party, (iii) the Indemnifying Party has
failed or is failing to prosecute or defend vigorously such claim,
litigation or proceeding or (iv) the Indemnifying Party (x) makes a general
assignment for the benefit of creditors, (y) commences any case, proceeding
or other action seeking to have an order for relief entered on its behalf
as a debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all of any
substantial part of its property, or (z) become the subject of any
proceeding referred to in clause (x) or (y) which is not dismissed within
60 days of its filing or entry.
<PAGE>
ARTICLE 14
TERMINATION
SECTION 14.1. Grounds for Termination. This Agreement may be
terminated prior to the Closing:
(a) at any time, by mutual written agreement of Seller and
Buyer;
(b) at any time, by Buyer if the Closing shall not have been
consummated on or before August 22, 1997;
(c) at any time, by Seller if the Closing shall not have
been consummated on or before September 15, 1997;
(d) at any time, by either Seller or Buyer if there shall be
any law or regulation that makes consummation of the Transaction illegal or
otherwise prohibited or if consummation of the Transaction would violate
any nonappealable final order, decree or judgment of any court or
governmental body having competent jurisdiction;
(e) at any time, by Buyer if Buyer shall have received any
formal communication from an attorney of the United States Department of
Justice ("DOJ") or the Federal Trade Commission ("FTC") indicating that the
DOJ or FTC has authorized the institution of litigation seeking an order,
decree or injunction that, if entered, would (i) restrain or prohibit the
consummation of the Transaction or (ii) restrain, prohibit or limit the
ownership or operation by Buyer or any of its Affiliates of all or a
material portion of Reseller Network or any of their other assets or
businesses;
(f) at any time, by either Seller or Buyer if an event
referred to in any clause of Section 15.03(b) (other than Section
15.03(b)(v) or 15.03(b)(vi)) or in Section 15.03(c) shall have occurred;
(g) at any time after June 27, 1997, by Seller if an event
referred to in Section 15.03(b)(v) shall have occurred; or
(h) at any time after May 15, 1997, by Buyer if an event
referred to in Section 15.03(b)(vi) shall have occurred.
The party desiring to terminate this Agreement pursuant to Section 14.01
(other than Section 14.01(a)) shall give notice of such termination to the
other party.
SECTION 14.2. Effect of Termination. If this Agreement is terminated
as permitted by Section 14.01, such termination shall be without liability
of any party (or any stockholder, director, officer, employee, agent,
consultant or representative of such party) to the other parties to this
Agreement, except as provided in the last sentence of this Section 14.02;
provided that if such termination shall result from the (i) willful
failure of any party to fulfill a condition to the performance of the
obligations of the other parties, (ii) failure to perform a covenant of
this Agreement or (iii) willful breach by any party hereto of any
representation or warranty or agreement contained herein, such party shall
be fully liable for any and all Damages incurred or suffered by the other
parties as a result of such failure or breach. The provisions of Sections
9.04, 15.03, 15.05 through 15.08, and 15.11 shall survive any termination
hereof pursuant to Section 14.01.
<PAGE>
ARTICLE 15
MISCELLANEOUS
SECTION 15.1. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including facsimile
transmission) and shall be given, if to Buyer, to:
Ingram Micro Inc.
1600 East Street
Andrew Place
Santa Ana, CA 92705
Attention: General Counsel
Fax: 714-566-9370
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Carole Schiffman, Esq.
Fax: (212) 450-4800
if to Seller, to:
Intelligent Electronics, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Attention: Chief Executive Officer
Fax: (610) 458-0599
with a copy to:
Pepper Hamilton & Scheetz LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
Attention: Barry M. Abelson, Esq.
Fax: 215-981-4750
if to XLSource, to:
XLSource, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Attention: Chief Executive Officer
Fax: (610) 458-0599
with a copy to:
Pepper Hamilton & Scheetz LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
Attention: Barry M. Abelson, Esq.
Fax: 215-981-4750
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior
to 5 p.m. in the place of receipt and such day is a business day in the
place of receipt. Otherwise, any such notice, request or communication
shall be deemed not to have been received until the next succeeding
business day in the place of receipt.
<PAGE>
SECTION 15.2. Amendments and Waivers. (a) Any provision of this
Agreement may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed, in the case of an amendment, by each
party to this Agreement, or in the case of a waiver, by the party against
whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.
SECTION 15.3. Fees and Expenses. (a) All costs and expenses incurred
in connection with this Agreement shall be paid by the party incurring
such cost or expense except as provided in 15.03(b). (b) If this Agreement
is terminated as a result of the occurrence of any of the events set forth
below, Seller agrees to pay to Buyer a fee in immediately available funds
equal to $5,000,000 promptly, but in no event later than two business
days, after such termination within the time period specified in Section
15.03(d) as a result of the occurrence of any of the events set forth
below:
(i) Seller or an Affiliate of Seller shall have entered into, or
shall have publicly announced its intention to enter into, an agreement or
an agreement in principle with respect to any Acquisition Proposal;
(ii) The Board of Directors of Seller shall have withdrawn or
materially modified its approval or recommendation of the Transaction or
this Agreement;
(iii) Prior to the mailing of the Seller Proxy Materials, Seller
or an Affiliate of Seller shall have received any Acquisition Proposal
which the Board of Directors of Seller has determined is more favorable to
Seller's stockholders than the Transaction;
(iv) The opinion of Legg Mason as to the fairness of the
Transaction to the stockholders of Seller from a financial point of view
shall have been revoked;
<PAGE>
(v) The absolute value of the Base Purchase Price, as adjusted
pursuant to Section 2.03 (if and only if such adjusted Base Purchase Price
is a negative number), is greater than the sum of (x) $10 million, (y)
$1,000,000 for each Monday, during the period commencing on June 30, 1997
and ending on July 28, 1997, prior to any termination of this Agreement and
(z) $2,000,000 for each Monday thereafter prior to the Closing Date;
provided that solely for purposes of this Section 15.03(b)(v), the Base
Purchase Price shall be calculated (A) excluding the impact of any
retention or severance payments and any interest expense paid or accrued
after April 5, 1997, (B) prior to giving effect to any capital contribution
made pursuant to Section 6.12 and (C) assuming that the date of such
calculation is the Closing Date; or
(vi) Seller shall not have obtained prior to May 15, 1997, for
the benefit of Buyer, an irrevocable letter of credit in the amount of
$5,000,000 and otherwise reasonably satisfactory to Buyer for the purpose
of securing the obligations of Seller pursuant to Sections 15.03(b) and
15.03(c).
(c) Seller agrees to pay to Buyer a fee in immediately
available funds equal to $2,500,000 promptly, but in no event later than
two business days, after any termination of this Agreement within the time
period specified in Section 15.03(d) as a result of a failure by the
stockholders of Seller to approve the Transaction by the required vote at a
duly held meeting of stockholders or of any adjournment thereof.
(d) Notwithstanding anything herein to the contrary, if this
Agreement is terminated by Buyer pursuant to Section 14.01(f), no fee shall
be payable pursuant to Section 15.03(b) or 15.03(c) unless such termination
occurs within 10 business days following the date that Seller notifies
Buyer in writing of the occurrence of an event referred to in Sections
15.03(b) or 15.03(c)
SECTION 15.4. Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns; provided that no party
may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the consent of each other party
hereto, except that Buyer may transfer or assign, in whole or from time to
time in part, to one or more of its Affiliates, the right to purchase all
or a portion of the RN Shares, but no such transfer or assignment will
relieve Buyer of its obligations hereunder.
SECTION 15.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of New York, without
regard to the conflicts of law rules of such state.
<PAGE>
SECTION 15.6. Jurisdiction. Except as otherwise expressly provided in
this Agreement, any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with,
this Agreement or the Transaction may be brought in the United States
District Court for the Southern District of New York or any other New York
State court sitting in New York City, and each of the parties hereby
consents to the jurisdiction of such courts (and of the appropriate
appellate courts therefrom) in any such suit, action or proceeding and
irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such
suit, action or proceeding in any such court or that any such suit, action
or proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be
served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. Without limiting the foregoing, each party
agrees that service of process on such party as provided in Section 15.01
shall be deemed effective service of process on such party.
SECTION 15.7. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
SECTION 15.8. Counterparts; Third Party Beneficiaries. This Agreement
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto
were upon the same instrument. This Agreement shall become effective when
each party hereto shall have received by facsimile transmission or
otherwise a counterpart hereof signed by the other party hereto. No
provision of this Agreement is intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder.
SECTION 15.9. Entire Agreement. This Agreement (including the
documents, instruments, exhibits, appendices and schedules attached hereto
and referenced herein) constitutes the entire agreement among the parties
with respect to the subject matter of this Agreement and supersedes all
prior agreements and understandings, both oral and written, among the
parties with respect to the subject matter of this Agreement.
SECTION 15.10. Definition of Knowledge. As used herein, the words
"knowledge", "best knowledge" or "known" shall, with respect to Seller,
mean the actual knowledge of the corporate officers of Seller and each of
the Companies, and those additional persons listed on Schedule 15.10 of
the Seller Disclosure Letter, in each case after such individuals have
made due and diligent inquiry as to the matters which are the subject of
the statements which are "known" by Seller or made to the "knowledge" or
"best knowledge" of Seller.
<PAGE>
SECTION 15.11. Specific Performance. Each party acknowledges and
agrees that remedies at law for a breach or threatened breach of any of
the provisions of this Agreement would be inadequate and, in recognition
of this fact, the parties agree that, in the event of such a breach or
threatened breach, in addition to any remedies at law, each party, without
posting any bond, shall be entitled to obtain equitable relief in the form
of specific performance, temporary restraining order, temporary or
permanent injunction or any other equitable remedy which may then be
available.
SECTION 15.12. Captions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and
year first above written.
INGRAM MICRO INC.
By: /s/ Michael J. Grainger
---------------------------------------
Name: Michael J. Grainger
Title: Executive Vice President,
Worldwide Chief Financial Officer
INTELLIGENT ELECTRONICS, INC.
By: /s/ Richard Sanford
---------------------------------------
Name: Richard Sanford
Title: Chairman and Chief Executive Officer
XLSOURCE, INC.
By: /s/ Michael A. Norris
----------------------------------------
Name: Michael A. Norris
Title: President
<PAGE>
SCHEDULE 2.04
Calculation of Net Liabilities Assumed
Proforma Adjusted
Balance Sheet Caption 11/2/96* 2/1/97*
- --------------------- -------- -------
Liabilities
- -----------
Accounts Payable ................................... $ 450,077 $ 401,561
Accrued Liabilities ................................ 21,194 18,035
Short-term debt .................................... 2,785 2,873
Long-term debt ..................................... 3,450 3,463
Other loug-term liabilities ........................ 1,325 1,084
Due to Corporate ................................... -- 22,648
-------- ----------
$ 478,831 $ 449,664
Assets
- ------
Accounts receivable, net ........................... (119,046) (32,891)
Accounts receivable, TFN (XLS) ..................... -- (57,520)
Inventory .......................................... (298,692) (301,433)
Prepaid expenses and other
current assets ................................... (1,763) (1,238)
-------- ---------
Net Liabilities Assumed ............................ $ 59,330 $ 56,582
======== =========
Balance sheet captions not included in calculation of Net Liabilities
Assumed:
Deferred income taxes ............................... 7,039 --
Property and equipment .............................. 42,548 43,647
Other assets ........................................ 3,218 5,135
Shareholders' equity ................................ (6,525) (7,800)
*Source: Balance Sheet provided by Buyer.
<PAGE>
Certain Adjustments:
In the event that the date of the Closing Balance Sheet is other than
Seller's fiscal quarter ending date, the Closing Balance Sheet shall be
subsequently adjusted within 30 days of the end of Seller's then current fiscal
quarter to reflect the pro rata accrual for Reseller Network's net revenues
relating to vendor programs, including special promotions, marketing-development
funds, sales-out objectives and returns incentives. The pro rata accrual shall
be determined based on the actual net revenues earned by Reseller Network from
the vendor program during such period multiplied by either (as appropriate
depending upon the type of vendor program): (i) the result of Reseller Network's
net sales of the vendor's products for the period from the beginning of the
fiscal quarter to the Closing Date divided by Reseller Network's net sales of
the vendor's products for the entire period of the vendor program or (b) the
result of the number of business days that the vendor's program was in effect
during the period prior to the Closing Date divided by the total number of
business days of such program.
2
<PAGE>
SCHEDULE 11.04
11.04(a)(I)
Buyer shall reimburse Seller, as provided in Section 11.03(b)(ii) of the Stock
Purchase Agreement (hereinafter, the "Agreement") for all severance payments
paid or payable under the severance plans and severance arrangements listed in
Schedule 11.02(a), (e), (f) and (j) of the Seller Disclosure Letter, and for all
actual out-of-pocket costs incurred by Seller with respect to WARN Obligations,
to the extent hereinafter provided.
Acutual out-of-pocket costs incurred by Seller with respect to WARN Obligations
shall be (a) actual cash costs (not including overhead or related fixed costs)
of preparing and mailing (or posting) required notifications; (b) payment of
any damages resulting from a failure to provide 60 days' notice as required in
WARN, unless such failure was due to a delay by Seller of more than five days in
providing notice to affected employees after the date of the Buyers notice
referred to in Section 11.04(b) of the Agreement; and (c) payment of any wages,
benefits or benefit costs that are required to be continued during said 60-day
notice period, if Seller continues affected employees' employment and if Seller
did not delay more than five days in providing notice to such affected employees
after the date of Buyer's notice referred to in Section 11.04(b) of the
Agreement.
For purposes of this Schedule, "benefit costs" shall mean insurance
premiums for any insured benefit plan, contributions to any funded benefit
plan, and with respect to any group medical plan that is subject to Section
601 of ERISA, shall be deemed to be 102% of the "applicable premium"
as defined in Section 604 of ERISA, determined in the same manner as
such applicable premium was determined during the current plan year for
Seller's plan, and subject to increase to the extent permitted under ERISA
and in accordance with past practice. Such amount shall hereinafter be
referred to as the "COBRA Cost." Buyer's obligation to reimburse Seller
for its Actual Out-of-Pocket COBRA Cost with respect to a Qualified
Beneficiary (as defined in ERISA) shall be limited to the Qualified
Beneficiary's COBRA Cost for any applicable month of coverage,
reduced by any COBRA premiums actually received from the Qualified
Beneficiary on account of such coverage during such month. In the case
of a Seller Employee who is continuing as an active participant in Seller's
3
<PAGE>
group medical plan pursuant to a severance agreement or arrangement, the benefit
costs related to such coverage shall be the Actual Out-of-Pocket COBRA Costs
that would otherwise be applicable if such Seller Employee were covered by COBRA
at such time. It is understood that such Seller Employee will be treated as
having incurred a Qualifiying Event under COBRA at the conclusion of such
severance period. With respect to any unfunded benefit plan other than a group
medical plan, "benefit costs" shall be determined in a manner comparable to
Actual Out-of-Pocket COBRA Costs.
11.04(a)(iii)
Buyer shall reimburse Seller, as provided in Section 11.03(b)(ii) of the
Agreement, for all severance payments and benefit costs (as defined above) to or
in respect of Scheduled Employees paid under the severence plans and
arrangements listed in respect thereof in Schedule 11.02(a), (e), (f) and (j) of
the Seller Disclosure Letter.
<PAGE>
SCHEDULE 11.06
Buyer shall reimburse Seller for all wages, salaries, contributions, premiums,
taxes, out-of-pocket costs and third-party administrative fees reasonably paid
or payable by Seller or its Subsidiary in respect of the Seconded Employees
providing the services described above. For this purpose:
"contributions" includes contributions to any Employee Plan or Benefit
Arrangement, including matching contributions under Seller's qualified
savings plan.
"premiums" includes any and all insurance premiums for any Employee Plan or
Benefit Arrangement, and any workers' compensation insurance premiums or
payments to any fund maintained in lieu of such insurance.
"taxes" includes F.I.C.A. and F.U.T.A. taxes payable by Seller or any
Subsidiary on account of such Seconded Employees.
"out-of-pocket costs" includes payments for self-funded or
partially-self-funded Employee Plans or Benefit Arrangements, and shall be
calculated in a manner similar to that described above for Actual
out-of-pocket COBRA costs.
"third-party administrative fees" includes any payments to any payroll
administrator, benefits administrator, or any other entity unrelated to
Seller that assists Seller or its Subsidiary in fulfilling its
employment-related responsibilities with respect ot the Seconded Employees.
Subject to Buyer's receipt of a detailed itemized list, in form and substance
reasonably acceptable to Buyer of expenses in respect of the foregoing, Buyer
shall provide advance payment to the account described in Section 11.03(b)(ii)
for any amount that is allocated to Buyer hereunder or under Sections 11.03(a),
11.04, or 11.06 of the Agreement, upon reasonable notice by the Seller, whether
or not such provision calls for "reimbursement" of such amount. It is the
intention of the parties that Seller and/or its Subsidiaries shall not be
required to advance such funds to the extent they are reasonably contemplated to
be reimbursed by Buyer.
<PAGE>
INTELLIGENT ELECTRONICS, INC.
Proxy Solicited On Behalf Of The Board of Directors
The undersigned, revoking all previous proxies, hereby appoints
Richard D. Sanford and Alan Resneck, or any of them acting individually,
as the proxy of the undersigned, with full power of substitution, to vote,
as indicated on the reverse side and in their discretion upon such other
matters as may properly come before the meeting, all shares which the
undersigned would be entitled to vote at the Annual Meeting of the Company
to be held at 10:00 A.M., July 16, 1997, at The Holiday Inn, 815 North
Pottstown Pike, Exton, Pennsylvania 19341, and at any postponement or
adjournment thereof.
1. The approval of the sale of the Company's Reseller Network Division, a
segment of the Company engaged in the distribution of computer products (the
"Indirect Business") and the adoption of the Stock Purchase Agreement (the
"Acquisition Agreement") providing for the sale of the Indirect Business, as it
may be amended or supplemented from time to time, including authorization of the
Company, without further shareholder approval, to make such modifications and
amendments to the terms and conditions of the sale of the Indirect Business,
including changes in the amount or type of consideration to be received or the
stock or assets to be sold, as the Board of Directors of the Company may deem
appropriate.
For Against Abstain
/ / / / / /
2. Election of Directors:
For all nominees Withhold Authority to vote for
listed below all nominees listed below
[ ] [ ]
Nominees: For a three-year term expiring at the 2000 Annual
Meeting of Shareholders:
Roger J. Fritz , Arnold S. Hoffman, John A. Porter
and Michael A. Norris
(Instruction: To withhold authority to vote for any nominee(s),
write the name(s) of such nominee(s) on the line below.)
------------------------------------------------------------
<PAGE>
Please mark your
votes as indicated [X]
in this example
3. In accordance with their best judgment, the Proxies are authorized to vote
upon such other business as may properly come before the Annual Meeting or any
adjournments or postponements thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. UNLESS OTHERWISE SPECIFIED, THE SHARES
WILL BE VOTED "FOR" THE ELECTION OF ALL NOMINEES
FOR DIRECTORS LISTED ON THE REVERSE SIDE HEREOF AND
"FOR" THE APPROVAL OF SALE OF THE INDIRECT BUSINESS
AND ADOPTION OF THE ACQUISITION AGREEMENT DESCRIBED
ON THE REVERSE SIDE HEREOF. THIS PROXY ALSO
DELEGATES DISCRETIONARY AUTHORITY WITH RESPECT TO
ANY OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE
THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT.
Date:_______________________________________, 1997
_________________________________________________
Signature of Shareholder
_________________________________________________
Signature of Shareholder
NOTE: PLEASE SIGN THIS PROXY EXACTLY AS NAME(S)
APPEAR ON YOUR STOCK CERTIFICATE. WHEN SIGNING AS
ATTORNEY-IN-FACT, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE ADD YOUR TITLE AS SUCH, AND IF
SIGNER IS A CORPORATION, PLEASE SIGN WITH FULL
CORPORATE NAME BY A DULY AUTHORIZED OFFICER OR
OFFICERS AND AFFIX THE CORPORATE SEAL. WHERE STOCK
IS ISSUED IN THE NAME OF TWO (2) OR MORE PERSONS,
ALL SUCH PERSONS SHOULD SIGN.
