SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
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 (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 March 31, 1998:
Common Stock, $.01 Par Value - $277,943,766
The number of shares outstanding of the issuer's common stock as of
March 31, 1998:
Common Stock, $.01 Par Value - 41,798,091
Documents Incorporated by Reference
None
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 Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
PAGE
<PAGE>
PART I
Item 1. BUSINESS
Introduction
Intelligent Electronics, Inc. (the "Company") provides information
technology products, services and solutions to corporate customers,
educational institutions and governmental agencies in the United States,
primarily through its branch locations. 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 then owned
by the Company. The acquisition of FNOW, a computer sales and services
company, expanded the Company's offerings through the addition of a direct
computer products 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. On July 18, 1997, the
Company sold certain assets of XLSource and XLConnect sold certain specified
managed services contracts and related assets (the "XL Transaction"). Also,
on July 18, 1997, the Company sold its business (the "Indirect Business") of
providing information technology products, services and solutions to network
integrators and resellers in the RND Transaction (as defined below) and,
accordingly, the Indirect Business is treated as a discontinued operation
in the accompanying 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 potential decline generally in
the level of demand for the Company's products and services; the potential
termination or non-renewal of a supply or services agreement with a major
vendor or customer; continued competitive and pricing pressures in the
industry; billable technical employee and product supply shortages; open
sourcing of products from vendors; changes in the mix of utilization to
provide billable services between employees and contractors; rapid product
improvement and technological change, short product life cycles and
resulting obsolescence risks; legal proceedings; the potential for year
2000-related expenditures; the risk factors described in "Quarterly Results
and Seasonality" in XLConnect's Form 10-K for the year ended December 31,
1997 and in "Risk Factors" in XLConnect's Prospectus dated October 17, 1996
filed with the Securities and Exchange Commission in connection with its
initial public offering; and the risks of unavailability of adequate
products, credit, capital or financing.
Sale of the Company and XLConnect
On March 4, 1998, the Company and XLConnect executed an Agreement and Plan
of Merger with Xerox Corporation ("Xerox"), whereby Xerox, using
acquisition subsidiaries, will acquire through mergers (i) all of the
outstanding capital stock of the Company in exchange for cash in the amount
of $7.60 per share and (ii) all of the outstanding capital stock of
XLConnect not owned by the Company in exchange for cash in the amount of
$20.00 per share (collectively, the "Mergers"). The closing of the Mergers
is subject to shareholder approval of both the Company and XLConnect at
meetings currently anticipated to occur no later than June 30, 1998 and
other customary terms and conditions. However, there can be no assurance
that the Mergers will be completed. After the closing of the Mergers, the
Company and XLConnect will be wholly-owned subsidiaries of Xerox.
XLSource
Through its acquisition of certain branch locations of FNOW in December
1994 and the 69% of FNOW's outstanding capital stock that it did not
already own in August 1995, the Company acquired a direct computer products
sales organization, which in 1996 was renamed XLSource. As part of the XL
Transaction which was consummated on July 18, 1997, the Company sold to a
subsidiary of GE Capital Information Technology Solutions, Inc. certain
assets, consisting primarily of the inventory, accounts receivable and
customer contracts relating to 20 of the 24 XLSource locations (comprising
approximately two-thirds of XLSource's historical revenues) and real
property leases and fixed assets relating to six of such 20 locations.
After the XL Transaction, XLSource continued to operate in 4 locations in
Cincinnati, Cleveland, Indianapolis and Pittsburgh. These four locations
comprised approximately one-third of XLSource's historical revenues prior
to the transaction. XLSource is an authorized dealer for or a reseller of
the products of over 80 manufacturers. XLSource has substantially outsourced
its distribution, handling and inventory logistics to Ingram Micro Inc.
("Ingram"), a leading distributor of computer-related products,
substantially reducing the need for XLSource to carry inventory and lease
warehouse space. As a result, XLSource is able to provide the delivery of
products from most of the leading technology vendors with minimal
operational risk or technology exposure.
XLSource, in conjunction with XLConnect (described below), focuses its
sales and marketing efforts towards selling computer-related products and
services to 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.
Sales to targeted customers are generated primarily by XLSource's sales
representatives. These sales representatives generally have three or more
years of microcomputer sales experience involving multi-product
authorizations and are assigned to accounts on the basis of skill,
experience and prior results. Successful operations will depend in part on
the Company's ability to attract, hire and retain highly skilled and motivated
sales personnel. Compensation programs for sales representatives include
both salary and commission. Commissions are based on a percentage of the
gross profit generated by the sale, thereby allowing the sales representative
to participate in XLSource's gross profit.
XLSource's operations are managed by XLConnect pursuant to the Amended and
Restated Services Agreement dated as of September 30, 1997 by and among the
Company, XLConnect and XLSource (the "Services Agreement"). The Services
Agreement provides for XLConnect to perform certain management, marketing
and administrative services for the Company for $225,000 per month. These
services include executive oversight, operations management at the
corporate and branch levels, practice development, sales and sales
management, marketing services, professional recruitment and legal,
financial and accounting services.
XLSource purchases the majority of the products its sells through a supply
agreement with Ingram. In the event the Company is unable to continue its
relationship with Ingram, it believes it could establish a similar
relationship with another company in a reasonable period of time. Because
of the competitive nature of the microcomputer distribution industry, the
Company believes it could ultimately obtain terms as beneficial as those
currently offered by Ingram. Ingram also provides configuration services,
for a fee. The majority of the products purchased from Ingram are shipped
directly from an Ingram warehouse to XLSource's customer. XLSource must be
authorized by the manufacturer to sell that manufacturer's products,
whether the product is purchased from Ingram, another source or the
manufacturer. The purchasing operations of XLSource are centralized in one
of its branches. This enables XLSource to more easily monitor and
authorize purchases. It also limits the number of vendors used, so that
overhead is minimized. XLSource's arrangements with the major
manufacturers generally provide protection against declines in the dealer
list price of products held in inventory by XLSource. These arrangements
typically take the form of cash payments or credits against purchases in
the amount equal to the difference between the price paid by XLSource and
the new dealer list price. XLSource's manufacturers permit XLSource to
pass through to its customers all warranties and return policies. XLSource
subcontracts with XLConnect for any warranty work performed for customers.
XLSource's customers operate in a variety of industries, and therefore,
XLSource is not dependent on any single industry as a source for customers.
No customer accounted for more than 10% of revenues generated by the four
remaining XLSource branches. Sales to XLSource's top 25 customers
accounted for approximately 50% of its revenue for the four branches in
the year ended January 31, 1998 ("fiscal 1997"). The Company does not believe
that the loss of any one customer would have a material adverse effect on
its business.
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.
XLConnect provides enterprise-wide solutions to clients with complex
computing and communications requirements. As a single-source provider,
XLConnect offers comprehensive internetworking services, applications
development services, managed services and telecommunication services, as
described below. XLConnect's solutions are custom designed to integrate
computing and communications devices and equipment with software
applications and systems to develop local area networks ("LANs") and to
link LANs through public and private communications networks and the
Internet to form wide area networks ("WANs").
Internetworking Services
XLConnect designs and implements internetworking solutions to connect all
segments of clients' networks using the proven products of leading hardware
and software vendors. Through its internetworking services, XLConnect
integrates computing and communications devices and equipment, such as PCs,
workstations, databases, routers and hubs, with software applications and
systems to develop LANs and to link LANs through public and private
communications networks and the Internet to form WANs.
LAN/WAN Consulting and Design. LAN/WAN consulting and design services
involve assessing clients' information-sharing needs, evaluating existing
infrastructure, analyzing current network performance and designing optimal
system and network solutions.
Implementation and Project Management. XLConnect implements network design
solutions and assumes responsibility for managing entire projects.
Elements of project management include configuring and installing desktop
devices and networking equipment, configuring network operating systems and
applications software, installing Internet web servers and implementing the
infrastructure required for telecommunications services. XLConnect also
provides services to enhance clients' information security over the
Internet by customizing and implementing firewalls.
Applications Development Services
XLConnect's applications development services include customization and
adaptation of proven software to meet clients' specific needs and training
to support XLConnect's applications and internetworking solutions.
Applications services provide clients with software solutions to improve
productivity through more timely and accurate information-sharing and
decision-making processes. XLConnect's applications solutions minimize
development times while delivering quality solutions by using proven
project management methodologies, risk assessment practices and software
development techniques. Projects start with detailed needs assessments,
requirements definitions and designs. The projects then involve prototype
development, testing, implementation, training and support.
Applications Development and Integration. XLConnect custom designs
groupware, client/server and intranet software applications. In
particular, XLConnect customizes IBM/Lotus Notes applications into
comprehensive intranet group communications solutions, such as electronic
messaging, bulletin boards and video and voice communications capabilities.
XLConnect also customizes Microsoft Exchange to help clients exchange
information seamlessly. XLConnect adapts Netscape and Microsoft software
to enable clients to implement electronic mail, electronic commerce and
other Internet applications over the World Wide Web. XLConnect also
provides Internet applications to develop web pages using programming
languages such as Java and HTML. Finally, XLConnect offers its own suite
of proprietary, intranet-based applications which it bundles together with
customization and other services such as training and refers to as
"XLConnectNets."
End-user Training. XLConnect offers comprehensive training through
cooperative relationships with vendors such as Microsoft, Novell and
IBM/Lotus to support its applications and internetworking solutions.
Training is provided to end-users through programs designed to address the
client's custom applications. In order to deliver training in an efficient
and effective manner, XLConnect uses proven methodologies, assesses end-
user training requirements and develops customized curricula.
Additionally, technical certification training centers are located in eight
of the Company's 27 locations and provide vendor-certified instructors.
Managed Services
XLConnect's managed services help clients to organize and manage their
technology resources, enable them to outsource multiple aspects of their
information technology functions and minimize their support costs from the
desktop through the LAN and WAN. XLConnect's managed services reduce
clients' costs of technology ownership, allowing them to focus on their
core competencies and reduce their in-house support staffs.
Technology Selection, Deployment and Management Services. XLConnect
provides technology selection, procurement and deployment, asset
management, software distribution and other support services. XLConnect
places personnel on-site and dispatches personnel as needed to provide
desktop and LAN support services. In addition, XLConnect also provides
hardware repair services when requested by clients. Typically, XLConnect
subcontracts a significant amount of these services to nationally
recognized hardware repair providers.
Network Management. XLConnect provides remote network monitoring and
diagnostics through its Network Management Center, minimizing the client's
need for costly on-site service. The Network Management Center is able to
detect failures throughout clients' LANs and WANs, to troubleshoot routers,
hubs, file servers and desktop devices remotely and to dispatch technicians
if necessary. In addition, XLConnect will provide remote network
management over the Internet for Microsoft NT and Novell based file server
environments. XLConnect also provides network management services at
clients' sites.
Help Desk. XLConnect's help desk services provide software and network
administration support, 24 hours a day, seven days a week, both on-site at
the client and remotely from the Company's Help Desk Centers. Most of the
calls involve software support for the clients' end-users.
Telecommunications Services
XLConnect's telecommunications services include the provision of data,
microwave and voice transmission services. To provide these services,
XLConnect has alliances with several leading telecommunications carriers
and Internet service providers.
XLConnect is a non-facilities-based sales agent, and in limited
circumstances a reseller, of value-enhanced services including voice,
Internet access, ISDN and frame relay services, utilizing public switched
and dedicated private networks.
Customers
No customer accounted for more than 10% of XLConnect's revenues during
fiscal 1997. Sales to XLConnect's top 25 customers accounted for
approximately 37% of its revenues. XLConnect does not believe that the
loss of any one customer would have a material adverse effect on its
business.
Indirect Business (Discontinued Operation)
The Company provided the distribution of microcomputers and related
equipment to network integrators and resellers, through a business-to-
business approach. Although the Indirect Business had historically
generated positive cash flows for the Company, it more recently had
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 was no longer generating positive cash flow. These factors
included: 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 was 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 were negatively
impacted. Product allocation and cash incentives are used by many vendors as
an incentive for early payment.
In the past, certain vendors of the Company required resellers to purchase
products from only one source. All of the Company's major vendors changed
their policy, allowing either "open sourcing" or "second sourcing"
(collectively "open sourcing") which permits resellers to purchase products
from more than one source. The decision to adopt open sourcing was made by
two of the Company's largest vendors during the third quarter of fiscal
1996. These vendors' products historically totaled approximately 30% to
36% of the Company's revenues. As a result of open sourcing, competitive
pricing pressures throughout the industry intensified and customer and
brand loyalty was reduced. The Company believes that this change had an
adverse effect on the Indirect Business' (and therefore the Company's)
results from operations and its financial position.
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 $78.0 million (the "RND Transaction"). On July 16, 1997, the
shareholders of the Company approved the RND Transaction and on July 18,
1997, the sale was consummated. The purchase price was paid by assumption
of liabilities, based on the estimated balance sheet of the Indirect
Business at the time of closing. The Company paid to Ingram approximately
$4.5 million, which was the amount by which the estimated net assumed
liabilities exceeded the purchase price.
Three separate escrow accounts were established as part of the RND
Transaction. An escrow in the amount of $10.0 million was established for
final settlement of any purchase price adjustments and indemnity claims.
This escrow was funded by an intercompany payable due from the Indirect
Business to the Company, which was paid by Ingram into escrow. Another
escrow account in the amount of $2.5 million was established pending
resolution of certain issues between the Company and Ingram relating to
pre-closing revenues. A third escrow account in the amount of $5.0 million
was established to secure the Company's obligations under the Amended and
Restated Volume Purchase Agreement (the "Supply Agreement"). This escrow was
to be released after the Company completed its obligations under the Supply
Agreement. Under the terms of the Supply Agreement, XLSource agreed to
order 100% of its product requirements available from Ingram, of no less
than $1.8 billion, over a three-year period. The Company was also required
to provide a $7.5 million irrevocable letter of credit in favor of Ingram
to secure further the Company's obligations under the Supply Agreement.
On January 7, 1998, the Company and Ingram reached an agreement, dated as
of November 21, 1997, whereby the material outstanding issues relating to
the RND Transaction were settled. As a part of the agreement, which became
effective as of January 7, 1998, the Company and Ingram agreed to the
following:
(a) The Supply Agreement was terminated and the Company and Ingram
entered into a standard primary source supply agreement. The new supply
agreement has no minimum purchase requirements or other volume purchase
commitments and can be terminated with 30 days written notice by either
party.
(b) The escrow account in the amount of $5.0 million plus accrued
interest, which was established to secure the Company's obligations under
the Supply Agreement, was released to Ingram.
(c) The escrow account in the amount of $2.5 million plus accrued
interest, which was established pending resolution of certain issues
between the Company and Ingram relating to revenues, was released to the
Company.
(d) All closing balance sheet issues and purchase price adjustments
have been resolved. With respect to the escrow account in the amount of
$10.0 million, which was established for final settlement of any purchase
price adjustments and indemnity claims, Ingram received approximately $3.6
million plus accrued interest thereon, the Company received approximately
$4.4 million plus accrued interest thereon and $2.0 million remained in
escrow to cover any indemnity claims. Subsequent to January 31, 1998, the
remaining $2.0 million escrow was released to the Company.
(e) The $7.5 million irrevocable letter of credit used to secure the
Company's obligations under the Supply Agreement was terminated and
replaced by a $5.0 million irrevocable letter of credit to cover any
indemnity claims. The letter of credit will expire no later than July 18,
2000.
Competition
Competition in the microcomputer industry is intense, principally in the
areas of price, product availability and technical consulting, support and
service. The Company competes 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. Certain competitors have greater
technical, marketing and financial resources than the Company.
XLConnect competes in rapidly changing markets that are intensely
competitive. These markets are highly fragmented with many direct and
indirect competitors in each of them. XLConnect believes that the
principal competitive factors for its services include technical expertise,
breadth of service offerings, geographic reach, quality performance, client
service and support, reputation, price of services and financial stability.
XLConnect's competitors include the services organizations of established
computer product manufacturers, value-added resellers, systems integrators
and consultants, aggregators, distributors, specific service providers and
long distance carriers and RBOCs. Many of XLConnect's current and potential
competitors have substantially longer operating histories and financial,
sales, marketing, technical and other competitive resources which are
substantially greater than those of XLConnect. As a result, such
competitors may be better able to respond or adapt to new or emerging
technologies and changes in client requirements or to devote greater
resources than XLConnect to XLConnect's markets, either through internal
efforts or by forming strategic alliances with hardware or software vendors,
telecommunication providers or other competitors of XLConnect, to offer new
and improved services to XLConnect's clients or to increase their efforts
to gain and retain market share through competitive pricing. There can be
no assurance that XLConnect will be able to continue to compete successfully.
Trademarks and Service Marks
The trademarks or service marks "The Future Now, Inc.," "IE," "IE
Intelligent Electronics," "XLConnect," "XLConnect Solutions,"
"XLConnectNets," "XLSource," and the design of the XLConnect logo are in
use and 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.
Employees
As of January 31, 1998, the Company had 1,646 full-time employees, of which
approximately 1,500 were employed by XLConnect. No employee is represented
by a labor union and the Company believes that its employee relations are
good.
Item 2. PROPERTY
The Company leases approximately 16,000 square feet in Exton, Pennsylvania,
primarily for its principal executive offices with a lease term expiring on
December 31, 1998. In addition, the Company leases facilities for the
XLConnect and XLSource branch locations expiring at various dates between
1998 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 reached a 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. This
settlement was approved by the Court on November 26, 1997 and became final
upon the expiration of the thirty day appeal period. Of the $10 million,
the Company contributed $3.8 million and the balance was funded by
insurance.
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.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market (symbol
INEL). As of March 26, 1998, there were 972 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 the Nasdaq Stock Market during each
fiscal quarter within the two most recent fiscal years:
Quarter ended High Low
----------------- ----------- ---------
January 31, 1998 $ 5 5/8 $ 4 7/16
November 1, 1997 $ 5 13/16 $ 3 1/32
August 2, 1997 $ 3 3/4 $ 2 3/8
May 3, 1997 $ 4 3/4 $ 2 1/4
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
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 the year ended
January 28, 1995 ("fiscal 1994"), the quarterly dividend was increased to
$0.10 per share on Common Stock. In the fourth quarter of the year ended
February 3, 1996 ("fiscal 1995"), the quarterly dividend on Common Stock
was suspended. It is unlikely that the quarterly dividend on Common Stock
will be resumed.
PAGE
<PAGE>
Item 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA(1) for fiscal 1997, the year ended February 1,
1997 ("fiscal 1996"), fiscal 1995, fiscal 1994 and fiscal 1993 (in thousands,
except per share data)
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Revenues
<S> <C> <C> <C> <C> <C> <S>
from continuing operations $ 557,912 $ 779,642 $ 469,266 $ 10,357 $ --
Loss from continuing operations
applicable to common shareholders (39,373) (44,340) (22,557) (22,649) (882)
Basic and diluted loss from continuing
operations per common share applicable
to common shareholders $ (1.00) $ (1.27) $ (0.69) $ (0.65) $ (0.02)
Cash dividends declared per
share of Common Stock -- -- $ 0.30 $ 0.38 $ 2.24
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1994 1993
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total assets $ 207,489 $ 699,081 $ 839,349 $ 670,774 $ 577,011
Long-term debt reclassified as current -- 55,000 -- -- --
Long-term debt 5,152 3,496 80,025 -- --
Total shareholders' equity 91,854 135,471 178,036 167,484 218,850
</TABLE>
(1) See Notes 3 and 4 to the Consolidated Financial Statements for
information regarding the RND Transaction on July 18, 1997, the sale of
certain assets of XLSource and certain specified managed services contracts
and related assets of XLConnect on July 18, 1997 and the acquisition of FNOW
on August 17, 1995. As a result of the RND Transaction, the results of
operations presented have been restated to show the Indirect Business as a
discontinued operation.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations
Fiscal 1997 compared to Fiscal 1996
Revenues for fiscal 1997 decreased as compared to fiscal 1996 due to the XL
Transaction, whereby the Company sold certain assets of locations
generating approximately two-thirds of XLSource's historical revenues. On
a pro forma basis (assuming the XL Transaction was consummated at the
beginning of fiscal 1996), revenues would have been approximately $336.6
million in fiscal 1997 compared to approximately $305.4 million in fiscal
1996. Pro forma revenues generated by XLSource increased by 4.6% and XLConnect
pro forma revenues increased by 21.5%. The XLConnect increases resulted from
growth in most of its service areas.
The gross margin percent for fiscal 1997 was 14.4% compared to 9.6% for
fiscal 1996. During fiscal 1996, a major customer of the Company's 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 ($4.5 million) and vendor
payables and receivable issues ($3.2 million) were also recorded.
Excluding these charges, the gross margin percent for fiscal 1996 would
have been 11.6%. The increase in gross margin percent was primarily
attributable to an increase in revenues from the services section (XLConnect),
which generates a higher gross margin percent. On a pro forma basis (assuming
the XL Transaction was consummated at the beginning of fiscal 1996), the gross
margin percent for fiscal 1997 would have been 18.6% compared to 15.5% for
fiscal 1996, reflecting an increase in revenues from XLConnect. The pro forma
gross margin percent for XLSource increased from 7.5% in fiscal 1996 to 9.5%
in fiscal 1997. The increase reflects certain of the charges, as described
above, taken in fiscal 1996, offset, in part by continued competitive pricing
pressures and the loss of certain vendor discounts and funding as a result of
decreased purchase volumes. The pro forma gross margin percent for XLConnect
increased to 34.4% in fiscal 1997 compared to 31.7% in fiscal 1996. The
increase was primarily due to the sale of certain lower-margin services
contracts as part of the XL Transaction.
Selling, general and administrative ("SG&A") expenses decreased to
approximately $81.7 million (14.7% of revenues) in fiscal 1997 compared to
approximately $101.5 million (13.0% of revenues) in fiscal 1996. The
decrease in SG&A expenses is primarily due to the XL Transaction in July
1997 and the reduction of the corporate staff as a result of the XL and RND
Transactions, offset in part by an increase in XLConnect's SG&A expenses to
support continued growth of the services business. On a pro forma basis
(assuming the XL Transaction was consummated at the beginning of fiscal
1996), SG&A expenses would have been approximately $60.8 million (18.1% of
revenues) in fiscal 1997 compared to approximately $60.0 million (19.7% of
revenues) in fiscal 1996. The pro forma increase in SG&A expenses was
primarily due to an increase in XLConnect's SG&A expenses to support continued
growth of the services business, partially offset by headcount reductions in
the Company's corporate staff and at XLSource. It is anticipated that the
decrease in the corporate staff and at XLSource will somewhat mitigate the
continued increase in expenses related to XLConnect's growth.
Amortization of intangibles decreased in fiscal 1997 compared to fiscal
1996 as a result of the XL Transaction which eliminated a portion of the
goodwill associated with the FNOW acquisition.
Interest expense decreased in fiscal 1997 compared to fiscal 1996 as a
result of the proceeds from the XLConnect initial public offering in
October 1996, the sale of Preferred Stock in October 1996 and January 1997
and the proceeds from the XL Transaction, which were used to repay
outstanding debt. Investment and other income increased as the Company's
investable cash increased due to the factors above.
For fiscal 1997, the Company's effective tax rate was a 13.2% provision
compared to a 11.8% benefit in fiscal 1996. The change in the Company's
effective tax rate was primarily due to the write-off of non-deductible
goodwill as part of the XL Transaction, partially offset by the use of the
Company's net operating losses to offset taxable income in the second half
of fiscal 1997.
Fiscal 1996 Compared to Fiscal 1995
Revenues increased 66.1% in fiscal 1996 compared to fiscal 1995 as a result
of the acquisition of FNOW in August 1995 and the subsequent inclusion of
its operating results for the full year in fiscal 1996 compared to only 24
weeks in fiscal 1995.
The gross margin percent for fiscal 1996 was 9.6% compared to 11.2% for
fiscal 1995. The decrease in gross margin percent in fiscal 1996 compared
to fiscal 1995 was primarily due to approximately $15.7 million of charges
recorded in fiscal 1996. Excluding these charges, the gross margin percent
for fiscal 1996 would have been 11.6%, reflecting an increase in revenues
from the services sector (XLConnect), which generates a higher gross margin
percent.
SG&A expenses increased to approximately $101.5 million (13.0% of revenues)
in fiscal 1996 compared to approximately $64.3 million (13.7% of revenues)
in fiscal 1995. The increase in SG&A expenses is due primarily to the
inclusion of FNOW's operating costs for the full year in fiscal 1996 compared
to only 24 weeks in fiscal 1995, partially offset by savings realized as a
result of workforce reductions which took place in fiscal 1995.
Amortization of intangibles increased in fiscal 1996 compared to fiscal
1995 due to a full year of goodwill amortization associated with the FNOW
acquisition.
Investment and other income 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.
The Company's effective tax rate for fiscal 1996 was an 11.8% benefit
compared to a 34.3% benefit for fiscal 1995. The change in the effective
tax rate was due primarily to the increase in the valuation allowance for
deferred tax assets.
Results of Discontinued Operation and the RND Transaction
For fiscal 1997, fiscal 1996 and fiscal 1995, the pre-tax income (loss) on
discontinued operations was approximately $(19.0) million, $(60.5) million
and $7.8 million, respectively. These changes were due to lower revenues
and gross margin percent as a result of increased competitive pressures
throughout the industry primarily due to open sourcing and the uncertainty
of the future of the Indirect Business. The Indirect Business experienced
a trend of declining sales caused by the Company's inability to retain and
attract customers resulting from a number of factors. These factors
included: 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); increased competition due to open sourcing;
and continued consolidation in the reseller channel. In addition, the
Indirect Business was no longer able to take advantage of cash incentives
offered by vendors due to the limited financial resources available to the
Company.
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
historically totaled approximately 30% to 36% of the Company's revenues.
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 undiscounted 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 Connect 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 fiscal 1996
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.
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 $78.0 million. On July 16, 1997, the shareholders of the
Company approved the sale of the Indirect Business as part of the RND
Transaction and on July 18, 1997, the sale was consummated. The purchase
price was paid by assumption of liabilities, based on the estimated balance
sheet of the Indirect Business at the time of closing. The Company paid to
Ingram approximately $4.5 million, which was the amount by which the
estimated net assumed liabilities exceeded the purchase price.
Three separate escrow accounts were established as part of the RND
Transaction. An escrow in the amount of $10.0 million was established for
final settlement of any purchase price adjustments and indemnity claims.
This escrow was funded by an intercompany payable due from the Indirect
Business to the Company, which was paid by Ingram into escrow. Another
escrow account in the amount of $2.5 million was established pending
resolution of certain issues between the Company and Ingram relating to
pre-closing revenues. A third escrow account in the amount of $5.0 million
was established to secure the Company's obligations under Supply Agreement.
This escrow was to be released after the Company completed its obligations
under the Supply Agreement. Under the terms of the Supply Agreement,
XLSource agreed to order 100% of its product requirements available from
Ingram, of no less than $1.8 billion, over a three-year period. The Company
was also required to provide a $7.5 million irrevocable letter of credit
in favor of Ingram to secure further the Company's obligations under the
Supply Agreement.
On January 7, 1998, the Company and Ingram reached an agreement, dated as
of November 21, 1997, whereby the material outstanding issues relating to
the RND Transaction were settled. As a part of the agreement, which became
effective as of January 7, 1998, the Company and Ingram agreed to the
following:
(a) The Supply Agreement was terminated and the Company and Ingram
entered into a standard primary source supply agreement. The new supply
agreement has no minimum purchase requirements or other volume purchase
commitments and can be terminated with 30 days written notice by either
party.
(b) The escrow account in the amount of $5.0 million plus accrued
interest, which was established to secure the Company's obligations under
the Supply Agreement, was released to Ingram.
(c) The escrow account in the amount of $2.5 million plus accrued
interest, which was established pending resolution of certain issues
between the Company and Ingram relating to revenues, was released to the
Company.
(d) All closing balance sheet issues and purchase price adjustments
have been resolved. With respect to the escrow account in the amount of
$10.0 million, which was established for final settlement of any purchase
price adjustments and indemnity claims, Ingram received approximately $3.6
million plus accrued interest thereon, the Company received approximately
$4.4 million plus accrued interest thereon and $2.0 million remained in
escrow to cover any indemnity claims. Subsequent to January 31, 1998, the
remaining $2.0 million escrow was released to the Company.
(e) The $7.5 million irrevocable letter of credit used to secure the
Company's obligations under the Supply Agreement was terminated and
replaced by a $5.0 million irrevocable letter of credit to cover any
indemnity claims. The letter of credit will expire no later than July 18,
2000.
As a result of the RND Transaction, the Company has recorded a pre-tax gain
of approximately $11.5 million, net of transaction costs, and a tax
provision of approximately $4.6 million. Results of the Indirect Business
have been reported separately as a discontinued operation in the
accompanying Consolidated Statements of Operations.
Liquidity and Capital Resources
The Company has financed its operations to date from stock offerings, bank
and subordinated borrowings, inventory financing, sales of businesses 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 1997, cash used by operating activities totaled approximately
$21.3 million compared to approximately $34.0 million of cash used in
fiscal 1996. This change can be attributed primarily to the lower
operating loss and an increase in accounts payable and accrued liabilities,
partially offset by an increase in accounts receivable in fiscal 1997
compared to fiscal 1996.
At January 31, 1998, the Company had cash and cash equivalents of $46.6
million compared to $42.9 million at February 1, 1997. The increase is
primarily due to the proceeds from the XL Transaction, partially offset by
the repayment of the long-term debt reclassified as current, operating
losses in the first and second quarters of fiscal 1997 and losses
attributed to the discontinued operation. In addition, at January 31,
1998, the Company had approximately $15.8 million in escrow classified as a
current asset pending resolution of the XL Transaction closing balance
sheet and accounts receivable issues and indemnity claims related to the
RND Transaction. Subsequent to January 31, 1998, the closing balance sheet
and accounts receivable issues related to the XL Transaction were resolved
with approximately $13.8 million of the escrow being released to the Buyer
and the Company paying approximately $4.6 million to the Buyer. In
addition, the $2.0 million escrow related to indemnity claims from the RND
Transaction was released to the Company. Working capital was positive
$43.6 million at January 31, 1998 compared to negative working capital of
$18.3 million at February 1, 1997. The reason for the negative working
capital was the reclassification of $55 million of long-term debt to a
current liability. Without this reclassification, the Company would have
had positive working capital of $36.7 million as of February 1, 1997.
The increase in working capital at January 31, 1998 is due primarily to
proceeds from the XL Transaction and the sale of the Indirect Business (which
had negative working capital at February 1, 1997) in the RND Transaction,
partially offset by the repayment of the long-term debt reclassified as
current.
At January 31, 1998, the Company had a $55 million financing agreement with
a finance company, of which $17.7 million was available after considering
the borrowing base formula (including the reduction due to the $5.0 million
irrevocable letter of credit to secure any indemnity claims brought by
Ingram) and trade payables outstanding to a vendor related to the finance
company.
In the fourth quarter of fiscal 1995, the Board of Directors suspended the
Company's quarterly dividend.
If the Mergers are not completed, based on the Company's expected level of
operations, including plans to improve the performance of the remaining
locations 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 for the next twelve months.
Sale of the Company and XLConnect
On March 4, 1998, the Company and XLConnect executed an Agreement and Plan
of Merger with Xerox, whereby Xerox, will acquire through the Mergers (i)
all of the outstanding capital stock of the Company in exchange for cash in
the amount of $7.60 per share and (ii) all of the outstanding capital stock
of XLConnect not owned by the Company in exchange for cash in the amount of
$20.00 per share. The closing of the Mergers is subject to shareholder
approval of both the Company and XLConnect at meetings currently anticipated
to occur no later than June 30, 1998 and other customary terms and
conditions. However, there can be no assurance that the Mergers will be
completed. After the closing of the Mergers, the Company and XLConnect will
be wholly-owned subsidiaries of Xerox.
Inflation and Seasonality
The Company believes that inflation has not had a material impact on its
operations or liquidity to date. The Company believes that its business is
subject to some seasonality, and that weaker sales in the services part of
the business (XLConnect) may be experienced during the fourth quarter due
to fewer business days and plant closings around the holidays. The
computer products part of the business (XLSource) follows a seasonal pattern
with peaks occurring near the end of the calendar year.
Year 2000 Issues
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information in the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations or systems
failures. Based on preliminary information, costs of addressing potential
problems are not currently expected to have a material adverse impact on
the Company's financial position. However, if the Company, its customers
or vendors are unable to resolve such processing issues in a timely manner,
they could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.
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>
REPORTS OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
The Board of Directors and Shareholders
Intelligent Electronics, Inc.
We have audited the accompanying consolidated balance sheet of Intelligent
Electronics, Inc. and subsidiaries as of January 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Intelligent Electronics, Inc. and subsidiaries as of January 31, 1998, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, PA
April 2, 1998
- ---------------------------------------------------------------------------
To the Board of Directors and Shareholders
Intelligent Electronics, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of shareholders' equity and of cash flows as of
and for each of the two years in the period ended February 1, 1997 present
fairly, in all material respects, the financial position, results
operations and cash flows of Intelligent Electronics, Inc. and its
subsidiaries as of and for each of the two 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.
We have not audited the consolidated financial statements of Intelligent
Electronics, Inc. for any period subsequent to February 1, 1997.
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)
January 31, February 1,
1998 1997
----------- -----------
Assets
------
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 46,586 $ 42,881
Escrow receivables 15,813 --
Accounts receivable (net of allowance for doubtful
accounts of $3,994 in 1997 and $8,101 in 1996) 63,323 149,107
Inventory 2,628 311,669
Prepaid expenses and other current assets 1,656 4,834
Deferred income taxes 7,617 11,861
----------- ----------
Total current assets 137,623 520,352
Property and equipment, net 9,885 58,712
Intangible assets, primarily goodwill (net of accumulated
amortization of $7,014 in 1997 and $7,389 in 1996) 43,576 91,914
Other assets 16,405 28,103
----------- ----------
Total assets $ 207,489 $ 699,081
=========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 16 $ 3,486
Accounts payable 40,473 430,107
Accrued liabilities 32,561 49,434
Income taxes payable 7,695 600
Accrued liabilities for sale of business 13,269 --
Long-term debt reclassified as current -- 55,000
----------- ----------
Total current liabilities 94,014 538,627
Long-term debt 5,152 3,496
Other long-term liabilities 4,935 11,015
Minority interest 11,534 10,472
Commitments and contingencies (Notes 3, 6, 7, 10, 14, 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,
issued and outstanding: none in 1997 and 15,000 in 1996 -- 750
Common stock $.01 par value per share:
Authorized 100,000,000 shares; issued: 47,052,959
in 1997 and 41,352,973 in 1996 471 413
Additional paid-in capital 286,210 284,666
Treasury stock, at cost (5,254,868 shares in 1997 and
5,303,332 shares in 1996) (66,696) (67,311)
Retained deficit (128,131) (83,047)
----------- ----------
Total shareholders' equity 91,854 135,471
----------- ----------
Total liabilities and shareholders' equity $ 207,489 $ 699,081
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Year ended
--------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 557,912 $ 779,642 $ 469,266
Cost of goods sold 477,412 704,926 416,882
----------- ----------- -----------
Gross profit 80,500 74,716 52,384
----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 81,719 101,499 64,283
Amortization of intangibles, primarily goodwill 3,781 4,960 2,300
Branch closure costs -- 9,790 --
----------- ----------- -----------
Total operating expenses 85,500 116,249 66,583
----------- ----------- -----------
Loss from operations (5,000) (41,533) (14,199)
Other income (expense):
Investment and other income, net 1,493 200 2,099
Interest expense (3,327) (8,712) (5,838)
Loss on XL Transaction (26,749) -- --
----------- ----------- -----------
Loss from continuing operations before provision
(benefit) for income taxes, equity in loss of affiliate,
and minority interest (33,583) (50,045) (17,938)
Provision (benefit) for income taxes 4,443 (5,895) (6,143)
----------- ----------- -----------
Loss from continuing operations before
equity in loss of affiliate and minority interest (38,026) (44,150) (11,795)
Equity in loss of affiliate (net of benefit of $1,123) -- -- (10,762)
----------- ----------- -----------
Loss from continuing operations
before minority interest (38,026) (44,150) (22,557)
Minority interest (990) (70) --
----------- ----------- -----------
Loss from continuing operations (39,016) (44,220) (22,557)
Discontinued operation:
Income (loss) from discontinued operation (net of tax
provision (benefit) of $(6,875), $(623) and $4,694) (12,095) (59,834) 3,069
Gain on sale of discontinued operation (net of tax
provision of $4,582) 6,875 -- --
----------- ----------- -----------
Net loss (44,236) (104,054) (19,488)
Preferred stock dividend 357 120 --
----------- ----------- -----------
Net loss applicable to common shareholders $ (44,593) $ (104,174) $ (19,488)
=========== =========== ===========
Basic and diluted loss per share:
Continuing operations $ (1.00) $ (1.27) $ (0.69)
Discontinued operation (0.30) (1.71) 0.10
Sale of discontinued operation 0.17 -- --
----------- ----------- -----------
Basic and diluted net loss per share
applicable to common shareholders $ (1.13) $ (2.98) $ (0.59)
=========== =========== ===========
Weighted average number of common shares
and share equivalents outstanding: 39,539 34,988 32,794
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands, except share-related data)
Series B Total
Convertible Additional share-
Common preferred paid-in Treasury Retained holders'
stock stock capital stock deficit equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 on
securities and investments -- -- 38 -- -- 38
Net loss applicable to common
shareholders -- -- -- -- (104,174) (104,174)
---------- ---------- ---------- ---------- ---------- ----------
Balance at February 1, 1997 413 750 284,666 (67,311) (83,047) 135,471
Issuance of 5,699,986 shares upon
conversion of preferred stock 58 (750) 1,188 -- -- 496
Reissuance of 48,464 shares of treasury
stock for employee stock purchase plan -- -- -- 615 (491) 124
Warrants and common stock issued
by subsidiary -- -- 356 -- -- 356
Net loss applicable to common
shareholders -- -- -- -- (44,593) (44,593)
---------- ---------- ---------- ---------- ---------- ----------
Balance at January 31, 1998 $ 471 -- $ 286,210 $ (66,696) $(128,131) $ 91,854
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended
-------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (44,236) $(104,054) $ (19,488)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 9,425 11,605 5,911
Write-off of property and equipment 2,849 227 --
Branch closure costs -- 9,790 --
Deferred taxes 2,865 (4,293) 3,242
Provision for losses on trade receivables 5,694 1,794 857
Provision for write-down of inventory 2,919 3,842 446
Minority interest in net income of XLConnect 990 70 --
(Income) loss from discontinued operation 12,095 59,834 (3,069)
Gain on RND Transaction (6,875) -- --
Equity in loss of affiliate -- -- 11,885
Changes in assets and liabilities excluding
effects of business sales and acquisitions:
Accounts receivable (34,064) 30,073 (26,341)
Inventory (7,630) 21,820 1,491
Other current assets 402 753 5,225
Accounts payable 13,426 (57,457) (47,524)
Accrued and other current liabilities 20,845 (8,018) (3,024)
---------- ----------- ----------
Net cash used for operating activities (21,295) (34,014) (70,389)
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of marketable securities -- -- 8,675
Proceeds from XL Transaction 135,740 -- --
Transfers to escrow receivables (50,313) -- --
Transfers from escrow receivables 34,500 -- --
Acquisition of property and equipment,
net of disposals (7,920) (5,163) (2,994)
Other (744) (560) (779)
---------- ----------- ----------
Net cash provided by (used for)
investing activities 111,263 (5,723) 4,902
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from working
capital advances -- (7,540) --
Proceeds from long-term debt 5,500 -- 75,000
Cash dividends paid -- -- (12,869)
Net proceeds from XLConnect initial
public offering -- 45,110 --
Net proceeds from sale of preferred stock -- 14,206 --
Repayment of long-term debt reclassified
as current (55,000) -- --
Repayment of long-term debt -- (20,000) --
Repayment of FNOW's bank debt -- -- (50,009)
Proceeds from exercise of stock options 84 1,984 2,990
Proceeds from employee stock purchase plan 124 439 --
Reduction in capital lease obligations (606) (437) (270)
---------- ----------- ----------
Net cash provided by (used for)
financing activities (49,898) 33,762 14,842
---------- ----------- ----------
Net cash provided by (used for)
continuing operations 40,070 (5,975) (50,645)
Cash provided by (used for)
discontinued operation (36,365) 14,238 16,236
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,705 8,263 (34,409)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,881 34,618 69,027
---------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 46,586 $ 42,881 $ 34,618
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Intelligent Electronics, Inc. (the "Company") provides information
technology products, services and solutions to corporate customers,
educational institutions and governmental agencies in the United States,
primarily through its branch locations. 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 then owned
by the Company (See Note 4). 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 5). On July
18, 1997, the Company sold certain assets of XLSource and XLConnect sold
certain specified managed services contracts and related assets (see Note
3). Also on July 18, 1997, the Company sold its business (the "Indirect
Business") of providing information technology products, services and
solutions to network integrators and resellers and, accordingly, the
Indirect Business is treated as a discontinued operation in the accompanying
financial statements (see Note 3).
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. Unless otherwise indicated, amounts and disclosures referred to
herein relate to continuing operations.
Preparation of Financial Statements
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.
Definition of Fiscal Year
The fifty-two week periods ended January 31, 1998 and February 1, 1997 and
the fifty-three week period ended February 3, 1996 are referred to herein
as "fiscal 1997," "fiscal 1996" and "fiscal 1995," respectively.
Cash and Cash Equivalents
Cash and cash equivalents comprise the Company's cash balances and short-
term investments with an initial maturity of less than ninety days and
include money-market funds and commercial paper. Short-term investments
totaled approximately $35.9 million and $37.5 million at January 31, 1998
and February 1, 1997, respectively. The carrying amount of cash and short-
term investments 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 No. 13 are
capitalized and depreciated over the lease term. Depreciation expense
totaled approximately $5.6 million, $6.6 million and $3.6 million for
fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Accumulated
depreciation was approximately $20.4 million at January 31, 1998 and $40.3
million (including accumulated depreciation of assets which were part of
the discontinued operation) at February 1, 1997.
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 undiscounted 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, which were part of the discontinued operation (See Note
3), and wrote-down an additional $8 million of goodwill relating to the
portion of the goodwill associated with closed XLSource branch locations
(See Note 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 1997, fiscal 1996 and fiscal 1995 for
vendor supported marketing programs are as follows (in thousands):
Fiscal 1997 Fiscal 1996 Fiscal 1995
------------ ----------- -----------
Revenues $ 1,545 $ -- $ --
Product cost 80 3,406 1,865
SG&A 1,594 1,452 2,445
------------ ----------- -----------
Total funding $ 3,219 $ 4,858 $ 4,310
============ =========== ===========
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("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.
Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial
instruments were made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107. Disclosures about Fair Value of
Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies.
Cash and cash equivalents, accounts receivable and accounts payable - The
carrying amount of these items are a reasonable estimate of their fair
value due to the short-term maturity of these instruments.
Long-term debt - Rates currently available to the Company for debt with
similar terms is used to estimate its fair value. Accordingly, the
carrying amount of debt is a reasonable estimate of its fair value.
Loss Per Share Applicable to Common Shareholders
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128"), which is designed to simplify the
existing computational guidelines for the earnings per share ("EPS")
information provided in financial statements, to revise the disclosure
requirements and to increase the comparability of EPS data on an
international basis. Pursuant to SFAS 128, the Company reflected on its
Consolidated Statements of Operations basic EPS and diluted EPS for fiscal
1997, fiscal 1996 and fiscal 1995. Adoption of SFAS No. 128 did not impact
the amount of EPS reported and, due to the Company's losses in each of the
past three years, there is no difference in the amounts calculated as basic
EPS and diluted EPS. The weighted average number of shares used to
calculate the basic and diluted loss per share was 39,538,949 in fiscal
1997, 34,987,262 in fiscal 1996 and 32,794,047 in fiscal 1995. There were
no options included in the diluted EPS calculation for the years presented
as the inclusion of options would have been anti-dilutive.
Accrued cumulative preferred stock dividends (6% per annum) are deducted
from the net loss in determining net loss applicable to common
shareholders. Treasury stock transactions are recorded on their trade date
and reduce weighted average shares outstanding from that date.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS No. 130"), which is effective for financial statements issued for
periods beginning after December 15, 1997. SFAS No. 130 requires the
presentation of comprehensive income and establishes standards for
reporting its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. The Company does not expect
the adoption of SFAS No. 130 to have a material effect on its reported
financial condition or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"), which is effective for
financial statements issued for periods beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way publicly-traded companies
report information about operating segments as well as disclosures about
products and services, geographic areas and major customers. The Company
does not expect the adoption of SFAS No. 131 to have a material effect on
its reported financial condition or results of operations.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits ("SFAS No. 132"), which is
effective for financial statements issued for periods beginning after
December 15, 1997. SFAS No. 132 standardizes the disclosure requirements
of previous standards. The Company does not expect the adoption of SFAS No.
132 to have a material effect on its reported financial condition or
results of operations.
(2) SUBSEQUENT EVENT - SALE OF THE COMPANY AND XLCONNECT
On March 4, 1998, the Company and XLConnect executed an Agreement and Plan
of Merger with Xerox, whereby Xerox, will acquire through the Mergers (i)
all of the outstanding capital stock of the Company in exchange for cash in
the amount of $7.60 per share and (ii) all of the outstanding capital stock
of XLConnect not owned by the Company in exchange for cash in the amount of
$20.00 per share. The closing of the Mergers is subject to shareholder
approval of both the Company and XLConnect at meetings currently anticipated
to occur no later than June 30, 1998 and other customary terms and conditions.
However, there can be no assurance that the Mergers will be completed.
After the closing of the Mergers, the Company and XLConnect will be wholly-
owned subsidiaries of Xerox.
(3) SALES OF BUSINESSES
XL Transaction
On July 18, 1997, the Company and certain of its direct and indirect
wholly-owned subsidiaries and XLConnect consummated the sale of certain
assets under an Asset Purchase Agreement, as amended (the "Purchase
Agreement") with GE Capital Information Technology Solutions Acquisition
Corp. (the "Buyer"), a subsidiary of GE Capital Information Technology
Solutions, Inc. ("GECITS"), pursuant to which:
(a) The Company sold to the Buyer certain assets related to XLSource,
consisting primarily of the inventory, accounts receivable and customer
contracts relating to 20 of the 24 XLSource locations and real property
leases and fixed assets related to six of such 20 locations; and
(b) XLConnect sold to the Buyer certain specified managed services
contracts and related assets, consisting principally of accounts receivable
and fixed assets.
The purchase price paid by the Buyer in the transaction pursuant to the
Purchase Agreement (the "XL Transaction") was approximately $136.5 million,
based on the estimated net book value of the assets being sold of
approximately $95.0 million. Of the total purchase price paid in the XL
Transaction, XLConnect received approximately $10.3 million (based on the
estimated net book value of the assets acquired from it of approximately
$5.6 million). Of the purchase price, approximately $102.9 million was
paid in cash at closing, with approximately $32.8 million paid into escrow.
Approximately $22.8 million of the total escrow was subject to release if
and when the consent of two customers, whose contracts with XLSource were
assigned in the transaction, are obtained. On September 15, 1997, $19.0
million was released as a result of obtaining one of the required consents.
The remaining $10.0 million in escrow was to be retained for up to 240 days
to fund purchase price adjustments and obligations of the Company and
XLConnect under the Purchase Agreement, including the obligation to
repurchase from the Buyer any accounts receivable which were sold to the
Buyer and remain uncollected 120 days after the closing date.
The Company and the Buyer reached an agreement, dated as of February 6,
1998, whereby the outstanding issues related to the XL Transaction have
been settled. As part of the agreement, the Company and the Buyer agreed
to the following:
(a) All closing balance sheet issues have been resolved. The Buyer
will receive a payment from the Company of approximately $4.4 million.
(b) The Buyer assigned to the Company uncollected receivables of
approximately $14.1 million. The Company will use the balance in escrow,
approximately $13.8 million, plus a cash payment of approximately $0.3
million to fund this repurchase.
(c) The above payments will be treated as a reduction in the purchase
price.
As a result of the XL Transaction, the Company recorded a pre-tax loss
of approximately $26.7 million, net of transaction costs, plus a tax
provision of approximately $2.7 million. The tax provision is due to
differences between the tax bases of the assets being sold and their
amounts for financial reporting purposes (primarily goodwill).
RND Transaction
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 $78.0 million (the "RND Transaction"). On July 16, 1997, the
shareholders of the Company approved the RND Transaction and on July 18,
1997, the sale was consummated. The purchase price was paid by assumption
of liabilities, based on the estimated balance sheet of the Indirect
Business at the time of closing. The Company paid to Ingram approximately
$4.5 million, which was the amount by which the estimated net assumed
liabilities exceeded the purchase price.
Three separate escrow accounts were established as part of the RND
Transaction. An escrow in the amount of $10.0 million was established for
final settlement of any purchase price adjustments and indemnity claims.
This escrow was funded by an intercompany payable due from the Indirect
Business to the Company, which was paid by Ingram into escrow. Another
escrow account in the amount of $2.5 million was established pending
resolution of certain issues between the Company and Ingram relating to
pre-closing revenues. A third escrow account in the amount of $5.0 million
was established to secure the Company's obligations under the Amended and
Restated Volume Purchase Agreement (the "Supply Agreement"). This escrow was
to be released after the Company completed its obligations under the Supply
Agreement. Under the terms of the Supply Agreement, XLSource agreed to
order 100% of its product requirements available from Ingram, of no less
than $1.8 billion, over a three-year period. The Company was also required
to provide a $7.5 million irrevocable letter of credit in favor of Ingram
to secure further the Company's obligations under the Supply Agreement.
On January 7, 1998, the Company and Ingram reached an agreement, dated as
of November 21, 1997, whereby the material outstanding issues relating to
the RND Transaction were settled. As a part of the agreement, which became
effective as of January 7, 1998, the Company and Ingram agreed to the
following:
(a) The Supply Agreement was terminated and the Company and Ingram
entered into a standard primary source supply agreement. The new supply
agreement has no minimum purchase requirements or other volume purchase
commitments and can be terminated with 30 days written notice by either
party.
(b) The escrow account in the amount of $5.0 million plus accrued
interest, which was established to secure the Company's obligations under
the Supply Agreement, was released to Ingram.
(c) The escrow account in the amount of $2.5 million plus accrued
interest, which was established pending resolution of certain issues
between the Company and Ingram relating to revenues, was released to the
Company.
(d) All closing balance sheet issues and purchase price adjustments
have been resolved. With respect to the escrow account in the amount of
$10.0 million, which was established for final settlement of any purchase
price adjustments and indemnity claims, Ingram received approximately $3.6
million plus accrued interest thereon, the Company received approximately
$4.4 million plus accrued interest thereon and $2.0 million remained in
escrow to cover any indemnity claims. Subsequent to January 31, 1998, the
remaining $2.0 million escrow was released to the Company.
(e) The $7.5 million irrevocable letter of credit used to secure the
Company's obligations under the Supply Agreement was terminated and
replaced by a $5.0 million irrevocable letter of credit to cover any
indemnity claims. The letter of credit will expire no later than July 18,
2000.
As a result of the RND Transaction, the Company has recorded a pre-tax gain
of approximately $11.5 million, net of transaction costs, and a tax
provision of approximately $4.6 million. Results of the Indirect Business
have been reported separately as a discontinued operation in the
accompanying Consolidated Statements of Operations.
The results of operations of the Indirect Business excluded from continuing
operations are summarized as follows (in thousands):
Fiscal Fiscal Fiscal
1997 1996 1995
--------- ---------- ----------
Revenues $ 787,821 $2,566,915 $3,118,833
Costs and expenses 806,791 2,627,372 3,111,070
--------- ---------- ----------
Income (loss) before taxes (18,970) (60,457) 7,763
Income tax provision (benefit) (6,875) (623) 4,694
--------- ---------- ----------
Income (loss) from discontinued operation $(12,095) $ (59,834) $ 3,069
========= ========== ==========
The assets and liabilities related to the Indirect Business in the February 1,
1997 Consolidated Balance Sheet consisted of the following (in thousands):
Cash $ 41,102
Accounts receivable 32,891
Inventory 301,433
Other current assets 8,277
Property and equipment 43,674
Other long-term assets 7,335
Short-term debt (2,873)
Accounts payable (401,562)
Accrued liabilities (22,549)
Long-term debt (3,463)
Other long-term liabilities (1,084)
----------
Net assets of discontinued operation $ 3,181
==========
Unaudited pro forma results of operations of the Company for fiscal 1997
and fiscal 1996, assuming the XL Transaction and the RND Transaction were
consummated on February 4, 1996, are as follows (in thousands except per
share data):
Fiscal Fiscal
1997 1996
----------- -----------
Revenues from continuing operations $ 336,615 $ 305,367
Loss from continuing operations (1,616) (12,829)
Loss from continuing operations per share (0.04) (0.37)
Unaudited pro forma financial information presented above is not
necessarily indicative of the results of operations that would have
occurred had the XL Transaction and the RND Transaction taken place at the
beginning of the periods presented or of future results of operations.
1996 Asset Impairment
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
historically totaled approximately 30% to 36% of the Company's revenues.
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 undiscounted 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
and 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 $6.0 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.
(4) 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
decision by the Company's Board of Directors to explore 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 (in thousands):
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)
----------
Total purchase price $ 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. The businesses
of E-C and RCK were sold as part of the XL Transaction (See Note 3).
On August 17, 1995, the Company acquired FNOW by issuing 2,952,282 shares
of its Common Stock (valued at approximately $36.5 million, excluding
acquisition-related costs of approximately $1.7 million) in exchange for
all of the remaining shares (approximately 69%) of FNOW Common Stock not then
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.
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, the Company
recorded equity in loss of affiliate of approximately $10.8 million in the
accompanying Consolidated Statements of Operations.
(5) 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, 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.
(6) CREDIT FACILITIES
In September 1997, the Company's financing agreement was amended to reduce
the allowable borrowings from $225 million to $55 million, subject to a
borrowing base formula, as a result of the RND and XL Transactions and the
Company's resultant decreased need for financing. This financing agreement
was originally signed in April 1996, has a rolling eighteen month term and
is renewable for six-month periods with the consent of the lender. This
financing agreement expires on October 5, 1998. The facility can be used
for inventory financing, equipment financing and working capital purposes.
As of January 31, 1998, the interest rate was prime plus 1.0%. The Company
repaid the $55 million long-term debt reclassified as current plus all
current interest-bearing borrowings with proceeds from the XL Transaction.
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 January 31, 1998 and believes that it
will remain in compliance during fiscal 1998. In connection with this
financing arrangement, the lender has a lien on all of the Company's
assets.
In March 1997, the financing agreement was amended to remove the assets of
XLConnect and XLConnect's subsidiaries from the borrowing base. 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 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 25% of the market value (calculated daily) of the XLConnect
pledged stock.
On July 18, 1997, the Company obtained a $7.5 million irrevocable letter of
credit to secure the Company's obligations under the Supply Agreement (see
Note 3). In January 1998, the above letter of credit was canceled and
replaced by a $5.0 million irrevocable letter of credit to secure any
indemnity claims brought by Ingram. A portion of the financing agreement
has been reserved for the letter of credit and 120% of the face amount of
the letter of credit is subtracted from the borrowing base.
All borrowings under this agreement are included in accounts payable in the
Company's Consolidated Balance Sheets. As of January 31, 1998,
approximately $17.7 million was available after considering the borrowing
base formula (including the reduction due to the $5.0 million irrevocable
letter of credit) and trade payables outstanding to a vendor affiliated
with the lender.
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.
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 January 31, 1998, $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 became exercisable on February 28, 1998, at a per share
exercise price of $6.65 and expires on February 27, 2007. The third party
has agreed not to exercise the warrant prior to the earlier of the closing
of the Mergers or June 30, 1998. After considering the effects of the issuance
of the warrant and the resultant discounting of the Loan, the effective
interest rate is 7.5%. Subsequent to January 31, 1998, XLConnect borrowed
the remaining $5.5 million.
(7) LEASE OBLIGATIONS
The Company has non-cancelable operating leases for offices and equipment
that expire over the next nine years. Most of the facilities' leases
include renewal options and certain of the equipment leases have purchase
options. Rent expense recorded for fiscal 1997, fiscal 1996 and fiscal
1995 was approximately $4.0 million, $4.0 million and $2.4 million,
respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands): fiscal 1998, $4,022; fiscal 1999, $3,372; fiscal 2000,
$2,826; fiscal 2001, $2,283; fiscal 2002, $1,637; and thereafter, $2,304.
(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. At
January 31, 1998, the remaining reserve was $0.4 million.
(9) THIRD QUARTER OF FISCAL 1996 CHARGES
During the third quarter of 1996, the Company recorded charges totaling
approximately $20.1 million. Approximately $15.7 million of these charges
were recorded as cost of sales and relate to the following. A major
customer of the Company's 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 ($4.5
million) and vendor payables and receivable issues ($3.2 million). Charges
recorded as selling, general and administrative expenses consisted of
write-offs for unutilized property and equipment and miscellaneous accruals
totaling approximately $4.4 million. At January 31, 1998, the remaining
reserve was $8.2 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.
During fiscal 1997, the holder of the Preferred Stock converted all 15,000
shares of Preferred Stock into 5,699,986 shares of Common Stock. 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 was accrued until the Preferred Stock was converted into Common
Stock, at which time the cumulative dividend was paid in Common Stock.
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 January 31, 1998, the weighted average remaining
contractual life was approximately 7 years.
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.
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.
Changes in stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Option price Price
Shares Range per Share Per Share
---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <S><C> <C>
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
Granted 25,000 $ 4.25 $ 4.25
Exercised -- -- --
Canceled (1,548,615) $ 6.69 - $13.25 $ 7.97
-----------
Balance outstanding - January 31, 1998 2,905,900 $ 4.25 - $13.25 $ 9.08
===========
</TABLE>
As of January 31, 1998, there were 2,148,760 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, with a weighted
average exercise price of $9.54 per share.
Information related to stock options issued under the 1995 Long-Term
Incentive Plan and the employee and director stock option plan at January
31, 1998 is as follows:
<TABLE>
<CAPTION>
$4.25 - $6.01 - $ 9.01 -
Exercise Price Range $6.00 $9.00 $13.25
- ---------------------------------- -------- ---------- ----------
Number of stock options:
<S> <C> <C> <C>
Outstanding 25,000 1,800,900 1,080,000
Exercisable -- 1,190,760 958,000
Weighted average exercise price:
Outstanding $ 4.25 $ 7.32 $ 12.14
Exercisable -- 7.27 12.38
Weighted average remaining contractual life 9.60 years 7.76 years 5.49 years
</TABLE>
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 January
31, 1998, there were 219,960 options outstanding and exercisable at prices
ranging from $8.00 to $21.94 per share, with a weighted average exercise
price of $18.27 per share.
Information related to stock options issued with the acquisition of FNOW at
January 31, 1998 is as follows:
$15.07 -
Exercise Price Range $ 8.00 $21.94
- -------------------------------------------- -------- ---------
Number of stock options:
Outstanding 18,330 201,630
Exercisable 18,330 201,630
Weighted average exercise price:
Outstanding $ 8.00 $ 19.20
Exercisable 8.00 19.20
Weighted average remaining contractual life 5.22 years 4.85 years
As of January 31, 1998, shares of Common Stock are reserved for issuance
for the following stock options:
Shares
---------
Exercise of employee and director stock options 6,336,580
Exercise of other stock options 219,960
---------
Total 6,556,540
=========
The Company accounts for stock option awards in accordance with the
provisions of Accounting Principles Board 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 Statement of Financial Accounting Standards No.
123, the Company's net loss and net loss per share would have been as
follows (in thousands except per share data):
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
---------- ---------- ----------
Net loss applicable to common shareholders
<S> <C> <C> <C>
As reported $ (44,593) $(104,174) $ (19,488)
Pro forma (49,208) (109,391) (23,707)
Basic and diluted net loss per share applicable
to common shareholders
As reported $ (1.13) $ (2.98) $ (0.59)
Pro forma (1.24) (3.13) (0.72)
</TABLE>
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 fiscal 1997, fiscal 1996 and fiscal
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 71.5% in fiscal 1997 and 62% in fiscal 1996 and fiscal 1995; and
dividend yield of 0.0%. The weighted average fair value at grant date of
options granted in fiscal 1997, fiscal 1996 and fiscal 1995 was $2.72,
$4.18 and $6.42, respectively.
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 1997 and fiscal 1996, a total of
119,050 shares of treasury stock were re-issued pursuant to this plan.
Effective December 31, 1997, the Company terminated this plan. The impact
of the ESPP on the pro forma amounts 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.
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.
On March 3, 1998, the Company amended the Plan to designate Xerox,
including any of its wholly-owned direct and indirect subsidiaries, as a
party exempt from the provisions of the Plan. As such, the Plan will have
no effect on the proposed transaction with Xerox.
(11) INCOME TAXES
The provision (benefit) for income taxes on continuing operations consists
of the following (in thousands):
Current Deferred Total
--------- --------- ---------
Fiscal 1997
Federal $ 901 $ 2,314 $ 3,215
State 677 551 1,228
--------- --------- ---------
Total $ 1,578 $ 2,865 $ 4,443
========= ========= =========
Fiscal 1996
Federal $ (1,269) $ (4,293) $ (5,562)
State (333) - (333)
--------- --------- ---------
Total $ (1,602) $ (4,293) $ (5,895)
========= ========= =========
Fiscal 1995
Federal $ (8,303) $ 3,312 $ (4,991)
State (1,082) (70) (1,152)
--------- --------- ---------
Total $ (9,385) $ 3,242 $ (6,143)
========= ========= =========
Deferred income tax balances, and the deferred component of the provision
for income taxes, relate to the following cumulative temporary differences
(in thousands):
January 31, February 1,
1998 1997
---------- ----------
Inventory $ 180 $ 4,452
Accounts receivable reserves 2,176 5,772
Sales and acquisitions accruals 10,808 9,362
Employee benefits 1,302 2,385
Depreciation 604 413
Litigation and related contingencies 193 1,683
Net operating loss carryforwards 19,288 24,933
Other accruals 1,976 8,196
---------- ----------
36,527 57,196
Valuation allowance (19,010) (27,575)
---------- ----------
Deferred tax asset $ 17,517 $ 29,621
========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which temporary differences representing net future deductible
amounts become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, potential
limitations with respect to the utilization of loss carryforwards and tax
planning strategies in making this assessment. Based upon the projections
for future taxable income over the periods in which deferred tax assets are
deductible and the potential limitations of loss carryforwards, management
believes that it is more likely than not the Company will realize a portion
of these deductible differences, net of remaining valuation allowances at
January 31, 1998. The Company will periodically assess and re-evaluate the
status of its recorded deferred tax assets.
The Company has available approximately $53 million of net operating loss
carryforwards that expire in various years ranging from 2008 to 2013.
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 ($9,9 million at January
31, 1998 and $17.8 million at February 1, 1997) is recorded in other assets
in 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
1997 1996 1995
------ ------ ------
Federal statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit 4.4 (2.2) (3.3)
Amortization/write-off of intangibles 39.7 4.2 4.5
Change in valuation allowance (3.0) 21.2 --
Change in estimate of accrued taxes 6.2 -- --
Tax-exempt investment income -- -- (0.4)
Other 0.9 -- --
------ ------ ------
13.2 % (11.8)% (34.2)%
====== ====== ======
Pursuant to the terms of the Stock Registration and Option Agreement
between the Company and XLConnect, the Company has been provided, by
XLConnect, with a continuous, cumulative option, upon the original issuance
of shares by XLConnect, to purchase from XLConnect the number of shares of
common stock as necessary for the Company to continue to own at least 80% of
XLConnect's outstanding shares of common stock. The purchase price of such
shares will be at the then-current market price. If exercised, this option is
intended to permit the Company to continue to include XLConnect in its
consolidated federal income tax return.
The Company and XLConnect have entered into a Tax Allocation Agreement to
provide for (i) the allocation of payments of taxes for periods during
which the Company and XLConnect are included in the same consolidated group
for federal income tax purposes or the same consolidated, combined or
unitary tax returns for state, local or foreign tax purposes, (ii) the
allocation of responsibility for the filing of tax returns, (iii) the
conduct of tax audits and the handling of tax controversies, and (iv)
various related matters. For periods during which XLConnect is included in
the aforementioned returns, XLConnect will be required to pay to the
Company its allocable portion of the consolidated federal income and state
tax liability and will be entitled to receive from the Company its
allocable share of any tax benefit attributable to the use of XLConnect's
losses, if any. XLConnect will be responsible for the filing of federal,
state, local and foreign tax returns and related liabilities for itself for
all periods, to the extent not included in the Company's combined or
consolidated tax returns. Notwithstanding the Tax Allocation Agreement,
under federal income tax law, each member of a consolidated group for
federal income tax purposes is also jointly and severally liable for
federal income tax liability of each other member of the consolidated
group. Similar rules may apply under state income tax laws.
(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 (in thousands):
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
-------- -------- --------
Details of acquisitions:
<S> <C> <C>
Fair value of assets acquired -- $15,889 $245,250
Liabilities assumed and acquisition-related accruals -- 5,655 208,716
Details of other financing activities:
Accrual of Preferred Stock dividends $ 357 120 --
Conversion of Preferred Stock 15,000 -- --
Cash paid during the year for:
Interest 4,505 8,524 4,470
Income taxes 480 172 2,526
</TABLE>
(13) 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.
(14) MAJOR SUPPLIER AND CUSTOMERS
The Company purchases the majority of the products its sells through a
supply agreement with Ingram, which either party may terminate upon 30
days' written notice. In the event the Company is unable to continue its
relationship with Ingram, it believes it could establish a similar
relationship with another company in a reasonable period of time.
Because of the competitive nature of the microcomputer distribution
industry, the Company believes it could ultimately obtain terms as
beneficial as those currently offered by Ingram.
The Company's customers operate in a variety of industries, and therefore,
the Company is not dependent on any single industry as a source for
customers. No customer accounted for more than 10% of revenues of the
Company. Sales to XLSource's top 25 customers accounted for approximately
50% of its revenues for the four branches in fiscal 1997. Sales to
XLConnect's top 25 customers accounted for approximately 37% of its
revenues in fiscal 1997. The Company does not believe that the loss of any
one customer would have a material adverse effect on its business.
(15) 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 reached a 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. This
settlement was approved by the Court on November 26, 1997 and became final
upon the expiration of the thirty day appeal period. Of the $10 million,
the Company contributed $3.8 million and the balance was funded by
insurance.
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.
(16) RELATED PARTY TRANSACTIONS
The Company is a party to split-dollar life insurance agreements with a
trust established by Richard D. Sanford, Chairman of the Board and Chief
Executive Officer of the Company (of which Barry M. 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. 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. 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. On August 2, 1997, the Company paid to
Mr. Sanford, all amounts accrued up to that date, including interest, of
$2,743,170. The remaining amount of approximately $1,145,000, was accrued
as part of the RND Transaction and will be paid to Mr. Sanford upon the sale
of the Company to Xerox.
On January 23, 1998, Mr. Sanford entered into an agreement with the Company
which provides for Mr. Sanford to receive certain benefits and payments
upon a change in control of the Company. Upon a change in control, Mr.
Sanford will be entitled to receive continued health and medical benefits
for him and his family for one year, a $40,000 lump sum payment to cover
administrative support for one year, a $30,000 lump sum payment to cover
office rent for one year and the receipt of two vehicles and certain other
miscellaneous equipment from the Company with a book value of approximately
$75,000. In addition, the Company will exercise its right to terminate
the split-dollar agreements discussed above, and the Company has agreed that
it will not be entitled to reimbursement for any excess of the premiums paid
by the Company over the cash surrender value of the life insurance policies
to which the split-dollar agreements pertain. The Company estimates this
excess to be approximately $138,000.
The Company and XLConnect have entered into a number of intercompany
agreements for the purpose of defining certain relationships.
Amended and Restated Intercompany Debt Agreement
Pursuant to the Amended and Restated Intercompany Debt Agreement dated as of
March 26, 1997, the Company will reimburse XLConnect for the difference
between LIBOR plus 0.75% and the interest rate paid by XLConnect for the
current financing agreement and other direct expenses that XLConnect would
not have been required to incur if it had entered into its own unsecured
credit facility.
Amended and Restated Services Agreement
Pursuant to the Amended and Restated Services Agreement dated as of
September 30, 1997 (the "Services Agreement"), the Company has provided
XLConnect various services including insurance coverage, employee benefits
coverage, human resources, administration and tax management services that
the Company has historically provided to XLConnect. XLConnect pays the
direct costs of these services. To the extent that the direct costs of
the services provided by the Company cannot be separately measured,
XLConnect pays its allocable portion of the total cost to the Company for
such services. The Services Agreement also provides for the Company to
furnish additional services as may be reasonably requested by XLConnect and
for the Company to permit the employees of XLConnect to continue to participate
in the benefits plans and programs sponsored by the Company.
Effective July 1, 1997, XLSource's operations are being managed by
XLConnect. The Services Agreement provides for XLConnect to perform
certain management, marketing and administrative services for the Company
for $225,000 per month. These services include executive oversight,
operations management at the corporate and branch levels, practice development,
sales and sales management, marketing services, professional recruitment and
legal, financial and accounting services.
Space Sharing Agreement
The Space Sharing Agreement provides for the sharing by the Company and
XLConnect of certain office facilities. Under this agreement, the costs
associated with leasing and maintaining facilities will, in general, be
allocated between the Company and XLConnect on a pro rata basis determined
by the square footage utilized by each company or the number of employees
of each company at the specified location, in accordance with historical
practices. XLConnect's rights to use portions of the shared facilities
leased from third parties and the corresponding obligations to pay for such
use may be terminated as to any such facility by either the Company or
XLConnect on 90 days' prior written notice.
Indemnification Agreement
The Indemnification Agreement provides for, among other things and subject
to limited exceptions, XLConnect to indemnify the Company and its
directors, officers, employees, agents and representatives for all
liabilities relating to XLConnect's business and operations and for all
liabilities arising out of or based upon alleged misrepresentations in or
omissions from the Registration Statement with respect to XLConnect's
initial public offering.
Stock Registration and Option Agreement
XLConnect has provided the Company with certain registration rights,
including demand registration rights and certain "piggy-back" registration
rights, with respect to common stock owned by the Company. XLConnect is
obligated to pay all expenses incidental to such registration, excluding
underwriters' discounts and commissions and certain legal fees and
expenses.
This agreement also grants to the Company a continuous, cumulative option,
upon the original issuance of shares by XLConnect, to purchase from XLConnect
the number of shares of common stock as necessary for the Company to continue
to own at least 80% of XLConnect's outstanding shares of common stock. The
purchase price of such shares will be at the then-current market price.
Tax Allocation Agreement
The Tax Allocation Agreement to provides for (i) the allocation of payments
of taxes for periods during which the Company and XLConnect are included in
the same consolidated group for federal income tax purposes or the same
consolidated, combined or unitary tax returns for state, local or foreign
tax purposes, (ii) the allocation of responsibility for the filing of tax
returns, (iii) the conduct of tax audits and the handling of tax
controversies, and (iv) various related matters. For periods during which
XLConnect is included in the aforementioned returns, XLConnect will be
required to pay to the Company its allocable portion of the consolidated
federal income and state tax liability and will be entitled to receive from
the Company its allocable share of any tax benefit attributable to the use
of XLConnect's losses, if any. XLConnect will be responsible for the
filing of federal, state, local and foreign tax returns and related
liabilities for itself for all periods, to the extent not included in the
Company's combined or consolidated tax returns. Notwithstanding the Tax
Allocation Agreement, under federal income tax law, each member of a
consolidated group for federal income tax purposes is also jointly and
severally liable for federal income tax liability of each other member of
the consolidated group. Similar rules may apply under state income tax
laws.
Existing Telecommunications Services Agreement
The Company has agreed to purchase from XLConnect all of the
telecommunications services required by the Company. The services
provided by XLConnect under this agreement include the transmission of
voice, data, video and other information as well as enhanced
telecommunications services and capacity planning, call accounting, network
design and similar services. The agreement requires the Company to
purchase sufficient telecommunications services to permit XLConnect to meet
minimum volume requirements imposed by XLConnect's agreement with a third
party, which expired on December 31, 1997. The agreement between the
Company and XLConnect has a term of five years from January 1, 1996 and
will renew automatically for six successive two-year periods, unless
terminated earlier in accordance with its terms. The Company may terminate
the agreement at the conclusion of any such term if its provides XLConnect
with at least 90 days' prior notice that it has received a bona fide offer
to provide telecommunications services that in quantity, quality and
duration are equal to or better than the services then being provided by
XLConnect at a price 5% or more below the price XLConnect charges for such
services and XLConnect does not match the offer. The Company has in the
past met the minimum purchase requirements.
<PAGE>
(17) QUARTERLY FINANCIAL DATA (unaudited)
Selected quarterly financial data for fiscal 1997 and fiscal 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Fiscal 1997 Quarter Quarter(1) Quarter Quarter(2) Year
- -------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $199,452 $186,755 $ 85,636 $ 86,069 $557,912
Gross profit 24,853 25,008 15,335 15,304 80,500
Loss from discontinued operation (6,255) (5,840) -- -- (12,095)
Sale of discontinued operation -- 6,875 -- -- 6,875
Net income (loss) (12,114) (34,366) 1,021 866 (44,593)
Basic and diluted income
(loss) per share:
Continuing operations $ (0.16) $ (0.92) $ 0.02 $ 0.02 $ (1.00)
Discontinued operation (0.18) (0.15) -- -- (0.30)
Sale of discontinued operation -- 0.18 -- -- 0.17
---------- ---------- ---------- ---------- ----------
Basic and diluted income
(loss) per share $ (0.34) $ (0.89) $ 0.02 $ 0.02 $ (1.13)
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Fiscal 1997 Quarter Quarter Quarter(3) Quarter Year
- ------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $188,673 $220,215 $189,637 $181,117 $779,642
Gross profit 21,704 23,873 9,657 19,482 74,716
Income (loss) from
discontinued operation 542 1,409 (60,642) (1,143) (59,834)
Net loss (3,194) (2,376) (93,440) (5,164) (104,174)
Basic and diluted income
(loss) per share:
Continuing operations $ (0.11) $ (0.11) $ (0.92) $ (0.11) $ (1.27)
Discontinued operation 0.02 0.04 (1.70) (0.03) (1.71)
---------- ---------- ---------- ---------- ----------
Basic and diluted income
(loss) per share $ (0.09) $ (0.07) $ (2.62) $ (0.14) $ (2.98)
========== ========== ========== ========== ==========
</TABLE>
(1) The Company recorded a pre-tax loss of approximately $27.2 million
related to the XL Transaction (See Note 3).
(2) The Company recorded a pre-tax gain of approximately $0.5 million
related to the XL Transaction (See Note 3) and recorded adjustments related
to the settlement of year-end reserves and capitalization of internal costs
associated with capitalized software costs totaling $0.7 million before
taxes.
(3) The Company recorded branch closure costs of $9.8 million (See Note 8)
and other charges totaling $20.1 million (See Note 9) which consisted of
charges to cost of goods sold of $15.7 million and write-offs for
unutilized property and equipment and miscellaneous accruals totaling $4.4
million from continuing operations. The Company also recorded impairment
losses of $61.6 million and other charges totaling $1.6 million from its
discontinued operation (See Note 3).
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.
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 following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Position with the Company
- ----------------------------------------------------------------------------
Barry M. Abelson (3) 51 Director
Christopher T.G. Fish (1), (3) 55 Director
Roger J. Fritz (1), (2), (3) 69 Director
Arnold S. Hoffman (1), (2), (3) 62 Director
Eugene E. Marinelli, Jr. 40 Vice President, Chief
Financial Officer and
Treasurer
Michael A. Norris 47 Director
Gregory A. Pratt 49 Director
William L. Rulon-Miller (1), (2), (3) 49 Director
Richard D. Sanford (3) 54 Chairman of the Board and
Chief Executive Officer
- ----------------------------------------------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
(3) Member of the Executive Committee
Barry M. Abelson has been a director of the Company since January 1989. In
May 1992, he joined the law firm of Pepper Hamilton 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 Acsys, Inc. and XLConnect.
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.
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.
Eugene E. Marinelli, Jr. was named Vice President, Chief Financial Officer
and Treasurer in September 1997. Mr. Marinelli joined the Company in
January 1996 as its Director of Taxation. Prior to joining the Company,
Mr. Marinelli was a partner in the accounting firm of Marinelli and Kemmey.
Michael A. Norris has been a director of the Company since September 1996.
From August 1996 to September 1997, Mr. Norris was 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.
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.
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., The JPM Company and
Metrologic Instruments, Inc.
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.
Effective July 1, 1997, XLSource's operations are being managed by XLConnect.
The Services Agreement provided for XLConnect to perform certain management,
marketing and administrative services for the Company for $225,000 per month.
These services include executive oversight, operations management at the
corporate and branch levels, practice development, sales and sales management,
marketing services, professional recruitment and legal, financial and
accounting services. Timothy W. Wallace is President, Chief Operating Officer
and a Director of XLConnect. Mr. Wallace joined XLConnect upon its formation
as Executive Vice President, Field Operations. He was promoted to President in
December 1996 and elected to the Board of Directors in February 1997. Between
1991 and March 1996, Mr. Wallace served in various management positions with
FNOW, rising from Assistant Vice President to Vice President, Strategic
Planning and Development, to Vice President, Professional Services in 1995.
Prior to joining FNOW, Mr. Wallace was employed by Arthur Andersen & Co. as
a managing director of business systems consulting.
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 1997, 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.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during fiscal 1997, fiscal 1996 and fiscal 1995 to the
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers based on salary and bonus earned during
fiscal 1997 (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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> <S> <C>
Richard D. Sanford 1997 $675,000 $175,000 -- $421,824
Chairman of the 1996 500,000 350,000 -- 442,758
Board and Chief 1995 850,000 0 500,000 453,879
Executive Officer
Michael A. Norris (4) 1997 343,462 975,000 -- 156,808
Former President and Chief 1996 193,654 125,000 750,000 243,843
Executive Officer of
the Reseller Network
Timothy D. Cook (5) 1997 174,714 350,000 -- 313,967
Former Senior Vice President 1996 300,385 0 150,000 39,789
1995 250,000 67,500 100,000 1,251
Thomas J. Coffey (6) 1997 223,462 100,000 -- 606,984
Former Senior Vice President, 1996 340,385 100,000 150,000 2,019
Treasurer and Chief 1995 177,846 100,000 100,000 0
Financial Officer
Eugene E. Marinelli, Jr. (7) 1997 82,773 19,508 25,000 2,147
Vice President, Treasurer 1996 74,908 -- 10,000 --
and Chief Financial Officer
</TABLE>
______________________________________________________________
(1) In each instance, the position indicated is the position held by the
executive officer on the last day of fiscal 1997 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 and Mr. Cook,
100,000).
(3) Except as indicated below, the amount included in the column for
fiscal 1997 represent the matching contribution under the Company's
401(k) Plan (Mr. Sanford, $2,942, Mr. Cook, $1,367, Mr. Coffey, $1,212
and Mr. Marinelli, $2,147), director's fees (Mr. Sanford, $7,500 and
Mr. Norris, $7,000), consulting services (Mr. Cook, $12,600 and Mr.
Coffey, $80,772) and severance payments (Mr. Norris, $149,808, Mr.
Cook, $300,000 and Mr. Coffey, $525,000). 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. 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 1997, fiscal 1996 and fiscal 1995 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.
On August 2, 1997, the Company paid to Mr. Sanford, all amounts
accrued up to that date, including interest, totaling $2,743,170. The
remaining amount of approximately $1,145,000, was accrued as part of the
RND Transaction and will be paid to Mr. Sanford upon the sale of the
Company to Xerox.
(4) Mr. Norris began his employment with the Company on August 27, 1996
and resigned on September 30, 1997. See "Employment and Severance
Agreements."
(5) Mr. Cook began his employment with the Company on October 10, 1994 and
resigned on July 18, 1997. See "Employment and Severance Agreements."
(6) Mr. Coffey began his employment with the Company on July 3, 1995 and
resigned on September 12, 1997. See "Employment and Severance
Agreements."
(7) Mr. Marinelli began his employment with the Company on January 2, 1996
and was appointed Vice President, Treasurer and Chief Financial
Officer on September 12, 1997. See "Employment and Severance
Agreements."
<PAGE>
OPTION GRANTS DURING FISCAL 1997
The following table provides information related to options to purchase
Common Stock which were granted to the named executive officers during
fiscal 1997.
<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> <S>
Richard D. Sanford -- -- -- -- -- --
Michael A. Norris -- -- -- -- -- --
Timothy D. Cook -- -- -- -- -- --
Thomas J. Coffey -- -- -- -- -- --
Eugene E. Marinelli, Jr. 25,000(2) 100.0% $ 4.25 9/4/07 $ 66,820 $169,335
____________________
</TABLE>
(1) The potential realizable value portion of the foregoing table
illustrates value that might be realized upon exercise of the options
immediately prior to the expiration of their term, assuming the
specified compounded rates of appreciation of the Company's Common
Stock over the term of the options.
(2) The options are exercisable in five equal annual installments
beginning September 4, 1998.
AGGREGATED OPTION EXERCISES DURING FISCAL 1997 AND
OPTION VALUES AT JANUARY 31, 1998
The following table provides information related to options to purchase
Common Stock which were exercised by the named executive officers during
fiscal 1997 and the number and value of options held on January 31, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs Options/SARs
Shares Acquired Value at FY-End (#) at FY-End ($)(1)
Name on Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard D. Sanford 0 0 470,000 30,000 0 0
Michael A. Norris 0 0 750,000 0 0 0
Timothy D. Cook 0 0 70,000 80,000 0 0
Thomas J. Coffey 0 0 50,000 100,000 0 0
Eugene E. Marinelli, Jr. 0 0 2,000 33,000 0 $ 20,313
</TABLE>
(1) Value based on the closing price of $5.0625 per share on January 31,
1998.
EMPLOYMENT AND SEVERANCE AGREEMENTS
On January 23, 1998, Mr. Sanford entered into an agreement with the Company
which provides for Mr. Sanford to receive certain benefits and payments
upon a change in control of the Company. Upon a change in control, Mr.
Sanford will be entitled to receive continued health and medical benefits
for him and his family for one year, a $40,000 lump sum payment to cover
administrative support for one year, a $30,000 lump sum payment to cover
office rent for one year and the receipt of two vehicles and certain other
miscellaneous equipment from the Company with a book value of approximately
$75,000. In addition, the Company will exercise its right to terminate
certain split-dollar agreements for Mr. Sanford, and the Company has agreed
that it will not be entitled to reimbursement for any excess of the
premiums paid by the Company over the cash surrender value of the life
insurance policies to which the split-dollar agreements pertain. The
Company estimates this excess to be approximately $138,000. Also as a
result of a change in control, Mr. Sanford is entitled to an acceleration
of certain deferred compensation payments under a 1995 agreement. The
Company estimates the amount subject to acceleration to be approximately
$1,145,000.
In August 1996, Mr. Norris entered into an employment agreement (the
"Initial Agreement") with the Company. The agreement provided 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 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 were 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 provided that if Mr. Norris was employed by the Company
on January 30, 1999 or the Company terminated Mr. Norris' employment
without cause on or before January 30, 1999, the Company was 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 would continue to
vest in accordance with their terms. The agreement provided 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 would
continue to receive payment equal to his then-current base salary.
In connection with Mr. Norris' resignation from the Company, the Company
and Mr. Norris amended the Initial Agreement. This amendment provides for
Mr. Norris to receive salary continuation of $593,750, which was equal to
his base salary for fifteen months, medical benefits for fifteen months,
reimbursement of relocation expenses, a payment of $975,000, acceleration
of the vesting of his 750,000 stock options, and continuation of a life
insurance policy. The Company will then be obligated to make a payment on
January 31, 1999 (or earlier upon a change in control) of $850,000 less the
aggregate net amount that Mr. Norris had received upon the exercise or
other disposition of his stock options prior to that time. Also upon a
change in control, Mr. Norris will receive an acceleration of his unpaid
salary continuation.
In March 1996, Mr. Coffey entered into an employment agreement with the
Company. The agreement provided 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 provided that if the Company terminated Mr. Coffey's
employment without cause on or before April 1, 1999, the Company would 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 occurred before April 1, 1998, the amount of total
compensation in excess of $350,000 included in such severance payments
would 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
provided that if Mr. Coffey's base annual compensation for fiscal 1997 was
less than $450,000 and he voluntarily terminated his employment after the
Company filed its Annual Report on Form 10-K for that fiscal year, then the
Company would 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 would 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 occurred first (the "Separation Date"). The Separation Date was
extended upon mutual agreement of Mr. Coffey and the Company until
September 12, 1997. The Company 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 or certain other events. In addition, Mr.
Coffey will receive up to $20,000 for outplacement services and certain
legal expenses. Mr. Coffey is 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 December 1997, Mr. Coffey received a lump sum
payment of his remaining salary continuation.
In May 1996, Mr. Cook entered into an employment agreement with the
Company. The agreement provided for Mr. Cook to receive a base annual
salary of $300,000 and reflected the grant to Mr. Cook of options to
purchase 50,000 shares of Common Stock on April 24, 1996. The agreement
provided that if Mr. Cook's employment was terminated by the Company
without cause: (i) the Company would be required to pay Mr. Cook his 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 would be prohibited from working for certain of the Company's
competitors and from soliciting the Company's employees during such period.
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 was required to pay Mr.
Cook an annual base salary of $300,000. In addition, if Mr. Cook remained
with the Company through the Retention Period, he was entitled to a
$150,000 bonus. Furthermore, pursuant to the agreement, Mr. Cook earned a
$100,000 bonus upon the execution of an agreement for the sale of the
Indirect Business and would earn an additional $100,000 bonus if the RND
Transaction was completed before October 31, 1997. If Mr. Cook remained
employed by the Company through the Retention Period, Mr. Cook would
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. In December
1997, Mr. Cook received a lump sum payment of his remaining salary
continuation.
In February 1997, Mr. Marinelli entered into a retention agreement with the
Company. The retention agreement was amended in February 1998 by a letter
agreement. The letter agreement provides for Mr. Marinelli to receive
salary continuation of $97,000 and also the continuation of medical
benefits for one year upon the termination, for any reason, of Mr.
Marinelli's employment by either Mr. Marinelli or the Company.
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 provided 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 RND Transaction.
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
provided 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.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 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
1997; and (iv) all directors and current 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 March 31, 1998.
Percentage
Amount and Nature of Shares
of Beneficial Outstanding
Name of Beneficial Owner Ownership(1) (if 1% or greater)
- -----------------------------------------------------------------------------
Barry M. Abelson 371,864 (2) --
Thomas J. Coffey (3) 63,100 --
Timothy D. Cook (4) 84,000 --
Christopher T. G. Fish 575,908 (5) 1.4%
Roger J. Fritz 60,004 --
Arnold S. Hoffman 6,000 --
Eugene E. Marinelli, Jr. 4,000 --
Michael A. Norris 750,000 1.8%
Gregory A. Pratt 330,000 --
William L. Rulon-Miller 14,136 --
Richard D. Sanford 3,640,751 (6) 8.6%
Strome Susskind Investment
Management L.P. 3,893,460 (7) 9.3%
The TCW Group Inc. 2,301,400 (8) 5.5%
All directors and current officers
as a group (9 persons) 5,551,961 (9) 12.8%
_________________________________
(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 March 31, 1998: Mr.
Coffey, 60,000; Mr. Cook, 80,000; Mr. Marinelli, 4,000; Mr. Norris,
750,000; Mr. Pratt, 330,000; Mr. Sanford, 480,000; and all directors
and current officers as a group, 1,564,000. The table does not
reflect the following respective number of shares purchasable upon the
exercise of stock options that are not exercisable within 60 days of
March 31, 1998: Mr. Coffey, 90,000; Mr. Cook, 70,000; Mr. Marinelli,
31,000; Mr. Norris, 0; Mr. Pratt, 20,000; Mr. Sanford, 20,000; and all
directors and current officers as a group, 71,000.
(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 128,992 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. Coffey resigned as the Company's Senior Vice President, Chief
Financial Officer and Treasurer on September 12, 1997.
(4) Mr. Cook resigned as the Company's Senior Vice President on July 18,
1997.
(5) Includes 470,198 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 by Mr. Fish as custodian for the benefit and in the name of Mr.
Fish's daughter.
(6) Includes 128,992 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 Strome Susskind Investment Management
L.P. was reported on a Schedule 13-G filed by Strome Susskind
Investment Management L.P. with the Securities and Exchange Commission
on February 11, 1998, a copy of which was received by the Company and
relied upon in making this disclosure. The address of Strome Susskind
Investment Management L.P. is 100 Wilshire Blvd., 15th Floor, Santa
Monica, CA 90401.
(8) The information with respect to The TCW Group, Inc. was reported on a
Schedule 13-G filed by The TCW Group, Inc. with the Securities and
Exchange Commission on February 12, 1998, a copy of which was received
by the Company and relied upon in making this disclosure. The address
of The TCW Group, Inc. is 865 South Figueroa Street, Los Angeles, CA
90017.
(9) Excludes shares owned by Messrs. Coffey and Cook, who are no longer
employed by the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Barry M. Abelson is a partner in the law firm of Pepper Hamilton LLP, which
provides legal services to the Company. The Company believes that the fees
charged by Pepper Hamilton LLP are comparable to those charged by other law
firms for comparable services.
Gregory A. Pratt is the President and Chief Executive Officer of Pratt
Capital Advisors, Inc., a private investment company. Pratt Capital
Advisors, Inc. provided financial advisory services to the Company in
connection with the XL Transaction. The Company believes that the fees
charged by Pratt Capital Advisors, Inc. are comparable to those charged by
other firms for comparable services.
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 provided 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 RND Transaction. 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
provided 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. The Company believes that the fees charged by JMS are comparable to
those charged by other investment banking firms for comparable services.
The Company and XLConnect have entered into a number of intercompany
agreements for the purpose of defining certain relationships. These agreements
are described in Note 16 to the Company's Consolidated Financial Statements
in this Annual Report on Form 10-K. The discussion regarding these agreements
is hereby incorporated herein by this reference.
<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:
Reports of Independent Accountants
Consolidated Balance Sheets, January 31, 1998
and February 1, 1997
Consolidated Statements of Operations, Years
ended January 31, 1998, February 1, 1997 and February 3, 1996
Consolidated Statements of Shareholders' Equity,
Years ended January 31, 1998, February 1, 1997 and February 3, 1996
Consolidated Statements of Cash Flows,
Years ended January 31, 1998, February 1, 1997 and February 3, 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Accountants
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.
(a)(3) Exhibits:
* 2.1 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).
* 2.2 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).
* 2.3 Stock Purchase Agreement between Ingram Micro Inc. and the
Company dated April 29, 1997 (Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended February 1, 1997 [the "1996
Form 10-K"]).
* 2.4 Amendment No. 1 to the Stock Purchase Agreement between Ingram
Micro Inc. and the Company dated as of July 2, 1997 (Exhibit 2.2 to
the Company's Report on Form 8-K dated July 18, 1997 [the "July 18,
1997 Form 8-K"]).
* 2.5 Asset Purchase Agreement between GE Capital Information
Technology Solutions Acquisition Corp. and the Company dated as of
July 1, 1997 (Exhibit 2.3 to the July 18, 1997 Form 8-K).
* 2.6 First Amendment to the Asset Purchase Agreement between GE
Capital Information Technology Solutions Acquisition Corp. and the
Company dated as of July 18, 1997 (Exhibit 2.4 to the July 18, 1997
Form 8-K).
* 2.7 Second Amendment to the Asset Purchase Agreement between GE
Capital Information Technology Solutions Acquisition Corp. and the
Company dated as of February 6, 1998 (Exhibit 10 to the Company's Report
on Form 8-K dated March 4, 1998).
2.8 Agreement and Plan of Merger dated as of March 4, 1998 among
Xerox Corporation, TDC Subsidiary Corporation, TDC Two Subsidiary
Corporation, the Company and XLConnect Solutions, Inc.
* 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).
4.1 Amendment No. 1 to Rights Agreement dated as of March 3, 1998
between the Company and ChaseMellon Shareholder Services L.L.C.,
formerly Chemical Mellon Shareholder Services L.L.C.
*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 Lease Agreement dated January 20, 1989 between the Company and
Hankin/Crow Associates. (Exhibit 10.13 to the 1989 Registration
Statement).
*10.3 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). **
*10.4 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"]). **
*10.5 1995 Employee Stock Purchase Plan (Exhibit 4.2 to the 1995
Registration Statement). **
*10.6 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).
*10.7 Letter Agreement between Michael A. Norris and the Company
dated August 8, 1996 (Exhibit 10.19 to the 1996 Form 10-K).**
*10.8 Agreement dated as of November 21, 1997 between the Company and
Ingram Micro Inc. (Exhibit 10 to the Company's Report on Form 8-K
dated January 7, 1998).
10.9 Separation Agreement dated as of September 11, 1997 between the
Company and Michael A. Norris. **
10.10 Agreement dated as of January 23, 1998 between the Company and
Richard D. Sanford. **
10.11 Letter Agreement dated as of February 27, 1998 between the
Company and Eugene E. Marinelli, Jr. **
*16 Letter dated September 8, 1997 from Price Waterhouse LLP to the
Securities and Exchange Commission (Exhibit 16 to the Company's Report
on Form 8-K dated September 3, 1997).
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
23.1 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 1997.
The Company's Report on Form 8-K dated January 7, 1998 relating to the
agreement between the Company and Ingram Micro Inc. resolving all
material outstanding issues as part of the sale of the Company's
Reseller Network to Ingram Micro Inc. on July 18, 1997.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Intelligent Electronics, Inc.
Under date of April 2, 1998, we reported on the consolidated balance sheet
of Intelligent Electronics, Inc. and subsidiaries as of January 31, 1998,
and the related consolidated statements of operations, cash flows and
shareholders' equity for the year then ended, which are included in this
Form 10-K. In connection with our audit of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Philadelphia, PA
April 6, 1998
<PAGE>
<TABLE>
<CAPTION>
Schedule II
INTELLIGENT ELECTRONICS, INC. and Subsidiaries
Valuation and Qualifying Accounts and Reserves
Years ended February 3, 1996, February 1, 1997 and January 31, 1998
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 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
========== ========== ========== ============ ==========
Year ended January 31, 1998 $8,101,000 $5,694,000 ($3,898,000)** ($5,903,000) $3,994,000
========== ========== ========== ============ ==========
* Allowance for doubtful accounts acquired as part of the acquisition of
The Future Now, Inc.
** Allowance for doubtful accounts sold as part of the RND Transaction.
</TABLE>
<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: April 6, 1998 By: /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: April 6, 1998 By: /s/ Richard D. Sanford
---------------------------------
Richard D. Sanford,
Chief Executive Officer
and Chairman of the Board
Date: April 6, 1998 By: /s/ Eugene E. Marinelli, Jr.
---------------------------------
Eugene E. Marinelli, Jr.
Chief Financial Officer
Date: April 6, 1998 By: /s/ Barry M. Abelson
---------------------------------
Barry M. Abelson, Director
Date: April 6, 1998 By: /s/ Roger J. Fritz
---------------------------------
Roger J. Fritz, Director
Date: April 6, 1998 By: /s/ Arnold S. Hoffman
---------------------------------
Arnold S. Hoffman, Director
Date: April 6, 1998 By: /s/ Michael A. Norris
---------------------------------
Michael A. Norris, Director
Date: April 6, 1998 By: /s/ William L. Rulon-Miller
---------------------------------
William L. Rulon-Miller, Director
Exhibit 2.8
_______________________________________________________________________________
AGREEMENT AND PLAN OF MERGER
Dated as of March 4, 1998
Among
Xerox Corporation
TDC Subsidiary Corporation
TDC Two Subsidiary Corporation
Intelligent Electronics, Inc.
and
XLConnect Solutions, Inc.
_______________________________________________________________________________
<PAGE>
Execution
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (the "Agreement") entered into as of
March 4, 1998 by and among Xerox Corporation, a New York corporation
("Purchaser"), TDC Subsidiary Corporation, a Pennsylvania corporation and a
wholly-owned subsidiary of Purchaser ("Acquisition Sub One"), TDC Two
Subsidiary Corporation, a Pennsylvania corporation and a wholly-owned
subsidiary of Purchaser ("Acquisition Sub Two"), Intelligent Electronics,
Inc., a Pennsylvania corporation ("Parent"), and XLConnect Solutions, Inc.,
a Pennsylvania corporation ("Sub"). Purchaser, Acquisition Sub One,
Acquisition Sub Two, Parent and Sub are referred to individually herein as
a "Party" and collectively herein as the "Parties".
Recitals
--------
WHEREAS, this Agreement contemplates a transaction in which Purchaser
will indirectly acquire, through a reverse triangular merger of Acquisition
Sub One with and into Sub (the "Sub Merger"), all of the capital stock of
Sub that is not owned directly or indirectly by Parent;
WHEREAS, this Agreement contemplates that immediately after completion
of the Sub Merger, Purchaser will acquire, through a reverse triangular
merger of Acquisition Sub Two with and into Parent (the "Parent Merger")
all of the capital stock of Parent;
WHEREAS, the Board of Directors of Sub (the "Sub Board") has
determined that the Sub Merger is fair to and in the best interests of the
holders of Sub's common stock and has resolved to recommend the acceptance
and approval of the Sub Merger by the holders of Sub Shares and Parent-
Owned Sub Shares (as defined in Section 1.2);
WHEREAS, the Independent Committee of the Board of Directors of Sub
(the "Independent Committee") has determined that the Sub Merger is fair to
and in the best interests of the holders of Sub Shares and has resolved to
recommend the acceptance and approval of the Sub Merger by the holders of
Sub Shares;
WHEREAS, the Sub Board, the Independent Committee and the respective
Boards of Directors of Purchaser and Acquisition Sub One have approved the
Sub Merger pursuant to and subject to the terms and conditions of this
Agreement;
WHEREAS, the Board of Directors of Parent (the "Parent Board") has
determined that the Parent Merger is fair to and in the best interests of
the holders of Parent's common stock and has resolved to take all necessary
action to approve the Sub Merger and to recommend the acceptance and
approval of the Parent Merger by the holders of Parent Shares (as defined
in Section 2.2);
WHEREAS, the Parent Board and the respective Boards of Directors of
Purchaser and Acquisition Sub Two have approved the Parent Merger pursuant
to and subject to the terms and conditions of this Agreement;
WHEREAS, the Parties desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth herein, and in consideration of the representations,
warranties and covenants set forth herein, intending to be legally bound
hereby, the Parties agree as follows:
ARTICLE I
The Sub Merger
--------------
1.1 The Sub Merger. Subject to the terms and conditions of this
Agreement, at the Sub Effective Time (as defined in Section 1.8),
Acquisition Sub One shall be merged with and into Sub pursuant to the Sub
Merger and the separate corporate existence of Acquisition Sub One shall
thereupon cease. Sub shall be the surviving corporation in the Sub Merger
(sometimes hereinafter referred to as the "Sub Surviving Corporation") and
shall continue to be governed by the laws of the Commonwealth of
Pennsylvania, with all of Sub's rights, privileges, immunities, powers and
franchises unaffected by the Sub Merger except as set forth in Sections 3.1
and 3.2 hereof. The Sub Merger shall have the effects specified in the
Pennsylvania Business Corporation Law of 1988, as amended (the "PABCL").
1.2 Conversion of Securities. At the Sub Effective Time, by virtue
of the Sub Merger and without any action on the part of the holder of any
shares of capital stock of Sub or common stock of Acquisition Sub One:
(i) each share of common stock of Sub issued and outstanding
immediately before the Sub Effective Time ("Sub Shares") shall as of
the Sub Effective Time be converted into and become the right to
receive from Purchaser the Sub Share Conversion Price, as provided in
Section 1.3; provided, however, that Sub Shares shall not include any
shares of common stock of Sub which immediately before the Sub
Effective Time are owned directly or indirectly by Parent ("Parent-
Owned Sub Shares");
(ii) each option or warrant to purchase a share of common stock
of Sub that is outstanding as of the Sub Effective Time ("Sub
Options") shall as of the Sub Effective Time be converted into and
become the right to receive from Purchaser the applicable Sub Option
Conversion Price, if any, as provided in Section 1.4;
(iii) each share of common stock of Sub issued and held in the
treasury of Sub at the Sub Effective Time shall as of the Sub
Effective Time be cancelled and no such shares shall be converted into
rights to receive the Sub Share Conversion Price;
(iv) each Parent-Owned Sub Share shall remain issued,
outstanding and unchanged, which shares shall be the only capital
stock of Sub outstanding after the Sub Effective Time, and as of the
Sub Effective Time Sub shall be a wholly-owned subsidiary of XLSource,
Inc., an Arkansas corporation and indirect wholly-owned subsidiary of
Parent; and
(v) the shares of common stock of Acquisition Sub One issued and
outstanding at the Sub Effective Time shall be surrendered and
cancelled.
1.3 Sub Share Conversion Price. The "Sub Share Conversion Price"
shall be an amount equal to $20.00.
1.4 Sub Option Conversion Price. The "Sub Option Conversion Price"
means, in the case of any Sub Option, the excess, if any, of $20.00 over
the exercise price of each such Sub Option, which excess shall be payable
at such time or times, if any, as shall be determined pursuant to the terms
and conditions of the applicable plan and/or agreement pursuant to which
such Sub Option is governed.
1.5 Payment for Sub Shares and Sub Options. Prior to the Sub
Effective Time, Purchaser shall designate a bank or trust company
reasonably acceptable to Sub to act as Paying Agent in connection with the
Sub Merger ("Paying Agent") and to receive and disburse the cash to which
holders of Sub Shares or Sub Options become entitled pursuant to Section
1.2. At the Sub Effective Time, Purchaser will provide Paying Agent with
sufficient cash to allow the Sub Share Conversion Price and the Sub Option
Conversion Price to be paid to the holders of each Sub Share or Sub Option
then entitled to be so paid. Promptly after the Sub Effective Time, the
Sub Surviving Corporation shall cause to be mailed to each Person who was,
at the Sub Effective Time, a holder of record of Sub Shares or Sub Options
forms (in a form mutually agreed to by Purchaser and Sub) of letters of
transmittal, with instructions for use in effecting the surrender of
certificates that represented Sub Shares before the Sub Effective Time in
exchange for payment of the Sub Share Conversion Price or in connection
with the payment of the applicable Sub Option Conversion Price. Upon
surrender to Paying Agent of such certificates and proper submittal of the
related letter of transmittal (in connection with Sub Shares), or upon
proper submittal of the letter of transmittal (in connection with Sub
Options), the Sub Surviving Corporation shall promptly cause to be paid to
the Persons entitled thereto a check in the amount of the Sub Share
Conversion Price and/or Sub Option Conversion Price to which such Persons
are entitled, after giving effect to any required tax withholdings. No
interest will be paid or will accrue on the amount payable to any such
Person. If payment of any Sub Share Conversion Price is to be made to a
Person other than the registered holder of the certificate surrendered, it
shall be a condition of such payment that the certificate so surrendered
shall be properly endorsed or otherwise in proper form for transfer and
that the Person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a Person other than the
registered holder of the certificate surrendered or establish to the
satisfaction of the Sub Surviving Corporation or the Paying Agent that such
tax has been paid or is not applicable. The Sub Surviving Corporation
shall pay all charges and expenses, including those of the Paying Agent, in
connection with the exchange of cash for Sub Shares and Sub Options. In
the event any certificate representing Sub Shares shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such certificate to be lost, stolen or destroyed, the
Paying Agent will issue in exchange for such lost, stolen or destroyed
certificate the Sub Share Conversion Price payable in respect thereof;
provided, however, the Person to whom the Sub Share Conversion Price is
paid shall, as a condition precedent to the payment thereof, give the Sub
Surviving Corporation a bond in such sum as it may direct or otherwise
indemnify the Sub Surviving Corporation in a manner satisfactory to it
against any claim that may be made against the Sub Surviving Corporation
with respect to the certificate alleged to have been lost, stolen or
destroyed. Promptly following the first anniversary of the Sub Effective
Time, the Paying Agent shall deliver to the Sub Surviving Corporation all
cash held for payment for Sub Shares or Sub Options and all other documents
in its possession relating to the transactions described in this Agreement,
and the Paying Agent's duties shall terminate. Thereafter each holder of a
certificate representing Sub Shares, and each holder of a Sub Option, may
surrender such certificate and/or other appropriate documentation to the
Sub Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws) and receive in exchange therefor the Sub Share
Conversion Price or Sub Option Conversion Price in respect thereof, without
interest thereon.
1.6 Transfers After the Sub Effective Time. No transfers of Sub
Shares or Sub Options shall be made on the stock transfer or other
applicable books of Sub at or after the Sub Effective Time.
1.7 Sub Closing. The closing of the Sub Merger (the "Sub Closing")
shall take place at the offices of Pepper Hamilton LLP, 3000 Two Logan
Square, Philadelphia, PA 19103-2799 at 10:00 A.M. on the first business day
after the last of the conditions set forth in Article 7 hereof shall be
fulfilled or waived in accordance with this Agreement, or at such other
place and time and/or on such other date as Sub and Purchaser may agree;
provided that the Sub Closing and the Parent Closing shall occur on the
same day.
1.8 Filing of Sub Merger Documents; Sub Effective Time. In
connection with the Sub Closing, Sub and Acquisition Sub One will execute
and file, and Purchaser will cause Acquisition Sub One to execute and file,
Articles of Merger relating to the Sub Merger ("Sub Articles of Merger")
with the Secretary of State of Pennsylvania as provided in the PABCL. The
Sub Merger shall become effective at the time at which the Sub Articles of
Merger have been duly filed with the Secretary of State of Pennsylvania
(the "Sub Effective Time"), which shall occur immediately prior to the
Parent Effective Time.
1.9 Dissenters Rights. Notwithstanding any provision of this
Article I to the contrary, shares held of record by shareholders who shall
not have voted such shares in favor of the Sub Merger and who shall have
properly exercised rights to demand payment of the fair value of such
shares in accordance with the applicable provisions of the PABCL ("Sub
Dissenting Shares") shall not be converted into the right to receive the
Sub Share Conversion Price, but the holders thereof shall be entitled to
payment of the fair value of such shares in accordance with the applicable
provisions of the PABCL; provided, however, that (i) if such a holder fails
to file a notice of election to dissent in accordance with the PABCL, or
after having done so delivers an effective withdrawal of such notice or
fails to establish (if he is required to do so) his entitlement to
dissenters rights as provided in the PABCL, or (ii) if a court shall
determine that such holder is not entitled to receive payment for his
shares or such holder shall otherwise lose his dissenters rights, each Sub
Share held of record by such holder shall automatically be converted into
and represent only the right to receive the Sub Share Conversion Price,
upon the surrender of the certificate or certificates representing such Sub
Shares. Sub will give Purchaser prompt notice of any demands received by
Sub for payment of the fair value of such shares, and Purchaser shall have
the right to participate in all negotiations and proceedings with respect
to such demands, Sub will not, except with the prior written consent of
Purchaser, make any payment (except to the extent that any such payment is
made pursuant to a court order) with respect to, or settle or offer to
settle, any such demands.
1.10 PABCL. Section 1906 of the PABCL shall apply to the Sub
Merger. Dissenters rights shall be available to the holders of Sub Shares
as provided in Section 1.9.
ARTICLE II
The Parent Merger
-----------------
2.1 The Parent Merger. Subject to the terms and conditions of this
Agreement, at the Parent Effective Time (as defined in Section 2.8),
Acquisition Sub Two shall be merged with and into Parent pursuant to the
Parent Merger and the separate corporate existence of Acquisition Sub Two
shall thereupon cease. Parent shall be the surviving corporation in the
Parent Merger (sometimes hereinafter referred to as the "Parent Surviving
Corporation") and shall continue to be governed by the laws of the
Commonwealth of Pennsylvania, with all of Parent's rights, privileges,
immunities, powers and franchises unaffected by the Parent Merger except as
set forth in Sections 3.1 and 3.2 hereof. The Parent Merger shall have the
effects specified in the PABCL.
2.2 Conversion of Securities. At the Parent Effective Time, by
virtue of the Parent Merger and without any action on the part of the
holder of any shares of capital stock of Parent or common stock of
Acquisition Sub Two:
(i) each share of common stock of Parent (and related Right,
as defined in the Rights Agreement) issued and outstanding
immediately before the Parent Effective Time ("Parent Shares")
shall as of the Parent Effective Time be converted into and become
the right to receive from Purchaser the Parent Share Conversion
Price, as provided in Section 2.3;
(ii) each option or warrant to purchase a share of common stock
of Parent that is outstanding as of the Parent Effective Time ("Parent
Options") shall as of the Parent Effective Time be converted into and
become the right to receive from Purchaser the applicable Parent
Option Conversion Price, if any, as provided in Section 2.4;
(iii) each share of common stock of Parent issued and held in
the treasury of Parent at the Parent Effective Time shall as of the
Parent Effective Time be cancelled and no such shares shall be
converted into rights to receive the Parent Share Conversion Price;
and
(iv) the shares of common stock of Acquisition Sub Two issued
and outstanding at the Parent Effective Time shall be converted into
and become the number of shares of common stock of Parent issued and
outstanding at the Parent Effective Time, which shares shall be the
only capital stock of Parent outstanding after the Parent Effective
Time, and as of the Parent Effective Time Parent shall become a
wholly-owned subsidiary of Purchaser.
2.3 Parent Share Conversion Price. The "Parent Share Conversion
Price" shall be an amount equal to $7.60.
2.4 Parent Option Conversion Price. The "Parent Option Conversion
Price" means, in the case of any Parent Option, the excess, if any, of
$7.60 over the exercise price of each such Parent Option, or such other
amount, if any, and which excess or other amount shall be payable at such
time or times, if any, as shall be determined pursuant to the terms and
conditions of the applicable plan and/or agreement pursuant to which such
Parent Option is governed.
2.5 Payment for Parent Shares and Parent Options. The Paying Agent
shall receive and disburse the cash to which holders of Parent Shares or
Parent Options become entitled pursuant to Section 2.2. At the Parent
Effective Time, Purchaser will provide Paying Agent with sufficient cash to
allow the Parent Share Conversion Price and the Parent Option Conversion
Price to be paid to the holders of each Parent Share or Parent Option then
entitled to be so paid. Promptly after the Parent Effective Time, the
Parent Surviving Corporation shall cause to be mailed to each Person who
was, at the Parent Effective Time, a holder of record of Parent Shares or
Parent Options forms (in a form mutually agreed to by Purchaser and Parent)
of letters of transmittal, with instructions for use in effecting the
surrender of certificates that represented Parent Shares before the Parent
Effective Time in exchange for payment of the Parent Share Conversion Price
or in connection with the payment of the applicable Parent Option
Conversion Price. Upon surrender to Paying Agent of such certificates and
proper submittal of the related letter of transmittal (in connection with
Parent Shares), or upon proper submittal of the letter of transmittal (in
connection with Parent Options), the Parent Surviving Corporation shall
promptly cause to be paid to the Persons entitled thereto a check in the
amount of the Parent Share Conversion Price and/or Parent Option Conversion
Price to which such Persons are entitled, after giving effect to any
required tax withholdings. No interest will be paid or will accrue on the
amount payable to any such Person. If payment of any Parent Share
Conversion Price is to be made to a Person other than the registered holder
of the certificate surrendered, it shall be a condition of such payment
that the certificate so surrendered shall be properly endorsed or otherwise
in proper form for transfer and that the Person requesting such payment
shall pay any transfer or other taxes required by reason of the payment to
a Person other than the registered holder of the certificate surrendered or
establish to the satisfaction of the Parent Surviving Corporation or the
Paying Agent that such tax has been paid or is not applicable. The Parent
Surviving Corporation shall pay all charges and expenses, including those
of the Paying Agent, in connection with the exchange of cash for Parent
Shares and Parent Options. In the event any certificate representing
Parent Shares shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the Person claiming such certificate to be
lost, stolen or destroyed, the Paying Agent will issue in exchange for such
lost, stolen or destroyed certificate the Parent Share Conversion Price
payable in respect thereof; provided, however, the Person to whom the
Parent Share Conversion Price is paid shall, as a condition precedent to
the payment thereof, give the Parent Surviving Corporation a bond in such
sum as it may direct or otherwise indemnify the Parent Surviving
Corporation in a manner satisfactory to it against any claim that may be
made against the Parent Surviving Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed. Promptly
following the first anniversary of the Parent Effective Time, the Paying
Agent shall deliver to the Parent Surviving Corporation all cash held for
payment for Parent Shares or Parent Options and all other documents in its
possession relating to the transactions described in this Agreement, and
the Paying Agent's duties shall terminate. Thereafter each holder of a
certificate representing Parent Shares, and each holder of a Parent Option,
may surrender such certificate and/or other appropriate documentation to
the Parent Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws) and receive in exchange therefor the Parent Share
Conversion Price or Parent Option Conversion Price in respect thereof,
without interest thereon.
2.6 Transfers After the Effective Time. No transfers of Parent
Shares or Parent Options shall be made on the stock transfer or other
applicable books of Parent at or after the Parent Effective Time.
2.7 Parent Closing. The closing of the Parent Merger (the "Parent
Closing") shall take place at the offices of Pepper Hamilton LLP, 3000 Two
Logan Square, Philadelphia, PA 19103-2799 at 10:00 A.M. on the first
business day after the last of the conditions set forth in Article 7 hereof
shall be fulfilled or waived in accordance with this Agreement, or at such
other place and time and/or on such other date as Parent and Purchaser may
agree; provided that the Parent Closing and the Sub Closing shall occur on
the same day.
2.8 Filing of Parent Merger Documents; Parent Effective Time. In
connection with the Closing, Parent and Acquisition Sub Two will execute
and file, and Purchaser will cause Acquisition Sub Two to execute and file,
Articles of Merger relating to the Parent Merger ("Parent Articles of
Merger") with the Secretary of State of Pennsylvania as provided in the
PABCL. The Parent Merger shall become effective at the time at which the
Parent Articles of Merger have been duly filed with the Secretary of State
of Pennsylvania (the "Parent Effective Time"), which shall occur
immediately after the Sub Effective Time.
2.9 Dissenters Rights. Notwithstanding any provision of this
Article II to the contrary, and to the extent required under the applicable
provisions of the PABCL, Parent Shares held of record by shareholders who
shall not have voted such shares in favor of the Parent Merger and who
shall have properly exercised rights to demand payment of the fair value of
such shares in accordance with the applicable provisions of the PABCL
("Parent Dissenting Shares") shall not be converted into the right to
receive the Parent Share Conversion Price, but the holders thereof shall be
entitled to payment of the fair value of such shares in accordance with the
applicable provisions of the PABCL; provided, however, that (i) if such a
holder fails to file a notice of election to dissent in accordance with the
PABCL, or after having done so delivers an effective withdrawal of such
notice or fails to establish (if he is required to do so) his entitlement
to dissenters rights as provided in the PABCL, or (ii) if a court shall
determine that such holder is not entitled to receive payment for his
shares or such holder shall otherwise lose his dissenters rights, each
Parent Share held of record by such holder shall automatically be converted
into and represent only the right to receive the Parent Share Conversion
Price, upon the surrender of the certificate or certificates representing
such Parent Shares. Parent will give Purchaser prompt notice of any
demands received by Parent for payment of the fair value of such shares,
and Purchaser shall have the right to participate in all negotiations and
proceedings with respect to such demands, Parent will not, except with
the prior written consent of Purchaser, make any payment (except to the
extent that any such payment is made pursuant to a court order) with
respect to, or settle or offer to settle, any such demands.
ARTICLE III
Articles of Incorporation and By-Laws
of the Surviving Corporations
-----------------------------
3.1 Articles of Incorporation. The Articles of Incorporation of the
Sub Surviving Corporation shall, upon the Sub Effective Time, be and remain
unchanged until further amended in accordance with the terms thereof and
the PABCL, subject, however, to the provisions of Section 6.2(f)(i) hereof.
The Articles of Incorporation of the Parent Surviving Corporation shall,
upon the Parent Effective Time, be and remain unchanged until
further amended in accordance with the terms thereof and the PABCL,
subject, however, to the provisions of Section 6.2(f)(i) hereof.
3.2 By-Laws. The By-Laws of the Sub Surviving Corporation in effect
at the Sub Effective Time shall be and remain unchanged until duly amended
in accordance with the terms thereof and the PABCL, subject, however, to
the provisions of Section 6.2(f)(i) hereof. The By-Laws of Parent
Surviving Corporation in effect at the Parent Effective Time shall be and
remain unchanged until duly amended in accordance with the terms thereof
and the PABCL, subject, however, to the provisions of Section 6.2(f)(i)
hereof.
ARTICLE IV
Officers and Directors
----------------------
4.1 Sub. At the Sub Effective Time, the directors of Acquisition
Sub One shall be all the directors of the Sub Surviving Corporation, each
of such directors to hold office, subject to the applicable provisions of
the Articles of Incorporation and By-Laws of the Sub Surviving Corporation,
until their respective successors shall be duly elected or appointed and
qualified. At the Sub Effective Time, the officers of Acquisition Sub One
immediately prior to the Sub Effective Time shall, subject to the
applicable provisions of the Articles of Incorporation and By-Laws of the
Sub Surviving Corporation, be the officers of the Sub Surviving Corporation
until their respective successors shall be duly elected or appointed and
qualified.
4.2 Parent. At the Parent Effective Time, the directors of
Acquisition Sub Two shall be all the directors of the Parent Surviving
Corporation, each of such directors to hold office, subject to the
applicable provisions of the Articles of Incorporation and By-Laws of the
Parent Surviving Corporation, until their respective successors shall be
duly elected or appointed and qualified. At the Parent Effective Time, the
officers of Acquisition Sub Two immediately prior to the Parent Effective
Time shall, subject to the applicable provisions of the Articles of
Incorporation and By-Laws of the Parent Surviving Corporation, be the
officers of the Parent Surviving Corporation until their respective
successors shall be duly elected or appointed and qualified.
ARTICLE V
Representations and Warranties
------------------------------
5.1 Representations and Warranties of Parent and Sub. Parent and
Sub hereby jointly and severally (but subject to Section 5.1(bb)) represent
and warrant to Purchaser that, except as set forth in the disclosure letter
of even date herewith delivered by Parent to Purchaser in conjunction with
execution of this Agreement (the "Disclosure Letter"):
(a) Organization, Qualification and Corporate Power. Each of
Parent and its subsidiaries (direct or indirect) (such subsidiaries,
including Sub, being collectively referred to as "Parent Subsidiaries") is
a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation, and is duly authorized to
conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of
such qualification would not result in a Material Adverse Change. Each of
the Parent and the Parent Subsidiaries has full corporate power and
corporate authority, and all foreign, federal, state and local governmental
permits, licenses and consents (collectively, "Permits"), to carry on the
businesses in which it is engaged and to own and use the properties owned
and used by it, except where the failure to have Permits would not result
in a Material Adverse Change. The Disclosure Letter contains an accurate
list of the Parent Subsidiaries and the Sub Subsidiaries, their
jurisdiction, date of incorporation and date of acquisition directly or
indirectly by Parent, and their respective material Permits as well as
material Permits the applicable entity does not have and which Parent or
Sub has knowledge that it is required to have.
(b) Capitalization. (I) The authorized capital stock of
Parent consists of 100,000,000 shares of common stock, par value $.01 per
share (the "Parent Common Stock") and 15,000,000 shares of preferred stock,
par value $50.00 per share (the "Parent Preferred Stock"). As of March 3,
1998, (i) 41,798,091 shares of Parent Common Stock are issued and
outstanding, and (ii) 7,006,540 shares of Parent Common Stock have been
reserved for issuance upon the exercise of outstanding options and
warrants. No shares of Parent Preferred Stock are issued and outstanding,
and 200,000 shares of Series A Junior Participating Preferred Stock have
been reserved for issuance upon exercise of the outstanding Rights (as
defined in the Rights Agreement), none of which is or will be outstanding
at or before the Parent Effective Time. All issued and outstanding shares
of Parent's capital stock and all issued and outstanding shares of each
Parent Subsidiary's capital stock, have been validly issued and are fully
paid and nonassessable, and are not subject to, nor were they issued in
violation of, any preemptive rights. Except as detailed in the Disclosure
Letter, neither Parent nor any of the Parent Subsidiaries has any
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other agreements relating to
the acquisition of capital stock, or any cash settlement option, phantom
stock, stock appreciation right or similar instrument (the "Stock Rights")
relating to any capital stock of Parent or any Parent Subsidiary.
(II) The authorized capital stock of Sub consists of
100,000,000 shares of common stock, par value $.01 per share (the "Sub
Common Stock") and 10,000,000 shares of preferred stock, par value $.01 per
shares (the "Sub Preferred Stock"). As of March 3, 1998, (i) 16,684,100
shares of Sub Common Stock are issued and outstanding, (ii) 13,348,280
shares of Sub Common Stock are owned by XLSource, Inc., an indirect wholly-
owned subsidiary of Parent, and (iii) 2,791,645 shares of Sub Common Stock
have been reserved for issuance upon the exercise of outstanding options
and warrants. No shares of Sub Preferred Stock are issued and outstanding.
All issued and outstanding shares of Sub's capital stock have been validly
issued and are fully paid and nonassessable, are entitled to full voting
rights as to the election of directors and other matters, and are not
subject to, nor were they issued in violation of, any preemptive rights.
Except as detailed in the Disclosure Letter, there exist no Stock Rights
relating to any capital stock of Sub. No stock of Sub or of any Sub
Subsidiary owned by Parent or any Parent Subsidiary is subject to any put
option, redemption agreement (including a right to cause redemption of
stock) or any other instrument that provides for the right to transfer such
stock. Disregarding the execution of this Agreement, the Parent Merger and
the Sub Merger, (x) neither the shares of Sub capital stock directly or
indirectly owned by Parent nor the holders of any such shares are subject
to any limitations, pursuant to any provision of Chapter 25 of the PABCL,
of voting rights afforded generally to holders of shares of such class or
series of capital stock, and (y) no transaction has occurred or state of
facts exists which has triggered dissenters rights or any other right on
the part of a shareholder under the PABCL to receive payment in respect of
such shares. Since December 1, 1997, neither Parent nor any Parent
Subsidiary has purchased or otherwise acquired any shares of common stock
of Sub for a per share price in excess of the Sub Share Conversion Price.
(III) The Disclosure Letter describes the equity
capitalization of each Parent Subsidiary, including the authorized capital
stock, the issued and outstanding capital stock, and the ownership thereof.
With the exception of Sub and the Sub Subsidiaries, Parent is directly or
indirectly the owner of all shares of capital stock of each Parent
Subsidiary. All Sub Subsidiaries are 100% owned by Sub.
(c) Authorization of Transaction. Each of Parent and Sub has
the requisite corporate power and authority, and has taken all required
action necessary, to properly execute and deliver this Agreement and to
perform its obligations hereunder, and this Agreement constitutes the valid
and legally binding obligation of each of Parent and Sub, enforceable in
accordance with its terms and conditions, except as limited by (i)
applicable bankruptcy, insolvency reorganization, moratorium and other laws
of general application affecting enforcement of creditors' rights generally
and (ii) general principles of equity, regardless of whether asserted in a
proceeding in equity or at law; provided, however, that Parent cannot
consummate the Parent Merger and Sub cannot consummate the Sub Merger
unless and except upon receipt of the approval of the holders of Parent
Common Stock and Sub Common Stock to the extent required by the PABCL.
(d) Noncontravention. Neither the execution and delivery of
this Agreement, nor the consummation by Parent or Sub of the transactions
contemplated hereby, will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree or other restriction
of any government, governmental agency or court to which Parent or any of
the Parent Subsidiaries is subject or any provision of the charter or
bylaws of Parent or any of the Parent Subsidiaries, or (ii) conflict with,
result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify or cancel or require any notice under any contract required to be
listed on the Disclosure Letter or under any other material agreement,
contract, lease, license, instrument or other arrangement to which Parent
or any of the Parent Subsidiaries is a party or by which any of them is
bound or to which any of their respective assets is subject (or result in
the imposition of any lien, encumbrance or other security interest (a
"Security Interest") upon any of their respective assets), except in the
case of clause (ii) as disclosed in the Disclosure Letter. Other than
filings required in connection with the provisions of the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "HSR Act"), the PABCL
and the Exchange Act, neither Parent nor any of the Parent Subsidiaries
needs to give any notice to, make any filing with or obtain any
authorization, consent or approval of any government or government agency
in order for the Parties to consummate the transactions contemplated by
this Agreement.
(e) Filings with the SEC. Since January 1, 1992, Parent and
Sub have made all filings with the SEC that either of them has been
required to make under the Securities Act and the Exchange Act
(collectively, the "Public Reports"). Each of the Public Reports complied
with the requirements of the Securities Act and the Exchange Act in all
material respects and none of the Public Reports, as of their respective
dates, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(f) Financial Statements. (I) Parent has filed an Annual
Report on Form 10-K, as amended by its Form 10-K/A (the "Parent 10-K"), for
the fiscal year ended on February 1, 1997 and a Quarterly Report on Form
10-Q (the "Parent 10-Q") for the fiscal quarter ended November 1, 1997 (the
"Parent Most Recent Quarter End"). The financial statements included in
the Parent 10-K and the Parent 10-Q (including the related notes and
schedules) have been prepared from the books and records of Parent and the
Parent Subsidiaries in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
covered thereby, and present fairly in all material respects the financial
condition of Parent and the Parent Subsidiaries as of the indicated dates
and the results of operations and cash flows of Parent and the Parent
Subsidiaries for the indicated periods. In the opinion of Parent's
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair statement of operating results
for the interim periods presented have been made.
(II) Sub has filed an Annual Report on Form 10-K (the "Sub
10-K") for the fiscal year ended on December 31, 1996 and a Quarterly
Report on Form 10-Q, as amended by its Form 10-Q/A (the "Sub 10-Q") for the
fiscal quarter ended September 30, 1997 (the "Sub Most Recent Quarter
End"). The financial statements included in the Sub 10-K and the Sub 10-Q
(including the related notes and schedules) have been prepared from the
books and records of Sub and the Sub Subsidiaries in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby, and
present fairly in all material respects the financial condition of Sub and
the Sub Subsidiaries as of the indicated dates and the results of
operations and cash flows of Sub and the Sub Subsidiaries for the indicated
periods. In the opinion of Parent's and Sub's management, all adjustments
(consisting only of normal recurring adjustments) which are necessary for a
fair statement of operating results for the interim periods presented have
been made.
(g) Events Subsequent to Most Recent Quarter End. (I) Since
the Parent Most Recent Quarter End, there has not been any Material Adverse
Change or any development or combination of developments relating to Parent
or any of the Parent Subsidiaries of which Parent has knowledge and which
would result in a Material Adverse Change.
(II) Since the Sub Most Recent Quarter End, there has not
been any Material Adverse Change or any development or combination of
developments relating to Sub or any of the Sub Subsidiaries of which Parent
or Sub has knowledge and which would result in a Material Adverse Change.
(h) Compliance. Parent and the Parent Subsidiaries are in
compliance with all applicable laws, rules and regulations, except where
the failure to be in compliance would not result in a Material Adverse
Change.
(i) Litigation and Liabilities. There are (i) no actions,
suits or proceedings pending or, to the knowledge of Parent or Sub,
threatened against Parent or any of the Parent Subsidiaries which (x) if
adversely determined against Parent or any of the Parent Subsidiaries could
reasonably be expected to result in a Material Adverse Change, or (y) could
reasonably be expected to materially impair or delay the Parties' ability
to consummate the transactions contemplated by this Agreement, and (ii) no
obligations or liabilities of Parent or any of the Parent Subsidiaries
known to Parent or Sub and not disclosed in the Disclosure Letter or
reflected in the financial statements or related notes included in the
Parent 10-K, the Parent 10-Q, the Sub 10-K or the Sub 10-Q which could
reasonably be expected to result in a Material Adverse Change. The
Disclosure Letter lists all pending and, to the knowledge of Parent or Sub,
threatened EEOC and similar investigations, actions, suits or proceedings
against Parent or any Parent Subsidiary (regardless of the materiality
thereof) and copies of the pleadings for each such pending matter have been
made available to Purchaser by Parent.
(j) Taxes. (I) Each of Parent and the Parent Subsidiaries has
duly filed all federal, state, local and foreign tax returns required to be
filed by it and has duly paid, caused to be paid or made adequate provision
for the payment of all Taxes (as hereinafter defined) required to be paid
in respect of the periods covered by such returns. No claims for Taxes
have been asserted against Parent or any of the Parent Subsidiaries, and no
deficiency for any Taxes has been proposed, asserted or assessed against
Parent or any of the Parent Subsidiaries, in either case which has not been
resolved or paid in full. To Parent's knowledge, no Tax return for any
taxable period of Parent or any Parent Subsidiary is under examination by
any taxing authority, Parent has not received written notice of any pending
audit by any taxing authority against the Parent or any of the Parent
Subsidiaries, and there are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any Tax return for any
taxable period of Parent or any of the Parent Subsidiaries. "Taxes" means
all federal, state, territorial, local, foreign and other net income, gross
income, gross receipts, sales, use, value added, ad valorem, transfer,
franchise, profits, license, lease, service, use, withholding, payroll,
employment, unemployment insurance, workers compensation, social security,
excise, severance, stamp, business license, occupation, premium, property,
environmental, windfall profits, customs, duties, alternative minimum,
estimated or other taxes, fees, premiums, assessments or charges of any
kind whatever imposed or collected by any governmental entity or political
subdivision thereof.
(II) Each of Sub and the Sub Subsidiaries has duly filed all
federal, state, local and foreign tax returns required to be filed by it
and has duly paid, caused to be paid or made adequate provision for the
payment of all Taxes required to be paid in respect of the periods covered
by such returns. No claims for Taxes have been asserted against Sub or any
of the Sub Subsidiaries, and no deficiency for any Taxes has been proposed,
asserted or assessed against Sub or any of the Sub Subsidiaries, in either
case which has not been resolved or paid in full. To Parent's and Sub's
knowledge, no Tax return for any taxable period of Sub is under examination
by any taxing authority, Sub has not received written notice of any pending
audit by any taxing authority against the Sub or any of the Sub
Subsidiaries, and there are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any Tax return for any
taxable period of Sub or any of the Sub Subsidiaries.
(III) Parent and each Parent Subsidiary has been a continuous
member of the consolidated group of companies of which Parent is the common
parent for Federal income tax purposes since the time such Subsidiary first
became affiliated with the Parent's consolidated group.
(k) Brokers' and Other Fees. Except for the fees and expenses
of Lazard Freres & Co. LLC ("Lazard") for Parent and NationsBanc Montgomery
Securities LLC ("Montgomery") for Sub, none of Parent or the Parent
Subsidiaries has any liability or obligation to pay any fees or commissions
to any investment adviser, broker, finder or agent with respect to the
transactions contemplated by this Agreement.
(l) Fairness Opinions. Montgomery has delivered to the
Independent Committee of the Board of Directors of Sub, and not withdrawn,
its opinion that the consideration being paid to the holders of Sub Shares
(other than shares held directly or indirectly by Parent) pursuant to
Section 1.2 hereof is fair to such holders, as of the date of such opinion,
from a financial point of view (the "Sub Fairness Opinion"), and a true and
complete copy thereof has been furnished to Purchaser. Lazard has
delivered to the Board of Directors of Parent, and not withdrawn, its
opinion that the consideration being paid pursuant to Section 2.2 hereof is
fair to the shareholders of Parent, as of the date of such opinion, from a
financial point of view (the "Parent Fairness Opinion"), and a true and
complete copy thereof has been furnished to Purchaser.
(m) Rights Plan. Parent has amended the Rights Agreement to
provide that the Purchaser and all direct and indirect wholly-owned
subsidiaries thereof and their respective Associates and Affiliates (as
such terms are defined in the Rights Agreement), for purposes of entering
into and consummating the transactions contemplated by this Agreement, are
considered an "Exempt Person", as defined in the Rights Agreement, until
such time as this Agreement shall terminate, if at all. Parent has taken
all necessary action so that none of the execution and delivery of this
Agreement or the consummation of the Sub Merger or Parent Merger
contemplated hereby will (i) cause the Rights (as such term is defined in
the Rights Agreement) issued pursuant to the Rights Agreement to become
exercisable, (ii) cause any Person to become an Acquiring Person (as such
term is defined in the Rights Agreement) or (iii) give rise to a
Distribution Date (as such term is defined in the Rights Agreement).
(n) Management Letters. There is no management letter of
outside auditors for the year ended February 1, 1997 (in the case of
Parent) or for the year ended December 31, 1996 (in the case of Sub).
(o) Environmental Matters. The conduct or operation of Parent
and Parent Subsidiaries and any condition of property presently or
previously owned, leased or operated by any of them violates or violated no
Environmental Laws in any material respect and no condition has existed or
event has occurred with respect to any of them or any such property that,
with notice or the passage of time, or both, is reasonably likely to result
in any material liability under Environmental Laws. Neither Parent nor any
of the Parent Subsidiaries has received any notice from any person or
entity that Parent or any Parent Subsidiary or the operation or condition
of any property ever owned, leased or operated by any of them are or were
in violation of or otherwise are alleged to have liability under any
Environmental Law. "Environmental Laws" means all applicable local, state
and federal environmental, health and safety laws and regulations,
including, without limitation, the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act,
the Clean Water Act, the Federal Clean Air Act, and the Occupational Safety
and Health Act, each as amended, regulations promulgated thereunder, and
state counterparts.
(p) Other Interests. Neither Parent nor any Parent Subsidiary
owns any shares of capital stock in any corporation (other than in the
Parent Subsidiaries as disclosed herein) or holds any debt or equity
interest in any joint venture, partnership or other entity.
(q) Intellectual Property. (I) Parent and each Parent
Subsidiary owns, or is licensed or otherwise possesses legally enforceable
rights to use, all material patents, trademarks, trade names, service
marks, copyrights, technology, know-how, computer software programs (which
shall exclude off-the-shelf software programs) that are used in the
business of Parent and each of the Parent Subsidiaries as currently
conducted (the "Intellectual Property").
(II) No claim against Parent or any Parent Subsidiary has
been asserted in writing or, to Parent's or Sub's knowledge, orally by a
third party respecting or related to the Intellectual Property or related
to the alleged infringement by Parent or any Parent Subsidiary of the
intellectual property of others and, in either case, Parent and the Parent
Subsidiaries do not know of any reasonable grounds for any such claim.
(III) To the knowledge of Parent and Sub, there is no
material unauthorized use, infringement or misappropriation of any
Intellectual Property by any third party, including any employee or former
employee of Parent or any Parent Subsidiary.
(r) Employment Matters. (I) The Disclosure Letter identifies
all stock options, restricted stock rights and other Stock Rights
outstanding under Parent's 1995 Long-Term Incentive Plan and Parent's Non-
Qualified Stock Option Plan for employees and directors and Sub's 1996
Long-Term Incentive Plan (the "Sub Plan") or any other agreement, plan or
arrangement of Parent or any Parent Subsidiary. Parent has provided
Purchaser with copies of all such agreements, plans and arrangements,
except for agreements utilizing a standard form of agreement, in which case
Parent has provided Purchaser with a copy of such standard form.
(II) Except as described in the Disclosure Letter, neither
Parent nor any Parent Subsidiary (i) is a party or subject to any contract
of employment with any person which is not terminable at will without
penalty (other than standard severance policies offered to all employees
generally), or which would entitle any person to any payment (severance or
otherwise) as a result of the Merger, or any collective bargaining
agreement, or (ii) maintains or contributes to any profit sharing, pension,
retirement, thrift, savings, incentive compensation, deferred compensation,
bonus, stock option, stock purchase, restricted stock, stock appreciation
right, performance share, performance unit, severance, salary continuation,
holiday, vacation, disability, insurance, medical or other employee
benefit, incentive or welfare plan, policy, material contract or material
arrangement (collectively, the "Employee Benefit Plans").
(III) During the last three years there have been no actual
or threatened strikes or labor stoppages involving any employees of Parent
or any Parent Subsidiary, and neither Parent nor any Parent Subsidiary is
aware of any organizing activity actively seeking to certify a collective
bargaining unit or representative for any employees.
(IV) All retirement and employee benefit or welfare plans of
Parent or any Parent Subsidiary have been maintained and operated in
accordance with their terms in all material respects, and all such plans
which are subject to the Employee Retirement Income Security Act of 1974
("ERISA") or the Internal Revenue Code ("IRC") have been maintained and
operated in material compliance with all applicable provisions of ERISA and
the IRC and the regulations thereunder and are not subject to any
accumulated funding deficiency within the meaning of ERISA and the
regulations thereunder or to any outstanding liability to the Pension
Benefit Guaranty Corporation (other than for routine premium payments).
All such plans are identified in the Disclosure Letter. No "prohibited
transaction" has occurred with respect to any such plan, nor has any
"reportable event" occurred in respect thereof, as such terms are defined
in ERISA and the regulations thereunder, and no such plan is a
"Multiemployer Plan" or a "Multiple Employer Plan", as such terms are
defined in ERISA and the regulations thereunder.
(s) Credit Support Arrangements. Neither the Parent nor any
Parent Subsidiary has issued any currently existing guarantee or credit
support or has obtained any currently existing letter of credit or bond
with respect to, or has directly or indirectly made any currently existing
promise, agreement or undertaking to fund, support, guarantee or otherwise
backstop any obligation or liability, contingent or otherwise, of any
person or entity other than Parent or a Parent Subsidiary.
(t) Changes. Since November 1, 1997 Parent and each Parent
Subsidiary has been operated only in the ordinary course of business and
there has not been any:
(i) Material Adverse Change;
(ii) casualty loss, whether or not covered by insurance,
involving in any instance an amount in excess of $50,000;
(iii) obligation or liability, contingent or otherwise,
incurred by Parent or any Parent Subsidiary other than obligations and
liabilities incurred in the ordinary course of business and consistent with
past practice, or loss of a customer otherwise required to be listed on the
Disclosure Letter pursuant to Section 5.1(v)(II);
(iv) payment, discharge or settlement of any claim against
or obligation or liability of Parent or any Parent Subsidiary except in the
ordinary course of business and consistent with past practice;
(v) capital expenditures or commitment to make any
capital expenditure by the Parent or any Parent Subsidiary not included in
Parent's or Sub's capital budget as set forth in the Disclosure Letter;
(vi) issuance, sale, transfer or pledge by Parent or any
Parent Subsidiary of any capital stock of Parent or any Parent Subsidiary;
(vii) sale, lease, transfer, pledge, mortgage or
encumbrance by Parent or any Parent Subsidiary of any capital assets in an
aggregate amount exceeding $100,000;
(viii) write-down or write off of any tangible or
intangible assets in an aggregate amount exceeding $100,000 except with
respect to accounts receivable and inventory in the ordinary course of
business and consistent with past practices; or
(ix) event which, if this Agreement were in effect, would
have required the consent of Purchaser pursuant to Section 6.1(a) (other
than (viii), (xiii) or (xiv) of Section 6.1(a)) and with respect to which
such consent was not obtained.
(u) Assets and Property. Parent and each Parent Subsidiary has
good and marketable title to all the assets it purports to own, free and
clear of all liens, claims and encumbrances, and valid leasehold interests
in all assets it purports to lease. Neither Parent nor any Parent
Subsidiary owns any real property.
(v) Contracts. (I) The Disclosure Letter lists all agreements
and arrangements pursuant to which Parent or any Parent Subsidiary has any
rights, obligations or liabilities with respect to (i) borrowed money, (ii)
real property leases, (iii) royalty agreements, (iv) joint venture or
product development agreements, (v) indemnification agreements, (vi)
limitations or restrictions on the use of assets it may own, the businesses
it may conduct, the persons or entities with whom it may do business or
whom it may hire or retain, or the locations in which it may own assets or
conduct business, or (vii) the performance of intercompany services or
other arrangements between or among Parent and any of the Parent
Subsidiaries.
(II) The Disclosure Letter lists all contracts and
arrangements to which Parent or any of the Parent Subsidiaries is a party
with vendors or customers that involve payments for services in excess of,
for any vendor or customer, $250,000 in the last fiscal year.
(III) Neither Parent or any Parent Subsidiary nor, to the
knowledge of Parent or Sub, any other party thereto is in breach or default
under any contract, agreement or instrument where the effect of such breach
or default would, singly or in the aggregate with breaches and defaults
under other contracts, agreements or instruments, result in a Material
Adverse Change.
(IV) Parent has provided Purchaser with a complete and
correct copy of each contract, agreement and instrument disclosed in the
Disclosure Letter (in the case of customer contracts, to the extent
available to Parent or Sub), and all such contracts, agreements and
instruments are in full force and effect, and are valid, binding and
enforceable in accordance with their terms subject, as to enforcement, to
laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(w) Insurance. The Disclosure Letter lists all insurance
policies insuring Parent or any Parent Subsidiary or any of their
respective assets or operations. All such policies are and will be in full
force and effect through the Parent Effective Time except to the extent
such policies expire and cannot be renewed on a commercially reasonable
basis. Except as disclosed in the Disclosure Letter there are no pending
or threatened disputes or communications with or from any insurance carrier
denying or disputing any claim or coverage or regarding cancellation or
nonrenewal of any such policy.
(x) Related Party Transactions. Except as described in the
Disclosure Letter, no executive officer of Parent or any Parent Subsidiary,
nor any entity in which any of the foregoing has a 1% or more equity
interest is a party to any contract, agreement or other financial or
business arrangement with Parent or any Parent Subsidiary.
(y) Reserves etc. (I) Parent has previously furnished to
Purchaser a list of (i) all reserves maintained on the unaudited books and
records of Parent or any Parent Subsidiary as of January 31, 1998, (ii)
each item in respect of which such reserves are maintained, and (iii) the
amount of reserves maintained for each such item. Parent management
believes no additional material reserves are required under GAAP.
(II) Neither Parent nor any Parent Subsidiary has any
liability in respect of the Novaquest or Pacific On Line notes receivable
totalling approximately $5.9 million as of May 1, 1997 that have been sold
to Ingram Micro.
(III) The reserves maintained on the unaudited books and
records of Parent and the Parent Subsidiaries respecting the sale
transaction with GE Capital are sufficient to satisfy any claims which
might reasonably be expected to arise out of either of those transactions.
(z) Board Action. The Boards of Directors of Parent and Sub
have duly and validly approved and taken all corporate action required to
be taken by the Boards of Directors for the execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement. The Boards of Directors of Parent and Sub have determined that
it is advisable and in the best interest of their respective stockholders
for the Parent Merger and the Sub Merger to occur upon the terms and
subject to the conditions of this Agreement and the Parent's Board of
Directors has resolved to recommend that Parent's stockholders approve and
adopt the Parent Merger and Sub's Board of Directors and Independent
Committee thereof have resolved to recommend that Sub's stockholders
approve and adopt the Sub Merger. The Board of Directors of Sub has
determined that the shareholders of Sub shall be entitled to dissenters
rights under Subchapter D of Chapter 15 of the PABCL in connection with
the Sub Merger in lieu of providing for a statutory class vote pursuant to
Section 1906(b) of the PABCL. The Board of Directors of Sub and the
Independent Committee thereof have approved an amendment to Sub's Articles
of Incorporation to provide that Subchapter E of Chapter 25 of the PABCL
shall not be applicable to Sub.
(aa) Expenses. Parent and Sub have provided to Purchaser a good
faith estimate and description of the expenses which either of them has
incurred or which either of them expects to incur in connection with the
transactions contemplated by this Agreement.
(bb) Effect of Certain Representations and Warranties. (i)
Insofar as any of the foregoing representations and warranties are
inaccurate with respect to or as a result of circumstances involving Sub,
and if Parent did not have knowledge of such inaccuracy, Parent will have
no liability for damages to Purchaser or Acquisition Sub One or Two for
breach of such representation and warranty; provided, however, that this
subparagraph shall have no effect on whether the condition set forth in
Section 7.2(b) has been satisfied, or on any right of Purchaser to
terminate this Agreement under Section 8.3, or on any obligation of Parent
and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b).
(ii) Insofar as any of the foregoing representations and
warranties are inaccurate with respect to or as a result of circumstances
involving Parent or any Parent Subsidiary (other than Sub or any Sub
Subsidiary), and if Sub did not have knowledge of such inaccuracy, Sub will
have no liability for damages to Purchaser or Acquisition Sub One or Two
for breach of such representation and warranty; provided, however, that
this subparagraph shall have no effect on whether the condition set forth
in Section 7.2(b) has been satisfied, or on any right of Purchaser to
terminate this Agreement under Section 8.3, or on any obligation of Parent
and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b).
5.2 Representations and Warranties of Purchaser, Acquisition Sub One
and Acquisition Sub Two. Purchaser, Acquisition Sub One and Acquisition
Sub Two jointly and severally represent and warrant to Parent and Sub that:
(a) Corporate Organization. Each of Purchaser, Acquisition Sub
One and Acquisition Sub Two is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each of Acquisition Sub One and Acquisition Sub Two is a
direct, wholly-owned subsidiary of Purchaser and was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement.
Except for obligations or liabilities incurred in connection with its
incorporation or other agreements or arrangements contemplated by this
Agreement, neither Acquisition Sub One nor Acquisition Sub Two has and will
not have incurred, directly or indirectly, through any subsidiary or
affiliate, any obligations or liabilities or engaged in any business
activities of any type or kind whatsoever or entered into any agreements or
arrangements with any Person.
(b) Corporate Authority. Purchaser, Acquisition Sub One and
Acquisition Sub Two each has the requisite corporate power and authority,
and has taken all required action necessary, to properly execute and
deliver this Agreement and to perform its obligations hereunder, and this
Agreement constitutes the valid and legally binding obligation of each of
Purchaser, Acquisition Sub One and Acquisition Sub Two, enforceable in
accordance with its terms and conditions, except as limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors' rights
generally and (ii) general principles of equity, regardless of whether
asserted in a proceeding in equity or at law.
(c) Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation by Purchaser, Acquisition Sub One
or Acquisition Sub Two of the transactions contemplated hereby, will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree or other restriction of any government, governmental agency
or court to which Purchaser, Acquisition Sub One or Acquisition Sub Two or
any of their respective subsidiaries is subject or any provision of the
charter or bylaws of the Purchaser, Acquisition Sub One or Acquisition Sub
Two or any of their respective subsidiaries, or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel or
require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which Purchaser, Acquisition Sub One or
Acquisition Sub Two or any of their respective subsidiaries is a party or
by which any of them is bound or to which any of their respective assets is
subject, and which would have a material adverse effect on the ability of
the Parties to consummate the transactions contemplated by this Agreement.
Other than filings required in connection with the provisions of the HSR
Act, the PABCL and the Exchange Act, neither Purchaser nor Acquisition Sub
One nor Acquisition Sub Two needs to give any notice to, make any filing
with or obtain any authorization, consent or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
(d) Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the executive officers of Purchaser,
Acquisition Sub One or Acquisition Sub Two, threatened against Purchaser,
Acquisition Sub One or Acquisition Sub Two which if adversely determined
against Purchaser, Acquisition Sub One or Acquisition Sub Two would
materially impair or delay the Parties' ability to consummate the
transactions contemplated by this Agreement.
(e) Funds. Purchaser has all of the funds in its control and
possession required in order to consummate the Parent Merger and the Sub
Merger and to pay all fees and expenses as contemplated by this Agreement
(the "Payment Funds").
(f) Brokers' and Other Fees. Neither Parent nor any Parent
Subsidiary has or will have any liability or obligation to pay any fees or
commissions to any investment advisor, broker, finder or agent engaged by
Purchaser, Acquisition Sub One or Acquisition Sub Two with respect to the
transactions contemplated by this Agreement. Any such fees or commissions
will be paid by Purchaser.
(g) Proxy Statement. None of the information supplied in
writing by Purchaser or any subsidiary of Purchaser specifically for
inclusion in the Proxy Statements (as defined in Section 6.1(c)), including
all amendments and supplements thereto, shall, in the case of the Proxy
Statements, at the date thereof and at the time of the meetings of
shareholders to vote on the matters covered thereby, contain any untrue
statement of a material fact, or omit a state material fact required to be
stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not misleading.
ARTICLE VI
Covenants
---------
6.1 Covenants of the Parent and Sub. Parent and Sub jointly and
severally (but subject to Section 6.4) covenant and agree that, except as
otherwise required by this Agreement:
(a) Interim Operations of Parent and Sub. From the date hereof
and continuing until the earlier of (i) the termination of this Agreement
or (ii) the Sub Effective Time (in the case of Sub) or (iii) the Parent
Effective Time (in the case of Parent), the business of Parent and Sub and
their respective subsidiaries, as applicable, shall be conducted only in
the ordinary and usual course and, to the extent consistent therewith,
Parent and Sub each shall use all commercially reasonable efforts to
preserve its business organization intact and maintain its existing
relations with customers, suppliers, employees and business associates.
Without limiting the generality of the foregoing from the date hereof and
continuing until the earlier of (i) the termination of this Agreement or
(ii) the Sub Effective Time (in the case of Sub) or (iii) the Parent
Effective Time (in the case of Parent), Parent and Sub will not with
respect to themselves or any Parent Subsidiary without the prior written
consent of Purchaser (or except as expressly permitted by the Disclosure
Letter or as required by this Agreement) do or commit to do any of the
following:
(i) authorize or effect any change in its charter or bylaws;
(ii) grant, amend or modify any Stock Rights or issue, sell
or otherwise dispose of any of its capital stock (except, in the case of
Parent, upon the exercise of Stock Rights outstanding as of the date of
this Agreement; it being understood, however, that Sub shall not issue any
capital stock, whether or not upon the exercise of Stock Rights);
(iii) declare, set aside or pay any dividend or distribution
with respect to its capital stock (whether in cash or in kind), or redeem,
repurchase or otherwise acquire any of its capital stock or any Stock
Rights;
(iv) issue any note, bond or other debt security or create,
incur, assume or guarantee any indebtedness for borrowed money or
capitalized lease obligation other than borrowings and reborrowings under
existing credit facilities to fund current obligations in the ordinary
course of business;
(v) impose or allow to be imposed any Security Interest upon
any of its assets except pursuant to after-acquired property clauses in
existing security arrangements disclosed in the Disclosure Letter or
purchase money security interests on inventory financed in the ordinary
course of business;
(vi) make any expenditure for a capital asset or lease any
real property except in accordance with the Parent or Sub capital budget as
disclosed in the Disclosure Letter;
(vii) implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by
generally accepted accounting principles and provided that same is promptly
disclosed to Purchaser;
(viii) (I) enter into or amend or renew any written
employment, consulting, severance, "golden parachute" or similar agreement
or arrangement with any director, officer or employee of Parent or of a
Parent Subsidiary, or (II) grant any salary or wage increase, or (III)
increase any employee benefit (including incentive or bonus payments),
except in the case of "(II)" for normal individual increases in
compensation to employees (other than officers and directors of Parent or a
Parent Subsidiary) in the ordinary course of business consistent with past
practice;
(ix) enter into, establish, adopt or amend (except as may be
required by applicable law) any pension, retirement, stock option, stock
purchase, savings, profit sharing, deferred compensation, consulting,
bonus, group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, in respect of any director, officer or
employee of Parent or any Parent Subsidiary, or take any action to
accelerate the vesting or exercisability of stock options, restricted stock
or other compensation or benefits payable thereunder;
(x) knowingly or negligently take or fail to take any
action, if such action or failure to act would, directly or indirectly,
cause any of the Parent Subsidiaries to cease to be a member of the
consolidated group of companies of which Parent is the common parent for
Federal income tax purposes; it being understood that compliance with
Section 6.1(g)(iii) and (iv) will not constitute a violation of this
Section 6.1(a)(x); and it being further understood that except as
contemplated by Section 6.1(g)(iv) or as otherwise agreed by Purchaser in
writing, Parent shall comply with this Section 6.1(a)(x) without resort to
exercising its rights to acquire additional shares of Sub pursuant to that
certain Stock Registration and Option Agreement dated as of May 31, 1996
among Parent, Sub and The Future Now of Arkansas, Inc., as amended;
(xi) take any action that would materially alter the
strategic business plan and/or services delivery capability of Sub;
(xii) make any capital investment in or make any loan to or
acquire the securities or assets of any other Person other than to or from
its subsidiaries in the ordinary course of business;
(xiii) make any change in employment terms for any of its
directors, officers and employees other than customary increases to non-
director or non-officer employees awarded in the ordinary course of
business consistent with past practices; or
(xiv) except as may be required by law, intentionally take
or fail to take any action the reasonably foreseeable effect of which would
be to cause any representation or warranty in this Agreement to be or
become inaccurate.
In the event Parent or Sub shall request Purchaser to consent in
writing to an action otherwise prohibited by this Section 6.1(a), Purchaser
shall use all reasonable efforts to respond in a prompt and timely fashion,
but may otherwise respond affirmatively or negatively in its sole
discretion exercised in good faith.
(b) Acquisition Proposals.
(1) Neither the Parent nor the Sub or any of their
respective officers and directors shall, and the Parent and Sub will cause
their respective employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by the
Parent or Sub) not to, solicit, initiate or encourage (including by way of
furnishing information), or take any other action designed or reasonably
likely to facilitate (including, without limitation, any amendment,
modification or termination, or any agreement to do any of the foregoing,
to the Rights Agreement or any redemption of rights issued thereunder) any
inquiries or the submission or any proposal or offer from any Person
relating to an Acquisition Proposal (as defined below) involving Parent,
Sub or any other Parent Subsidiary or participate in any discussions or
negotiations regarding any such Acquisition Proposal; provided, however,
that subject to compliance with this Section 6.1(b), the Parent, the Sub
and their respective directors and officers may participate in any
discussions or negotiations regarding, furnish any information with respect
to, assist or facilitate any effort or attempt by any Person to do or seek,
an Acquisition Proposal, solely to the extent that the Board of Directors
of Parent or Sub, as applicable, determines in good faith, that such
actions are necessary in order for the Board of Directors of Parent or Sub,
as applicable, to comply with its fiduciary obligations under applicable
law in response to an Acquisition Proposal or material modification to an
Acquisition Proposal, which Acquisition Proposal or material modification
was made after the date hereof and was not solicited after the date hereof.
As used herein, the term "Acquisition Proposal" means, with respect to a
particular Person, a merger, consolidation, share exchange, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving, or any purchase of all or any significant portion of
the assets or any equity securities of, or any tender offer or exchange
offer for shares of any class of equity securities of, such Person. The
transactions contemplated by this Agreement shall not be deemed an
Acquisition Proposal. The Parent and Sub will cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition Proposal and
will notify Purchaser promptly if any such Acquisition Proposal is received
by, any such information is requested from, or any such negotiations or
discussions are sought to be instituted or continued with, the Parent or
the Sub.
(2) Except as set forth in this paragraph (2), neither the
Board of Directors of Parent nor the Board of Directors of Sub nor any
committee of either of them shall (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Purchaser, or take
any action not explicitly permitted by this Agreement that would be
inconsistent with, the approval or recommendation by such Board of
Directors or such committee of the Parent Merger or the Sub Merger, (ii)
approve or recommend, or propose publicly to approve or recommend, any
Acquisition Proposal, or (iii) cause Parent or Sub to enter into any letter
of intent, agreement in principle, acquisition agreement or other similar
agreement (each, an "Acquisition Agreement") related to any Acquisition
Proposal. Notwithstanding the foregoing, in the event that the Board of
Directors of Parent or Sub has received a Superior Proposal (defined below)
and determines in good faith, after receipt of advice from outside counsel,
that it is necessary to do so in order to comply with its fiduciary
obligations under applicable law, the Board of Directors of Parent or Sub,
as applicable, may (subject to compliance with this Section 6.1(b) and
subject to payment of any Termination Fee (as hereinafter defined) then
required pursuant to this Agreement), (x) withdraw or modify its approval
or recommendation of the Parent Merger or the Sub Merger or (y) terminate
this Agreement (and concurrently with or after such termination, if it so
chooses, cause Parent or Sub, as applicable, to enter into any Acquisition
Agreement with respect to any Superior Proposal), but in any such case set
forth in this clause (y), only at a time that is after the fifth (5th) day
following Purchaser's receipt of written notice advising Purchaser that the
Board of Directors of Parent or Sub or any such committee has received a
Superior Proposal, specifying the material terms and conditions of such
Superior Proposal and identifying the Person making such Superior Proposal.
For purposes of this Agreement, a "Superior Proposal" means any bona fide
proposal made by a third party to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, all or substantially
all of the voting power of the shares of Parent Common Stock or Sub Common
Stock then outstanding or all or substantially all of the assets of Parent
(which proposal may include as a component thereof the purchase of all or
substantially all of the shares of capital stock of Sub) or Sub and
otherwise on terms which the Board of Directors of Parent or Sub or such
committee determines in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation) to be materially
more favorable to Parent's or Sub's stockholders than the Parent Merger and
the Sub Merger and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the Board of Directors of
Parent or Sub or such committee, is reasonably capable of being furnished
by such third party.
(c) Meetings of the Shareholders. Each of Parent and Sub will
take all action necessary in accordance with applicable law and its
Articles of Incorporation and By-Laws to convene a meeting of its
stockholders as promptly as practicable to consider and vote upon the
approval of this Agreement and the Parent Merger or Sub Merger, as
applicable (the "Stockholder Meetings"). Subject to Section 6.1(b)(2), the
Board of Directors of Parent shall recommend approval of the Parent Merger,
and the Board of Directors of Sub and the Independent Committee of Sub's
Board shall recommend approval of the Sub Merger, and the Parent and Sub
shall take all lawful action to solicit such approvals, as applicable.
Each of the Parent and Sub hereby severally represents, warrants and
covenants that the proxy or information statement with respect to such
meeting of its shareholders (each, a "Proxy Statement"), at the date
thereof and at the date of such meetings, will not include an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided,
however, the foregoing shall not apply to the extent that any such untrue
statement of a material fact or omission to state a material fact was made
in reliance upon and in conformity with written information concerning the
Purchaser, Acquisition Sub One or Acquisition Sub Two furnished by
Purchaser specifically for use in the Proxy Statement. No Proxy Statement
shall be filed, and no amendment or supplement to such Proxy Statement will
be made by the Parent or Sub, without consultation with Purchaser and its
counsel.
(d) Exchange Act Filings. Unless an exemption shall be
expressly applicable to the Parent or the Sub, or unless Purchaser agrees
otherwise in writing, the Parent and the Sub will each file with the SEC
and NASDAQ National Market System ("NASDAQ") all reports required to be
filed by it pursuant to the rules and regulations of the SEC (including,
without limitation, all required financial statements). Such reports and
other information shall comply in all material respects with all of the
requirements of the SEC rules and regulations and, when filed, will not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Purchaser and its counsel, shall be given a reasonable
opportunity to review and to comment on such filings prior to their being
filed with the SEC and NASDAQ.
(e) Access. Upon reasonable notice, the Parent and the Sub
shall afford Purchaser's officers, employees, counsel, accountants and
other authorized representatives access, during reasonable business hours
throughout the period prior to the Parent Effective Time and in a manner
which will not unreasonably interfere with the management of the business
of Parent or any Parent Subsidiary, to its officers, employees, agents,
independent auditors, representatives, properties, books and records and,
during such period, the Parent and the Sub each shall furnish promptly to
Purchaser all information concerning its business, properties and personnel
as Purchaser may reasonably request provided, however, neither the Parent
nor the Sub shall be obligated to furnish Purchaser with information
respecting any negotiations referred to in the last sentence of Section
6.1(b)(1) of this Agreement.
(f) Takeover Statutes. If any "fair price," "moratorium,"
"control share acquisition" or other similar anti-takeover statute or
regulation enacted under state or federal laws in the United States,
including, without limitation, Subchapter E, F, G or H of the PABCL (each,
a "Takeover Statute" and, collectively, "Takeover Statutes"), is or becomes
applicable to the Parent Merger or the Sub Merger or the transactions
contemplated hereby, Parent, Sub and their respective Boards or Directors
will use all commercially reasonable efforts (a) to grant such approvals
and take such actions as are reasonably necessary, lawful and requested or
consented to by Purchaser so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and thereby, and (b) to otherwise act to eliminate the
effects of any Takeover Statute on any of the transactions contemplated
hereby and thereby. Parent and Sub will use all commercially reasonable
efforts to effect, prior to the Sub Effective Time, the amendment to Sub's
Articles of Incorporation described in Section 5.1(z) hereof.
(g) Options and Warrants.
(i) Prior to the Parent Effective Time, the Parent shall
take such actions (including obtaining any required consents) as may be
necessary such that at the Parent Effective Time each Stock Right issued by
the Parent shall be cancelled or converted into the right to receive, as
the case may be, and the holder thereof, upon surrender thereof, shall
receive, the Parent Option Conversion Price to which such holder is
entitled, if any.
(ii) Prior to the Sub Effective Time, Sub shall take such
actions (including obtaining any required consents) as may be necessary
such that at the Sub Effective Time each Stock Right issued by Sub shall be
cancelled or converted into the right to receive, as the case may be, and
the holder thereof, upon surrender thereof, shall receive, the Sub Option
Conversion Price to which such holder is entitled, if any.
(iii) In connection with the exercise, prior to the Sub
Effective Time, of any employee stock options issued by Sub, Sub shall
(unless otherwise agreed by Purchaser in writing), in accordance with the
cash-out option of Sub under Section 3(l) of its 1996 Long-Term Incentive
Plan (the "XLC Plan"), pay to each holder of an option, upon notice of any
exercise thereof, cash in an amount equal to the spread between the
exercise price and the fair market value of the underlying common share or
the Spread Value (as defined in the XLC Plan), and will take all other
action as may be necessary to ensure that in no event will any capital
stock of Sub be issued upon or in connection with the exercise of any such
option. Parent will, if necessary, lend sufficient funds to Sub on
commercially reasonable terms to enable Sub to pay such cash in a timely
manner.
(iv) In connection with the exercise, prior to the Sub
Effective Time, of any Stock Rights issued by Sub (other than employee
stock options), Sub shall not issue or permit to be issued any shares of
capital stock of Sub upon the exercise thereof other than simultaneously
with or after Parent (or a direct or indirect wholly-owned subsidiary of
Parent) shall have purchased (which Parent hereby agrees to do or cause to
be done), and Sub shall have issued (which Sub agrees to do or cause to be
done) that number of validly issued shares of the same class to Parent or
such subsidiary that is equal to four times the number of shares of capital
stock issuable upon such exercise of such Stock Rights, it being understood
that Parent, Sub and Purchaser expect such purchase and issuance to occur
pursuant to that certain Stock Registration and Option Agreement dated as
of May 31, 1996 among Parent, Sub and The Future Now of Arkansas, Inc., as
amended; provided, however, that in no event will Parent or any Parent
Subsidiary purchase or otherwise acquire any such shares of Sub for a per
share amount in excess of the Sub Share Conversion Price.
(h) [intentionally left blank]
(i) IBMCC. Parent and Sub shall request that IBM Credit
Corporation ("IBMCC") give any consent to the Sub Merger or the Parent
Merger necessary under Parent's and Sub's credit arrangements with IBMCC.
If Purchaser so requests, Parent and Sub will take all action necessary to
pay, at the time the Parent Merger and Sub Merger are consummated, any or
all of the balance of any amounts owed to IBMCC, subject, however, to
Purchaser making available to Parent and Sub the cash necessary to do so.
(j) Third Party Consents. Parent and Sub shall use their
commercially reasonable efforts to obtain all necessary consents to the
transactions contemplated by this Agreement as may be required under
contracts to which Parent or any Parent Subsidiary is a party and as to
which Purchaser requests that such consents be obtained, including without
limitation the real property leases required to be listed in Section 5.1(v)
of the Disclosure Letter.
6.2 Covenants of the Parties. Each of the Parties, severally and
not jointly, covenants and agrees as to itself, as follows:
(a) Confidentiality. The terms and conditions of that certain
letter agreement dated December 8, 1997 entered into by the Purchaser and
the Parent (the "Confidentiality Agreement") are ratified and confirmed and
shall remain in full force and effect. Notwithstanding the foregoing, the
Parent and Purchaser hereby amend the Confidentiality Agreement such that
the provisions of the paragraph 2(c) thereof do not apply to any public
announcement effected in accordance with the provisions of Section 6.2(d)
below regarding the Parties' execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby.
(b) Hart-Scott-Rodino Filings. Each Party will file any
Notification and Report Forms and related material that it may be required
to file with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice under the HSR Act, will use
commercially reasonable efforts to obtain termination of the applicable
waiting period under the HSR Act, and will make any further filings
pursuant thereto that may be necessary or appropriate.
(c) Notification of Certain Matters. Each Party will give
prompt written notice to the others of any development causing a breach of
any of its own representations and warranties set forth in this Agreement.
(d) Publicity. The initial press release relating to the
transactions contemplated hereby shall be a joint press release and
thereafter the Parent, the Sub and Purchaser shall consult with each other
in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and in making any filings
with any federal or state governmental or regulatory agency or with any
national securities exchange with respect thereto. None of the Parties
shall issue any such press release or make any such public statement or
filing prior to such consultation, except as may be required by law or by
obligations pursuant to any listing agreement with any national securities
exchange or the NASDAQ.
(e) Cooperation. Each Party shall upon the request of another
Party provide its commercially reasonable cooperation and assistance to the
requesting Party in the latter's efforts to obtain any consents, approvals
and amendments to contracts required or to take such actions as may be
required to comply with any applicable laws to effect the Sub Merger, the
Parent Merger or otherwise required under this Agreement.
(f) Indemnification; Directors' and Officers' Insurance.
(i) The Parties agree that all rights to indemnification and
advancement of expenses by the Parent or the Sub now existing in favor of
each present and former director and officer of the Parent or the Sub
(acting in their capacities as directors and/or officers of the Parent or
the Sub, as applicable, the "Indemnified Parties") as provided in (i) the
Parent's or the Sub's respective Articles of Incorporation or By-Laws, or
(ii) the indemnification agreements listed in the Disclosure Letter as in
effect on the date thereof (the "Indemnification Agreements"), shall, with
respect to matters occurring at or prior to the Parent or Sub Effective
Time, as applicable, continue in full force and effect, shall survive the
Sub Merger and Parent Merger and shall continue in full force and effect
thereafter until the date which is six (6) years from the Sub Effective
Time or Parent Effective Time, as applicable; provided, however, in the
event any claim or claims are asserted or threatened within such period,
all rights to indemnification in respect of any such claim or claims shall
continue until final disposition of any and all such claims.
(ii) Subject to the provisions of Section 6.2(f)(iii) below,
after the Sub Effective Time or Parent Effective Time, as applicable, the
Purchaser shall, subject to the further terms set forth herein, indemnify
and hold harmless, to the fullest extent permitted under applicable law
(and shall also advance expenses as incurred to the fullest extent
permitted under applicable law provided the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification), each
Indemnified Party against any costs or expenses (including reasonable
attorneys' fees and disbursements), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to the
transactions contemplated by this Agreement (and whether commenced prior to
or after the Sub Effective Time or the Parent Effective Time), for a period
of six (6) years after the Sub Effective Time or Parent Effective Time, as
applicable, in each case regardless of by whom asserted and regardless of
whether such claim, action, suit, proceeding or investigation arises out
of, pertains to or results from, solely or in part, the active, passive or
concurrent negligence of any Indemnified Party; provided, however, in the
event any claim or claims are asserted or threatened within such six-year
period, all right to indemnification in respect of any such claim or claims
shall continue until final disposition of any and all such claims. Any
Indemnified Party wishing to claim indemnification under this Section
6.2(f)(ii), and notwithstanding the provisions set forth in the Parent's or
the Sub's respective Articles of Incorporation or By-Laws, or in the
Indemnification Agreements, upon learning of any such claim, action, suit,
proceeding or investigation, such Indemnified Party shall promptly notify
Purchaser thereof, but the failure to so notify shall not relieve Purchaser
of any liability it may have to such Indemnified Party if such failure does
not materially prejudice the indemnifying party. In the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Sub Effective Time or the Parent Effective Time), (i) Purchaser
shall have the right to assume the defense thereof and Purchaser shall not
be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Purchaser
fails to assume such defense or counsel for Purchaser advises that there
are issues which raise conflicts of interest between the Parties, on the
one hand, and the Indemnified Parties, on the other hand, or that there are
additional defenses available to the Indemnified Parties which are not
otherwise available to the Parties, the Indemnified Parties may retain
counsel satisfactory to them, and the Purchaser shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; provided, however, that Purchaser shall
be obligated pursuant to this paragraph (ii) to pay for only one firm of
counsel for all Indemnified Parties in any jurisdiction unless the use of
one counsel for such Indemnified Parties would present such counsel with a
conflict of interest, in which case Purchaser need only pay for separate
counsel to the extent necessary to resolve such conflict, (ii) the
Indemnified Parties will cooperate in the defense of any such matter and
(iii) Purchaser shall not be liable for any settlement effectuated without
its prior written consent. Purchaser shall not settle any action or claim
identified in this Section 6.2(f)(ii) in any manner that would impose any
liability on an Indemnified Party not paid by Purchaser or the Sub
Surviving Corporation or the Parent Surviving Corporation without such
Indemnified Party's prior written consent.
(iii) Notwithstanding any thing contained in paragraph (ii)
of this Section 6.2(f), Purchaser shall not have any obligation hereunder
to any Indemnified Party if the indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law, or the
conduct of the Indemnified Party relating to the matter for which
indemnification is sought involved willful misconduct.
(iv) Parent and Sub shall maintain their respective existing
officers' and directors' liability insurance ("D&O Insurance") for a period
of three (3) years after the Sub Effective Time or Parent Effective Time,
as applicable, so long as the annual premium therefor, in the aggregate, is
not in excess of 150% of the last annual premium paid prior to the date
hereof (the "Maximum Premium"); provided, however, if the existing D&O
Insurance expires, or is terminated or cancelled by the insurance carrier
during such three-year period, the Parent and Sub will use their
commercially reasonable efforts to obtain as much D&O Insurance as can be
obtained for the remainder of such period for a premium not in excess (on
an annualized basis) of the Maximum Premium.
(v) To the fullest extent not prohibited by applicable New
York law or federal securities laws, Purchaser agrees to guarantee the
payment and performance of the Parent's, Sub's, Acquisition Sub One's and
Acquisition Sub Two's obligations under this Section 6.2(f). This Section
6.2(f) shall survive the closing of the transactions contemplated hereby
and is intended to benefit each of the Indemnified Parties (each of whom
shall be entitled to enforce this Section against the Parties). If any
Party, or any of their respective successors or assigns (i) reorganizes or
consolidates with or merges into any other Person and is not the resulting,
continuing or surviving corporation or entity of such consolidation or
merger or (ii) liquidates, dissolves or transfers all or substantially all
of its properties and assets to any Person, then, and in each such case,
prior to such action, proper provision will be made so that the successors
and assigns of such party assume the obligations of such party set forth in
this Section.
6.3 Covenants of Purchaser. Purchaser covenants and agrees as
follows:
(a) Maintenance of Payment Funds. Prior to the Sub Effective
Time and Parent Effective Time, as applicable, Purchaser shall cause the
Payment Funds to be available to effect payment of the Sub Share Conversion
Price, the Sub Option Conversion Price, the Parent Share Conversion Price
and the Parent Option Conversion Price and neither Purchaser, Acquisition
Sub One nor Acquisition Sub Two will enter into any transaction, commitment
or obligation which could reasonably result in the Payment Funds not being
so available as and when required for such payments pursuant to the terms
and conditions of this Agreement.
(b) Purchaser Shares. At the Parent Stockholders' Meeting, all
Parent Shares then owned by Purchaser or any of its direct or indirect
wholly-owned subsidiaries shall be voted in favor of the Parent Merger. At
the Sub Stockholders' Meeting, all Sub Shares then owned by Purchaser or
any of its direct or indirect wholly-owned subsidiaries shall be voted in
favor or the Sub Merger.
6.4 Effect of Certain Covenants. (i) Insofar as any covenants in
this Article VI relate specifically to Sub, Parent shall have no obligation
to force Sub to comply therewith, but shall take such actions as may
reasonably assist and facilitate Sub in complying therewith. If Parent has
done so and Sub has nonetheless failed to comply with such covenant, Parent
will have no liability for damages to Purchaser, Acquisition Sub One or
Acquisition Sub Two for breach of such covenant; provided, however, that
this subparagraph shall have no effect on whether the condition set forth
in Section 7.2(a) has been satisfied, or on any right of Purchaser to
terminate this Agreement under Section 8.3, or on any obligation of Parent
and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b).
(ii) Insofar as any Covenants in this Article VI relate
specifically to Parent or any Parent Subsidiaries (other than Sub or any
Sub Subsidiaries), Sub shall have no obligation to force Parent to comply
therewith, but shall take such actions as may reasonably assist and
facilitate Parent in complying therewith. If Sub has done so and Parent
has nonetheless failed to comply with such covenant, Sub will have no
liability for damages to Purchaser, Acquisition Sub One or Acquisition Sub
Two for breach of such covenant; provided, however, that this subparagraph
shall have no effect on whether the condition set forth in Section 7.2(a)
has been satisfied, or on any right of Purchaser to terminate this
Agreement under Section 8.3, or on any obligation of Parent and Sub to pay
the Termination Fee to Purchaser pursuant to Section 9.1(b).
ARTICLE VII
Conditions
----------
7.1 Conditions to Obligations of the Parties. The obligations of
the Parties to consummate the Sub Merger and the Parent Merger are subject
to the fulfillment of each of the following conditions, any or all of which
may be waived in whole or in party by any of the Parties, as the case may
be, to the extent permitted by applicable law:
(a) Parent Shareholder Approval. The Parent Merger shall have
been duly approved by the holders of the outstanding stock of Parent in
accordance with the PABCL and the Articles of Incorporation and By-Laws of
the Parent.
(b) Sub Shareholder Approval. The Sub Merger and the amendment
to Sub's Articles of Incorporation described in Section 5.1(z) hereof shall
have been duly approved by the holders of the outstanding stock of Sub in
accordance with the PABCL and the Articles of Incorporation and By-Laws of
the Sub.
(c) Governmental and Regulatory Consent. (i) The HSR waiting
period shall have expired or been terminated, and (ii) other than the
filings provided for in Section 1.8, all other filings required to be made
prior to the Sub Effective Time or Parent Effective Time, as applicable, by
the Parties with, and all consents, approvals and authorizations required
to be obtained prior to the applicable Effective Time by the Parties from,
governmental and regulatory authorities in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby shall have been made or obtained (as the case may be).
(d) Statutes; Injunctions. Neither any statute, rule,
regulation, order, stipulation or injunction (each an "Order") shall be
enacted, promulgated, entered, enforced or deemed applicable to the Sub
Merger or the Parent Merger, nor shall any other action have been taken by
any governmental authority, administrative agency or court of competent
jurisdiction which (i) prohibits the consummation of the transactions
contemplated by this Agreement, or (ii) prohibits Purchaser's direct or
indirect ownership or operation of all or any material portion of the
business or assets of Parent or Sub, or (iii) could compel Purchaser to
dispose of or hold separate all or any material portion of such business or
assets as a result of the transactions contemplated by this Agreement.
(e) Both Mergers. No Party shall be obligated to consummate the
Parent Merger if the Sub Merger shall not have been consummated. No Party
shall be obligated to consummate the Sub Merger unless all conditions to
the Parent Merger have been satisfied or waived.
(f) Amendment to Articles. The Articles of Incorporation of
Sub shall have been amended as described in Section 5.1(z).
7.2 Conditions to Obligations of Purchaser, Acquisition Sub One and
Acquisition Sub Two. The obligation of Purchaser, Acquisition Sub One and
Acquisition Sub Two to consummate the Sub Merger and Parent Merger is
further subject to the fulfillment of the following conditions, which may
be waived by Purchaser, Acquisition Sub One or Acquisition Sub Two:
(a) Compliance. The Parent and the Sub each shall have
performed and complied with, in all material respects, all obligations and
covenants required to be performed or completed with by it under,
respectively, this Agreement at or prior to the Sub Effective Time or
Parent Effective Time, as applicable, and Parent and Sub shall each have
delivered to Purchaser a certificate of an executive officer so certifying.
(b) Representations. Each of the representations and
warranties of Parent and of Sub made in this Agreement shall be true and
correct in all material respects as of the date when made and shall be
deemed to be made again at and as of the Sub Closing and the Parent Closing
and shall then be true and correct in all material respects, except to the
extent changes are required, permitted or contemplated pursuant to this
Agreement, and Parent and Sub shall each have delivered to Purchaser a
certificate of an executive officer so certifying.
(c) Opinion of Counsel. Purchaser shall have received an
opinion of counsel to Parent and Sub in form and substance substantially
the same as previously agreed by Purchaser, Parent and Sub.
(d) Proceedings. No action or proceeding shall have been
instituted and be pending before any court or governmental body to restrain
or prohibit, or to obtain substantial damages in respect of, the
consummation of this Agreement and the transactions contemplated hereby
which, in the reasonable opinion of Purchaser based upon advice of counsel
respecting the likelihood of an adverse outcome in such action or
proceeding, may reasonably be expected to result in a preliminary or
permanent injunction against such consummation or damages which would
constitute a Material Adverse Change.
(e) Material Adverse Change. There shall not have occurred a
Material Adverse Change.
(f) Liens. With the exception of the Security Interest of
IBMCC as disclosed in the Disclosure Letter, in all instances and respects
Parent (or the applicable Parent Subsidiaries as the case may be) shall
hold all shares of stock in all Parent Subsidiaries free and clear of any
restrictions, liens, claims and encumbrances whatsoever.
(g) Tax Consolidation. Each of the Parent Subsidiaries shall
be, and shall have been at all times from the date hereof to the Parent
Effective Time, a member of the consolidated group of companies of which
Parent is the common parent for Federal income tax purposes, it being
understood that compliance with Section 6.1(g)(iii) and (iv) will (for
purposes only of Sub Stock Rights) be deemed to satisfy this subparagraph
(g).
(h) Employment Agreements. The employees of Sub previously
identified in writing by Purchaser shall be employees of Sub and shall have
entered into employment agreements on terms and conditions previously
identified in writing by Purchaser to Parent and Sub, and such employment
agreements shall be in full force and effect..
(i) Letter from Auditors. Purchaser shall have received a
letter (the "Agreed Upon Procedures Letter") from Parent's independent
certified public accountants substantially in the form previously agreed by
Purchaser, Parent and Sub.
(j) Stock Issuance, etc. Neither Parent, Sub nor any Parent
Subsidiary shall (I) after the date of this Agreement have granted, amended
or modified any Stock Rights (except as required pursuant to Section
6.1(g)(iii) or (iv)) or issued any capital stock (except, in the case of
Parent, but not Sub, upon the exercise of Stock Rights outstanding as of
the date of this Agreement), or (II) after December 1, 1997 have purchased
or otherwise acquired any shares of common stock of Sub for a per share
price in excess of the Sub Share Conversion Price.
(k) Stock Rights. There shall be outstanding no Stock Right
which by its terms does not either terminate upon the completion of the Sub
Merger or the Parent Merger or convert into the right to receive only the
Sub Option Conversion Price or the Parent Option Conversion Price, as the
case may be.
(l) Dividends, etc. After the date of this Agreement, neither
Parent nor Sub shall have declared, set aside or paid any dividend or
distribution with respect to its capital stock (whether in cash or in
kind), or shall have redeemed, repurchased or otherwise acquired any of its
capital stock or, except as required by this Agreement, any Stock Rights.
(m) XLSource Transition. Those portions of the XLSource
Transition Plan to have been implemented prior to the Sub Effective Time
shall have been implemented on a timely basis in all material respects, and
there shall not have occurred a material adverse effect on the ability of
Parent or any Parent Subsidiary to implement the XLSource Transition Plan
on a timely basis.
7.3 Conditions to Obligations of Parent. The obligation of Parent
to consummate the Parent Merger and of Parent and Sub to consummate the Sub
Merger is further subject to the fulfillment of the following conditions,
which may be waived by Parent and Sub:
(a) Compliance. Purchaser, Acquisition Sub One and Acquisition
Sub Two each shall have performed and complied with, in all material
respects, all obligations and covenants required to be performed or
completed with by it under this Agreement at or prior to the Sub Effective
Time or Parent Effective Time, as applicable, and Purchaser shall have
delivered to Parent and Sub a certificate of an officer of Purchaser so
certifying.
(b) Representations. Each of the representations and
warranties of Purchaser, Acquisition Sub One and Acquisition Sub Two made
in this Agreement shall be true and correct in all material respects as of
the date when made and shall be deemed to be made again at and as of the
Sub Closing and the Parent Closing and shall then be true and correct in
all material respects, except to the extent changes are required, permitted
or contemplated pursuant to this Agreement, and Purchaser shall have
delivered to Parent and Sub a certificate of an officer of Purchaser so
certifying.
(c) Opinion of Counsel. Parent shall have received an opinion
of counsel to Purchaser in form and substance substantially the same as
previously agreed by Purchaser, Parent and Sub.
ARTICLE VIII
Termination
-----------
8.1 Termination by Mutual Consent. This Agreement may be terminated
and the Sub Merger and the Parent Merger may be abandoned at any time prior
to consummation thereof, before or after the approval by the stockholders
of Parent or Sub, by the written mutual consent of Purchaser, Sub and
Parent.
8.2 Termination by Purchaser, Sub or Parent. This Agreement may be
terminated and the Merger may be abandoned by Purchaser, Sub or Parent if
(i) the Sub Merger or the Parent Merger shall not have been consummated by
July 31, 1998 (unless the failure to consummate by such date is due to the
wrongful action or failure to act of the party seeking to terminate), or
(ii) the stockholders of Parent disapprove the Parent Merger at the Parent
Stockholder Meeting, or (iii) any Order shall have become final and non-
appealable.
8.3 Termination by Purchaser. This Agreement may be terminated by
Purchaser and the Sub Merger and the Parent Merger may be abandoned at any
time prior to consummation thereof, before or after the approval by
stockholders of Parent or Sub if (a) the Parent Board shall have withdrawn
or modified in a manner adverse to Purchaser its approval or recommendation
of this Agreement, or the Parent Board, upon request by Purchaser, shall
fail to reaffirm its approval or recommendation, or shall have resolved to
do any of the foregoing, or at the Sub Stockholders' Meeting all shares of
Sub Common Stock owned directly or indirectly by Parent shall not have been
voted in favor of the Sub Merger and in favor of the amendment to Sub's
Articles of Incorporation described in Section 5.1(z) hereof; or (b) Parent
shall have failed to perform in any material way any of its covenants under
this Agreement in a manner so as not to satisfy the condition to closing in
Section 7.2(a), which failure to perform is incapable of being cured or has
not been cured within twenty (20) days after the giving of notice thereof
to Parent; or (c) Parent shall have breached any of its representations or
warranties in any material respect in a manner so as not to satisfy the
condition to closing in Section 7.2(b), which breach is incapable of being
cured or has not been cured within twenty (20) days after the giving of
notice thereof to Parent; or (d) the Board of Directors of Sub, or the
Independent Committee thereof, shall have withdrawn or modified in a manner
adverse to Purchaser its approval or recommendation of this Agreement, or
the Board of Directors of Sub, or the Independent Committee thereof, upon
request by Purchaser, shall fail to reaffirm its approval or
recommendation, or shall have resolved to do any of the foregoing; or (e)
Sub shall have failed to perform in any material way any of its covenants
under this Agreement in a manner so as not to satisfy the condition to
closing in Section 7.2(a), which failure to perform is incapable of being
cured or has not been cured within twenty (20) days after the giving of
notice thereof to Sub; or (f) Sub shall have breached any of its
representations or warranties in any material respect in a manner so as not
to satisfy the condition to closing in Section 7.2(b), which breach is
incapable of being cured or has not been cured within twenty (20) days
after the giving of notice thereof to Sub.
8.4 Termination by the Parent. This Agreement may be terminated by
Parent and the Sub Merger and the Parent Merger may be abandoned at any
time (i) prior to the consummation thereof, before or after the approval by
stockholders of Parent or Sub, by action of the Parent Board if the Parent
Board receives an unsolicited written offer with respect to a Superior
Proposal, or if an unsolicited tender or exchange offer for the Parent
Shares (with respect to a Superior Proposal) is commenced, and the Parent
Board determines to accept such Superior Proposal or recommend that its
shareholders accept such tender or exchange offer, but only after the
Parent Board has been advised by counsel that approval, acceptance or
recommendation of such transaction is necessary in order for the Parent
Board to act in a manner consistent with its fiduciary obligations under
applicable law, in accordance with clause "(y)" of Section 6.1(b)(2)
provided that Parent has complied with all provisions thereof, including
the notice provisions therein, and that Parent and Sub comply with
applicable requirements relating to the payment (including the timing of
any payment) of the Termination Fee, or (ii) before the Parent Effective
Time, if Purchaser shall have breached or failed to perform in any material
way any of its representations, warranties or covenants under this
Agreement which breach or failure to perform is incapable of being cured or
has not been cured within twenty (20) days after the giving of notice
thereof to Purchaser.
8.5 Termination by the Sub. This Agreement may be terminated by Sub
and the Sub Merger and the Parent Merger may be abandoned at any time (i)
prior to the consummation thereof, before or after the approval by
stockholders of Parent or Sub, by action of the Sub Board if the Sub Board
receives an unsolicited written offer with respect to a Superior Proposal,
or if an unsolicited tender or exchange offer for the Sub Shares (with
respect to a Superior Proposal) is commenced, and the Sub Board determines
to accept such Superior Proposal or recommend that its shareholders accept
such tender or exchange offer, but only after the Sub Board has been
advised by counsel that approval, acceptance or recommendation of such
transaction is necessary in order for the Sub Board to act in a manner
consistent with its fiduciary obligations under applicable law, in
accordance with clause "(y)" of Section 6.1(b)(2) provided that Sub has
complied with all provisions thereof, including the notice provisions
therein, and that Parent and Sub comply with applicable requirements
relating to the payment (including the timing of any payment) of the
Termination Fee, or (ii) before the Sub Effective Time, if Purchaser shall
have breached or failed to perform in any material way any of its
representations, warranties or covenants under this Agreement in a manner
so as not to satisfy the condition to closing in Section 7.3(a) or (b)
which breach or failure to perform is incapable of being cured or has not
been cured within twenty (20) days after the giving of notice thereof to
Purchaser.
8.6 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to
this Article 8, no party thereto (or any of its directors or officers)
shall have any liability or further obligation to any other party to this
Agreement, except as provided in Sections 9.1 and 9.2. No termination of
this Agreement shall result in the termination of the obligations of the
parties under Sections 5.1(k), 5.2(f), 6.2(a) or 9.1.
ARTICLE IX
Miscellaneous and General
-------------------------
9.1 Payment of Expenses.
(a) Except as set forth in subsection (b) below, whether or not
the Merger shall be consummated, each Party hereto shall pay its own
expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the Merger, except that and provided the
Merger is consummated, the expenses of Sub shall be borne by Parent.
(b) In the event that this Agreement is terminated by Purchaser
pursuant to Section 8.3(a), (b), (d) or (e), Parent and Sub shall pay
Purchaser an aggregate fee equal to $12,300,000 (the "Termination Fee"),
payable by wire transfer in immediately available funds, within one (1)
business day of the date of such termination in the respective proportions
set forth below, and such payment shall constitute Purchaser's and its
affiliates' exclusive remedy and be a limit on any damages to which
Purchaser and such affiliates may be entitled for any loss or injury
incurred with respect to any such termination. In the event that this
Agreement is terminated by Purchaser pursuant to Section 8.3(c) or (f), and
if the applicable breach of representation by Parent or Sub was
intentional, reckless or grossly negligent, Parent and Sub shall pay
Purchaser the Termination Fee, payable by wire transfer in immediately
available funds, within one (1) business day of the date of such
termination in the respective proportions set forth below, and such
payment shall constitute Purchaser's and its affiliates' exclusive remedy
and be a limit on any damages to which Purchaser and such affiliates may be
entitled for any loss or injury incurred with respect to any such
termination. Prior to any termination of this Agreement by Parent pursuant
to Section 8.4(i) or by Sub pursuant to Section 8.5(i), Parent and Sub
shall pay Purchaser the Termination Fee, payable by wire transfer of
immediately available funds in the respective proportions set forth below,
and such payment shall constitute Purchaser's and its affiliates exclusive
remedy and be a limit on any damages to which Purchaser and such affiliates
may be entitled for any loss or injury incurred with respect to any such
termination. Parent and Sub acknowledge that the agreements contained in
this Section 9.1(b) are an integral part of the transactions contemplated
by this Agreement, that Parent and Sub will derive substantial benefits
from the transactions involving Sub contemplated by this Agreement, and
that, without the agreements contained in this Section 9.1(b), Purchaser
would not enter into this Agreement; accordingly, if Parent or Sub fails to
promptly pay any amount due pursuant to this Section 9.1(b), and, in order
to obtain such payment, Purchaser commences a suit which results in a
judgment against Parent or Sub for the applicable portion of the
Termination Fee or damages in excess thereof (to the extent permitted
hereunder), Parent or Sub, as applicable, shall also pay to Purchaser its
costs and expenses (including reasonable attorneys' fees) in connection
with such suit, together with interest on the amount of the Termination Fee
at the prime rate of Citibank N.A. in effect on the date such payment was
required to be made. If Purchaser terminates this Agreement pursuant to
Section 8.3(a), (b), (d) or (e), or if Purchaser terminates this Agreement
pursuant to Section 8.3(c) or (f) and is entitled to be paid the
Termination Fee, or if Parent terminates this Agreement pursuant to Section
8.4(i), or if Sub terminates this Agreement pursuant to Section 8.5(i),
then 80% of the Termination Fee shall be paid to Purchaser by Parent and
20% of the Termination Fee shall be paid to Purchaser by Sub.
Notwithstanding the foregoing, if the breach by Parent which gave rise to
the ability to terminate this Agreement under Section 8.3(b) or (c) or if
the breach by Sub which gave rise to the ability to terminate this
Agreement under Section 8.3(e) or (f) constituted a bad faith attempt by
Parent or Sub to avoid its contractual obligations under this Agreement,
nothing in this Agreement shall limit the relief (in addition to the
Termination Fee) which Purchaser shall be entitled to recover under
applicable law. A good faith dispute as to whether the Termination Fee is
payable shall not constitute evidence of such bad faith.
(c) In the event that this Agreement is terminated by Parent
pursuant to Section 8.4(ii) or by Sub pursuant to Section 8.5(ii),
Purchaser shall pay Parent and Sub an aggregate amount equal to the
Termination Fee, payable by wire transfer in immediately available funds,
within one (1) business day of the date of such termination, payable 80% to
Parent and 20% to Sub, and such payment shall constitute Parent's and Sub's
any of their respective affiliates' exclusive remedy and be a limit on any
damages to which Parent or any such affiliate may be entitled for any loss
or injury incurred with respect to any such termination or breach or
failure to perform that gave rise to such termination. Notwithstanding the
foregoing, if the breach by Purchaser which gave rise to the ability to
terminate this Agreement under Section 8.4(ii) or 8.5(ii) constituted a bad
faith attempt by Purchaser to avoid its contractual obligations under this
Agreement, nothing in this Agreement shall limit the relief (in addition to
the Termination Fee) which Parent or Sub shall be entitled to recover under
applicable law. A good faith dispute as to whether the Termination Fee is
payable shall not constitute evidence of such bad faith. Purchaser
acknowledges that the agreements contained in this Section 9.1(c) are an
integral part of the transactions contemplated by this Agreement, that
Purchaser will derive substantial benefits from the transactions
contemplated by this Agreement, and that, without the agreements contained
in this Section 9.1(c), Parent and Sub would not enter into this Agreement;
accordingly, if Purchaser fails to promptly pay any amount due pursuant to
this Section 9.1(c), and, in order to obtain such payment, Parent or Sub
commences a suit which results in a judgment against Purchaser for the
Termination Fee or damages in excess thereof (to the extent permitted
hereunder), Purchaser shall also pay to Parent or Sub, as applicable, its
costs and expenses (including reasonable attorneys' fees but only for the
attorneys of either Parent or Sub, as the case may be, and not both) in
connection with such suit, together with interest on the amount of the
Termination Fee at the prime rate of Citibank N.A. in effect on the date
such payment was required to be made.
9.2 Survival. The representations, warranties, agreements and
covenants in this Agreement shall not survive the consummation of the Sub
Merger and the Parent Merger or the termination of this Agreement unless
the terms of a specific agreement or covenant specify otherwise, in which
case it shall survive in accordance with its terms. Without limiting the
foregoing, the provisions of Section 6.2(f) shall survive the consummation
of the Sub Merger and the Parent Merger.
9.3 Cooperation. The Parties will cooperate with one another in
effecting the transactions contemplated hereby, in the making of all
necessary governmental filings (including, without limitation, filings with
any applicable taxing authority) and in connection with the prosecution or
defense of any investigation, claim, suit, arbitration or other proceeding
brought by or against any governmental authority or other third party.
9.4 Modification or Amendment. Subject to the applicable provisions
of the PABCL, at any time prior to the Parent Effective Time or Sub
Effective Time, as applicable, the Parties hereto may modify or amend this
Agreement, by written agreement executed and delivered by duly authorized
officers of the respective Parties.
9.5 Waiver of Conditions. The conditions to each of the Parties'
obligations to consummate the transactions contemplated hereby are for the
sole benefit of such Party and may be waived by such Party in whole or in
part to the extent permitted hereby and by applicable law.
9.6 Counterparts and Facsimile Signatures. For the convenience of
the Parties hereto, this Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original
instrument, and all such counterparts shall together constitute the same
agreement. Execution of this Agreement may be made by facsimile signature
which, for all purposes, shall be deemed to be an original signature.
9.7 GOVERNING LAW; JURISDICTION; AND SERVICE OF PROCESS. EXCEPT AS
EXPRESSLY SET FORTH BELOW, THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA,
REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF THE PARENT,
THE PURCHASER AND ACQUISITION SUB HEREBY AGREE THAT ANY DISPUTE ARISING OUT
OF THIS AGREEMENT OR THE MERGER SHALL BE HEARD IN THE COURT OF COMMON
PLEAS, COUNTY OF CHESTER, OF THE COMMONWEALTH OF PENNSYLVANIA, OR IN THE
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA AND,
IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS TO
THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN
CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT OR THE MERGER MAY
BE GIVEN TO ANY OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, AT THE RESPECTIVE ADDRESSES SET FORTH IN SECTION 9.8 BELOW.
9.8 Notices. Any notice, request, instruction or other document to
be given hereunder by any party to the others shall be in writing and shall
be deemed delivered upon receipt, if to Purchaser, Acquisition Sub One or
Acquisition Sub Two, addressed to Purchaser, Acquisition Sub One or
Acquisition Sub Two, as the case may be, Attention: Barry D. Romeril, P.O.
Box 1600, 800 Long Ridge Road, Stamford, CT 06904, facsimile: (203) 968-
3633 (with a copy to Attention: Richard S. Paul, facsimile: (203) 968-3446;
and with a copy to Nixon, Hargrave, Devans & Doyle LLP, 437 Madison Avenue,
New York, NY 10022-7001, Attention: Richard F. Langan, Esq., facsimile
(212) 940-3111); and if to the Parent, addressed to the Parent c/o Pepper
Hamilton LLP, 3000 Two Logan Square, Philadelphia, Pennsylvania 19103-2799,
Attention Barry M. Abelson, facsimile (215) 981-4750 (with a copy to Pepper
Hamilton LLP, 3000 Two Logan Square, Philadelphia, PA 19103-2799,
Attention: Elam M. Hitchner, III, Esq., facsimile (215) 981-4750); and if
to the Sub, addressed to the Sub at 411 Eagleview Boulevard, Exton,
Pennsylvania 19341, Attention: Timothy W. Wallace, facsimile (610) 458-6530
(with a copy to McCausland, Keen & Buckman, Radnor Court, 259 Radnor-
Chester Road, Suite 160, Radnor, Pennsylvania 19087-5240, Attention Robert
H. Young, facsimile (610) 341-1099); or to such other Persons or addresses
as may be designated in writing by the party to receive such notice.
9.9 Entire Agreement, etc. This Agreement (including any schedules,
exhibits or Annexes hereto) and the Confidentiality Agreement (i)
constitute the entire agreement, and supersede all other prior agreements,
understandings, representations and warranties both written and oral among
the parties, with respect to the subject matter hereof, (ii) shall not be
assignable by operation of law or otherwise and are not intended to create
any obligations to, or rights in respect of, any Persons other than the
parties hereto; provided, however, Purchaser may cause Acquisition Sub One
and/or Acquisition Sub Two to assign its rights and obligations hereunder
to Purchaser or any other wholly-owned subsidiary of Purchaser, but no such
assignment shall relieve Purchaser, Acquisition Sub One and Acquisition Sub
Two of their obligations hereunder.
9.10 Obligation of Purchaser. Whenever this Agreement requires
Acquisition Sub One or Acquisition Sub Two to take any action (including,
without limitation, the making of payment for the Parent Shares or the Sub
Shares), such requirement shall be deemed to include an undertaking on the
part of Purchaser to cause Acquisition Sub One and/or Acquisition Sub Two
to take such action.
9.11 Captions. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
9.12 Specific Performance. The parties hereto agree that if any of
the provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached, irreparable damage would occur,
no adequate remedy at law would exist, and damages would be difficult to
determine, and that the parties shall be entitled to specific performance
of the terms hereof, in addition to any other remedy at law or equity.
9.13 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force
and effect except to the extent that the enforcement of such remaining
provisions would be inequitable.
9.14 Certain Definitions. (a) As used herein, the term "knowledge"
of a particular Person shall mean the actual knowledge of any such
individual or the actual knowledge of the executive officers (which, or
purposes hereof, shall mean those individuals who are required to file
reports under Section 16(a) of the Exchange Act) of any Person which is a
corporation or other entity.
(b) As used in this Agreement, the following terms shall have
the meanings set forth below:
"Acquisition Agreement" is defined in Section 6.1(b)(2).
"Acquisition Proposal" is defined in Section 6.1(b)(1).
"Acquisition Sub One" means TDC Subsidiary Corporation, a Pennsylvania
corporation.
"Acquisition Sub Two" means TDC Two Subsidiary Corporation, a
Pennsylvania corporation.
"Agreed Upon Procedures Letter" is defined in Section 7.2(j).
"Auditors" is defined in Section 7.2(j).
"Confidentiality Agreement" is defined in Section 6.2(a).
"D & O Insurance" is defined in Section 6.2(f)(iv).
"Disclosure Letter" is defined in Section 5.1.
"Employee Benefit Plans" is defined in Section 5.1(r)(II).
"Environmental Laws" is defined in Section 5.1(o).
"ERISA" is defined in Section 5.1(r)(II).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" is defined in Section 5.1(f).
"HSR Act" is defined in Section 5.1(d).
"IBMCC" is defined in Section 6.1(
"Indemnification Agreements" is defined in Section 6.2(f)(i).
"Indemnified Parties" is defined in Section 6.2(f)(i).
"Independent Committee" means the Independent Committee of the Sub
Board.
"Intellectual Property" is defined in Section 5.1(q).
"IRC" is defined in Section 5.1(r)(IV).
"January 1998 Financial Statements" is defined in Section 7.2(j).
"Lazard" is defined in Section 5.1(k).
"Material Adverse Change" means a material adverse effect on the
assets, property, prospects, business condition (financial or
otherwise) or results of operations of either Parent and the Parent
Subsidiaries (including Sub and the Sub Subsidiaries) taken as a
whole or Sub and the Sub Subsidiaries taken as a whole, or on the
ability of the Parties to consummate the transactions contemplated by
this Agreement. Whenever a representation, warranty, covenant,
agreement or condition involves a determination as to whether there
has been a Material Adverse Change, the market price of Parent Common
Stock and Sub Common Stock on NASDAQ shall not constitute evidence as
to whether or not a Material Adverse Change has occurred.
"Maximum Premium" is defined in Section 6.2(f)(iv).
"Montgomery" is defined in Section 5.1(k).
"Most Recent Financial Statements" is defined in Section 7.2(j).
"NASDAQ" is defined in Section 6.1(d).
"Order" is defined in Section 7.1(d).
"PABCL" is defined in Section 1.1.
"Parent" means Intelligent Electronics, Inc., a Pennsylvania
corporation.
"Parent Articles of Merger" is defined in Section 2.8.
"Parent Board" is defined in the recitals.
"Parent Closing" is defined in Section 2.7.
"Parent Common Stock" is defined in Section 5.1(b)(I).
"Parent Dissenting Shares" is defined in Section 2.9.
"Parent Effective Time" is defined in Section 2.8.
"Parent Fairness Opinion" is defined in Section 5.1(l).
"Parent Merger" is defined in the recitals.
"Parent Most Recent Quarter End" is defined in Section 5.1(f)(I).
"Parent Option Conversion Price" is defined in Section 2.4.
"Parent Options" is defined in Section 2.2(ii).
"Parent-Owned Sub Shares" is defined in Section 1.2(i).
"Parent Preferred Stock" is defined in Section 5.1(b).
"Parent Share Conversion Price" is defined in Section 2.3.
"Parent Shares" is defined in Section 2.2(i).
"Parent Subsidiaries" is defined in Section 5.1(a).
"Parent Surviving Corporation" is defined in Section 2.1.
"Parent 10-K" is defined in Section 5.1(f)(I).
"Parent 10-Q" is defined in Section 5.1(f)(I).
"Party" is defined in the introduction.
"Paying Agent" is defined in Section 1.5.
"Payment Funds" is defined in Section 5.2(e).
"Permits" is defined in Section 5.1(a).
"Person" means an individual, a partnership (general or limited), a
joint venture, a corporation, a trust, an unincorporated
organization, a limited liability company, a group and a government
or other department or agency thereof.
"Proxy Statement" is defined in Section 6.1(c).
"Public Reports" is defined in Section 5.1(e).
"Purchaser" means Xerox Corporation, a New York corporation.
"Purchaser Companies" means Purchaser and all direct and indirect
subsidiaries thereof.
"Rights Agreement" means the Rights Agreement dated as of March 22,
1996 between Parent and Chemical Mellon Shareholder Services L.L.C.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" is defined in Section 5.1(d).
"Stock Rights" is defined in Section 5.1(b)(I).
"Stockholders Meeting" is defined in Section 6.1(c).
"Sub" means XLConnect Solutions, Inc., a Pennsylvania corporation.
"Sub Articles of Merger" is defined in Section 1.8.
"Sub Board" is defined in the recitals.
"Sub Closing" is defined in Section 1.7.
"Sub Common Stock" is defined in Section 5.1(b)(II).
"Sub Dissenting Shares" is defined in Section 1.9.
"Sub Effective Time" is defined in Section 1.8.
"Sub Fairness Opinion" is defined in Section 5.1(l).
"Sub Merger" is defined in the recitals.
"Sub Most Recent Quarter End" is defined in Section 5.1(f)(II).
"Sub Option Conversion Price" is defined in Section 1.4.
"Sub Options" is defined in Section 1.2(ii).
"Sub Plan" is defined in Section 5.1(r)(I).
"Sub Preferred Stock " is defined in Section 5.1(b)(II).
"Sub Share Conversion Price" is defined in Section 1.3.
"Sub Shares" is defined in Section 1.2(i).
"Sub Subsidiaries" means all direct and indirect subsidiaries of Sub.
"Sub Surviving Corporation" is defined in Section 1.1.
"Sub 10-K" is defined in Section 5.1(f)(II).
"Sub 10-Q" is defined in Section 5.1(f)(II).
"Superior Proposal" is defined in Section 6.1(b)(2).
"Takeover Statutes" is defined in Section 6.1(f).
"Taxes" is defined in Section 5.1(j)(I).
"Termination Fee" is defined in Section 9.1(b).
"XLC Plan" is defined in Section 6.1(g)(iii).
"XLSource Transition Plan" means the plan Parent has previously
delivered to Purchaser regarding the pending transition of certain
business of XLSource, Inc.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto on the date
first hereinabove written.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Richard D. Sanford
----------------------------------
Title: Chairman and CEO
XLCONNECT SOLUTIONS, INC.
By: /s/ Richard D. Sanford
----------------------------------
Title: Chairman
XEROX CORPORATION
By: /s/ W. F. Buehler
----------------------------------
Title: Executive Vice President
TDC SUBSIDIARY CORPORATION
By: /s/ Charles P. Gilliam
----------------------------------
Title: President
TDC TWO SUBSIDIARY CORPORATION
By: /s/ Charles P. Gilliam
----------------------------------
Title: President
Exhibit 4.1
AMENDMENT NO. 1
TO
RIGHTS AGREEMENT
----------------
THIS AMENDMENT NO. 1, dated as of March 3, 1998 (the "Amendment") to
the Rights Agreement dated as of March 22, 1996 (the "Rights Agreement"),
between INTELLIGENT ELECTRONICS, INC., a Pennsylvania corporation (the
"Company") and CHASE MELLON SHAREHOLDER SERVICES L.L.C., formerly CHEMICAL
MELLON SHAREHOLDER SERVICES L.L.C. (the "Rights Agent").
WHEREAS, the Company desires to amend the Rights Agreement to
designate Xerox Corporation, a New York corporation, including any of its
wholly-owned direct and indirect subsidiaries now existing or hereafter
formed (together, "Xerox"), as an Exempt Person, provided that Xerox shall
immediately and thereafter cease to be an Exempt Person if it shall become
the Beneficial Owner (as defined in the Rights Agreement) of 15% or more of
the shares of Company Common Stock (as defined in the Rights Agreement)
then outstanding, other than pursuant to an agreement of merger to which
Xerox and the Company are both parties;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
SECTION 1. Section 1, paragraph (i) of the Rights Agreement is
amended to read in its entirety as follows:
(i) "Exempt Person" means:
(1) Company, any Subsidiary of the Company, any employee
benefit plan or employee stock plan of the Company or of any Subsidiary of
the Company, or any person or entity organized, appointed, established or
holding Company Common Stock for or pursuant to the terms of any such plan;
(2) Xerox Corporation, a New York corporation, including
any of its wholly-owned direct and indirect subsidiaries now existing or
hereafter formed and their respective Associates and Affiliates (together,
"Xerox"); provided, however, that Xerox shall immediately and thereafter
cease to be an Exempt Person if it shall become the Beneficial Owner of 15%
or more of the shares of Company Common Stock then outstanding, other than
pursuant to an agreement of merger to which Xerox and the Company are both
parties; and
(3) any Person who would otherwise become an Acquiring
Person solely by virtue of a reduction in the number of outstanding shares
of Company Common Stock; provided, however, that such Person shall not be
an Exempt Person if, subsequent to such reduction, such Person shall become
the Beneficial Owner of any additional shares of Company Common Stock.
SECTION 2. Notwithstanding any provision of the Rights Agreement to
the contrary, the execution and delivery of the Agreement and Plan of
Merger dated as of March 4, 1998 by and among Xerox Corporation, TDC
Subsidiary Corporation, TDC Two Subsidiary Corporation, the Company and
XLConnect Solutions, Inc. (the "Merger Agreement") or the consummation of
the Sub Merger or Parent Merger (as such terms are defined in the Merger
Agreement) contemplated thereby will not (i) cause the Rights to become
exercisable, (ii) cause any Person to become an Acquiring Person or (iii)
give rise to a Distribution Date.
SECTION 3. The form of Summary of Rights set forth in Exhibit C
attached to the Rights Agreement is hereby amended to read in its entirety
as set forth in Exhibit C attached hereto.
SECTION 4. The terms "Agreement" and "Rights Agreement" as used in
the Rights Agreement shall be deemed to refer to the Rights Agreement as
amended hereby. Capitalized terms used herein but not otherwise defined
herein shall have the respective meanings ascribed thereto in the Rights
Agreement. This Amendment shall be effective as of the date hereof and,
except as set forth herein, the Rights Agreement shall remain in full force
and effect and be otherwise unaffected hereby.
SECTION 5. This Amendment may be executed (including by facsimile) in
one or more counterparts and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed, all as of the date first above written.
ATTEST: INTELLIGENT ELECTRONICS, INC.
By: /s/ Paula Worn By: /s/ Gene Marinelli
-------------------------- --------------------------------
Name: Paula Worn Name: Gene Marinelli
Title: Paralegal Title: CFO
ATTEST: CHASE MELLON SHAREHOLDER
SERVICES L.L.C.
By: /s/ Jared Fassler By: /s/ Joseph Flood
--------------------------- ---------------------------------
Name: Jared Fassler Name: Joseph Flood
Title: Assistant Vice President Title: Assistant Vice President
<PAGE>
EXHIBIT C
---------
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On March 8, 1996, the Board of Directors of Intelligent Electronics,
Inc., a Pennsylvania corporation (the "Company"), declared a distribution
of one Right (as defined below) for each outstanding share of Common Stock,
par value $.01 per share (the "Company Common Stock"), to shareholders of
record at the close of business on March 25, 1996 (the "Record Date") and
for each share of Company Common Stock issued by the Company thereafter and
prior to the Distribution Date. Each Right entitles the registered holder,
subject to the terms of the Rights Agreement (as defined below), to
purchase from the Company one one-thousandth of a share (a "Unit") of
Series A Preferred Stock, par value $.01 per share (the "Preferred
Stock"), at a Purchase Price of $28.00 per Unit, subject to adjustment
(the "Right"). The Purchase Price is payable in cash or by certified or
bank check or money order payable to the order of the Company. As of March
3, 1998, the Company entered into an amendment ("Amendment No. 1") to its
Rights Agreement that designates Xerox Corporation, a New York corporation,
including any of its wholly-owned direct and indirect subsidiaries now
existing or hereafter formed (together, "Xerox"), an Exempt Person (as
defined in the Rights Agreement, as amended), provided that Xerox shall
immediately and thereafter cease to be an Exempt Person if it shall become
the Beneficial Owner of 15% or more of the shares of Company Common Stock
then outstanding, other than pursuant to an agreement of merger to which
Xerox and the Company are both parties. The description and terms of the
Rights are set forth in a Rights Agreement between the Company and Chase
Mellon Shareholder Services L.L.C. (formerly Chemical Mellon Shareholder
Services L.L.C.), as Rights Agent (the "Rights Agreement").
Copies of the Rights Agreement and the Certificate of Designation for
the Preferred Stock have been filed with the Securities and Exchange
Commission as exhibits to a Registration Statement on Form 8-A dated March
20, 1996 (the "Form 8-A"). Copies of Amendment No. 1 to the Rights
Agreement have been filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K dated __________, 1998 (the "Form
8-K"). Copies of the Rights Agreement, Amendment No. 1 to the Rights
Agreement and the Certificate of Designation are available free of charge
from the Company. This summary description of the Rights and the Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to all the provisions of the Rights Agreement, as amended, and
the Certificate of Designation, including the definitions therein of
certain terms, which Rights Agreement and Certificate of Designation are
incorporated herein by reference.
The Rights Agreement
- --------------------
Initially, the Rights will attach to all certificates representing
shares of outstanding Company Common Stock, and no separate Rights
Certificates will be distributed. The Rights will separate from the
Company Common Stock and the "Distribution Date" will occur upon the
earlier of (i) 10 business days following a public announcement (the date
of such announcement being the "Stock Acquisition Date") that a person or
group of affiliated or associated persons (other than an Exempt Person) (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 Company Common Stock, and (ii) 10 business days (or
such later date as may be determined by action of the Board of Directors
prior to such time as any person becomes an Acquiring Person) following the
commencement of a tender offer or exchange offer that would result in a
person or group beneficially other than an Exempt Person owning 15% or more
of the then outstanding shares of Company Common Stock. Until the
Distribution Date, (i) the Rights will be evidenced by Company Common Stock
certificates and will be transferred with and only with such Company Common
Stock certificates, (ii) new Company Common Stock certificates issued after
the Record Date (also including shares distributed from Treasury) will
contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates representing
outstanding Company Common Stock will also constitute the transfer of the
Rights associated with the Company Common Stock represented by such
certificates.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights
Agreement unless earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of Company Common Stock as
of the close of business on the Distribution Date and, thereafter, the
separate Rights certificates alone will represent the Rights.
In the event that (i) the Company is the surviving corporation in a
merger with an Acquiring Person and shares of Company Common Stock shall
remain outstanding, (ii) a Person other than an Exempt 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%
(e.g., by means of a reverse stock split or recapitalization), then, in
each such case, each holder of a Right will thereafter have the right to
receive, upon exercise, Units of Preferred Stock (or, in certain
circumstances, Company Common Stock, cash, property or other securities of
the Company) 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 are, or (under certain circumstances
specified in the Rights Agreement) 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 (other than a
merger described in the preceding paragraph), (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, each holder of a Right (except Rights which previously have
been voided as described above) shall thereafter 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.
The Purchase Price payable, and the number of Units of Preferred Stock
issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii)
if holders of the Preferred Stock are granted certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the
current market price of the Preferred Stock, or (iii) upon the distribution
to the holders of the Preferred Stock of evidences of indebtedness, cash or
assets (excluding regular quarterly cash dividends) or of subscription
rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. The Company is not required to issue fractional Units. In lieu
thereof, an adjustment in cash may be made based on the market price of the
Preferred Stock prior to the date of exercise.
At any time until ten business days following the Stock Acquisition
Date, a majority of the Independent Directors may redeem the Rights in
whole, but not in part, at a price of $.001 per Right (subject to
adjustment in certain events) (the "Redemption Price"), payable, at the
election of such majority of the Independent Directors, in cash or shares
of Company Common Stock. Immediately upon the action of a majority of the
Independent Directors ordering the redemption of the Rights, the Rights
will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
At any time prior to the Distribution Date, the Company (by action of
a majority of the Independent Directors) may exchange all or part of the
outstanding Rights for that number of Units of Preferred Stock at an
exchange ratio determined pursuant to the Rights Agreement and reflective
of the then current market price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the
right to vote or to receive dividends. While the distribution of the
Rights will not be taxable to shareholders or to the Company, shareholders
may, depending upon the circumstances, recognize taxable income in the
event that the Rights become exercisable for Units of Preferred Stock (or
other consideration).
Notwithstanding any provision of the Rights Agreement to the contrary,
the execution and delivery of the Agreement and Plan of Merger dated as of
March ___, 1998 by and among Xerox Corporation, TDC subsidiary Corporation,
TDC Two Subsidiary Corporation, the Company and XLConnect Solutions, Inc.
(the "Merger Agreement") or the consummation of the Sub Merger or Parent
Merger (as such terms are defined in the Merger Agreement) contemplated
thereby will not (i) cause the Rights to become exercisable, (ii) cause any
Person to become an Acquiring Person or (iii) give rise to a Distribution
Date.
Any of the provisions of the Rights Agreement may be amended without
the approval of the holders of Company Common Stock at any time prior to
the Distribution Date. After the Distribution Date, the provisions of the
Rights Agreement may be amended in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests
of holders of Rights (excluding the interests of any Acquiring Person), or
to shorten or lengthen any time period under the Rights Agreement;
provided, however, that, except under certain circumstances, no amendment
to adjust the time period governing redemption shall be made at such time
as the Rights are not redeemable.
Description of Preferred Stock
- ------------------------------
The Units of Preferred Stock that may be acquired upon exercise of the
Rights will be nonredeemable and subordinate to any other shares of
preferred stock that may be issued by the Company.
Each Unit of Preferred Stock will be entitled to dividends at the same
rate per share as dividends declared on the Company Common Stock and shall
be entitled to payment of dividends to the extent dividends are declared on
the Company Common Stock. In the event of liquidation, the holder of a
Unit of Preferred Stock will receive the per share amount paid in respect
of a share of Company Common Stock.
In the event of any merger, consolidation or other transaction in
which shares of Company Common Stock are exchanged, each Unit of Preferred
Stock will be entitled to receive the per share amount paid in respect of
each share of Company Common Stock. Each Unit of Preferred Stock will have
one vote, voting together with the Company Common Stock. The rights of
holders of the Preferred Stock to dividends, liquidation and voting, and in
the event of mergers and consolidations, are protected by customary
antidilution provisions.
Because of the nature of the Preferred Stock's dividend, liquidation
and voting rights, the economic value of one Unit of Preferred Stock, that
may be acquired upon the exercise of each Right should approximate the
economic value of one share of the Company's Common Stock.
Exhibit 10.9
SEPARATION AGREEMENT
--------------------
THIS SEPARATION AGREEMENT ("Agreement") is made this 11th day of
September, 1997, by and between Michael A. Norris ("Norris"), an individual
who resides at _______________________________________________, as well
as each and every dependent, heir, executor, legal representative and
assign of Norris, and INTELLIGENT ELECTRONICS, INC. ("IE"), a business
corporation existing under the laws of the Commonwealth of Pennsylvania,
having its corporate headquarters at Exton, Pennsylvania, together with
each and every of its predecessors, successors (by merger or otherwise),
parent, subsidiaries, affiliates, divisions, directors, officers, employees
and agents, whether present or former, including XLConnect Solutions, Inc.
This Agreement also constitutes an amendment to the employment letter
dated August 8, 1996 between Norris and IE (the "Employment Letter").
WHEREAS, the parties reached an agreement in principle in July 1997
concerning the resignation of Norris as President of IE and CEO of the
Reseller Network Division of IE and the termination of his employment with
IE.
WHEREAS, Norris and IE desire to part on an amicable basis.
WHEREAS, the parties are entering into this Agreement in order to more
fully set forth the parties' agreements and understandings regarding
Norris' resignation as an officer and the termination of his employment.
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth, Norris and IE acting of their own free will and intending to be
legally and irrevocably bound, hereby agree as follows:
1. Employment Termination. Norris agrees that his employment with
IE will terminate on September 30, 1997 (the "Separation Date"). The
parties acknowledge that effective August 27, 1997, Norris resigned from
all positions as a director, officer, trustee or otherwise with IE and its
subsidiaries and affiliates, except that Norris has not resigned as a
member of the Board of Directors of IE. Upon termination of his employment
with IE, Norris shall be entitled to receive the benefits set forth in this
Agreement as and when required in accordance with the terms hereof. Until
termination of Norris' employment, Norris will continue to perform services
relating to transitional issues in connection with IE's former Reseller
Network Division and XLSource Division, which were sold in July 1997.
2. Salary Continuation. Commencing on the Separation Date, IE
agrees to pay Norris, as salary continuation, at the rate of his current
base annual salary of Four Hundred Seventy Five Thousand, for fifteen (15)
months following Norris' Separation Date ("Severance Period"). This salary
continuation will be paid in equal bi-weekly installments in the same
manner and subject to all required federal, state and local tax
withholdings as is the case with Norris' current salary.
3. Medical and Dental Benefits Continuation. During the Severance
Period, IE will provide Norris and his family full coverage under the IE
group medical and dental programs subject to the terms of the medical and
dental plans. Any required employee contribution to the medical plan
premium will be deducted from Norris' monthly salary continuation payments
during such period. Norris' statutory rights under COBRA to continue
participation in IE's group medical coverage for a period of up to eighteen
(18) months, at his own cost, shall begin immediately following the
termination of medical and dental coverage paid for by IE. IE's obligation
to continue to pay for medical coverage, and any corresponding deduction
from Norris' salary continuation payments, will cease if Norris becomes
eligible to participate in a comparable medical and dental plan with a new
employer. In this case, Norris agrees to immediately notify IE by written
notice to IE's Chief Financial Officer.
4. Stock Options. Norris' IE stock options will continue to vest in
accordance with their original terms and conditions through August 27,
2006, notwithstanding the termination of Norris' employment with IE. If
the Inherent Value (as defined in Section 5) as of September 30, 1997 is
greater than zero, then all IE stock options then held by Norris which are
not yet fully vested will become fully vested. If the Inherent Value as
of January 30, 1999 is greater than zero, then all IE stock options and
XLConnect stock options then held by Norris will become fully vested.
5. Stock Value Guarantee Payment. This Section 5 supersedes and
replaces the fifth paragraph of the Employment Letter relating to the
payment of up to $1.7 million in connection with Norris' options to
purchase common stock of IE. The net amount of the payment required to be
made by IE to Norris under this Section 5 is herein referred to as the
"Stock Value Guarantee Payment." For purposes of this Section 5, the "fair
market value" as of a specified date shall be deemed to be the average of
the closing price per share of IE common stock on the five trading days
ending on the last trading day prior to the specified date.
As long as Norris is an employee of IE on September 30, 1997 or was
previously terminated by the Company without cause (as defined in the
Employment Letter), IE will pay Norris, on September 30, 1997, an amount
(the "First Installment") equal to one-half of the excess of $1.7 million
over the product of (a) 750,000 (corresponding to the number of IE stock
options granted to Norris) and (b) the excess of the fair market value (as
of September 30, 1997) over the exercise price of Norris' IE stock options
(such excess being herein referred to as the "Inherent Value"). So long as
Norris was entitled to receive the First Installment pursuant to the
preceding sentence, then on January 30, 1999, IE will pay Norris an amount,
equal to the excess of $1.7 million over the First Installment (such excess
being herein referred to as the "Option Payment Balance"), which amount
shall be further reduced (but not below zero) by the Realized Value (as
defined below) (the "Second Installment").
For purposes hereof, the "Realized Value" shall mean the sum of the
amounts described in paragraphs (a) through (e) below, as reduced by the
net amount of any taxes which Norris was, is, or will be, obligated to pay
as a result of the exercise of stock options or the sale or other
disposition of shares described in said paragraphs (a) through (e):
a. The excess of the product of the fair market value (as of
January 30, 1999) of the IE common stock underlying Norris' IE options or
acquired on exercise of stock options, and retained by Norris as of January
30, 1999, over the aggregate exercise price of such options.
b. The excess of the product of the fair market value (as of
January 30, 1999) of any XLConnect common stock acquired on exercise of
stock options and retained by Norris as of January 30, 1999, over the
aggregate exercise price of such options.
c. The value of any proceeds received by Norris on or prior to
January 30, 1999 from any sale or other disposition of IE options, together
with the excess of the value of any proceeds received by Norris on or prior
to January 30, 1999 from any sale or other disposition of any shares of IE
common stock (acquired on exercise of stock options) over the exercise
price paid by Norris for such shares;
d. The excess of the value of any proceeds received by Norris
on or prior to January 30, 1999 from any sale or other disposition of any
shares of XLConnect common stock (acquired on exercise of stock options)
over the exercise price paid by Norris for such shares;
e. The value of any distributions or dividends received by
Norris on or prior to January 30, 1999 on IE common stock (acquired on
exercise of stock options) and XLConnect common stock (acquired on exercise
of stock options);
In the event that the Realized Value exceeds the Option Payment
Balance, then Norris agrees to pay to IE on January 30, 1999 the amount of
such excess (but in no event more than the amount of the First
Installment).
All references to options to purchase XLConnect common stock in this
Agreement shall be deemed to refer only to options which are held by Norris
as of the date hereof and not to any XLConnect options which may be granted
to Norris after the date hereof.
Repayment of Certain Amounts. In the event that after January 30,
1999 and on or prior to November 27, 2000, Norris receives (i) any
distributions or dividends on IE common stock (acquired on exercise of
stock options) or XLConnect common stock (acquired on exercise of options),
or (ii) any proceeds from any sale or other disposition of Norris' IE or
XLConnect options or shares of IE or XLConnect common stock (acquired on
exercise of stock options) and the aggregate of such proceeds exceed the
sum of (x) the Realized Value, and (y) in the case of the sale or other
disposition of shares, the exercise price paid by Norris on exercise of the
options underlying such shares, Norris agree to repay to IE, promptly upon
receipt of such proceeds and promptly from time to time as future proceeds
are received, all such proceeds up to an amount not exceeding the following
amount: (a) the First Installment, plus (b) the Second Installment, minus
(c) the net amount of any taxes which Norris was, is or will be obligated
to pay as a result of Norris' receipt of the First Installment and the
Second Installment, plus (d) the net amount of any tax benefit which Norris
receives by reason of the repayment by Norris to IE pursuant to this
paragraph.
6. Other Benefits. IE agrees to extend to Norris the following
additional benefits:
a. IE will provide Norris its executive relocation package as
utilized in his move to Denver, CO, and IE will provide Norris with a tax
gross-up related to this relocation package. IE will cover any loss in
equity associated with the sale of Norris' current principal residence
located in Denver. Said loss in equity will be calculated as the excess of
the purchase price paid by Norris for the residence over the gross sales
price of the residence as sold by Norris in a bona fide sale to an
unrelated third party.
b. Until the earlier of the expiration of the Severance Period
or the occurrence of a Change of Control, IE will continue to pay the
premiums on the $1 million life insurance policy currently in force
insuring Norris' life.
c. Until the earlier of the expiration of the Severance Period,
the occurrence of a Change of Control or the expiration of the car lease
currently in force, Norris will continue to have the right to retain use of
his current executive automobile currently leased for his use by the
Company, at Company expense.
d. The obligation of IE to bonus Norris certain interest charges
as set forth on page two of the Employment Letter is hereby terminated and
is of no further force or effect.
7. Bonus Payment. On the Separation Date IE agrees to pay Norris
the sum of $125,000 in cash, representing one-half of his maximum 1997
bonus entitlement. Norris will thereafter not be entitled to receive any
further bonus payments.
8. Acceleration of Salary Continuation and Stock Value Guarantee
Payment. In the event either:
a. a Change of Control (as defined below) occurs after the date
hereof, whether before or after the Separation Date; or
b. IE at any time hereafter has either insignificant assets
(defined as consolidated total assets of less than $100 million at the end
of any quarterly reporting period commencing after the date hereof) or
insignificant operations (defined as consolidated revenues during any
quarterly reporting period commencing after the date hereof of less than
$75 million) or insignificant tangible net worth (defined as consolidated
shareholders' equity less goodwill of less than $20 million or at the end
of any quarterly reporting period commencing after the date hereof); then
(1) the salary continuation payments and the Stock Value
Guarantee Payment not yet paid to Norris pursuant to this Agreement shall
be accelerated so that Norris shall receive, within fifteen (15) business
days of such event, a lump sum payment equal to the balance of salary
continuation payments and the balance of the Stock Value Guarantee Payment
which Norris would have received had such acceleration not taken place; and
(2) all IE stock options and XLConnect stock options then
held by Norris which are not yet fully vested will become fully vested.
For purposes of calculating the Second Installment of the Stock Value
Guarantee Payment under this Section, all references to January 30, 1999 in
the definition of "Realized Value" will be replaced by the date of the
Change of Control.
For the purposes of this Agreement a "Change of Control" of IE shall
be deemed to have occurred upon the earliest of the following events:
(a) Any "person," as such term is defined under Section
3(a)(9) and 13(d) of the Exchange Act, who is not an affiliate of IE on the
date hereof, becomes a "beneficial owner," as such term is used in Rule
13d-3 under the Exchange Act, of more than 50% of IE's common stock;
(b) Upon the distribution by IE of all or substantially
all of its assets to its shareholders pursuant to a plan of liquidation; or
(c) IE consummates a merger, consolidation, other form of
business combination or a sale of all or substantially all of its assets,
unless the business of IE is continued following any such transaction by a
resulting entity (which may be but need not be, IE) and the shareholders of
IE immediately prior to such transaction (the "Prior Shareholders") hold,
directly or indirectly, a majority of the voting power of the resulting
entity.
In the event Norris becomes entitled to receive any amounts under this
Section 8, then Norris will become obligated to repay certain amounts in
accordance with the provisions set forth under the caption "Repayment of
Certain Amounts" in Section 5 hereof, provided that any reference to
January 30, 1999 therein will be replaced by the date of the Change of
Control.
9. Confidentiality:
a. Norris agrees that he will not disclose or use for his
direct or indirect benefit or the direct or indirect benefit of any third
party, any Confidential Information (as hereinafter defined) of IE. In
general, "Confidential Information" means any and all proprietary
information of IE, whether any information relating to computer codes or
instructions (including source and object code listings, logic algorithms,
subroutines, modules or other subparts of computer programs and related
documentation, including program notation); computer processing systems and
techniques, concepts, layouts, flowcharts, specification, know-how, and
associated programmer, user or other manuals or other like textual
materials (including any other data and materials used in performing
Norris' duties); all computer input and outputs (regardless of the media on
which stored or located); hardware and software configurations; designs,
interfaces, research, processes, inventions, products, methods; marketing,
sales and distribution, data, methods , plans and efforts; IE's
relationship with actual and prospective customers, contractors and
suppliers; IE's relationship with actual financial and banking
institutions, creditors, or vendors; any other materials prepared by Norris
or other employees in the course of, relating to or arising out of their
employment, or prepared by any other contractor for IE or its customers:
and any other materials that have not been made available to the general
public.
b. Norris agrees that he will, effective on Separation Date:
(I) discontinue all use of Confidential Information; (ii) return to IE all
material furnished by IE that contains Confidential Information; (iii)
erase or destroy and Confidential Information contained in computer memory
or data storage apparatus under the ownership or control of Norris; and
(iv) remove Confidential Information from any software under the ownership
or control of Norris that incorporates or uses Confidential Information in
whole or in part.
c. Norris agrees to return to IE on the Separation Date, or
earlier termination of employment, any documents, records, notebooks, files
correspondence, reports, memorandum, personal property owned by IE, or any
other documents and material whatsoever relating to the business of the
Company. He also agrees that he will not make, retain, remove or
distribute any copies of the foregoing. IE agrees that Norris can purchase
at agreed upon prices IE's equipment being used by him including the
laptop, desktop, Officefax, chair and work top at his residence.
10. Waiver and Release of Claims.
a. Norris Release. Norris completely releases, relinquishes,
waives and forever discharges IE, its officers, directors, employees,
agents, subsidiaries and affiliates, and their respective successors and
assigns, from all manner of actions, causes of action, suits, debts, dues,
accounts, bonds, covenants, contracts, agreements, judgments, claims, and
demands whatsoever, in law or equity, known or unknown, in tort, contract,
by statute, negligence (whether by contribution or indemnification) or any
other basis for relief, compensatory, punitive, or other damages, expenses
(including attorney's fees), reimbursement or costs of any kind which
Norris ever had, now has or may have, for or by reason of any cause, matter
or thing whatsoever, arising out of or in any way related to Norris'
employment with IE and its subsidiaries and affiliates, his membership of
any of the Board of Directors of IE or any of its subsidiaries or
affiliates, or the termination of any such employment and membership;
provided however, that nothing contained herein shall release IE from its
obligations under this Agreement. Norris agrees that he has executed this
Release on his own behalf, and also on behalf of his heirs, agents,
representatives, successors and assigns. This release includes, but is not
limited to, a release of any rights or claims he may have under:
(1) The Age Discrimination in Employment Act (ADEA), which
prohibits age discrimination in employment;
(2) Title VII of the Civil Rights Act of 1964; as amended by
the Civil Rights Act of 1991, which prohibits discrimination in employment
based on race, color, national origin, religion or sex;
(3) The Americans with Disabilities Act (ADA), which
prohibits discrimination on the basis of a covered disability;
(4) The Employer Retirement and Income Security Act (ERISA),
which prohibits discrimination on the basis of entitlement to certain
benefits;
(5) Any other federal, state or local laws or regulations
prohibiting employment discrimination;
(6) Breach of any express or implied contract claims;
(7) Wrongful termination or any other tort claims, including
claims for attorney's fees whether based on common law, or otherwise.
Norris understands, however, that by signing this Release, he does not
waive rights to (i) claims arising under any applicable worker's
compensation laws; (ii) any claims which the law states may not be waived;
and (iii) his vested rights under the regular employment benefit plans of
IE, in effect as of the date of this Agreement.
b. IE Release. IE hereby completely remises, releases,
relinquishes, waives and forever discharges Norris and his dependents,
heirs, executors, agents, legal representatives, successors and assigns, of
and from all manner of actions, causes of action, suits, debts, dues,
accounts, bonds, covenants, contracts, agreements, judgments, claims and
demands whatsoever, in law or equity, known or unknown, in tort, contract,
by statute, negligence (whether by contribution or indemnification) or any
other basis for relief, compensatory, punitive or other damages, expenses
(including attorney's fees), reimbursements or costs of any kind which IE
ever had, now has or may have, for or by reason of any cause, matter or
thing whatsoever, arising out of or in any way related to his employment
with IE and its subsidiaries and affiliates, his membership of any of the
Board of Directors of IE or any of its subsidiaries or affiliates, or the
termination of any such employment and membership; provided however, that
nothing contained herein shall release Norris from his obligations under
this Agreement. IE agrees that it has executed this Release on its own
behalf, and also on behalf of its subsidiaries, affiliates, divisions,
successors (by merger or otherwise) and assigns, including XLC.
11. Indemnification. To the extent permitted by law, IE agrees to
defend, indemnify and hold Norris harmless against any threatened or
pending actions or proceedings, whether brought by a third party or as a
derivative action, by reason of the fact that Norris was an officer or
representative of IE acting within the scope of his employment.
12. Cooperation in Defending Legal Actions. Norris understands that
he will not in the future voluntarily assist any individual or entity in
preparing, commencing or prosecuting any action or proceeding against IE
its directors, officers, employees, or affiliates, including but not
limited to, any administrative agency claims, charges or complaints and/or
lawsuits against IE, its directors, officers, employees or affiliates, or
to voluntarily participate or cooperate in any such action or proceeding,
except as such agreement is specifically prohibited by statute. Norris
also agrees that he will cooperate with and assist IE in its defense or
prosecution of any such action or proceeding. This Agreement shall not
preclude Norris from testifying in such an action or proceeding if he is
compelled to do so pursuant to a subpoena or other court order. However,
Norris expressly agrees that he will provide written notice addressed to
the attention of Barry M. Abelson, Esquire, Pepper Hamilton & Sheetz, LLP,
3000 Two Logan Square, Philadelphia, PA 19103 (fax no. 215-981-4750) if he
should receive, by service or otherwise, a notice, subpoena or other court
order or any other written request seeking or requiring him to testify or
otherwise participate in or assist in any action or proceeding against IE,
such notice to be so provided within 24 hours of each such receipt by
Norris or anyone acting on his behalf.
13. Announcements and Non-Disparagement. The parties hereby agree
that all public disclosure regarding the reasons for the termination of
Norris' employment and other positions with the Company shall be agreed
upon between the parties in advance, which agreement will not be
unreasonably withheld. Each party agrees not to make any comments
inconsistent with any agreed upon language. Each party further agrees not
to disparage the other with respect to matters arising prior to the date of
the execution of this Agreement or to disclose or otherwise identify any
matters which may be detrimental to the other which occurred prior to the
date of the execution of this Agreement. It is further agreed that
inquiries for references by prospective employers shall be directed to
Richard Sanford, whose comments shall be positive in nature and not
inconsistent with the provisions of this paragraph.
14. Arbitration of Disputes Under this Agreement. The parties agree
that any and all disputes arising out of the performance or breach of this
Agreement or any promise or covenant herein shall be resolved by submission
to arbitration in Philadelphia, PA under, and in accordance with, the rules
and procedures of the American Arbitration Association. In any such
proceeding, the prevailing party shall be entitled to an award of
reasonable attorney's fees, costs and expenses. It is expressly agreed
that no amounts will be withheld from any amounts due during the Severance
Period unless an appropriate court order has been obtained.
15. Governing Law; Enforcement. This agreement shall be governed by
and construed and enforced under the laws of the Commonwealth of
Pennsylvania. All remedies at law and equity shall be available for the
enforcement of this Agreement incorporated by reference herein. This
Agreement may be pleaded as a full bar to the enforcement of nay claim in
any way related to or arising out of Norris' employment with IE and/or the
termination thereof.
16. Opportunity to Review and Right to Revoke. Norris hereby
acknowledges that he is acting on his own free will, that he has been
afforded ample opportunity to read and review the terms of this Agreement,
that he has had an opportunity to seek the advise of counsel, and that he
is voluntarily entering into this Agreement with full knowledge of its
respective provisions and effects. Norris also acknowledges that he has
seven (7) days following his signing of this Agreement to revoke this
Agreement in which case IE will have no obligation to make any payment to
him hereunder, and as a condition to any such revocation, any payment
already made hereunder by IE to Norris will be returned by Norris to IE.
17. Contractual Effect. The parties understand and acknowledge that
the terms of this Agreement are contractual and not a mere recital.
Consequently, they expressly consent that this Agreement shall be given
full force and effect according to each and all of its express terms and
provision, and that it shall be binding upon the respective parties as well
as their heirs, executors, successors, administrators and assigns including
XLC. The parties further acknowledge that this Agreement, including the
recitals, sets forth the entire agreement and understanding of the parties
relating to its subject matter, and supersedes and merges all prior and
contemporaneous agreements, negotiations and understandings between the
parties, both oral and written. No change or modification to the Agreement
will be binding unless it is in writing and signed by both IE and Norris.
IN WITNESS WHEREOF, Norris and IE each acknowledge that they are
acting of their own free will, that they have had a sufficient opportunity
to read and review the terms of this Agreement, they have each received the
advice of their respective counsel with respect hereto, and that they have
voluntarily caused the execution of this Agreement and by reference herein
as of the day and year first set forth above.
/s/ Michael A. Norris /s/ Nancy Norris
- ----------------------------- ---------------------------------
Michael A. Norris Witness
On behalf of INTELLIGENT ELECTRONICS, INC.:
By: /s/ Richard D. Sanford Attest: /s/ Virginia G. Rosen
----------------------------- -------------------------
Richard D. Sanford Name: Virginia G. Rosen
Chairman of the Board, Title: Executive Assistant
Chief Executive Officer and
President
Exhibit 10.10
1/23/98
Mr. Richard D. Sanford
Dear Mr. Sanford,
The purpose of this letter agreement ("Letter Agreement") is to set
forth certain understandings relating to your continued employment by
INTELLIGENT ELECTRONICS, INC., a Pennsylvania corporation (the "Company")
and certain continuing obligations of the Company following the termination
of your employment.
Our understandings are as follows:
1. You will continue to serve the Company as Chief Executive Officer
and Chairman of the Board of Directors of the Company through the
consummation of the proposed acquisition transaction involving the sale of
the Company in its entirety (the "Transaction").
2. The Company will pay you as compensation for all services rendered
hereunder a base salary at the annual rate of $850,000 through the closing
of the Transaction. In addition, upon the closing of the Transaction, the
Company will (i) continue your health and major medical benefits for you
and your family for one year from such closing, (ii) pay you a $40,000 lump
sum at closing to cover administrative support for one year, (iii) pay you
a $30,000 lump sum at closing to cover office rent for one year, and (iv)
convey to you the two vehicles and miscellaneous equipment identified on
Annex A.
3. The Company agrees that in the event any of the Split-Dollar
Agreements between the Company and Barry Abelson (as trustee of the trust
created under the Irrevocable Trust Agreement of Richard D. Sanford dated
August 22, 1991) are terminated, notwithstanding anything in any other
agreement to the contrary, the Company will not be entitled to
reimbursement for any excess of premiums paid by the Company over the cash
surrender values of the policies to which such Split-Dollar Agreements
pertain and neither you nor such trustee or trust will have any liabilities
or obligations to the Company with respect thereto other than for the cash
surrender values.
4. The Company agrees to maintain for your benefit and as you may
instruct from time to time, forwarding of calls for six (6) months after
the Transaction.
5. You completely release, relinquish, waive and discharge the
Company, its predecessors, successors (by merger or otherwise), parents,
subsidiaries, affiliates, divisions, officers, directors, employees and
agents, whether present or former, from all claims, liabilities, demands
and causes of action, known or unknown, filed or contingent, which you may
have or claim to have against the Company as of the date of the signing of
this Agreement arising out of or in any way related to your employment with
the Company or the contemplated termination of that employment. You agree
that you have executed this Agreement on your own behalf, and also on
behalf of your heirs, agents, representatives, successors and assigns.
This release includes, but is not limited to, a release of any rights or
claims you may have under: (i) the Age Discrimination in Employment Act
(ADEA), which prohibits age discrimination in employment; (ii) Title VII of
the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991,
which prohibits discrimination in employment based on race, color, national
origin, religion or sex; (iii) the Americans with Disabilities Act (ADA),
which prohibits discrimination on the basis of a covered disability; (iv)
the Employer Retirement and Income Security Act (ERISA), which prohibits
discrimination on the basis of entitlement to certain benefits; (v) any
other federal, state or local laws or regulations prohibiting employment
discrimination; (vi) breach of any express or implied contract claims; or
(vii) wrongful termination or any other tort claims, including claims for
attorney's fees, whether based on common law, or otherwise. You
understand, however, that by signing this Agreement, you do not waive
rights to: (i) claims arising under any applicable worker's compensation
laws; (ii) any claims which the law states may not be waived; and (iii) if
applicable, your vested rights under the regular employment benefit plans
of the Company, in effect as of the date of this Agreement.
6. You will not in the future voluntarily assist any individual or
entity in preparing, commencing or prosecuting any action or proceeding
against the Company, its directors, officers, employees, or affiliates,
including but not limited to, any administrative agency claims, charges or
complaints and/or lawsuits against the Company, its directors, officers,
employees, or affiliates, nor will you voluntarily participate or cooperate
in any such action or proceeding, except to the extent such an undertaking
is specifically prohibited by statute. You also agree that you will
cooperate with and assist the Company in its defense of any such action or
proceeding, subject to reimbursement of reasonable out-of-pocket expenses.
This Agreement shall not preclude you from testifying in such an action or
proceeding if you are compelled to do so pursuant to a subpoena or other
court order. However, you expressly agrees that you will provide written
notice addressed to the attention of Barry M. Abelson, Esquire, Pepper,
Hamilton, LLP, 3000 Two Logan Square, Philadelphia, PA 19103 (Fax No.:
215-981-4750) if you should receive, by service or otherwise, a notice,
subpoena or other court order or any other written request seeking or
requiring you to testify or otherwise participate in or assist in any
action or proceeding against the Company, such notice to be so provided
within 48 hours of each such receipt by you or anyone acting on your
behalf.
7. Except to the extent inconsistent with any terms herein, all terms
of your current employment will remain unchanged.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Eugene Marinelli, CFO
------------------------------------
The foregoing is acceptable and approved
as of the date first written above:
/s/ Richard D. Sanford
- ----------------------------------------
Richard D. Sanford
<PAGE>
Annex A
See following pages.
Exhibit 10.11
2/27/98
Mr. Gene E. Marinelli
Dear Mr. Marinelli,
The purpose of this letter agreement ("Agreement") is to set forth
certain understandings relating to your continued employment by INTELLIGENT
ELECTRONICS, INC., a Pennsylvania corporation (the "Company") and certain
continuing obligations of the Company following the termination of your
employment, such understanding to be made effective November 1, 1997.
Our understandings are as follows:
WHEREAS, you have been employed by the Company pursuant to the terms
of that Retention Agreement between you and the Company signed by the
Company on March 6, 1997 (the "Retention Agreement") which contemplated
your employment by the Company through October 31, 1997;
WHEREAS, prior to October 31, 1997, you reached an informal
understanding with the Company that you would continue to serve the Company
beyond October 31, 1997; and
WHEREAS, the parties hereto now wish to memorialize the terms of that
understanding, effective October 31, 1997.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, covenants and promises hereafter set forth, the parties hereby
agree as follows:
1. You will continue to serve the Company under the terms of the
Retention Agreement and the Confidentiality and Non-Disclosure Agreement
between you and the Company signed by you on February 21, 1997 (the
"Confidentiality Agreement"), except that (i) Sections 1, 2, 3 and 5 and
the last sentence of Section 8 of the Retention Agreement will be of no
further force and effect, (ii) recognizing your fulfillment of the
obligations under the Retention Agreement, upon termination of your
employment by either you or the Company for any reason, you will be
entitled to a total severance award of $97,000 to be paid in equal bi-
weekly installments throughout the one year period following your
termination (the "Severance Period") and also the continuation of medical
benefits during the Severance Period the same as were in effect upon the
commencement of the Retention Agreement, (iii) your base salary will be
$97,000 on an annual basis, and (iv) you agree to the terms set forth
below.
2. You completely release, relinquish, waive and discharge the
Company, its predecessors, successors (by merger or otherwise), parents,
subsidiaries, affiliates, divisions, officers, directors, employees and
agents, whether present or former, from all claims, liabilities, demands
and causes of action, known or unknown, filed or contingent, which you may
have or claim to have against the Company as of the date of the signing of
this Agreement arising out of or in any way related to your employment with
the Company or the contemplated termination of that employment. You agree
that you have executed this Agreement on your own behalf, and also on
behalf of your heirs, agents, representatives, successors and assigns.
This release includes, but is not limited to, a release of any rights or
claims you may have under: (i) the Age Discrimination in Employment Act
(ADEA), which prohibits age discrimination in employment; (ii) Title VII of
the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991,
which prohibits discrimination in employment based on race, color, national
origin, religion or sex; (iii) the Americans with Disabilities Act (ADA),
which prohibits discrimination on the basis of a covered disability; (iv)
the Employer Retirement and Income Security Act (ERISA), which prohibits
discrimination on the basis of entitlement to certain benefits; (v) any
other federal, state or local laws or regulations prohibiting employment
discrimination; (vi) breach of any express or implied contract claims; or
(vii) wrongful termination or any other tort claims, including claims for
attorney's fees, whether based on common law, or otherwise. You
understand, however, that by signing this Agreement, you do not waive
rights to: (i) claims arising under any applicable worker's compensation
laws; (ii) any claims which the law states may not be waived; and (iii) if
applicable, your vested rights under the regular employment benefit plans
of the Company, in effect as of the date of this Agreement.
3. You will not in the future voluntarily assist any individual or
entity in preparing, commencing or prosecuting any action or proceeding
against the Company, its directors, officers, employees, or affiliates,
including but not limited to, any administrative agency claims, charges or
complaints and/or lawsuits against the Company, its directors, officers,
employees, or affiliates, nor will you voluntarily participate or cooperate
in any such action or proceeding, except as such agreement is specifically
prohibited by statute. You also agrees that you will cooperate with and
assist the Company in its defense of any such action or proceeding, subject
to reimbursement of reasonable out-of-pocket expenses. This Agreement
shall not preclude you from testifying in such an action or proceeding if
you are compelled to do so pursuant to a subpoena or other court order.
However, you expressly agree that you will provide written notice addressed
to the attention of Barry M. Abelson, Esquire, Pepper, Hamilton, LLP, 3000
Two Logan Square, Philadelphia, PA 19103 (Fax No.: 215-981-4750) if you
should receive, by service or otherwise, a notice, subpoena or other court
order or any other written request seeking or requiring you to testify or
otherwise participate in or assist in any action or proceeding against the
Company, such notice to be so provided within 48 hours of each such receipt
by you or anyone acting on your behalf.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Richard D. Sanford
---------------------------------
The foregoing is acceptable and approved
effective as of October 31, 1997:
/s/ Eugene E. Marinelli
- ----------------------------------------
Gene Marinelli
Exhibit 21
----------
SUBSIDIARIES OF INTELLIGENT ELECTRONICS, INC.
The following is a list of the Company's subsidiaries:
E-C Computer Technical Services, Inc., a Texas corporation
Intellinet, Ltd., a Pennsylvania corporation
R C K Computers, Inc., a Texas corporation
RNTS, Inc., a Colorado corporation
The Future Now, Inc., an Ohio corporation
XLConnect Solutions, Inc., a Pennsylvania corporation
XLConnect Systems, Inc., a Pennsylvania corporation
XLSource, Inc., an Arkansas corporation
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Intelligent Electronics, Inc.
We consent to incorporation by reference in the Registration
Statements (No. 33-39398, 333-15971 and 333-19161) on Form
S-3 and (No. 33-144436, 33-42119 and 33-60771) on Form S-8
of Intelligent Electronics, Inc. of our reports dated April 2,
1998, relating to the consolidated balance sheet of Intelligent
Electronics, Inc. and subsidiaries as of January 31, 1998, the
related consolidated statements of operations, shareholders'
equity and cash flows and the related schedule for the year then
ended, which reports are included in the January 31, 1998 annual
report on Form 10-K of Intelligent Electronics, Inc.
KPMG Peat Marwick LLP
Philadelphia, PA
April 2, 1998
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in both
the Prospectus constituting part of the Registration
Statement on Forms S-3 (No. 33-39398, 333-15971 and 333-
19161) and the Registration Statements on Forms S-8 (Nos.
33-144436, 33-42119 and 33-60771) of Intelligent
Electronics, Inc. of our report dated April 30, 1997,
appearing on page 16 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 46,586
<SECURITIES> 0
<RECEIVABLES> 67,317
<ALLOWANCES> 3,994
<INVENTORY> 2,628
<CURRENT-ASSETS> 137,623
<PP&E> 30,274
<DEPRECIATION> 20,389
<TOTAL-ASSETS> 207,489
<CURRENT-LIABILITIES> 94,014
<BONDS> 0
0
0
<COMMON> 471
<OTHER-SE> 91,383
<TOTAL-LIABILITY-AND-EQUITY> 207,489
<SALES> 557,912
<TOTAL-REVENUES> 557,912
<CGS> 477,412
<TOTAL-COSTS> 477,412
<OTHER-EXPENSES> 79,806
<LOSS-PROVISION> 5,694
<INTEREST-EXPENSE> 3,327
<INCOME-PRETAX> (33,583)
<INCOME-TAX> 4,443
<INCOME-CONTINUING> (39,373)
<DISCONTINUED> (5,220)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,593)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
