-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, LIgLoMxT2oY78U34DHRll7UEoXSqNthkyh7z4uuFxNz2tnCoN8hrbevNbnDw/47H rCMRf6Zmghw0Fb1A5leShQ== 0000890566-94-000453.txt : 19941117 0000890566-94-000453.hdr.sgml : 19941117 ACCESSION NUMBER: 0000890566-94-000453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19940731 FILED AS OF DATE: 19941115 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELOGIC TRACE INC CENTRAL INDEX KEY: 0000771993 STANDARD INDUSTRIAL CLASSIFICATION: 7370 IRS NUMBER: 742368260 STATE OF INCORPORATION: NY FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08948 FILM NUMBER: 94560414 BUSINESS ADDRESS: STREET 1: TURTLE CREEK TWR I STREET 2: PO BOX 400044 CITY: SAN ANTONIO STATE: TX ZIP: 78229-8415 BUSINESS PHONE: 2105935700 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) FOR THE FISCAL YEAR ENDED JULY 31, 1994 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from _________ to _________. COMMISSION FILE NUMBER 1-8948 INTELOGIC TRACE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 74-2368260 (STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) Turtle Creek Tower I P. O. Box 400044, San Antonio, Texas 78229-8415 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 210-593-5700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered 11.99% Subordinated debentures due 1996 New York Stock Exchange Common Stock ($.01 par value) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the shares of Common Stock of the Registrant held by non-affiliates as of October 17, 1994 was $2,864,962 which value, solely for the purposes of this calculation, excludes shares held by the Registrant's executive officers and directors based on the closing price of the stock as reported on the New York Stock Exchange. As of October 17, 1994, there were 12,490,782 shares of the Registrant's Common Stock outstanding (excluding treasury shares). 1 INTELOGIC TRACE, INC. INDEX TO FORM 10-K Page No. PART I -------- Item 1. Business................................. 3 Item 2. Properties............................... 8 Item 3. Legal Proceedings........................ 9 Item 4. Submission of Matters to a Vote of Security Holders....................... 10 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.... 11 Item 6. Selected Financial Data.................. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 13 Item 8. Financial Statements and Supplementary Data .................................. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 43 PART III Item 10. Directors and Executive Officers of the Registrant............................. 44 Item 11. Executive Compensation................... 46 Item 12. Security Ownership of Certain Beneficial Owners and Management ................. 57 Item 13. Certain Relationships and Related Transactions........................... 59 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 62 2 PART I ITEM 1. BUSINESS GENERAL Intelogic Trace, Inc. ("I T" or the "Company"), is an independent, nationwide provider of computer and telecommunications maintenance and support services. The Company was founded in 1968 and operated as the domestic Customer Service Division of Datapoint Corporation. In July 1985, Datapoint distributed all of the Company's common stock to the Datapoint shareholders and created the independent service Company, I T. From its inception, the Company has expanded its services and support capabilities through internal development and acquisitions. The Company's service programs utilize the Company's field force and technical headquarters support functions to develop customized service solutions for customers. These solutions include the installation and maintenance of hardware and software, upgrade services, help services, help desk, network support, project management services, remote diagnostic and repair capabilities and database management systems. In 1994, I T added programs for the installation, service, and support of telecommunications devices and telephone debit card dispensers. Today, I T is working with potential customers to develop service solutions for the users of PCs, minicomputers, kiosks, call directors, ACD switches, and assorted telecommunications devices and other electronic equipment. REORGANIZATION UNDER CHAPTER 11 During Spring 1994, the Company experienced an increased reliance on borrowed funds to satisfy working capital requirements, principally as a result of continued erosion in operating performance. The Company engaged Buccino & Associates, Inc. ("Buccino"), a nationally recognized company which specializes in consulting with financially troubled businesses to review cash flows, liquidity concerns, and provide recommendations to establish both immediate and long-term improvements in cash flow, profitability, asset management, and capital structure. Liquidity pressures continued to increase and the Company determined that the aggregate borrowing availability under its revolving credit agreement would not be sufficient to meet the Company's obligations on a current basis. The Company's liquidity shortfall was compounded by the semi-annual interest payment due July 15, 1994, of $3.0 million on the $49.9 million in principal amount of 11.99% Subordinated Debentures due 1996 (the "Debentures"). In addition to ongoing discussions with its lender, during late June and early July 1994, the Company held discussions with the holders of a majority of principal amount of Debentures (the "Principal Debentureholders") regarding a potential restructuring of that obligation. On July 15, 1994, the Company filed a Current Report on Form 8-K disclosing that it was negotiating with its Principal Debentureholders and that it would not make the interest payment on the Debentures. On July 21, 1994, the Indenture Trustee for the Debentures issued its notice of default. Pursuant to the terms of the Indenture, a failure to make the semi-annual interest payment within the thirty-day grace period allowed by the Indenture would cause an Event of Default to have occurred. Due principally to increasing pressures on available capital, the nonpayment of a promissory note due to the Company and potential terminations of certain leases, licenses, and contracts due to financial defaults, the Board of Directors reached the conclusion that the protection of the Bankruptcy Code was necessary in order to consummate the restructuring of the Debentures and the revolving financing agreement. 3 On August 5, 1994, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division (the "Court"). As a result of discussions with its Principal Debentureholders, contemporaneously with filing the petition, the Company filed a Plan of Reorganization setting forth the terms of a proposed restructuring. Under Chapter 11, enforcement of certain claims in existence prior to the filing of the petitions are stayed, while the Company continues operations in the ordinary course of business as debtor-in-possession. On October 4, 1994, the Court approved the Company's Disclosure Statement to the Company's Plan of Reorganization (the "Disclosure Statement"). The Disclosure Statement, as modified and amended, describes the Plan of Reorganization (the "Plan") proposed by the Company. The Plan has been submitted to a vote of creditors, security holders and parties in interest, and a hearing on confirmation of the Plan has been scheduled by the Court for November 22, 1994. If confirmed, the Plan would, among other things, cause the following to occur on the effective date of the Plan (the "Effective Date"): (1) administrative and tax claims would be paid in full; (2) a new series of preferred stock would be issued to holders of unsecured claims; (3) a four-for-one reverse split of the common stock would be consummated, with existing common shareholders retaining approximately 25% of the Company's common stock outstanding after the Effective Date, and holders of unsecured claims receiving 75% of the shares of common stock outstanding after the Effective Date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this filing. The terms of the Plan are subject to acceptance by the parties to the Plan and confirmation by the Court; therefore, the ultimate impact of the bankruptcy on the Company's results of operations and financial position cannot presently be determined. MARKETS & SERVICES COMPUTER HARDWARE MAINTENANCE AND SUPPORT The Company's services include preventive/remedial maintenance and basic installation. This is the Company's core business and accounts for 95% of the Company's service revenues during fiscal 1994. Customers include end- users, manufacturers/resellers, and business partners. The Company normally provides these services on an "on-call" basis either pursuant to a contract of a specified term and coverage ("Service Agreement") or on a time and materials ("T&M") basis. During fiscal year 1994, approximately 78% of the Company's revenue was generated from service provided pursuant to Service Agreements. I T has these agreements with end-users, major equipment manufacturers, and value-added resellers (VARs). In addition, I T is an Authorized Service Provider for a number of manufacturers, including AST, Datapoint, Magna, PAJ Electronics, Inc., and Teknekron Infoswitch Corporation. On-site repair service is initiated by a customer telephoning the Company's Customer Support Center, which then dispatches a Customer Engineer from the customer's service area to answer the call. The Customer Engineer diagnoses the source of the problem and repairs or replaces the malfunctioning component. The Company has expanded its on-site maintenance business to respond to customers with many types of computer equipment from a wide variety of vendors and now maintains approximately 2,000 different products from over 150 vendors. The Company also has a limited "carry-in" or "mail-in" business. The Company maintains repair 4 facilities at selected district offices and in San Antonio, Texas to perform maintenance for selected products. TELECOMMUNICATIONS HARDWARE INSTALLATION, MAINTENANCE, AND SUPPORT Traditional services provided in this market include installation, warranty repair, preventive and remedial maintenance, system upgrades, moves, and systems integration. Typically, this telecommunications market is served by distributors or resellers who provide service and support on a local or regional basis. In 1994, I T developed new capabilities to provide customized service solutions for the installation, service, and support of certain telecommunications equipment. These programs include order entry, scheduling, programming, remote diagnostic and repair capabilities, and management database systems. The foundation of these new services is an interactive communications network system which administers the programs. This system allows orders to be entered electronically and coordinates the installation activities. The system communicates with installers via radio frequency devices and provides the I T installer with the ability to communicate with the on-line system with minimal human intervention. The network also provides remote verification, diagnostic, and repair capabilities for such equipment. I T performs monthly auto-polling during the customer's off hours to verify the integrity of the installed equipment and activity of the devices. If it detects an error in the equipment's programming, the system notifies an I T technician on the "Help Desk" and the technician can remotely interrogate the "ailing" device. The technician frequently can repair and restore the device to proper operation without the need for an on-site visit. Another capability of the program is the "Call Home Sick" feature involving such equipment. A device which begins to experience problems can go off- line (enter into a by-pass mode with no disruption to telephone service) and call the system in San Antonio. The technician can typically resolve the problem remotely by interactively communicating with the device. If this is not possible, the Help Desk technician can dispatch an I T customer engineer to repair the device. Other capabilities of the program include the creation of management databases to track revenues generated by the dialers and maintain records of the location and configuration of installed dialers. During 1994, the Company capitalized on these new capabilities and entered into an agreement with a telecommunications company to install and maintain Dialers. This new activity accounted for $3.4 million of the Company's 1994 revenues. 5 OTHER EQUIPMENT The Company's new capabilities provide opportunities for the installation, service, and support of other electronic devices and equipment. These include debit card dispensers and kiosk equipment similar to the units which allow customers to create their own individual greeting cards. MARKETING The Company markets its services in the following ways: * Through a national sales force, the Company pursues multi-vendor installation, service, and support agreements with end-users of computer, telecommunications and other electronic equipment. * The Company enters into agreements with leading manufacturers to provide authorized service to their end-users during both the warranty and post-warranty period. * Agreements are established with value-added dealers, distributors and systems integrators ("resellers") to market the Company's services as a part of the reseller's total product offering. * The Company enters into subcontracting agreements to perform services for other vendors, typically a seller of equipment, where the seller serves as the general contractor for all maintenance services. * Solicitation agreements are established with independent sales organizations, dealers and distributors which receive a commission for obtaining service agreements for the Company. END-USER AGREEMENTS Service Agreements with end-users normally have an initial term of one year and continue thereafter until terminated by either the customer or the Company upon 90-days prior written notice. After the first year, the Company may increase or decrease maintenance prices upon 90-days prior written notice to the customer. End-user agreements address the particular service needs of the end-users, and therefore, each contract is unique to individual requirements. Service is also provided on a "time and materials" basis to those customers who request services outside the terms of the Service Agreement. In such instances, the customer typically is charged for labor and materials used in making the required repairs, at predetermined labor rates and at the Company's established prices for parts. MANUFACTURER AGREEMENTS Agreements with manufacturers usually call for the Company to provide installation and database maintenance service to an end-user during the manufacturer's warranty period, normally 90 days to three years from the date of purchase. These agreements typically provide that the Company will be compensated by the manufacturer either by receiving a fee for all units shipped by the manufacturer or on a per incident basis. 6 The Company's agreements with manufacturers are generally for a term of three years, and continue thereafter until terminated upon one year's notice by either party, and provide that the Company will be an authorized third-party maintainer for the manufacturer during the term of the agreement. In addition, the Company receives favorable terms for the supply, purchase and repair of spare parts, training and support equipment. Under the terms of its agreement with Datapoint, the Company is the exclusive service agent for Datapoint equipment throughout the United States. The agreement with Datapoint, dated June 29, 1985, provides for an exclusive relationship with the Company until terminated by either party, notice of which termination must be given 180 days prior to the anniversary of the execution of the agreement, to be effective six years thereafter. Following termination, the Company would have a non-exclusive relationship with Datapoint. As of the date of this document, neither party has issued any such notice. During fiscal years 1994, 1993 and 1992, 13%, 17%, and 24% of the Company's maintenance service revenue was derived from servicing Datapoint products. See Note 4 to the consolidated financial statements included elsewhere in this filing. RESELLER AGREEMENTS The Company provides services at end-user sites pursuant to agreements with resellers of the Company's services, whereby the resellers subcontract the performance of services to the Company. The resellers receive a discount from the Company's published or established prices based upon volume commitments and achievements. The resellers are responsible for payment for all services rendered by the Company to the end-user and are required to perform certain services which lower the Company's cost of providing maintenance services. Agreements with resellers are normally for an initial term of three years, terminable thereafter by either party upon 90-days written notice. Reseller agreements typically provide that the Company is the sole third-party maintainer for the selected products of the reseller during the term of the agreement. SUBCONTRACTING AGREEMENTS The Company provides services at end-user sites pursuant to subcontracting agreements with other vendors, typically a seller of equipment acting as the general contractor for all maintenance services at a site, regardless of equipment manufacturer. The vendors are responsible for payment for all services rendered by the Company to the end-user. The Company has established subcontractor relationships with IBM, Digital Equipment Corporation, and C&L Communications. SOLICITATION AGREEMENTS Pursuant to the Company's agreements with independent sales organizations, dealers and distributors, the Company is obligated to pay such organizations a commission for the first year of installation and maintenance revenue received by the Company as a result of such solicitor providing the Company with a Service Agreement between the end-user and the Company. 7 CUSTOMERS Providing service at end-user sites pursuant to subcontract agreements with other vendors and agreements with resellers is a meaningful source of the Company's revenue. The three most significant of these relationships (IBM, MCI, and EDS) accounted for approximately 14%, 5%, and 4%, respectively, of the Company's 1994 service revenue. COMPETITION The Company competes nationwide principally with service companies which furnish service nationally on a multi-vendor basis; with many companies which furnish multi-vendor service only on a local or regional basis; and with computer manufacturers and distributors which have their own service organizations. Management believes that the Company competes with other multi-vendor service organizations based on coverage, technical competence, customer satisfaction, responsiveness, total service offering, and the effectiveness of maintenance and support services and the price at which such services are offered. In addition, the Company believes that its independence and its ability to provide a full range of services gives it a competitive advantage over pure maintenance companies and allows it to compete with other large national service companies. SPARE PARTS The Company maintains an on-hand supply of spare parts to be utilized as replacement parts in servicing its customers. As is the practice in the service industry, a significant quantity of parts is required in order to facilitate prompt repair service. Spare parts are obtained from manufacturers or other reliable sources with which the Company has maintenance and spare parts agreements. Spare parts also are obtained pursuant to purchase contracts with vendors and are obtained through open market purchases. In 1995, the Company plans to outsource this business. As a result of this plan, the Company has commenced negotiations to sell the majority of its field support spares to various third parties. Based on estimates received by a prospective buyer, field support spares have been written down by $17.3 million to their estimated realizable value of $2.6 million. It is expected that the sale of the field support spares will occur in 1995. EMPLOYEES At July 31, 1994, the Company had 726 employees. With the exception of four employees with the Company's Canadian subsidiary, Intelogic Trace Canada ("I T Canada"), all remaining employees of the Company are not covered by any collective bargaining agreements and the Company has never experienced a strike or work stoppage. The Company considers its relations with its employees to be good. ITEM 2. PROPERTIES The Company's principal executive offices are located at Turtle Creek Tower I, San Antonio, Texas. The Company leases its executive offices and other office and warehouse facilities throughout the United States. 8 ITEM 3. LEGAL PROCEEDINGS The Company filed a Voluntary Petition on August 5, 1994, under Chapter 11 of the United States Bankruptcy Court. The Company, as debtor-in- possession, continues to operate and manage its affairs. A Disclosure Statement to the Plan of Reorganization of the Company has been approved by the Court, and is an exhibit to this filing. A Confirmation Hearing for the Company's proposed Plan has been set for November 22, 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Two shareholders of the Company have filed lawsuits against the Company and its Board of Directors demanding that the Company seek damages from its Board of Directors with respect to the Company's 1990 purchases of the stock of the Company and Datapoint. A committee of the Board of Directors was appointed to consider the demands raised in each case. The committee retained independent counsel to review the matters raised in the lawsuits and determined that it was not in the best interest of either the Company or its shareholders to accept either demand and, accordingly, instructed counsel to seek the dismissal of both lawsuits. In January 1992, a motion for summary judgment on behalf of the Company and the Board of Directors was denied in the lawsuit pending in the New York State Court and is currently on appeal. A similar motion, involving only the Company's purchase of its own stock, was denied, with leave to renew after the appeal in the New York State Court action is decided. The second case is pending in the United States District Court for the Southern District of New York. This action charged a violation of the proxy laws and breach of fiduciary duties with respect to several actions by the Board, including the purchase of the Company's own stock. In June 1993, another shareholder commenced a derivative action against certain members of the Company's Board of Directors and Datapoint. Because this latest action is substantially similar to one of the previously filed suits, the plaintiffs in the latest action have filed a motion to dismiss their complaint without prejudice. On May 13, 1994, the Company announced that although it and the Board of Directors expressly disclaim and deny any liability or wrongdoing with respect to the allegations, a settlement had been reached in order to avoid the additional expense, burden, inconvenience and distraction of continued litigation. Pursuant to the settlement agreement, which is subject to Bankruptcy and District Court approval, the Company will receive $2.4 million less attorney's fees and expenses (not to exceed $800,000) awarded by the Court. In addition, the Company has agreed to form a committee of the Board to address and approve certain matters relating to the Company's current and prospective investments. The cash portion of the settlement is fully covered by the Company's director and officer liability insurance but may be offset in whole or in part by future director and officer liability insurance premium increases. The Honorable Leonard B. Sand, United States District Judge for the Southern District of New York, has held a hearing concerning the fairness of the proposed settlement. However, no opinion has yet been issued. Judge Sand has referred the case to the Court for further adjudication consistent with bankruptcy law. Due to the current uncertainty as to any recovery the Company has not recorded any receivable. On October 4, 1994, certain Debentureholders filed an adversary proceeding in the Court against the Company alleging securities law violations and certain other common law causes of action. The litigation relates to the Company's purchases of securities, including Datapoint Stock and related actions. The plaintiffs in the adversary proceeding seek monetary damages, attorney's fees, and costs of suit. Any allowed claims against the Company may be subordinated to the claims of secured and unsecured creditors. 9 The Internal Revenue Service ("IRS") has issued assessment letters relating to the consolidated federal income tax returns of the Company for the years 1986 through 1992. The IRS letters propose assessments totaling $31.0 million in additional taxes plus interest. The assessment primarily involves the industry-wide issue of the appropriate method for cost recovery of spare parts. A recent case on the same issue was decided in the taxpayer's favor by the United States Tax Court, but is being appealed by the IRS. If the decision was followed by courts with jurisdiction over the Company, the remaining proposed assessment would be approximately $2.5 million in additional taxes plus interest. The Company strongly disagrees with the proposed adjustments and has filed a protest, appealing each of the adjustments in the IRS report. During 1994, the Company negotiated a settlement with the IRS and on October 3, 1994 the IRS appeals officer provided the Company a settlement document indicating a refund of approximately $1.0 million net of interest costs. The IRS settlement document is subject to approval by the Joint Committee of Congress and therefore, the ultimate outcome cannot presently be determined. No receivable has been recorded for any possible refund. The Company is a party to various legal proceedings in the ordinary course of business. The Company believes, based upon the advice of legal counsel responsible for the review of such matters, that there is no proceeding either threatened or pending against the Company that could result in a materially adverse effect on the business or the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is traded on the composite tape on the New York Stock Exchange under the symbol IT. The following table sets forth the high and low sales prices on the composite tape for the New York Stock Exchange for the periods indicated. HIGH LOW ------- -------- August 1, 1994 - October 17, 1994 ............... $ 11/16 $ 1/4 FISCAL QUARTER ENDED 1994 October 31, 1993 ................................. 2 7/8 1 7/8 January 31, 1994 ................................. 4 1/8 2 7/8 April 30, 1994 ................................... 3 5/8 1 1/2 July 31, 1994 .................................... 1 1/2 7/16 1993 October 31, 1992 ................................. 3/4 1/2 January 31, 1993 ................................. 1 1/8 3/8 April 30, 1993 ................................... 1 1/8 11/16 July 31, 1993 .................................... 2 3/8 13/16 As of October 17, 1994, there were 3,425 holders of record of the Company's common stock. The Company has not paid cash dividends to date and has no present intention to pay cash dividends on its common stock in the future. Restrictive provisions of the 11.99% Subordinated Debentures due 1996 limit the payment of cash dividends and other distributions on capital stock, as well as the acquisition or retirement, by the Company, of its capital stock. As a condition precedent to consummation of the Plan, the Company will be required to enter into a Registration Rights Agreement (the "Registration Rights Agreement") with certain principal holders of Debentures (the "Principal Holders") on or prior to the Effective Date of the Plan. Under the Registration Rights Agreement, the Company will be required, among other things, to cause to be filed with the Securities and Exchange Commission within thirty days of the Effective Date a registration statement covering the shares of stock issued to Principal Holders in connection with the Plan, with respect to the resale of such securities by the Principal Holders from time to time. 11 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ----------------------------------------------------------------------- 1994 1993 1992 1991 1990 ----------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total Revenue .................................... $ 72,555 $ 88,172 $ 103,647 $ 105,500 $ 107,726 Earnings (Loss) from Operations .................. (27,278) 4,031 (6,568) (7,083) 3,038 Loss from Continuing Operations .................. (34,388) (3,431) (15,658) (13,108) (26,962) Earnings (Loss) from Discontinued Operations ....................... 505 -- (1,622) (5,452) (132) Extraordinary Items .............................. -- 2,547 416 5,246 7,396 Net Loss ......................................... (33,883) (884) (16,864) (13,314) (19,698) Net Loss Less Preferred Stock Dividends ............................... (34,671) (1,528) (17,409) (13,668) (19,698) Loss per Share: Continuing operations ....................... (2.85) (.34) (1.36) (1.13) (2.14) Net loss less preferred stock dividends ..... (2.81) (.13) (1.46) (1.15) (1.56) BALANCE SHEET DATA: Total Assets ..................................... $ 15,569 $ 44,461 $ 58,744 $ 74,039 $ 86,774 Long-Term Debt ................................... -- 49,924 56,930 56,930 63,356 Redeemable Preferred Stock ....................... 4,691 3,903 3,259 2,714 -- Shareholders' Deficit ............................ (73,529) (39,249) (35,335) (17,973) (4,359) Gains from the repurchase of $7.0 million of the Company's 11.99% Subordinated Debentures at a discount. See Note 8 of the Notes to Consolidated Financial Statements included elsewhere in this filing. The Company's pro-rata share of Datapoint Corporation's extraordinary gains for 1992. See Note 4 of the Notes to Consolidated Financial Statements included elsewhere in this filing. Gains from the repurchase of $6.4 million of the Company's 11.99% Subordinated Debentures at a discount and the Company's share of Datapoint Corporation's extraordinary gains for 1991. See Notes 4 and 8 of the Notes to Consolidated Financial Statements included elsewhere in this filing. Gains from the repurchase of $21.6 million of the Company's 11.99% Subordinated Debentures at a discount and the Company's share of Datapoint Corporation's extraordinary items for 1990. See Notes 4 and 8 of the Notes to Consolidated Financial Statements included elsewhere in this filing. $49.9 million of 11.99% Subordinated Debentures has been classified as liabilities subject to compromise at July 31, 1994.
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (YEARS REFERRED TO ARE FISCAL YEARS) OVERVIEW During Spring 1994, the Company experienced an increased reliance on borrowed funds to satisfy working capital requirements, principally as a result of continued erosion in operating performance. The Company engaged Buccino to review cash flows, financial needs, liquidity concerns, and provide recommendations to establish both immediate and long-term improvements in cash flow, profitability, asset management, and capital structure. Liquidity pressures continued to increase and the Company determined that the aggregate borrowing availability under its revolving credit agreement would not be sufficient to meet the Company's obligations on a current basis. The Company's liquidity shortfall was compounded by the semi-annual interest payment due July 15, 1994, of $3.0 million on the $49.9 million in principal amount of Debentures. In addition to ongoing discussions with its lender, during late June and early July 1994, the Company held discussions with the Principal Debentureholders regarding a potential restructuring of that obligation. On July 15, 1994, the Company filed a Current Report on Form 8-K disclosing that it was negotiating with its Principal Debentureholders and that it would not make the interest payment on the Debentures. On July 21, 1994, the Indenture Trustee for the Debentures issued its Notice of Default and Notice of Conditional Holders' Meeting. Pursuant to the terms of the Indenture, a failure to make the semi-annual interest payment within the thirty-day grace period allowed by the Indenture would cause an Event of Default to have occurred. A meeting of the holders of Debentures was scheduled for August 23, 1994, to discuss the situation. In the interim, discussions continued with both the Principal Debentureholders and Foothill Capital Corporation ("Foothill"), the Company's primary lender. Due to increasing pressures on available capital, including but not limited to the non-payment of a $750,000 promissory note to the Company and potential terminations of certain leases, licenses, and contracts due to financial defaults, the Board of Directors reached the conclusion that the protection of the Bankruptcy Code was necessary in order to consummate the restructuring of the Debenture obligations and the revolving financing facility. Accordingly, on August 5, 1994, the Company initiated a Chapter 11 Case under the Bankruptcy Code. Since the commencement of the Chapter 11 Case, the Company has continued to conduct business in the ordinary course under the protection of the Bankruptcy Code. The Company's financial condition and results of operations will be affected by the ultimate terms of any reorganization plan. A Disclosure Statement to the proposed Plan has been approved by the Court. The case is pending as Cause No. 94-52172C in the United States Bankruptcy Court for the Western District of Texas. The Disclosure Statement, as modified and amended, describes the Plan proposed by the Company after negotiations with creditors. The Plan has been submitted to a vote of creditors, security holders and parties in interest, and a hearing on confirmation of the Plan has been scheduled by the Court for November 22, 1994. If confirmed, the Plan would, among other things, cause the following to occur on the Effective Date: (1) administrative and tax claims would be paid in full; (2) a new series of preferred stock would be issued to holders of unsecured claims; (3) a four-for-one reverse split of the common stock would be consummated, with existing common shareholders retaining approximately 25% of the Company's common stock outstanding after the Effective Date, and holders of unsecured claims receiving 75% of the shares of common stock outstanding after the Effective Date. 13 Because of uncertainty regarding the outcome of the Chapter 11 Bankruptcy Case and the effect of any bankruptcy reorganization plan on the interests of the Company's creditors and securityholders, the ultimate impact of the Chapter 11 Bankruptcy Case on the Company's results of operations and financial position cannot presently be determined. The Company is also unable to predict the value, if any, to be realized by securityholders in a bankruptcy case whether or not a successful reorganization is achieved. For this reason, any investment in the Company's common stock should be considered speculative. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing and circumstances relating to this event, such continuity of operations and realization of assets and liquidation of liabilities are subject to uncertainty. Further, the Plan will materially change the amounts reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of the Plan. The appropriateness of using the going concern basis is dependent upon, among other things, the confirmation of the Plan, the ability to comply with debtor-in-possession financing agreements, generation of sufficient cash from operations and financing sources to meet obligations, and achievement of satisfactory levels of future operating profit. DEBTOR-IN-POSSESSION FINANCING On September 16, 1994, the Court entered an order approving a debtor-in- possession credit agreement (the "DIP Facility"). The DIP Facility consists of an extension and modification of the previously existing credit agreement with Foothill, the terms of which are described in Note 8 to the consolidated financial statements. Borrowings under the DIP Facility bear interest at the prime rate plus 4.5 percent, are payable monthly in arrears, and are secured by a lien on substantially all of the assets of the Company. Under the terms of the DIP Facility, the Company is not authorized to use the collateral (i) upon an event of non-compliance with the Bankruptcy Court order approving the DIP Facility, (ii) after December 31, 1994, unless extended by mutual agreement of the Company and Foothill, or (iii) after entry of an order by the Court confirming a plan of reorganization of the Company. In September, the Company determined that it would require $1.3 million post-petition credit in addition to the DIP Facility to provide additional working capital for continued operations. Under approval of the Court, the Company obtained this additional credit from Fidelity Capital and Income Fund ("Fidelity"), a Principal Debentureholder, at an annual interest rate of 15% and pursuant to the terms and conditions as further described under Item 13 of this Report. Although no assurance can be made, management believes the Company can generate sufficient cash from operations and from existing financing sources to meet its obligations on a current basis during the pendency of the Case. EXIT FINANCING The Company is engaging in various negotiations to obtain an Exit Financing Facility in order to provide for expected post-confirmation working capital needs. Management anticipates that the 14 Exit Financing Facility would consist primarily of a $7.0 million revolving loan primarily secured by senior liens on inventory, receivables, and equipment. The Company has engaged in discussions with financial institutions other than Foothill and Fidelity regarding the provision of an Exit Financing Facility and have not received favorable indications of interest from such institutions. As a result, management has determined to pursue a commitment from, and has commenced negotiations with Foothill and Fidelity for an Exit Financing Facility. The terms of the Plan require the Company to secure a firm commitment for a post-confirmation revolving financing facility acceptable to the holders of a majority in principal amount of the Debentures. Although management believes that the Company can obtain a satisfactory exit financing facility, no assurance can be made that an appropriate exit financing facility will be obtained. CONFIRMATION OF THE PLAN OF REORGANIZATION There can be no assurance that the Plan will be confirmed. If the Plan is not confirmed, the Company or any other party-in-interest could attempt to formulate a different plan. Such a plan might involve a reorganization or an orderly liquidation of the Company's assets. As substantially all of the material assets of the Company are subject to liens of the Company's debtor-in-possession lender, management believes a liquidation would result in little, if any, distribution to Company shareholders. Further, if the Plan is consummated after December 31, 1994, the Company would be required to utilize its tax attributes, principally its net operating losses, to offset the cancellations of debt income, due to changes in U.S. tax law effective December 31, 1994 that repeal the stock-for-debt exception relied upon by the Company for the issuance of common stock under the Plan. REORGANIZATION ACCOUNTING ISSUES In November 1990, the American Institute of Certified Public Accountants issued SOP 90-7. Pursuant to the guidance provide by SOP 90-7, the Company will adopt "fresh start" reporting as of the Effective Date. Under "fresh start" reporting, the reorganization value of the entity is allocated to the entity's assets. If any portion of the reorganization value cannot be attributed to specific tangible or identifiable intangible assets of the emerging entity, such amounts are to be reported as "reorganization value in excess of amounts allocable to identifiable intangible assets" and amortized over a period of years, generally substantially less than forty years. As a result of adopting "fresh start" reporting upon emerging from Chapter 11 status, the Company's consolidated financial statements will not be comparable with those prepared before the Plan is confirmed, including the historical consolidated financial statements included herein. In addition to "fresh start" reporting, SOP 90-7 provides guidance for financial reporting by entities that have filed petition with the Court and expect to reorganize under Chapter 11. The Company followed these guidelines in the accompanying July 31, 1994 consolidated financial statements. Pursuant to SOP 90-7, prepetition liabilities are reported on the basis of the expected amount of such allowed claims, as opposed to the amounts for which those allowed claims may be settled. Under the Plan, if accepted by the parties and confirmed by the Court, those claims will be settled at amounts substantially less than their allowed amounts. 15 As of July 31, 1994, prepetition liabilities subject to compromise consist of the following (in thousands): 11.99% Subordinated Debentures due 1996 ....................... $49,924 Accounts payable .............................................. 6,521 Accrued interest payable ...................................... 3,242 Contribution payable to pension plan .......................... 2,417 Other liabilities ............................................. 148 ------- $62,252 ======= The Plan also provides that the $10 Redeemable Preferred Stock issued by the Company, all of which is owned by Datapoint, will be canceled and no distributions will be made on account of this stock. The $10 Redeemable Preferred Stock has been returned to the Company and the common stock in the trust has been distributed to the Company (300,000 shares) and Datapoint (2.4 million shares). RESULTS OF OPERATIONS 1994 VS. 1993 Net loss increased from $884,000 in 1993 to $33.9 million in 1994. This net loss increase of $33.0 million was due primarily to a decline in revenues of $15.6 million and an increase in reorganization and restructuring charges of $17.5 million. REVENUE Total revenue for 1994 declined $15.6 million (17.7%) primarily due to cancellations of service contracts of $28.2 million outpacing new sales of $18.0 million. Additionally, $5.4 million was due to a decline in revenue from servicing Datapoint-manufactured products. This was due primarily to the continued decline of the Datapoint customer base. Management believes that the decline in revenue during 1994 is attributable to a variety of factors including the price of service offerings, new product warranty offerings and an increased level of competition in the market for service-related products. These factors are expected to continue into 1995 and as a result, revenues are expected to continue to decline during 1995. COST OF REVENUE Total cost of revenue decreased $2.3 million in 1994 compared to 1993; however, the revenue decline outpaced efforts to reduce expenses. OPERATING EXPENSES Operating expenses increased $18.0 million due primarily to the reorganization and restructuring charges incurred in the writedown of field support spares. During 1994, the Company began negotiations to sell the majority of its field support spares to various third parties. Based on estimates received by a prospective buyer, field support spares have been written down by $17.3 million to their estimated fair market value. Management expects that the sale of the field support spares will occur in 1995. 16 At the beginning of June 1994, the Company began implementing cost reduction programs designed to reduce fixed and variable expenses, including: * Restructure and reduce staff. * Arrange for the sale of field support spare parts inventories, repair operations, and the logistics function to generate annual expense savings and eliminate the majority of the Company's depreciation expense. * Terminate and renegotiate facilities leases to generate additional expense reductions. Management expects to begin realizing the benefits of these cost savings in fiscal year 1995. INTEREST EXPENSE Interest expense increased $234,000 in 1994 compared to 1993 due to the increase in the average borrowings under the Company's credit line. The Company expects interest expense to decline during 1995 assuming the proposed Plan is confirmed by the Court. FEDERAL AND STATE INCOME TAX BENEFIT The tax benefit of $1.2 million was the result of the change in the valuation allowance associated with the tax refunds previously received. 1993 VS. 1992 At the beginning of 1993, the Company instituted an across-the-board salary reduction averaging 6%. This reduction reduced expenses for the year by $4.0 million. Overall, costs and expenses declined $26.1 million when compared to 1992. In October 1992, the Company moved to a new decentralized organization, with responsibility for profitability and service satisfaction closer to the customer. This geographic "business unit" structure combines service and sales into one organization reporting to a General Manager. REVENUE Total revenue for 1993 of $88.2 million decreased $15.5 million (14.9%) from 1992 primarily due to expirations and cancellations of service contracts throughout the year exceeding new business generated during the period, resulting in lower service revenue for 1993. New business additions were below prior year levels due to a smaller yet more productive sales force combined with a move away from marginal sales opportunities. Revenue from servicing Datapoint products declined by $8.7 million representing 56.1% of the total revenue decline. Canadian revenue decreased from $4.5 million in 1992 to $3.3 million in 1993 representing 7.5% of the total revenue decline. COST OF REVENUE Cost of revenue decreased $17.3 million (20.8%) from 1992 to 1993. Reductions in salaries and wages related to cost of service totaled $9.1 million representing 53.0% of this decline. Reductions in board repair expense and material and freight totaled $1.5 million or 8.7% of the 17 total decrease. Canadian cost of service declined by $1.8 million. GROSS PROFIT Despite the above mentioned revenue decline, gross profit of $22.4 million (25.4%) increased by $1.8 million from the previous year which reported gross profit of $20.6 million (19.8%). The Company benefited from reductions in personnel expense, board repair, and material and freight. OPERATING EXPENSES Selling, General & Administrative ("SG&A") expenses of $17.9 million for 1993 decreased $6.8 million (27.6%) from 1992. Further reductions of management layers and across-the-board wage reductions enacted at the start of the current fiscal year contributed $3.7 million of this improvement. The cost of streamlining the Logistics and SG&A functions are shown in other operating expenses for 1993 and 1992. These charges of $457,000 and $2.4 million, respectively, primarily represent severance and facility closing costs. Canadian operating expenses declined by $1.4 million (56%) from 1992. INTEREST EXPENSE Interest expense decreased $251,000 in 1993 as compared to 1992. During the year, the Company repurchased $7.0 million face value of its outstanding Debentures for $4.4 million, recognizing extraordinary gains of $2.5 million. Short-term borrowings under the Foothill credit line carried an interest rate of prime plus 3 7/8% and averaged $5.9 million in 1993 compared to an average balance of $528,000 in 1992. The balance at July 31, 1993, of $4.4 million, however, was down $2.5 million from year-end 1992. EQUITY IN INCOME (LOSS) OF AFFILIATE As of July 31, 1993 and 1992, the Company's investment in Datapoint had zero carrying value. Note 3 to the Company's consolidated financial statements provides a complete discussion of this investment. 18 FEDERAL AND STATE INCOME TAXES During the second quarter of 1992, the Company ceased recording income tax benefits on losses because realization of further tax benefits is contingent upon income in future periods. DISCONTINUED OPERATIONS The results of the Company's hardware sales and leasing and application software sales businesses, for all periods presented, have been shown separately because of the sale of substantially all of the assets of those operations effective July 1992. In 1992 the Company reflected a loss of $1.6 million from discontinued operations related to the sale of substantially all of the assets of those businesses. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE NO. ---- Report of Independent Auditors ...................................................... 21 Consolidated Statements of Financial Position at July 31, 1994 and 1993 ............. 22 Consolidated Statements of Operations for each of the Years Ended July 31, 1994, 1993 and 1992 ..................................................... 23 Consolidated Statements of Cash Flows for each of the Years Ended July 31, 1994, 1993 and 1992 ......................................... 24 Consolidated Statements of Shareholders' Deficit for each of the Years Ended July 31, 1994, 1993, and 1992 ........................................ 25 Notes to Consolidated Financial Statements .......................................... 26 Schedule V - Leasehold Improvements and Equipment and Field Support Spares for each of the Years Ended July 31, 1994, 1993 and 1992 .................. 68 Schedule VI - Accumulated Depreciation of Leasehold Improvements and Equipment and Field Support Spares for each of the Years Ended July 31, 1994, 1993 and 1992 ............................................... 69 Schedule VIII - Valuation and Qualifying Accounts and Reserves for each of the Years Ended July 31, 1994, 1993 and 1992 ......................... 70 Schedule IX - Short Term Borrowings for each of the Years Ended July 31, 1994, 1993 and 1992 ............................................... 71 Schedule X - Supplementary Income Statement Information for each of the Years Ended July 31, 1994, 1993 and 1992 .................................. 72
20 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Intelogic Trace, Inc. We have audited the accompanying consolidated statements of financial position of Intelogic Trace, Inc. as of July 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and shareholders' deficit for each of the three years in the period ended July 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intelogic Trace, Inc. at July 31, 1994 and 1993 and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that Intelogic Trace, Inc. will continue as a going concern. As discussed in Note 2 to the consolidated financial statements on August 5, 1994, Intelogic Trace, Inc. has filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. This event and circumstances relating to this event, including the Company's losses, accumulated deficit and leveraged capital structure, raise substantial doubt about its ability to continue as a going concern. Continuation of the Company as a going concern and realization of its assets and liquidation of its liabilities are dependent upon, among other things, the confirmation of a plan of reorganization and the Company's ability to generate sufficient cash from operations and obtain financing sources to meet its obligations. As a result of the reorganization proceedings, the Company may sell or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the confirmation of a plan of reorganization could materially change the amounts currently recorded in the consolidated financial statements. If no reorganization plan is approved, it is possible that the Company's assets could be liquidated. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. As discussed in Note 16 to the consolidated financial statements, the Internal Revenue Service issued assessments for additional taxes for the years 1986 through 1992 which the Company disagreed with, and accordingly, filed a protest appealing each assessment. During 1994, the Company negotiated a settlement with the Internal Revenue Service indicating a refund of approximately $1 million. The settlement is subject to approval by the Joint Committee of Congress and, therefore, the ultimate outcome cannot presently be determined. Accordingly, no amounts have been recorded in the consolidated financial statements for any outcome that may result from these assessments and settlement negotiations. ERNST & YOUNG LLP San Antonio, Texas October 14, 1994, except for Note 2, Paragraph 8 as to which the date is November 9, 1994 21 INTELOGIC TRACE, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands, except share data)
JULY 31, --------------------------- ASSETS 1994 1993 -------- -------- Current Assets Cash and temporary investments ........................................................... $ 605 $ 1,626 Marketable securities, net of valuation allowance of $2,693 in 1994 and 1993 ............................................................... -- -- Accounts receivable, net of valuation allowance of $2,880 in 1994 and $3,342 in 1993 ..................................................... 7,192 8,728 Net assets of discontinued operations .................................................... 200 320 Other current assets ..................................................................... 1,624 2,070 -------- -------- Total Current Assets .................................................................. 9,621 12,744 Leasehold Improvements and Equipment, net .................................................... 1,213 2,076 Field Support Spares, net .................................................................... 2,625 26,788 Intangible Assets, net of accumulated amortization of $4,490 in 1994 and $4,141 in 1993 ..................................................... 1,864 2,213 Other Assets ................................................................................. 246 640 -------- -------- Total Assets .......................................................................... $ 15,569 $ 44,461 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities Not Subject to Compromise Accounts payable ......................................................................... $ 1,571 $ 3,689 Accrued expenses ......................................................................... 2,534 5,900 Short-term borrowings .................................................................... 7,919 4,377 Deferred revenue ......................................................................... 9,690 12,170 Other current liabilities ................................................................ -- 254 -------- -------- Total Current Liabilities ............................................................. 21,714 26,390 Liabilities Subject to Compromise ............................................................ 62,252 -- 11.99% Subordinated Debentures Due 1996 ...................................................... -- 49,924 Deferred Income Taxes and Other Liabilities .................................................. 441 1,632 Deferred Pension Liability ................................................................... -- 1,861 Commitments and Contingencies (Note 14) $10.00 Redeemable Preferred Stock: 65,000 shares authorized; 46,301 and 40,571 shares issued and outstanding at July 31, 1994 and 1993, respectively, $100 per share mandatory redemption value .................................. 4,691 3,903 Shareholders' Deficit Preferred stock ($.01 par; 20,000,000 shares authorized) ................................. -- -- Common stock ($.01 par; 40,000,000 shares authorized; 19,908,398 shares issued) ............................................................. 199 199 Additional paid-in capital ............................................................... 51,508 55,003 Retained deficit ......................................................................... (69,695) (35,024) Foreign currency translation adjustment .................................................. 28 54 Less common stock in treasury - at cost (7,240,210 shares in 1994 and 7,812,495 shares in 1993) ............................................................ (53,152) (56,919) Retirement valuation reserve ............................................................. (2,417) (2,562) -------- -------- Total Shareholders' Deficit ........................................................... (73,529) (39,249) -------- -------- Total Liabilities and Shareholders' Deficit ........................................ $ 15,569 $ 44,461 ======== ========
See accompanying notes to consolidated financial statements. 22 INTELOGIC TRACE, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
FISCAL YEARS ENDED JULY 31, --------------------------------------------- 1994 1993 1992 -------- -------- --------- Revenue Service ................................................................ $ 71,388 $ 86,727 $ 101,346 Sales .................................................................. 1,167 1,445 2,301 -------- -------- --------- Total Revenue ..................................................... 72,555 88,172 103,647 Cost of Revenue Service ................................................................ 61,215 65,226 81,252 Sales .................................................................. 2,329 579 1,825 -------- -------- --------- Total Cost of Revenue ............................................. 63,544 65,805 83,077 -------- -------- --------- Gross Profit ...................................................... 9,011 22,367 20,570 Operating Expenses Selling, general and administrative expenses ........................... 18,659 17,879 24,689 Restructuring charges: Write down of field support spares .................................. 17,253 -- -- Other restructuring charges ......................................... 377 457 2,449 -------- -------- --------- Total Operating Expenses .......................................... 36,289 18,336 27,138 -------- -------- --------- Earnings (Loss) From Operations ................................... (27,278) 4,031 (6,568) Other Expenses Reorganization charges - bankruptcy .................................... 340 -- -- Interest expense ....................................................... 7,096 6,862 7,113 Equity in loss of affiliate ............................................ -- -- 1,876 Other, net ............................................................. 865 600 256 -------- -------- --------- Loss From Continuing Operations Before Income Taxes ............................................. (35,579) (3,431) (15,813) Federal and State Income Tax Benefit ........................................ 1,191 -- 155 -------- -------- --------- Loss From Continuing Operations ................................... (34,388) (3,431) (15,658) Discontinued Operations Loss from operations (net of tax benefits of $33) ...................... -- -- (63) Earnings (Loss) on disposal (net of tax benefits of $1,082 for 1992) ............................................................ 505 -- (1,559) -------- -------- --------- Earnings (Loss) from Discontinued Operations ...................... 505 -- (1,622) -------- -------- --------- Loss Before Extraordinary Items ................................... (33,883) (3,431) (17,280) Extraordinary Items ......................................................... -- 2,547 416 -------- -------- --------- Net Loss .......................................................... $(33,883) $ (884) $ (16,864) ======== ======== ========= Net Loss Less Preferred Stock Dividends ..................................... $(34,671) $ (1,528) $ (17,409) ======== ======== ========= Earnings (Loss) per Common Share Continuing operations .................................................. $ (2.85) $ (.34) $ (1.36) Discontinued operations ................................................ .04 -- (.14) Extraordinary items .................................................... -- .21 .04 -------- -------- --------- Net Loss Less Preferred Stock Dividends Per Share .................. $ (2.81) $ (.13) $ (1.46) ======== ======== ========= Weighted Average Common Shares Outstanding .................................. 12,343 11,994 11,939 ======== ======== =========
See accompanying notes to consolidated financial statements. 23 INTELOGIC TRACE, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FISCAL YEARS ENDED JULY 31, -------------------------------------------- 1994 1993 1992 -------- -------- -------- Operating Activities Net loss ................................................................... $(33,883) $ (884) $(16,864) Adjustments to reconcile net loss to net cash provided by operating activities: Loss from discontinued operations ..................................... 323 -- 1,622 Depreciation and amortization ......................................... 11,543 12,150 15,208 Provision for doubtful accounts ....................................... 1,650 335 912 Write down of field support spares .................................... 17,253 -- -- Net loss from investment in affiliate ................................. -- -- 1,460 Extraordinary gain from debenture repurchases ......................... -- (2,547) -- Realized loss - securities ............................................ -- -- 4,116 Unrealized gain - securities .......................................... -- -- (4,059) Foreign currency valuation (gains) losses ............................. (26) 67 79 Deferred income tax benefit ........................................... (1,191) -- (537) Other ................................................................. 2,848 2,489 1,544 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable ................................................... (114) (1,143) 2,009 Other current assets .................................................. 446 830 265 Accounts payable and accrued expenses ................................. 4,443 (5,095) (2,485) Deferred revenue ...................................................... (2,480) (359) (118) Other current liabilities ............................................. 283 (33) 90 -------- -------- -------- Net Cash Provided by Operating Activities ........................... 1,095 5,810 3,242 Investing Activities Purchase of field support spares and other fixed assets .................... (6,078) (8,482) (12,860) Sale of equity and debt securities ......................................... -- -- 396 Proceeds from sale of discontinued operations .............................. -- 6,049 -- Other, net ................................................................. 272 1,359 1,292 -------- -------- -------- Net Cash Used in Investing Activities .............................. (5,806) (1,074) (11,172) Financing Activities Short-term borrowings (repayments) ......................................... 3,542 (2,536) 5,644 Repurchase of subordinated debentures ...................................... -- (4,459) -- Other ...................................................................... 148 -- (1,072) -------- -------- Net Cash Provided by (Used in) Financing Activities ................ 3,690 (6,995) 4,572 -------- -------- -------- Net Decrease in Cash and Temporary Investments ............................... (1,021) (2,259) (3,358) Cash and Temporary Investments, beginning of year ............................ 1,626 3,885 7,243 -------- -------- -------- Cash and Temporary Investments, end of year .................................. $ 605 $ 1,626 $ 3,885 ======== ======== ========
See accompanying notes to consolidated financial statements. 24 INTELOGIC TRACE, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (In thousands, except share data)
FOREIGN NET ADDITIONAL CURRENCY RETIREMENT SHAREHOLDERS' COMMON PAID-IN RETAINED TRANSLATION TREASURY VALUATION EQUITY STOCK CAPITAL DEFICIT ADJUSTMENT STOCK RESERVE (DEFICIT) ------------------------------------------------------------------------------------------- BALANCE JULY 27, 1991 $199 $ 56,592 $(16,087) $ 54 $(58,731) $ -- $(17,973) Net loss -- -- (16,864) -- -- -- (16,864) Preferred dividends -- -- (545) -- -- -- (545) Matching contribution to 401(k) plan -- (769) -- -- 837 -- 68 Foreign currency translation adjustment -- -- -- (21) -- -- (21) ------------------------------------------------------------------------------------------- BALANCE JULY 31, 1992 199 55,823 (33,496) 33 (57,894) -- (35,335) Net loss -- -- (884) -- -- -- (884) Preferred dividends -- -- (644) -- -- -- (644) Matching contribution to 401(k) plan -- (820) -- -- 975 -- 155 Retirement valuation reserve -- -- -- -- -- (2,562) (2,562) Foreign currency translation adjustment -- -- -- 21 -- -- 21 --------------------------------------------------------------------------------------------- BALANCE JULY 31, 1993 199 55,003 (35,024) 54 (56,919) (2,562) (39,249) Net loss -- -- (33,883) -- -- -- (33,883) Preferred dividends -- -- (788) -- -- -- (788) Matching contribution to 401(k) plan -- 167 -- -- 105 -- 272 Retirement valuation reserve -- -- -- -- -- 145 145 Stock options exercised -- (3,662) -- -- 3,662 -- -- Foreign currency translation adjustment -- -- -- (26) -- -- (26) -------------------------------------------------------------------------------------------------------- BALANCE JULY 31, 1994 $199 $ 51,508 $(69,695) $ 28 $(53,152) $(2,417) $(73,529) ================================================================================================
See accompanying notes to consolidated financial statements. 25 INTELOGIC TRACE, INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Intelogic Trace, Inc. and its wholly owned subsidiaries (the "Company"). Investments in affiliated companies owned 20% or more are accounted for on the equity method. All significant intercompany transactions and balances have been eliminated. MARKETABLE SECURITIES Marketable equity securities are stated at the lower of aggregate cost or market and other marketable securities are stated at cost. Net realized gains/losses represent cash received less the cost of the securities sold, which includes commissions and investment management fees, if any. The cost of securities sold is based on the first-in, first-out method. PROPERTY Leasehold improvements and equipment are carried at cost and depreciated using straight-line and accelerated methods over the estimated useful lives of the assets, which are generally as follows: Leasehold improvements 5 years Computer equipment 4 - 5 years Other machinery, equipment, furniture, and fixtures 3 - 10 years Repair and maintenance costs are expensed as incurred. Gains or losses on dispositions are included in earnings. FIELD SUPPORT SPARES Field support spares are carried at lower of cost or net realizable value and depreciated using the straight-line method over an estimated useful life of 5 years. Other significant policies used by the Company in accounting for spares are as follows: * Repair costs of spares are accrued and expensed when the need for repair is identified. * Other costs associated with maintaining spares are expensed when incurred. INTANGIBLE ASSETS Intangible assets include the excess of cost over net tangible assets of businesses acquired by purchase. Goodwill arising from these acquisitions is being amortized on a straight-line basis over 40 years. Excess costs associated with the purchase of service contracts are being amortized on a 26 straight-line basis over five years. REVENUE RECOGNITION SERVICE REVENUE The majority of the Company's revenues are generated under contractual arrangements. These arrangements are billed in advance on a periodic basis. Contract service revenue is recognized ratably over the contractual period or as services are provided. Amounts billed in excess of amounts recognized are recorded as deferred revenue. Warranty service revenue is recognized ratably over the warranty period beginning in the month shipped. Revenue from services rendered on a "time and materials" basis is recognized in the period the work is performed. SALES REVENUE Revenue from equipment sales and the related cost of sales are recognized when title to the equipment passes. Component repair revenue and related costs are recognized upon completion of the repair. EARNINGS PER COMMON SHARE Earnings per common share are based on the weighted average number of shares outstanding during the period, after giving effect for preferred stock dividends. Because operations resulted in a loss, common stock equivalents were not considered in the computation as their effect would be anti-dilutive. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be temporary investments. 2. PETITION FOR RELIEF UNDER CHAPTER 11 During Spring 1994, the Company experienced an increased reliance on borrowed funds to satisfy working capital requirements, principally as a result of a continued erosion in operating performance. The Company engaged a company which specializes in consulting with financially troubled businesses to review cash flows, liquidity concerns, and provide recommendations to establish both immediate and long-term improvements in cash flow, profitability, asset management, and capital structure. Liquidity pressures continued to increase and the Company determined that the aggregate borrowing availability under its revolving credit agreement would not be sufficient to meet the Company's obligations on a current basis. The Company's liquidity shortfall was compounded by the semi-annual interest payment due July 15, 1994 of $3.0 million on the $49.9 million in principal amount of 11.99% Subordinated Debentures due 1996 (the "Debentures"). In addition to ongoing discussions with its lender, during late June and early July 1994, the Company held discussions with the holders of a majority in principal amount of Debentures (the "Principal Debentureholders") regarding a potential restructuring of that obligation. On July 15, 1994, the Company filed a Current Report on Form 8-K disclosing that it was negotiating with its Principal Debentureholders and that it would not make the interest payment on the Debentures. On July 21, 1994, the Indenture Trustee for the Debentures issued its notice of default. Pursuant to the terms of the Indenture, a failure to make the semi-annual interest payment within the thirty-day grace period allowed by the Indenture would cause an Event of Default to have occurred. Due principally to increasing pressures on available capital, 27 the nonpayment of a promissory note to the Company and potential terminations of certain leases, licenses, and contracts due to financial defaults, the Company reached the conclusion that the protection of the Bankruptcy Code was necessary in order to consummate the restructuring of the Debentures and the revolving financing agreement. On August 5, 1994, the Company filed a voluntary petition for reorganization under Chapter 11. As a result of discussions with its Principal Debentureholders, contemporaneously with filing the petition, the Company filed a Plan of Reorganization setting forth the terms of the proposed restructuring. Under Chapter 11, enforcement of certain claims in existence prior to the filing of the petitions are stayed, while the Company continues operations in the ordinary course of business as debtor- in-possession. These claims are reflected in the consolidated financial statements as of July 31, 1994, as "liabilities subject to compromise." Additional claims may arise subsequent to the petition date resulting from the rejection of executory contracts and/or leases and determination of the Court of allowed claims for contingencies and other disputed amounts. On October 4, 1994, the Court approved the Company's Disclosure Statement. The Disclosure Statement, as modified and amended, describes the Plan proposed by the Company. The Plan has been submitted to a vote of creditors, security holders and parties in interest, and a hearing on confirmation of the Plan has been scheduled by the Court for November 22, 1994. If confirmed, the Plan would, among other things, cause the following to occur on the Effective Date of the Plan: (1) administrative and tax claims would be paid in full; (2) a new series of Preferred Stock would be issued to holders of unsecured claims; (3) a four-for-one reverse split of the common stock would be consummated, with existing common shareholders retaining approximately 25% of the Company's common stock outstanding after the Effective Date, and holders of unsecured claims receiving 75% of the shares of common stock outstanding after the Effective Date. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing and circumstances relating to this event, such continuity of operations and realization of assets and liquidation of liabilities are subject to uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the Plan will materially change the amounts reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of the Plan. The appropriateness of using the going concern basis is dependent upon, among other things, the confirmation of the Plan, the ability to comply with debtor-in-possession financing agreements, generation of sufficient cash from operations and financing sources to meet obligations, and achievement of satisfactory levels of future operating profit. In November 1990, the American Institute of Certified Public Accountants issued Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Pursuant to the guidance provide by SOP 90-7, the Company will adopt "fresh start" reporting as of the effective date of the Plan. Under "fresh start" reporting, the reorganization value of the entity is allocated to the entity's assets. If any portion of the reorganization value cannot be attributed to specific tangible or identifiable intangible assets of the emerging entity, such amounts are to be reported as "reorganization value in excess of amounts allocable to identifiable intangible assets" and amortized over a period of years, generally 28 substantially less than forty years. As a result of adopting "fresh start" reporting upon emerging from Chapter 11 status, the Company's consolidated financial statements will not be comparable with those prepared before the Plan is confirmed, including the historical consolidated financial statements included herein. In addition to fresh start reporting, SOP 90-7 provides guidance for financial reporting by entities that have filed petition with the Court and expect to reorganize under Chapter 11. The Company followed these guidelines in the accompanying July 31, 1994 consolidated financial statements. Pursuant to SOP 90-7, prepetition liabilities are reported on the basis of the expected amount of such allowed claims, as opposed to the amounts for which those allowed claims may be settled. Under the Plan, if accepted by the parties and confirmed by the Court, those claims will be settled at amounts substantially less than their allowed amounts. As of July 31, 1994, prepetition liabilities subject to compromise consist of the following (in thousands): 11.99% Subordinated Debentures due 1996 $49,924 Accounts payable 6,521 Accrued interest payable 3,242 Contribution payable to pension plan 2,417 Other liabilities 148 ------- $62,252 ======= The Plan provides that the Company must negotiate a settlement with the Pension Benefit Guaranty Corporation (the "PBGC") on terms acceptable to the holders of a majority of the Debentureholders, provided however, that if no settlement is reached, the allowed unsecured claim shall be treated as an unsecured claim subject to compromise. Subsequent to July 31, 1994, the Company notified the PBGC of its intent to terminate its pension plan effective December 31, 1994. A Bankruptcy Court hearing was held on November 9, 1994, at which the Honorable Leif Clark found that a distress termination of the retirement income plan was appropriate and so ordered. The Plan also provides that the $10 Redeemable Preferred Stock issued by the Company, all of which is owned by Datapoint, will be canceled and no distributions will be made on account of this stock (see Note 3). The $10 Redeemable Preferred Stock has been returned to the Company and the common stock in the trust has been distributed to the Company (300,000 shares) and Datapoint (2.4 million shares). The Company has requested approval from the Court to pay or otherwise honor certain of its prepetition obligations, including certain wages, salaries and related benefits of employees, claims for certain limited contributions to an employee benefit plan, and claims up to $900 per creditor arising from the deposit of money for certain services, claims of vendors to contracts under which the Company has posted a bond. The Plan provides that unsecured claims (other than subordinated Debentureholders) of $5,000 or less, which will be entitled to receive the lesser of a payment of cash equal to 50% of such claim or such creditors pro rata share of $650,000. The Company's short-term borrowings under a revolving financing agreement is a secured claim. Under the Plan, the Company is responsible for either renegotiating the revolving financing agreement or finding a lender that will satisfy the creditor's claim. 29 Under the terms of the Plan, each holder of an unsecured claim not specifically classified in another class will receive, after the Effective Date of the Plan, a pro rata share of a new series of preferred stock and new common stock. The new series of preferred stock will consist of 1,133,333 shares, subject to increase based upon unsecured claims other than the Debentureholders in excess of $5 million, and will have an aggregate liquidation preference of at least $17 million. The new common stock will constitute 75% of the total outstanding common stock of the Company after the Effective Date. The above terms are subject to acceptance by the parties to the Plan and confirmation by the Court; therefore, the ultimate impact of the bankruptcy on the Company's results of operations and financial position cannot presently be determined. 3. ACQUISITIONS In 1990 the Company acquired all of the outstanding stock of Datapoint Canada, Inc., a wholly owned subsidiary of Datapoint. Datapoint Canada, subsequently renamed I T Canada, sells and services computer hardware throughout Canada, primarily products marketed by Datapoint and Teknekron Infoswitch Corp. The transaction was accounted for as a purchase. The purchase price of $2.8 million consisted of $300,000 in cash and 25,000 shares of Intelogic Trace $10 Redeemable Preferred Stock ("Preferred Stock"). In addition, the Company issued to Datapoint a five-year option ("Option") to repurchase substantially all of the Company's holdings of Datapoint's common and preferred stock. The Preferred Stock is subject to optional redemption by the Company through November 9, 1994, at $87.50 per share; after November 9, 1994, at $100 per share; and to mandatory redemption on November 9, 1995, at $100 per share. The carrying value of the Preferred Stock has been increased by periodic accretion of the difference between the fair value at issuance and the mandatory redemption value. The Preferred Stock accumulates dividends annually at a rate of $10 per share if paid in cash or $18 per share if paid in additional shares of Preferred Stock. The Preferred Stock is cumulative and has no voting rights. The Preferred Stock has a liquidation preference of $100 per share plus dividends in arrears to the date of such liquidation. To date, an additional 21,301 shares of Preferred Stock have been issued in payment of dividends. The Option allows Datapoint to purchase, from the Company, up to 2.7 million shares of Datapoint common stock for $.75 per share and up to 85,000 shares of Datapoint preferred stock for $1.375 per share, payable in cash or by delivery of shares of Preferred Stock if permissible under the terms of the Company's agreements. Datapoint exercised its option on the 85,000 shares of Datapoint preferred stock in 1992. The remaining Datapoint common stock shares subject to the Option will be held in a Grantor Trust until exercised or upon expiration of the Option on November 9, 1995. Subsequent to July 31, 1994, the Company and Datapoint mutually agreed to a division of the corpus in the Grantor Trust in lieu of the above Option. Pursuant to this agreement, the Company and Datapoint sought Bankruptcy Court approval to have the trustee of the Grantor Trust transfer and distribute 2.4 million shares of Datapoint Common Stock held in the Grantor Trust to Datapoint, and transfer and distribute the remaining 300,000 shares of Datapoint Common Stock to the Company, and to terminate the Option and the Grantor Trust. The Court approved the 30 agreement on September 9, 1994. In connection with the division of the corpus in the Grantor Trust, the $10 Redeemable Preferred Stock will be canceled subsequent to July 31, 1994. The $10 Redeemable Preferred Stock has been returned to the Company and the common stock in the trust has been distributed to the Company (300,000 shares) and Datapoint (2.4 million shares). Financial information of I T Canada is summarized as follows: 1994 1993 1992 -------------------------- (In thousands) Revenue $1,890 $3,668 $5,122 Loss from operations (861) (286) (2,205) Net Loss (1,447) (281) (1,998) Identifiable assets 146 1,950 1,947 I T Canada ceased its operations effective September 30, 1994. 4. INVESTMENT IN AFFILIATE In 1989, the Company purchased an aggregate of 2,545,600 shares of Datapoint common stock which, combined with shares already owned, increased the Company's holdings to 2,743,385 shares, or approximately 27% of Datapoint's outstanding common stock. In 1992, Datapoint issued additional shares of common stock and a new class of preferred stock in exchange for its then outstanding preferred stock. The issuance of the additional common stock diluted the Company's holdings to approximately 20% of Datapoint's outstanding common stock. The Company's share of Datapoint's fiscal 1992 consolidated results were based on 27% of Datapoint's 1992 consolidated net earnings through the third quarter and 20% of Datapoint's results in the fourth quarter. For 1992, the Company's share of Datapoint's losses exceeded its recorded investment, therefore, a loss was recognized in 1992 equal to the beginning of year investment balance of $1.5 million. The Company's recorded investment balance currently equals zero. The Company's share of Datapoint's future earnings will have to exceed $21.4 million before the Company can again reflect results on this investment. See Note 3 for a description regarding an agreement between the Company and Datapoint which reduced the Company's holdings in Datapoint common stock to 343,385 shares subsequent to July 31, 1994. 31 Financial information for Datapoint as of July 31, 1994, 1993, and August 1, 1992, and for the years then ended is summarized below. Datapoint uses a 52- or 53-week fiscal year ending on the last Saturday in July. 1994 1993 1992 --------------------------------- (In thousands) Total Revenue .............................. $ 172,936 $ 208,344 $ 255,243 Gross Profit ............................... 65,565 86,149 101,877 Loss before Extraordinary Items ............ (94,765) (11,859) (10,409) Net Loss ................................... (93,425) (11,260) (8,756) Net Loss Applicable to Common Stockholders . (95,209) (13,044) (16,357) Current Assets ............................. 79,915 94,169 121,991 Total Assets ............................... 127,434 202,275 248,813 Current Liabilities ........................ 98,202 74,759 90,581 Total Liabilities .......................... 178,195 155,254 173,978 Stockholders' Equity (Deficit) ............. (50,761) 47,021 74,835 5. PROPERTY The Company's property consists of the following: 1994 1993 ------------------- (In thousands) Leasehold Improvements and Equipment (at cost): Leasehold improvements ............................... $ 4,459 $ 4,442 Computer equipment ................................... 19,434 19,498 Other machinery, equipment, furniture and fixtures ... 6,994 7,429 -------- -------- 30,887 31,369 Less: Accumulated Depreciation ........................... (29,674) (29,293) -------- -------- Net Leasehold Improvements and Equipment ................. $ 1,213 $ 2,076 ======== ======== Field Support Spares (at cost) ........................... $ 35,775 $ 63,891 Less: Accumulated Depreciation ........................... (33,150) (37,103) -------- -------- Net Field Support Spares ................................. $ 2,625 $ 26,788 ======== ======== See Note 12 for a discussion of the Company's intent to sell its field support spares in 1995. 6. DISCONTINUED OPERATIONS During 1992, the Company sold substantially all of the assets of its computer hardware sales and leasing and application software businesses. These businesses represented the entire operations of the Systems Group. The total sales price, including assumed liabilities, was $26.1 million, which, after satisfaction of existing financing related to the lease base, resulted in $8.1 million to be paid to the Company, subject to the transfer of leases under the provision of the sales agreement, as amended. The remainder of the net receivable is due, with interest from the closing date, as leases are confirmed 32 under the provisions of the sales agreement, as amended. For all periods presented, the operating results of the businesses sold have been shown as discontinued operations. Summary operating results for each of the periods is as follows: 1994 1993 1992 ------------------------ (In thousands) Revenue $ - $ - $ 27,927 Loss before taxes and loss on disposal - - (96) Net Loss - - (1,622) 7. ACCRUED EXPENSES Accrued expenses include $1.8 million and $3.7 million for salaries and employee benefits at July 31, 1994 and 1993, respectively and $250,000 for accrued interest at July 31, 1993. 8. DEBT 11.99% SUBORDINATED DEBENTURES On July 29, 1986, the Company issued $100 million of 11.99% Subordinated Debentures due July 15, 1996. Interest is payable January 15 and July 15 of each year. The Debentures are redeemable at the option of the Company at any time, at prices ranging from 102.67% of the principal amount in 1994 to 100% of the principal amount in 1995 and thereafter. Restrictive provisions of the Debentures limit the payment of cash dividends and other distributions on capital stock as well as the acquisition or retirement, by the Company, of its capital stock. On July 15, 1994, the Company failed to make the semi-annual interest payment which constituted a default under terms of the Subordinated Debentures Indenture. As of August 14, 1994, an event of default existed for failure to remedy this default within the 30- day grace period. As a result of the Company's filing on August 5, 1994, of a voluntary petition for reorganization under Chapter 11, the Debentures are classified as "liabilities subject to compromise" at July 31, 1994. Prior to 1991, the Company purchased $43.1 million face value of the Debentures. During 1993, the Company purchased $7.0 million face value of the Debentures and recognized extraordinary gains, after tax, of $2.5 million. No Debentures were purchased in 1992 or 1994. SHORT-TERM BORROWINGS In June 1991 the Company entered into a revolving financing agreement. Loan proceeds may be used to repurchase the Company's outstanding Debentures and up to $9.0 million may be used for general corporate purposes. Under an amendment to the agreement, the Company's borrowings under this facility are limited to the lesser of: (1) fifteen percent of annualized service maintenance revenue, (2) cash collections for the prior 50-day period, or (3) an amount equal to the sum of 70% of eligible accounts receivable plus 20% of eligible net field support spares or $2.0 million, whichever is less. Borrowings are secured by the Company's accounts receivable, field support spares, leasehold improvements and equipment. Outstanding borrowings accrue interest at 4 1/2 percentage points above the prime rate. The Company is required to pay a commitment fee of 1/2 of 1 percent per annum on the average daily unborrowed amounts. In 33 addition, the Company is required to pay an annual commitment fee equal to 3/8 of 1 percent of the committed amount and a fee of 11/2% of the face value of all Debentures repurchased by the Company during the term of the financing agreement, with a minimum fee of $150,000. The agreement expires December 31, 1995, at which time all outstanding borrowings are due. The agreement contains restrictive covenants which, among other things, require the Company to maintain certain financial ratios. At July 31, 1994, the Company is not in compliance with the financial covenants of the revolving financing agreement. At July 31, 1994 and 1993, $7.9 million and $4.4 million, respectively, were outstanding under this agreement. Subsequent to July 31, 1994, the Company consummated a loan agreement with Fidelity, its Principal Debentureholder. Pursuant to this agreement, the Company received an additional $1.3 million in working capital in order to satisfy certain loan covenants of the revolving financing agreement. The Principal Debentureholder received a junior lien on all of the Company's assets subject to the revolving financing agreement. The Principal Debentureholder also received a senior lien on the Company's field support spares, the Company's potential refund from the IRS; the 300,000 shares of Datapoint Common Stock to be distributed to the Company under the arrangement with Datapoint described in Note 3; and certain marketable securities held by the Company with priority over the liens of the revolving financing agreement. The Company has agreed to sell its Datapoint Common Stock and such marketable securities and remit all proceeds of such sales to the Debentureholder. Interest paid was $3.5 million, $6.7 million, and $6.8 million for the years ended July 31, 1994, 1993, and 1992, respectively. 9. INCOME TAXES Effective August 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes." Under Statement No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement No. 109, income tax expense was determined using the deferred method. Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. As permitted by Statement No. 109, the Company has elected not to restate the consolidated financial statements of any prior years. The effect of the change on pretax income from continuing operations for the years ended July 31, 1994 and 1993 was not material. 34 Significant components of the Company's deferred tax assets and liabilities as of July 31, 1994 are as follows: DEFERRED TAX ASSETS: Field Support Spares Obsolescence ........................... $ 4,883 Bad Debt Reserve ............................................ 255 Accrued Expenses ............................................ 390 Equity in Subsidiary Loss Carryforwards ..................... 5,791 Loss on Marketable Securities ............................... 601 Net Operating Loss .......................................... 10,200 Miscellaneous ............................................... 341 -------- Total Deferred Tax Assets .............................. 22,461 Valuation Allowance for Deferred Tax Assets ............ (18,710) -------- Net Deferred Tax Assets ................................ 3,751 DEFERRED TAX LIABILITIES: Depreciation ................................................ 3,580 Deferred State Income Tax Liability ......................... 287 Miscellaneous ............................................... 325 -------- Total Deferred Tax Liabilities ......................... 4,192 -------- Net Deferred Tax Liabilities ........................... $ 441 ======== Income tax benefits from continuing operations were composed of the following: LIABILITY DEFERRED DEFERRED METHOD METHOD METHOD 1994 1993 1992 ---------------------------- Current: ..................................... $ - $ - $ - Federal ...................................... - - - State ..................................... - - - ---------------------------- Total Current ......................... - - - ============================ Deferred: Federal ................................... (1,191) - - State ..................................... -- - (155) Total Deferred ........................ (1,191) - (155) ============================ Total Income Tax Benefit .............. $(1,191) $ - $(155) ============================ 35 The differences between the actual benefit from continuing operations in the financial statements and the expected benefit computed at the United States federal statutory tax rate of 35% are as follows: 1994 1993 1992 --------------------------------- Expected Tax Benefit ...................... $(12,017) $(1,166) $(5,376) Capital Loss Carryforward ................. - (41) - Financial Reporting Loss Carryforward ..... - 1,207 5,126 Change in Valuation Allowance ............. 10,734 - - Other ..................................... 92 - 95 --------------------------------- Total Income Tax Benefit ............. $ (1,191) $ 0 $ (155) ================================= The tax benefit of $1.2 million in 1994 was the result of the change in the valuation allowance associated with tax refunds previously received. At July 31, 1994, the Company had a net operating loss carryforward of $29.0 million for U.S. income tax purposes that expires in years 2005 through 2009. At June 30, 1994, I T Canada had a net operating loss carryforward for Canadian tax purposes of approximately $7 million expiring in various amounts beginning in 1996. For financial reporting purposes, a valuation allowance of $18.7 million has been recognized to offset the deferred tax asset principally related to the carryforwards and the field support spares. Based on the discussions in Note 2 relating to the bankruptcy filing, if the Court accepts the plan of reorganization, the net operating loss carryforward may be reduced as a result of possible income tax positions that will be available to the Company in 1995. Any future benefits realized from preconfirmation net operation loss carryforwards will first reduce any reorganization value in excess of amounts allocable to identifiable intangible assets and other intangible assets until exhausted and thereafter be reported as a direct addition to additional paid-in capital. 10. CAPITAL STOCK AND STOCK OPTION PLANS In addition to the common and redeemable preferred stock disclosed in the Consolidated Statements of Financial Position, the Company is authorized to issue 20 million shares of preferred stock with a par value of $.01 per share. No such preferred shares were outstanding on July 31, 1994 or 1993. Under the terms of two approved stock option plans, an aggregate of 798,034 shares of the Company's common stock are reserved and available for issuance under such plans as described below: * Employee stock option plan - Employees may be granted options to purchase common stock and related stock appreciation rights. Under the terms of this plan, options may be granted at no less than 75% of the fair market value of the shares on the date of the grant, and expire no later than ten years and one day after the date of the grant. The Board of Directors may grant options exercisable in full or in installments, and will determine the date after which the options may be exercised in whole or in part. * Director stock option plan - Members of the Board of Directors may be granted options to purchase common stock at the fair market value at the date of grant. The options may be 36 exercised at any time after the date of grant and will expire ten years and one day from the date of grant. Each current Director has received, and each newly elected Director, at the time of election, will be entitled to receive, an option for 25,000 shares. The outstanding options granted to current Directors elected prior to 1987 have been increased to reflect the 10% common stock dividend paid in June 1986. The changes in the number of common shares under option for the years 1994 and 1993 are summarized as follows: NUMBER DESCRIPTION PRICE PER SHARE OF SHARES - - ----------- ------------------------------- OUTSTANDING AT JULY 31, 1992 . . . . . . $ .53 to $ 15.05 1,874,288 Granted . . . . . . . . . . . . . . . . . $ .37 to $ 2.37 1,708,059 Canceled . . . . . . . . . . . . . . . . $ .42 to $ 14.03 (1,113,836) Exercised . . . . . . . . . . . . . . . . $ .42 to $ 1.06 (27,333) --------- OUTSTANDING AT JULY 31, 1993 . . . . . . $ .37 to $ 15.06 2,441,178 Granted . . . . . . . . . . . . . . . . . $ .55 to $ 3.94 1,928,707 Canceled . . . . . . . . . . . . . . . . $ .42 to $ 13.98 (863,974) Exercised . . . . . . . . . . . . . . . . $ .42 to $ 3.38 (398,333) --------- OUTSTANDING AT JULY 31, 1994 . . . . . . $ .37 to $ 15.06 3,107,578 ========= EXERCISABLE AT JULY 31, 1994. . . . . . . $ .37 to $ 15.06 1,162,402 ========= AVAILABLE FOR GRANT AT JULY 31, 1994 . . 798,034 ========= All common shares under option which are beneficially owned by one of the Company's Directors and member of the Office of the President will be canceled as of the effective date of the Plan. The Company established an Employee Stock Purchase Plan in 1992. Participants in this plan may purchase shares monthly, at the market price, through payroll deductions. Common stock for the plan will be purchased on the open market. 11. LEASES The Company leases certain facilities and equipment under various operating leases. Most of the leases contain renewal options for varying periods and require the Company to provide maintenance of the property. Certain leases contain provisions for periodic rate adjustments to reflect Consumer Price Index changes. Rent expense under these leases for 1994, 1993 and 1992 was $3.9 million, $4.1 million, and $5.5 million, respectively. 37 The future minimum rental commitments as of July 31, 1994, for all noncancellable leases are as follows (in thousands): 1995......................... $1,915 1996......................... 1,643 1997......................... 1,263 1998......................... 997 1999......................... 807 In connection with filing for Chapter 11 protection, the Company has obtained approval of the Court to reject real property leases at closed locations. The above schedule of minimum rental commitments has not been modified for such renegotiations subsequent to July 31, 1994. 12. RESTRUCTURING CHARGES In 1994, the Company began negotiations to sell the majority of its field support spares to various third parties. Based on estimates received by the prospective buyer, field support spares have been written-down by $17.3 million to their estimated realizable value. It is expected that the sale of the field support spares will occur in 1995. During 1994, 1993, and 1992, the Company recorded other restructuring charges of $377,000, $457,000, and $2.4 million, respectively, representing primarily severance and facility closing costs. 13. BENEFIT PLANS The Company has a defined benefit pension plan. The benefits are based on years of service and the employee's average compensation for the five highest compensation years during the ten consecutive years preceding retirement or termination. The cost of the plan is actuarially determined, including amortization of the unrecognized actuarial net obligation over a 15-year period, and is funded annually based on the minimum amount that can be deducted for federal income tax purposes. On October 28, 1991, the Retirement Income Plan was frozen. The curtailment of the plan limits future retirement income payments to only those employees participating in the plan on that date. The future payments to those employees will be based on their salary and service as of October 28, 1991. See Note 2. The following table sets forth the plan's funded status and accrued pension cost at July 31, 1994 and 1993: 38 Actuarial present value of accumulated benefit obligations: 1994 1993 ----------------- (In thousands) Vested ................................................... $ 6,822 $ 6,055 Non-vested ............................................... 247 381 ------- ------- 7,069 6,436 ======= ======= Projected benefit obligation for service rendered to date .. (7,069) (6,436) Plan assets at fair value .................................. 4,652 3,874 ------- ------- Projected benefit obligation in excess of plan assets - Accrued pension cost ..................................... $(2,417) $(2,562) ======= ======= Net pension cost included the following components: 1994 1993 1992 ----------------------- (In thousands) Service costs-benefits earned during the period ..... $ -- $ -- $ 96 Interest cost on projected benefit obligation ....... 528 339 373 Actual return on plan assets ........................ (10) (42) (83) Net amortization and deferral ....................... 64 (193) (238) ----- ----- ----- Net periodic pension cost ....................... $ 582 $ 104 $ 148 ===== ===== ===== During 1993, due to the decline in interest rates the plan adopted a lower weighted average discount rate in determining the actuarial present value of its projected benefit obligation and assumed a lower expected long-term rate of return on its assets. This, coupled with the use of updated mortality tables, caused the projected benefit obligation for service rendered to date, which benefits were frozen at the time the Company curtailed the pension plan, to increase to an amount in excess of the fair value of the plan's assets. A valuation reserve, representing the excess of the projected benefit obligation over the fair value of the plan's assets has been established by a charge to the Company's shareholders' equity. This excess liability will be funded over time as actuarial computations of pension cost and funding requirements are determined. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation at July 31, 1994 and 1993 was 8%. No rate of increase in future compensation levels was assumed for 1994 and 1993 due to the curtailed status of the plan. The expected long-term rate of return on assets was 8% for 1994 and 1993, and 9.5% for 1992. At July 31, 1994, the plan's assets consisted of cash and investments in money market funds. Upon the suspension of the Retirement Income Plan, a 401(k) savings plan covering substantially all employees was established. Under that plan the Company matches a portion of an employee's contribution. Treasury stock was used for the Company's matching portion. The amounts charged to expense for the years ended July 31, 1994, 1993, and 1992 were $272,000, $155,000, and $68,000, respectively. 39 14. CONTINGENCIES The Company filed a Voluntary Petition on August 5, 1994 under Chapter 11 of the United States Bankruptcy Court. The Company, as debtor-in- possession, continues to operate and manage its affairs. A Disclosure Statement to the Plan of Reorganization of the Company has been approved by the Court. A Confirmation Hearing for the Company's proposed Plan has been set for November 22, 1994. See Note 2 for further discussion. Two shareholders of the Company have filed lawsuits against the Company and its Board of Directors demanding that the Company seek damages from its Board of Directors with respect to the Company's 1990 purchases of the stock of the Company and Datapoint. A committee of the Board of Directors was appointed to consider the demands raised in each case. The committee retained independent counsel to review the matters raised in the lawsuits and determined that it was not in the best interest of either the Company or its shareholders to accept either demand and, accordingly, instructed counsel to seek the dismissal of both lawsuits. In January 1992, a motion for summary judgment on behalf of the Company and the Board of Directors was denied in the lawsuit pending in the New York State Court and is currently on appeal. A similar motion, involving only the Company's purchase of its own stock, was denied with leave to renew after the appeal in the New York State Court action is decided. The second case is pending in the United States District Court for the Southern District of New York. This action charged a violation of the proxy laws and breach of fiduciary duties with respect to several actions by the Board, including the purchase of the Company's own stock. In June 1993, another shareholder commenced a derivative action against certain members of the Company's Board of Directors and Datapoint. Because this latest action is substantially similar to one of the previously filed suits, the plaintiffs in the latest action have filed a motion to dismiss their complaint without prejudice. On May 13, 1994, the Company announced that although it and the Board of Directors expressly disclaim and deny any liability or wrongdoing with respect to the allegations, a settlement had been reached in order to avoid the additional expense, burden, inconvenience and distraction of continued litigation. Pursuant to the settlement agreement, which is subject to Bankruptcy and District Court approval, the Company will receive $2.4 million less attorney's fees and expenses (not to exceed $800,000) awarded by the Court. In addition, the Company has agreed to form a committee of the Board to address and approve certain matters relating to the Company's current and prospective investments. The cash portion of the settlement is fully covered by the Company's director and officer liability insurance but may be offset in whole or in part by future director and officer liability insurance premium increases. A United States District Judge for the Southern District of New York has held a hearing concerning the fairness of the proposed settlement. However, no opinion has yet been issued. The Judge has referred the case to the Bankruptcy Court for further adjudication consistent with bankruptcy laws. Due to the current uncertainty as to any recovery, the Company has not recorded any receivable. On October 4, 1994, certain Debentureholders filed an adversary proceeding in the Court against the Company alleging securities law violations and certain other common law causes of action. The litigation relates to the Company's purchases of securities, including Datapoint Stock and related actions. The plaintiffs in the adversary proceeding seek monetary damages, attorney's fees, and costs of suit. Any allowed claims against the Company may be subordinated to the claims of secured and unsecured creditors. The Internal Revenue Service ("IRS") has issued assessment letters relating to the consolidated 40 federal income tax returns of the Company for the years 1986 through 1992. The IRS letters propose assessments totaling $31.0 million in additional taxes plus interest. The assessment primarily involves the industry-wide issue of the appropriate method for cost recovery of spare parts. A recent case on the same issue was decided in the taxpayer's favor by the United States Tax Court, but is being appealed by the IRS. If the decision was followed by courts with jurisdiction over the Company, the remaining proposed assessment would be approximately $2.5 million in additional taxes plus interest. The Company strongly disagrees with the proposed adjustments and has filed a protest, appealing each of the adjustments in the IRS report. During 1994, the Company negotiated a settlement with the IRS and on October 3, 1994 the IRS appeals officer provided the Company a settlement document indicating a refund of approximately $1.0 million net of interest costs. The IRS settlement document is subject to approval by the Joint Committee of Congress and therefore, the ultimate outcome cannot presently be determined. No receivable has been recorded for any possible refund. The Company is a party to various legal proceedings in the ordinary course of business. The Company believes, based upon the advice of legal counsel responsible for the review of such matters, that there is no proceeding either threatened or pending against the Company that could result in a materially adverse effect on the business or the financial condition of the Company. 15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS As of October 17, 1994, the Company beneficially owned approximately 2.5% of Datapoint's outstanding common stock. The Company's Chairman of the Board and three other directors are also members of Datapoint's eight- person Board of Directors. Mr. Agranoff, a member of the Company's and Datapoint's Board of Directors, became General Counsel of Datapoint in September 1994. Such relationships may result in conflicts of interest as a result of the loyalties owed by the same persons acting as corporate fiduciaries for two different companies may have adverse interests. Mr. Agranoff reports no direct ownership of Datapoint stock and disclaims ownership of 274,766 shares owned by Plaza Securities Company of which he is a general partner. All transactions between the Company and Datapoint have been pursuant to an agreement between the parties and relate to the ordinary business operations of the Company. Pursuant to the agreement, the Company is charged by Datapoint for equipment and field support spares, royalties, and repairs, and Datapoint is charged by the Company for services and sales. Investments in marketable securities include securities of companies affiliated with the Company by virtue of certain common directors. The aggregate cost of such securities at July 31, 1994 and 1993 was $2.7 million. Included in accounts receivable at July 31, 1994 is $103,000 due from employees. 41 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is an unaudited summary of quarterly financial information for 1994 and 1993:
QUARTER ENDED ------------------------------------------------------- OCTOBER JANUARY 31 APRIL 30 JULY 31 ------- ---------- -------- ------- 1994 Revenue ....................................................... $ 20,102 $ 18,798 $ 16,984 $ 16,671 Loss from Operations .......................................... (850) (647) (4,152) (21,629) Loss from Continuing Operations ............................... (1,393) (2,493) (6,030) (24,472) Net Loss ...................................................... (565) (2,493) (6,030) (24,795) Net Loss Less Preferred Stock Dividends ....................... (744) (2,685) (6,244) (24,998) Earnings (Loss) per Common Share Loss from continuing operations ........................... (.13) (.22) (.52) (1.97) Earnings (loss) from discontinued operations .............. .07 -- -- (.03) ------- ------- ------- ------- Net loss less preferred stock dividends per common share ....................................... (.06) (.22) (.52) (2.00) 1993 Revenue ....................................................... $ 23,762 $ 22,464 $ 20,738 $ 21,208 Earnings from Operations ...................................... 275 1,071 1,3278 1,358 Loss from Continuing Operations ............................... (1,686) (916) (447) (382) Extraordinary Items ........................................... 1,997 691 -- (141) Net Earnings (Loss) ........................................... 311 (225) (447) (523) Net Earnings (Loss) Less Preferred Stock Dividends ............ 161 (382) (611) (696) Earnings (Loss) per Common Share Loss from continuing operations ............................. (.15) (.08) (.04) (.05) Extraordinary items ......................................... .16 .05 -- (.01) ------- ------- ------- ------- Net loss less preferred stock dividends per common share ......................................... .01 (.03) (.04) (.06) Reflects restructuring and reorganization charges of $18.0 million in the fourth quarter. The sum of the quarterly per share amounts do not necessarily equal the annual amount reported, as per share amounts are computed independently for each quarter and the full year based on respective weighted average common shares outstanding. Reflects restructuring charges of $213,000 in the second quarter and $244,000 in the third quarter.
42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth certain information regarding the directors and executive officers of the Company as of October 17, 1994. All executive officers serve at the discretion of the Board of Directors. NAME AGE OFFICE ------ --- ------ Asher B. Edelman 54 Chairman of the Board; Director; Office of the President Mark S. Helwege 43 Director; Office of the President; Chief Executive Officer Gerald N. Agranoff 47 Director Leon Botstein 47 Director Daniel R. Kail 59 Director Michael E. Schultz 59 Director; Executive Vice President- Special Projects Philip D. Freeman 46 Senior Vice President; General Counsel; Secretary ASHER B. EDELMAN was elected to the Office of the President in 1991 and has been a Director of the Company since 1985. Mr. Edelman has been General Partner of Plaza Securities Company, an investment partnership, since July 1979; General Partner of Asco Partners, a general partner of Arbitrage Securities Company, a broker/dealer, since July 1984; and General Partner of Arbitrage Securities Company, from January 1977 until June 1984. Mr. Edelman is a Director, Chairman of the Board, and Chairman of the Executive Committee of Datapoint Corporation ("Datapoint"), and a Director, Chairman of the Board and Chairman of the Executive Committee of Canal Capital Corporation ("Canal Capital"). Since February 1985, Canran Corp., a corporation controlled by Mr. Edelman and of which he is a Director and President, has been a General Partner of Canal-Randolph Limited Partnership (which is the successor liquidating partnership to Canal-Randolph Corporation). MARK S. HELWEGE was elected to the Office of the President and Chief Executive Officer in May 1994. He was elected as a Director of the Company in June 1994. Previously, Mr. Helwege served as Executive Vice President - Sales and Operations, with the additional responsibility for IT Canada from January 1992 to May 1994. From August 1991 to December 1991 Mr. Helwege served as Senior Vice President, Sales and Operations. Previously, Mr. Helwege was the Company's National Sales Manager from 1986 to 1988, Vice President, Sales from 1988 to 1989, and Area Vice President, Eastern Area Sales and Operations from 1989 to 1991. GERALD N. AGRANOFF was elected as a Director of the Company in 1991. Mr. Agranoff was General Partner, Asco Partners (the General Partner of Arbitrage Securities Company ("Arbitrage Securities") from July 1984 through December 1991; a General Partner of Arbitrage Securities, a broker/dealer, and of Plaza Securities Company ("Plaza"), an investment partnership for more than five years; Trustee, Management Assistance Inc. Liquidating Trust ("Management Assistance Trust") since February, 1986; General Counsel to Plaza and Arbitrage Securities for more than five years; Director of Bull Run Corporation since December 1990; Director of Datapoint Corporation since 1991; Director of Canal Capital Corporation since 1984 and the General Counsel of Datapoint, effective September 1994. 44 LEON BOTSTEIN was elected as a Director of the Company in 1985. Dr. Botstein has been President of Bard College for more than five years and is also a Director of Interferon Sciences, Inc. DANIEL R. KAIL was elected a Director as of the date of the distribution of the outstanding shares of the Company's Common Stock by Datapoint (July 28, 1985). Mr. Kail has been Managing Trustee, since January 1986, of Management Assistance Inc. Liquidating Trust, and prior thereto, since October 1984, had been Executive Vice President, Chief Operating Officer and a Director of Management Assistance Inc. ("MAI"), a computer manufacturing and servicing company. He was also Executive Vice President and Director of Canal Capital Corporation from November 1987 through 1991. Mr. Kail is also a Director of Datapoint. MICHAEL E. SCHULTZ was elected Executive Vice President - Special Projects in 1992. Mr. Schultz was elected a Director as of the date of the distribution of the outstanding shares of the Company's Common Stock by Datapoint (July 28, 1985). Mr. Schultz has been a partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz for more than five years. Mr. Schultz serves as a Director and President of Canal Capital. Effective October 31, 1994, Mr. Schultz ceased to be an executive officer of the Company. PHILIP D. FREEMAN has been employed as Vice President and General Counsel since the Spin-off and in September 1985 was elected Secretary. In 1989, Mr. Freeman was elected Senior Vice President. Mr. Freeman is also the Director of the Human Resources and Facilities functions of the Company. 45 ITEM 11. EXECUTIVE COMPENSATION CASH COMPENSATION The following table sets forth information for the three years ended July 31, 1994, concerning the compensation of the Company's chief executive officer and its four next most highly compensated executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE ----------------------------------------------------------------------- LONG -TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------------------- ------------- OTHER ANNUAL OPTIONS/ ALL OTHER NAME AND PRINCIPAL COMPENSATION SARS COMPENSATION POSITION YEAR SALARY($) BONUS($) ($)(d) GRANTED ($)(e) - - -------------------------------------------------------------------------------------------------------------- Asher B. Edelman 1994 169,200 0 31,263 (b) 100,000 572 (e) Chairman, Member 1993 169,200 80,620 53,757 (c) 2,701 390 (f) Office of the 1992 150,000 0 -- 300,000 President Mark S. Helwege 1994 148,338 0 -- 315,000 1,788 (e) Director, Member 1993 137,387 45,000 -- 12,101 1,014 (f) Office of the 1992 140,000 16,560 -- 69,100 President, Chief Executive Officer Philip D. Freeman 1994 141,606 0 -- 140,000 2,530 (e) Senior Vice 1993 134,872 25,000 -- 12,101 1,699 (f) President General 1992 140,000 0 -- 62,222 Counsel and Secretary Michael E. Schultz 1994 150,010 0 -- 100,000 3,303 (e) Director, Executive 1993 109,696 80,620 -- 200,000 0 (f) Vice President- 1992 N/A N/A(a) -- N/A N/A Special Projects (a) Mr. Schultz became an executive officer on November 2, 1992. Prior to that date, Mr. Schultz received compensation for his services as a Director of the Company as described in "Compensation of Directors." Mr. Schultz ceased to be executive officer of the Company effective October 31, 1994. (b) Mr. Edelman's other annual compensation for fiscal year 1994 includes $25,263 paid under the Executive Medical Plan and $6,000 for preparation of his U.S. federal income tax return. Other annual compensation for the other Named Executive Officers was not greater than the lesser of $50,000 or 10% of the total of annual salary and bonus reported for such officer during fiscal year 1994. (c) Mr. Edelman's other annual compensation for fiscal year 1993 includes $48,757 paid under the Executive Medical Plan and $5,000 for preparation of his U.S. federal income tax return. Other annual compensation for the other Named Executive Officers was not greater than the lesser of $50,000 or 10% of the total of annual salary and bonus reported for such officer during fiscal year 1993. (d) As permitted by Securities and Exchange Commission transition rules, information in these columns is provided for fiscal years 1994 and 1993 only. (e) Other compensation for fiscal year 1994 includes $410, $1,183, $1,041 and $0 for Messrs. Edelman, 46 Helwege, Freeman and Schultz, respectively, for the Company's matching contributions to the executives' accounts in the Company's 401(k) retirement plan. Other compensation also includes $162, $605, $1,489 and $3,303 for Messrs. Edelman, Helwege, Freeman and Schultz, respectively, for life insurance premiums paid by the Company on the officers behalf. (f) Other compensation for fiscal year 1993 includes $390, $550, $516 and $0 for Messrs. Edelman, Helwege, Freeman and Schultz, respectively, for the Company's matching contributions to the executives' accounts in the Company's 401(k) retirement plan. Other compensation also includes $0, $464, $1,183 and $0 for Messrs. Edelman, Helwege, Freeman and Schultz, respectively, for life insurance premiums paid by the Company on the officers behalf.
EMPLOYMENT AGREEMENTS The Company entered into an employment agreement, dated as of July 1, 1991, with Mr. Asher B. Edelman pursuant to which Mr. Edelman was appointed a member of the Company's Office of the President. In addition, Mr. Edelman continues to serve as Chairman of the Board. The agreement has a three- year term. Mr. Edelman's agreement will be renewed automatically for successive three-year periods if not terminated. The agreement provided for an initial annual base salary of $150,000. Mr. Edelman's annual salary was increased to $180,000 starting on July 1, 1992, in accordance with the agreement. The agreement also provides that Mr. Edelman will be entitled to executive officer-level perquisites and benefits. Under the provisions of the First Amendment made as of July 10, 1992, Mr. Edelman was entitled to receive an annual bonus payable as follows: (A) for the Company's 1993 fiscal year, if at least $3 million of operating income has been achieved, the bonus payment will be 2% of the greater of (x) operating income or (y) net income before taxes; provided that, if the Company's business plan, for such fiscal year, with respect to net income before taxes is met, then the bonus payment will be 3% of the greater of (x) operating income or (y) net income before taxes (without any threshold requirement); and (B) for the Company's 1994 fiscal year and thereafter, the bonus payment will be 3% of net income before taxes; provided, however, that, if the Company's business plan for the relevant fiscal year with respect to net income before taxes is met, then the bonus payment for such fiscal year will be 4% of net income before taxes. The effect of this First Amendment was to delay the effective dates of these provisions, as set forth in the original agreement, for one additional year. Mr. Edelman is entitled to receive a lump-sum severance payment equal to (i) two-years' salary, and (ii) an amount equal to the bonus he would have received through the end of the fiscal year in which the termination occurs and twelve months thereafter assuming the Company's business plan had been met for such periods, in the event of the involuntary termination of his employment other than for "cause" or in the event Mr. Edelman's contract is not renewed or if a majority of the directors on the Board are not "continuing directors" and Mr. Edelman resigns within sixty days after the occurrence of such event. In connection with the agreement, on September 24, 1991, the options previously granted to Mr. Edelman were canceled and he was granted 200,000 new options under the Company's 1985 Employee Stock Option Plan at an exercise price of $0.5625 per share (the market value on the date of grant) such options vesting ratably over 4 years. 47 Under the terms of a Second Amendment made as of July 31, 1992, Mr. Edelman consented to a six percent (6%) reduction in base salary. The agreement also provides that the aforementioned reduction shall not apply to any severance payment to be made under the Agreement. As of November 2, 1992, the Company entered into an employment agreement with Michael E. Schultz providing for a term of one (1) year which is terminable thereafter upon six (6) months prior written notice. Mr. Schultz' bonus provision is the same as provided to Mr. Edelman. Mr. Schultz is required to devote a minimum of fifty (50) days at the Company's premises during each one (1) year period. Mr. Schultz is permitted to continue to perform services for the law firm of Ehrenkranz, Ehrenkranz and Schultz and Canal Capital Corporation. Mr. Schultz does not have any severance provision in his contract. Mr. Schultz received his monthly salary through October 31, 1994 pursuant to court order and shall receive no other payments. Mr. Schultz is required to relinquish and waive any claims he might have with respect to his employment agreement with the Company. Mr. Schultz ceased to be an executive officer of the Company effective October 31, 1994. Messrs. Helwege and Freeman have entered into employment agreements with the Company which provide for an initial term of one year and which automatically renew for successive annual periods after their respective anniversaries. Unless either Officer's employment is terminated for defined causes, the Officer is entitled to a continuance of his base salary and perquisites for eighteen and twelve months, respectively, from the date of termination plus a pro rata amount based upon his last preceding bonus and a lump sum payment, respectively, of $20,000 and $10,000 on the date of termination. Subsequent to the end of the 1994 fiscal year, a Modified First Amended Chapter 11 Plan ("Plan") was submitted to a vote of the Company's creditors which calls for the assumption of modified employment agreements with Mark S. Helwege and Philip D. Freeman as of the date of confirmation of the Plan. The modified agreements contain a revised bonus compensation plan and a revised stock option plan, and provide for a release of any claims against the Company, except for indemnification and as may be set forth in the modified agreements. The Plan also provides for the assumption of a modified agreement with Mr. Edelman, effective as of the date of confirmation, which provides only for a severance benefit payable over 24 months in equal monthly payments of $15,000, totaling $360,000 and for a release of claims except for indemnification and as may be set forth in the modified agreement. DIRECTORS' COMPENSATION Directors who are employees of the Company receive no additional compensation for serving on the Board of Directors or its committees, other than pursuant to the 1985 Director Stock Option Plan discussed below. Each director who is not an employee of the Company receives an annual fee of $15,000 for serving on the Board which is paid quarterly in arrears, $1,000 for serving on a committee (other than the Executive Committee), $5,000 for serving on the Executive Committee and an additional $2,000 if he serves as chairman of a committee. Each non-employee director receives a fee of $750 for each Board of Directors meeting attended and $500 for each committee meeting attended. Directors are reimbursed for expenses incurred in attending Board of Directors and committee meetings, including those for travel, food and lodging. The Board of Directors 48 voluntarily reduced the aforementioned fees by six (6%) percent for services to be performed during the 1993 fiscal year effective August 1, 1992. The Board of Directors has not rescinded the reduction. Each non-employee director is provided, at the Company's expense, $50,000 of group term life insurance and $250,000 of accidental death insurance. STOCK OPTIONS FOR DIRECTORS The 1985 Director Stock Option Plan (the "Director Plan") provides for the issuance of a maximum of 550,000 shares of the Company's Common Stock (which may be authorized and unissued or treasury shares) pursuant to the exercise of stock options granted under the Director Plan to directors of the Company. Each director of the Company is eligible to receive options under the Director Plan, whether or not he is an employee of the Company. Each current director has received, and each newly elected director at the time of his election will receive, an option for 25,000 shares of Common Stock. Each Chairman at the time of his election shall be entitled to receive an option to purchase 50,000 shares of Common Stock in addition to those otherwise granted for services as a director. The director stock options of the current chairman have been canceled as more fully described below. The outstanding options granted to current directors elected prior to fiscal year 1987 have been increased to reflect the 10% Common Stock dividend paid to holders of record on June 9, 1986. An amendment to the Director Stock Option Plan to reprice options held by each director and the Chairman of the Board as of September 23, 1988 was approved by the shareholders on December 6, 1988. The revised option price per share was $4.07. As of July 31, 1993, options for 132,500 shares were outstanding with an average per share exercise price of $3.53. Expiration dates of these options range from July 28, 1995 to April 11, 2001. Only non-incentive stock options may be granted under the Director Plan. The option price per share, except for those affected by the Director Plan amendment, equals the fair market value of a share of Common Stock on the date of grant. The exercise price of a stock option may be paid in cash, shares of Common Stock (subject to such conditions as may be set by the Compensation Committee referred to below) or a combination of cash and stock. Options may be exercised at any time after the date of grant. A stock option may not be granted which expires more than ten years and one day from the date of grant. The Director Plan is administered by the Management Compensation and Stock Option Committee of the Board of Directors (the "Compensation Committee"), which sets the terms and conditions of the stock option agreements, subject to the provisions of the Director Plan. However, the Compensation Committee has no discretion either to determine which directors receive options or to set the number of shares subject to such options. 49 COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has the following committees, the membership and principal responsibilities of which are below. EXECUTIVE COMMITTEE Members: Asher B. Edelman (Chairman), Daniel R. Kail and Michael E. Schultz Between meetings of the Board of Directors, the Executive Committee has all powers which may be lawfully delegated to it under New York law. In general, the Executive Committee may supervise the management of all business of the Company except for matters which, by law, specifically require the action of the Board of Directors or of the shareholders. Actions taken by the Executive Committee are reported to the Board of Directors at its next meeting. During the 1994 fiscal year, the Executive Committee held no meetings. AUDIT COMMITTEE Members: Daniel R. Kail (Chairman), Gerald N. Agranoff, and Michael E. Schultz The Audit Committee, which held two meetings during the 1994 fiscal year, reviews the scope and results of the audit by the independent auditors and the adequacy of the Company's system of internal accounting controls and procedures, proposes the appointment of the independent auditors subject to approval of the Board of Directors and ratification by the shareholders, and approves the fees paid for services rendered by such auditors. MANAGEMENT COMPENSATION AND STOCK OPTION COMMITTEE Members: Daniel R. Kail (Chairman) and Gerald N. Agranoff. The Management Compensation and Stock Option Committee reviews and makes recommendations with respect to the Company's various compensation programs. This Committee administers the Company's 1985 Employee Stock Option Plan, providing for the grant of stock options and stock appreciation rights, and designates the employees to participate in these and certain other benefit plans of the Company. This Committee also reviews and approves the remuneration of all officers of the Company and the terms of any employment contracts with officers. During the 1994 fiscal year, the Committee held three meetings. SPECIAL LITIGATION COMMITTEE Members: Leon Botstein (Chairman), Daniel R. Kail and Michael E. Schultz The Special Litigation Committee was appointed to consider the demand brought by two shareholders in separate lawsuits against the Company and its Board of Directors. During the 1994 fiscal year, the Committee had no meetings. 50 The Board of Directors does not have a standing nominating committee or a committee performing similar functions. RETIREMENT INCOME PLAN A defined benefit pension plan is maintained by the Company, solely at its cost, for its officers and employees. On September 24, 1991, the Company's Board of Directors approved the curtailment of the Retirement Income Plan. Effective October 28, 1991, the accrual of defined benefits for all employees' future service was eliminated. No additional participants have been added to the Retirement Income Plan after the date of the Plan's curtailment. A hearing was held on November 9, 1994, at which the Honorable Leif Clark found that a distress termination of the retirement income plan was appropriate and so ordered. The annual pension to which a participant is entitled at normal retirement age (65) is based on the average of his covered compensation for the five plan years prior to the Plan's curtailment. Covered compensation includes salary as reported in the Summary Compensation Table. The estimated annual benefit payable to Mr. Edelman, Mr. Helwege and Mr. Freeman under the Retirement Income Plan is $4,608, $5,207 and $10,937, respectively, assuming they remain in the Company's employ and retire at the normal retirement age of 65. None of the other Named Executive Officers were qualified to receive benefits under the Retirement Income Plan prior to its curtailment in 1991. Estimated credited years of service for each of the participating Named Executive Officers is: Mr. Edelman, 7 years; Mr. Helwege, 6 years; and Mr. Freeman, 10 years. INTELOGIC TRACE, INC. 401(K) RETIREMENT SAVINGS PLAN On September 24, 1991, the Company's Board of Directors approved the implementation of the 401(k) Plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. The effective starting date of the 401(k) Plan was January 1, 1992. This 401(k) Plan covers substantially all employees and executive officers. Participants in the 401(k) Plan may authorize the Company to make salary deferral contributions limited to the lesser of $8,994 or 15% of total pay. Amounts in the compensation table include such amounts deferred. Such contributions are forwarded to a trustee for investment into one or more of the five pre- established investment funds as the employee may choose. The Company matches 15% of the employee's contribution up to 4% of the employee's compensation. The Company's match is in the form of Intelogic Trace common stock valued at the closing price on the date of the contribution, and vests according to a five-year graded schedule. Increases and decreases in the value of the stock accrue to the employee but the employee has no voting rights. Upon leaving the 401(k) Plan, the participant receives the cash value of shares held in his or her behalf. Withdrawals of contributions, earnings and vested matching funds in the 401(k) Plan may be made in the event of hardship or attainment of age 59- 1/2 under the provisions of Section 401(k). Other distributions may occur following separation from service or the occurrence of a permanent disability. In addition, loans to a participant from his or her Section 401(k) fund are available. 51 During fiscal 1994, the dollar value of the Company's matching contributions to the 401(k) Plan accounts of Messrs. Edelman, Helwege, Freeman and Schultz were $410, $1,183, $1,041 and $0, respectively. 52 STOCK OPTIONS AND SARS GRANTED IN LAST FISCAL YEAR The following table sets forth information concerning stock options and stock appreciation rights granted during the fiscal year ended July 31, 1994, to the Named Executive Officers. OPTION/SAR GRANTS FOR FISCAL YEAR The following table sets forth information concerning stock options and stock appreciation rights granted during the fiscal year ended July 31, 1994, to the Named Executive Officers. OPTION/SAR GRANTS FOR FISCAL YEAR
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE - - -------------------------------------------------------------------------------- AT ASSUMED ANNUAL % OF TOTAL RATES OF OPTIONS STOCK PRICE GRANTED TO EXERCISE APPRECIATION FOR NO. EMPLOYEES OR BASE OPTION TERM OPTIONS IN FISCAL PRICE EXPIRATION ----------------------------- NAME GRANTED YEAR ($/SH) DATE 0%($) 5%($) 10%($) - - ----------- ------------ -------- --------- ---------- ------ --------- --------- A. Edelman 100,000(a) 5.2% $ 2.95630 9/23/98 $0 $ 152,316 $ 417,649 M. Helwege 40,000(b) 2.1% $ 2.68750 9/23/03 $0 $ 67,606 $ 171,327 25,000(c) 1.3% $ 0.93750 5/31/04 $0 $ 14,740 $ 37,353 250,000(d) 13.0% $ 0.78125 6/15/04 $0 $ 122,831 $ 311,278 P. Freeman 40,000(b) 2.1% $ 2.68750 9/23/03 $0 $ 67,606 $ 171,327 100,000(d) 5.2% $ 0.78125 6/15/04 $0 $ 49,132 $ 124,511 M. Schultz 100,000(b) 5.2% $ 2.68750 9/23/03 $0 $ 169,015 $ 428,318
(a) Options granted under the 1985 Employee Stock Option Plan. These options vest ratably over two years. The term of the options is five years. (b) Options granted under the 1985 Employee Stock Option Plan. These options vest ratably over three years. The term of the options is ten years. (c) Options granted under the 1985 Director Stock Option Plan. These options vested on May 31, 1994, the date of grant. The term of the options is ten years. (d) Options granted under the 1985 Employee Stock Option Plan. These options vest ratably over eighteen months. The term of the options is ten years. 53 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES The following table sets forth information concerning stock options and SARs exercised during the fiscal year ended July 31, 1994, and the fiscal year-end value of unexercised options and SARs for the Named Executive Officers. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FY-END OPTIONS AT FY-END (#) ($) SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1) - - --------------------------------------------------------------------------- A. Edelman 0 $ 0 152,701/ $19,383/ 250,000 $18,750 M. Helwege 20,101 $63,920 137,450/ $ 0/ 269,550 $ 1,875 P. Freeman 6,101 $18,795 92,390/ $ 0/ 153,610 $ 0 M. Schultz 0 $ 0 77,500/ $10,935/ 250,000 $32,805 (1) Computed based upon the difference between the fair market value and aggregate exercise price at July 31, 1994. LONG-TERM INCENTIVE PLAN The Company does not maintain any long-term incentive plan under which awards were granted or paid during 1994. 54 REPORT OF THE COMPENSATION COMMITTEE COMPENSATION PHILOSOPHY The Compensation Committee of the Company's Board of Directors administers the Company's executive compensation program. Each of the members of the Compensation Committee are non-employee directors. Each year the Compensation Committee reviews the compensation of the Company's executive officers. Total compensation consists of three (3) elements: (i) base compensation set at levels commensurate with the responsibility attendant to such position; (ii) annual bonus, determined either by a formula or pre-set goals thereby linking pay to performance; and (iii) long-term compensation as established by stock option grants. The Compensation Committee believes that stock-based performance arrangements and bonuses directly based upon the Company's results aligns the interests of management with the interests of the Company's shareholders which ultimately results in increased shareholder value. The Named Executive Officers and other employees received stock option grants during the 1994 fiscal year following an assessment by the Committee of various factors such as personnel's contribution to the long-term growth prospects for the Company and the necessity of retention of key personnel. No bonuses were paid in 1994. The Committee is of the opinion that stock options offer incentives to the Company's personnel to build for the future and encourage management to take actions which will provide the shareholders and such personnel with the opportunity for long-term benefits even though such actions might adversely impact such personnel's short-term earnings potential. OFFICE OF THE PRESIDENT-CHIEF EXECUTIVE OFFICER In July 1991, the Board of Directors established the Office of the President. The incumbents in this position are Messrs. Edelman and Helwege. During the Company's 1994 fiscal year, Mr. Helwege assumed the role of Chief Executive Officer. The Compensation Committee determined that Mr. Helwege's compensation should be tied directly to the performance of the Company and therefore, under his contract with the Company, he received an increase in base salary plus an additional grant of stock options. COMPENSATION COMMITTEE Daniel R. Kail, Chairman Gerald N. Agranoff 55 STOCK PRICE PERFORMANCE The following graph depicts the Company's stock price performance relative to the performance of the Standard & Poor Composite Index and a Peer Group Index of 25 companies. [LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW] Cumulative Total Return ---------------------------------------- 7/89 7/90 7/91 7/92 7/93 7/94 97471IT --- --- --- --- --- --- -------- Intelogic Trace Inc IT 100 42 21 25 75 25 10/17/94 PEER GROUP PPEER1 100 75 82 80 89 125 974UIT S & P 500 I500 100 106 120 135 147 155 97477500 The graph above assumes an investment of $100 in the Company's Common Stock, the Standard & Poor 500 Composite Index and the Peer Group Index on July 31, 1989, and assumes the reinvestment of all dividends. The Company has not paid cash dividends on its Common Stock. Note that the Company's Common Stock price performance on the graph above is not necessarily indicative of future stock price performance. SECTION 16(A) REPORTING Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the two-year period ended July 31, 1994, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with by all reporting persons. Participants in the 401(k) Plan may be deemed to have beneficial ownership; however, no voting rights or shares are acquired by the participant. 56 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table furnishes information concerning all persons known to the Company, other than directors or officers, who beneficially own 5% or more of the voting stock of the Company as of July 31, 1994: NAME AND ADDRESS OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON BENEFICIAL OWNER BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED - - -------------------------------------------------------------------------------- Shufro Rose & Ehrman (1) 3,040,047 24.3% 63 Wall Street New York, NY 10005 Asher B. Edelman(2) 1,928,757 15.2% 717 Fifth Avenue New York, NY 10022 (1) As reported by such holder in a Schedule 13G as of February 14, 1994, filed with the Securities and Exchange Commission. (2) Includes shares for which Mr. Edelman had the right to acquire beneficial ownership within sixty days through exercise of stock options. Mr. Edelman held options covering 200,000 shares under the 1985 Employee Stock Option Plan which are exercisable in annual increments of 50,000 commencing on September 24, 1992. Mr. Edelman received a grant of 100,000 stock options under the 1985 Employee Stock Option Plan on July 10, 1992 which vests ratably over four (4) years commencing on July 10, 1993. A grant of 2,701 immediately vested options was made to Mr. Edelman under the 1985 Employee Stock Option Plan when a corporate wide wage decrease was made effective August 4, 1992 on the basis of one option for each four dollar reduction in compensation. On September 23, 1993, Mr. Edelman was granted an option for 100,000 shares under the 1985 Employee Stock Option Plan vesting in three annual increments commencing September 23, 1994. All of these options will be canceled as of the Effective Date. 57 SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of October 17, 1994, with respect to the beneficial ownership of the Company's Common Stock with respect to all persons who are directors, each of the executives named in the Summary Compensation Table and by all directors and officers as of the most practicable date. Unless otherwise indicated, the percentage of stock owned constitutes less than one percent of the outstanding Common Stock and the beneficial ownership for each person consists of sole voting and sole investment power. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES NO. OF COMMON SHARES BENEFICIALLY PERCENT OF CLASS NAME OWNED OF COMMON STOCK - - ----------------------------------------------------------------------------- Asher B. Edelman (e) 1,928,757(a)(b)(c) 15.2% Mark S. Helwege (e) 158,366 1.3% Gerald N. Agranoff (e) 25,000(b) Leon Botstein (e) 27,500 Daniel R. Kail (e) 28,600(b) Michael E. Schultz (e) 167,333(b)(d) 1.3% Philip D. Freeman (e) 108,060 All directors and executive Officers as a group (7 persons)(e) 2,443,616 18.5% (a) Mr. Edelman, as controlling General Partner of Citas Partners, the General Partner of Felicitas Partners, L.P. ("Felicitas") may be deemed to be the beneficial owner of the 1,963 shares of Common Stock held by Felicitas. As the sole holder of beneficial interests in A.B. Edelman Limited Partnership ("Edelman Limited Partnership"), Mr. Edelman may be deemed to be the beneficial owner of the 854,952 shares of the Common Stock held by Edelman Limited Partnership. As the sole stockholder of Aile Blanche, Inc. ("Aile Blanche"), Mr. Edelman may be deemed to be beneficial owner of the 11,100 shares of Common Stock held by Aile Blanche. Mr. Edelman also may be deemed to be the beneficial owner of the 149,300 shares of Common Stock held by his wife. Mr. Edelman, as custodian for three accounts benefiting Mr. Edelman's children, may be deemed to be the beneficial owner of 51,840 shares of Common Stock. The total reported herein for Mr. Edelman excludes (i) 71,600 shares of Common Stock held in three accounts of which Mr. Edelman's former wife is custodian, for the benefit of Mr. Edelman's three children, (ii) 149,300 held by Mr. Edelman's wife, and (iii) 51,840 shares owned by custodial accounts for Mr. Edelman's children. (b) Each of Messrs. Edelman, Agranoff and Schultz is a Director of Canal Capital Corporation ("Canal Capital") and each of Messrs. Edelman, Agranoff and Kail is a Director of Datapoint Corporation ("Datapoint"). Canal Capital holds 454,260 shares of Common Stock of the Company and Datapoint holds 292,920 shares. Discretionary power with respect to investments by Canal Capital and Datapoint is held by A. B. Edelman Management Company Inc. ("Edelman Management") as investment manager for both Canal Capital and Datapoint. Mr. Edelman is the sole stockholder and officer and Director of Edelman Management. All of Canal Capital's and Datapoint's shares have been included in the number of shares reported by Mr. Edelman only. (c) Excludes 37,000, 15,000 and 175,745 shares of Common Stock owned by the Canal Capital Corporation Retirement Plan (the "Canal Capital Plan"), the Intelogic Trace Retirement Income Plan (the "Intelogic Trace Plan") and the Intelogic Trace 401(k) Retirement Savings Plan (the "401(k) Plan") more fully described below, respectively. Mr. Edelman serves as trustee of the Canal Capital Plan, and Messrs. Edelman, Agranoff, Kail and Schultz serve as trustees of the 401(k) Plan. Messrs. Edelman, Agranoff, Kail, and Schultz resigned as trustees of both the Intelogic Trace Plan and the 401K Plan as of September 29, 1994. (d) Excludes 421,257 shares of Common Stock held in three trusts, of which Mr. Schultz is trustee, for benefit of Mr. Edelman's three children. 58 (e) The following table set forth the detail of amounts held by each of the directors and Named Executive Officers of the Company:
COMMON STOCK COMMON STOCK BENEFICIALLY OPTIONS EXERCISABLE NAME OWNED WITHIN 60 DAYS TOTAL - - ------------------------------------------------------------------------------------------------ Asher B. Edelman 1,692,723 236,034 1,928,757 Mark S. Helwege 2,583 155,783 158,366 Gerald N. Agranoff - 25,000 25,000 Leon Botstein - 27,500 27,500 Daniel R. Kail 1,100 27,500 28,600 Michael E. Schultz 6,500 160,833 167,333 Philip D. Freeman 2,337 105,723 108,060 All directors & executives of the Company as a group (7 persons) 1,705,243 738,373 2,443,616
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of October 17, 1994, the Company beneficially owns approximately 2.5% of Datapoint's outstanding common stock. The Company's Chairman of the Board and three other directors are also members of Datapoint's eight-person Board of Directors. Mr. Agranoff, a member of the Company's and Datapoint's Board of Directors, became General Counsel of Datapoint in September 1994. Such relationships may result in conflicts of interest as a result of the loyalties owed by the same persons acting as corporate fiduciaries for two different companies may have adverse interests. Mr. Agranoff reports no direct ownership of Datapoint stock and disclaims ownership of 248,995 shares owned by Plaza Securities Company of which he is a general partner. All transactions between the Company and Datapoint have been pursuant to an agreement between the parties and relate to the ordinary business operations of the Company. The agreement with Datapoint, dated June 29, 1985, provides for an exclusive relationship with the Company until terminated by either party, notice of which termination must be given 180 days prior to the anniversary of the execution of the agreement, to be effective six years thereafter. Pursuant to the agreement, the Company is charged by Datapoint for equipment and field support spares, royalties, and repairs, and Datapoint is charged by the Company for services and sales. Following termination, the Company would have a non-exclusive relationship with Datapoint. As of the date of this document, neither party has issued any such notice. During fiscal years 1994, 1993 and 1992, 13%, 17%, and 24% of the Company's maintenance service revenue was derived from servicing Datapoint products. See Note 4 to the consolidated financial statements included elsewhere in this filing. On August 5, 1986, the Company entered into an agreement with Arbitrage Securities Company whereby Arbitrage Securities Company provides investment management and financial advisory services to the Company. On October 24, 1988, Arbitrage Securities Company assigned all of its rights, interest, and obligations under the agreement to A.B. Edelman Management Company, Inc. Each calendar quarter the Company is obligated to pay an investment management fee equal to 25% of any realized gains from transactions in the Company's portfolio less realized and net 59 unrealized losses in securities positions for such calendar quarter. Realized losses in excess of realized gains in any quarter are carried over to subsequent quarters. Since 1988, no investment management fees have been paid under this agreement. As of July 31, 1994, Company held investments in marketable securities of certain companies affiliated to the Company by virtue of certain common directors, including 234,440 shares of common stock of Canal Capital (the "Canal Stock"). On September 30, 1994, the Company sold the Canal Stock in a private transaction, with court approval, at a price of $.50 per share. On April 11, 1991, Mr. Edelman and certain affiliates settled an action brought by the SEC alleging failure to promptly amend a Schedule 13D in connections with purchases of the common stock of Datapoint Corporation by the Company and others on September 11 and 12, 1989. Without admitting or denying the allegations of the SEC's complaint, the defendants consented to the entry of a judgment enjoining them from violating Section 13(d) of the Securities Exchange Act of 1934 and Rule 13d-2 thereunder and requiring disgorgement of savings alleged to have been achieved as a result of the failure promptly to amend the Schedule 13(d). The Board of Directors approved indemnification of Mr. Edelman, in accordance with the by-laws of the Company, for a pro rata portion of the disgorged amount and legal fees incurred with respect to the SEC's allegations, which amounted to $380,037. On November 9, 1990, the Company acquired all of the outstanding stock of Datapoint Canada, Inc., a wholly owned subsidiary of Datapoint. Datapoint Canada, Inc. is no longer active and the Company is in the process of winding up its affairs. The purchase price of $2.8 million consisted of $300,000 in cash and 25,000 shares of the Company's $10 Redeemable Preferred Stock ("Preferred Stock"). In addition, the Company issued to Datapoint a five-year option to purchase substantially all of the Company's holdings of Datapoint's common and preferred stock (the "Datapoint Option"). The Company entered into a Grantor Trust Agreement to establish a Grantor Trust to hold the Datapoint Common Stock subject to the Datapoint Option. In 1992, Datapoint exercised the Option with respect to the Datapoint preferred stock for the agreed upon price of $1.375 per share or $116,875. None of the Datapoint Option pertaining to the common stock of Datapoint was exercised in 1994 or 1993. Through September 30, 1994, an additional 21,301 shares of Preferred Stock of the Company have been issued in payment of dividends on the Preferred Stock. After July 31, 1994, the Company and Datapoint mutually agreed to a division of the corpus in the Grantor Trust and cancellation of the Datapoint Option. Pursuant to this agreement, the Company and Datapoint sought Bankruptcy Court approval to (i) have the trustee of the Grantor Trust transfer and distribute 2.4 million shares of Datapoint Common Stock held in the Grantor Trust to Datapoint, and transfer and distribute the remaining 300,000 shares of Datapoint Common Stock to the Company, and (ii) to terminate the Datapoint Option and the Grantor Trust Agreement. An order of the Bankruptcy Court authorizing these matters was entered September 9, 1994. On September 27, 1994, the Company consummated a loan transaction with Fidelity. Pursuant to the Loan Agreement, the Company received an additional $1.3 million in working capital in order to satisfy certain loan covenants with Foothill. Fidelity received a first-lien security interest in, among other things, the 300,000 shares of Datapoint Common Stock distributed to the Company under the arrangement with Datapoint described in the preceding paragraph, and a first-lien security interest in the shares of Canal Stock. Pursuant to the loan agreement, the Company has 60 commenced the sale of its Datapoint Common Stock and Canal Capital Stock and will continue to remit all proceeds of such sales to Fidelity. As of the date of this filing, the Company has remitted $223,000 to Fidelity from such sales. Investments in marketable securities include securities of companies affiliated with the Company by virtue of certain common directors. The aggregate cost of such securities at July 31, 1994 and 1993 was $2.7 million with no determinable market value. Included in accounts receivable at July 31, 1994 is $103,000 due from employees. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) CERTAIN DOCUMENTS FILED AS PART OF THE FORM 10-K 1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements and financial statement schedules are set forth in Item 8 of the Form 10-K Annual Report. Financial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. PAGE NO. -------- Report of Independent Auditors . . . . . . . . . . . . . . . . . . 21 Consolidated Statements of Financial Position at July 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . 22 Consolidated Statements of Operations for each of the three years in the period ended July 31, 1994 . . . . . . . . . . . . . . . 23 Consolidated Statements of Cash Flows for each of the three years in the period ended July 31, 1994 . . . . . . . . . . . . . . . 24 Consolidated Statements of Shareholders' Deficit for each of the three years in the period ended July 31, 1994 . . . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . 26 Schedule V - Leasehold Improvements and Equipment and Field Support Spares . . . . . . . . . . . . . . . . . . . . . . . . 68 Schedule VI - Accumulated Depreciation of Leasehold Improvements and Equipment and Field Support Spares , . . . . . . . . . . . . 69 Schedule VIII - Valuation and Qualifying Accounts and Reserves. . . 70 Schedule IX - Short Term Borrowings . . . . . . . . . . . . . . . . 71 Schedule X - Supplementary Income Statement Information . . . . . . 72 3. EXHIBITS 3.1- Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form 10 filed with the Commission on July 3, 1985, (the "Form 10") and incorporated herein by reference). 3.2- Certificate of Amendment of the Certificate of Incorporation (filed as Exhibit 3.1 to Amendment No. 2 to the Form 10 ("Form 10, Amendment No. 2") filed with the Commission on October 24, 1985 and incorporated herein by reference). 3.3- By-laws of the Company, as amended (filed as Exhibit 3.2 to Form 10, Amendment No. 2 and incorporated herein by reference). 62 3.4- Certificate of Amendment of the Certificate of Incorporation, dated November 8, 1990 (filed as Exhibit 3(d) to the 1990 Form 10-K and incorporated herein by reference). 4.1- Form of 11.99% Subordinated Debenture due July 15, 1996 (filed as Exhibit 4(a) to the Company's Registration Statement on Form S-1 filed with the Commission on July 22, 1986 (the "Form S-1") and incorporated herein by reference). 4.2- Form of Indenture between the Company and Manufacturers Hanover Trust Company, as Trustee, relating to the Debentures registered (filed as Exhibit 4(b) to the Form S-1 and incorporated herein by reference). 4.3- Indenture dated October 1, 1985 between the Company and the Manufacturers Hanover Trust Company, as Trustee, relating to the 14 1/2% Subordinated Notes Due 1995 (filed as Exhibit (c) to Amendment No. 2 on Form 8 to the Company's Registration Statement on Form 8-A filed with the Commission on September 19, 1985 and incorporated herein by reference). 4.4- Article Fourth of the Certificate of Incorporation of the Company (included in Exhibit 3.2). 10.1- Agreement for Transfer of Assets and Liabilities in Exchange for Stock, dated June 29, 1985, between Datapoint and the Company (filed as Exhibit 10.1 to the Form 10 and incorporated herein by reference). 10.2- Master Maintenance Agreement, dated June 28, 1985, between Datapoint and the Company (filed as Exhibit 10.2 to the Form 10 and incorporated herein by reference). 10.3- Assignment and License, dated as of June 29, 1985, between the Company and Datapoint (filed as Exhibit 10.3 to the Form 10 and incorporated herein by reference). 10.4- Datapoint License Agreement, dated as of June 29, 1985, between the Company and Datapoint (filed as Exhibit 10.4 to the Form 10 and incorporated herein by reference). 10.5- I T License Agreement, dated as of June 29, 1985, between the Company and Datapoint (filed as Exhibit 10.5 to the Form 10 and incorporated herein by reference). *10.6- Employment Agreement, dated January 27, 1986, between Philip D. Freeman and the Company (filed as Exhibit 10(j) to the Form S-1 and incorporated herein by reference). *10.7- 1985 Directors Stock Option Plan (filed as Exhibit 10.10 to the Form 10 and incorporated herein by reference). 63 *10.8- 1985 Employee Stock Option Plan (filed as Exhibit 10.11 to the Form 10 and incorporated herein by reference). *10.9- Retirement Income Plan (filed as Exhibit 10.12 to the Form 10 and incorporated herein by reference). *10.10- Executive Benefit Plan (filed as Exhibit 10.14 to the Form 10 and incorporated herein by reference). 10.11- Directors' and Officers' Liability Insurance Policy (filed as Exhibit 10(s) to the Form S-1 and incorporated herein by reference). 10.12- TexCom Purchase Agreement, dated November 25, 1987, between the Company and TexCom, Inc. (filed as Exhibit C(2) to the Form 8-K filed with the Commission on December 9, 1987 and incorporated herein by reference). *10.13- Amendment to the 1985 Directors Stock Option Plan (filed as Exhibit 10(o) to the 1989 Form 10-K and incorporated herein by reference). 10.14- First Amendment to the TexCom Purchase Agreement, dated June 20, 1989, between the Company and TexCom, Inc. (filed as Exhibit 10(v) to the 1989 Form 10-K and incorporated herein by reference). 10.15- Acquisition Agreement, dated November 9, 1990, between Datapoint and the Company (filed as Exhibit 10(v) to the 1990 Form 10-K and incorporated herein by reference). 10.16- Option Agreement, dated November 9, 1990, between Datapoint and the Company (filed as Exhibit 10(w) to the 1990 Form 10-K and incorporated herein by reference). *10.17- Employment Agreement, dated July 1, 1991, between Asher B. Edelman and the Company (filed as Exhibit 10(s) to the 1991 Form 10-K and incorporated herein by reference). *10.18- Intelogic Trace, Inc. 401(k) Retirement Savings Plan (filed as Exhibit 10.22 to the 1992 Form 10-K and incorporated herein by reference). 10.19- Purchase Agreement, dated June 23, 1992, between Gemini Systems Leasing Corp., Intelogic Trace TexCom Group, Inc. and The Lockwood Association, Inc. (filed as Exhibit 10.23 to the 1992 Form 10-K and incorporated herein by reference). 10.20- First Amendment to Purchase Agreement, dated June 23, 1992, between Gemini Systems Leasing Corp., Intelogic Trace TexCom Group, Inc. and The Lockwood Association, Inc. (filed as Exhibit 10.24 to the 1992 Form 10-K and incorporated herein by reference). *10.21- First Amendment to the Employment agreement, dated July 1, 1991, between 64 Asher B. Edelman and the Company (filed as Exhibit 10.29 to the 1992 Form 10-K and incorporated herein by reference). *10.22- Second Amendment to the Employment Agreement, dated July 1, 1991, between Asher B. Edelman and the Company (filed as Exhibit 10.35 to the 1992 Form 10-K and incorporated herein by reference). *10.23- First Amendment to the Employment Agreement, dated July 28, 1991, between Mark S. Helwege and the Company (filed as Exhibit 10.36 to the 1992 Form 10-K and incorporated herein by reference). *10.24- Employment Agreement, dated August 1, 1993, between Martin J. Landon and the Company (filed as Exhibit 10.37 to the 1993 Form 10-K and incorporated herein by reference). *10.25- Employment Agreement, dated October 26, 1992, between John Alexander Wilder and the Company (filed as Exhibit 10.38 to the 1993 Form 10-K and incorporated herein by reference). *10.26- Employment Agreement, dated November 2, 1992, between Michael E. Schultz and the Company (filed as Exhibit 10.39 to the 1993 Form 10-K and incorporated herein by reference). *10.27- Second Amendment to the Employment Agreement, dated July 28, 1991, between Mark S. Helwege and the Company. *10.28- Second Amendment to the Employment Agreement dated January 27, 1986, between Philip D. Freeman and the Company. 10.29- Agreement, dated September 27, 1994, between the Company and Datapoint Corporation. 10.30- Final Order Authorizing Use of Cash Collateral, Post-Petition Financing, and Grant of Security Interests (describing debtor-in-possession Financing Facility between the Company and Foothill Capital Corporation) dated September 16, 1994. 10.31- Final Order (1) Authorizing the Debtor to Incur Secured Priority Administrative Indebtedness Pursuant to Section 364 (c) of the Bankruptcy Code, (2) Granting Security Interests, (3) Approving Agreement Related to the Foregoing and (4) Granting Other Relief (describing the loan agreement between Fidelity Capital and Income Fund and the Company) dated November 8, 1994. 65 11 - Computation of Earnings Per Share. 21 - Subsidiaries of the Registrant. 23 - Consent of Ernst & Young LLP. 25 - Powers of Attorney. 99 - Modified First Amended Plan of Reorganization of the Company, dated October 12, 1994. *Management compensatory plan or arrangement. 66 (B) REPORTS ON FORM 8-K: During the quarter ended July 31, 1994, the Company filed the following current reports on Form 8-K: DATE FILED DESCRIPTION - - ------------ ----------- May 16, 1994 Form 8-K reported the settlement of two shareholders derivative lawsuits brought against certain of the Company's present and former directors (see Note 16 to the consolidated financial statements included elsewhere in this filing). May 24, 1994 Form 8-K announced that Mark S. Helwege had been named Chief Executive Officer and a Member of the Office of the President. Additionally, it reported the resignation of J. Alec Wilder as Chief Operating Officer and a Member of the Office of the President. June 8, 1994 Form 8-K announced the resignation of Dwight D. Sutherland as a director and the appointment of Mark S. Helwege, Chief Executive Officer and Member, Office of the President, as director. July 15, 1994 Form 8-K reported that the Company is engaged in discussions with its largest bondholders to explore the restructuring of the Company's debt. 67 SCHEDULE V INTELOGIC TRACE, INC. AND SUBSIDIARY LEASEHOLD IMPROVEMENTS AND EQUIPMENT AND FIELD SUPPORT SPARES (In thousands)
BALANCE AT BALANCE BEGINNING OTHER AT END CLASSIFICATION OF YEAR ADDITIONS RETIREMENTS CHANGES OF YEAR - - ------------------------------------------------------------------------------------------------------------------------------------ JULY 31, 1994 Leasehold improvements and equipment: Leasehold improvements .......................... $ 4,442 $ 30 $ (13) $- $ 4,459 Computer equipment .............................. 19,498 246 (310) -- 19,434 Other machinery, equipment, furniture and fixtures .................................. 7,429 38 (473) -- 6,994 ------- -------- -------- -------- ------- $31,369 $ 314 $ (796) $- $30,887 ======= ======== ======== ======== ======= Field support spares .............................. $63,891 $ 5,764 $(14,140) $(19,740) $35,775 ======= ======== ======== ======== ======= JULY 31, 1993 Leasehold improvements and equipment: Leasehold improvements .......................... $ 4,427 $ 15 $- $- $ 4,442 Computer equipment .............................. 19,364 134 -- -- 19,498 Other machinery, equipment, furniture and fixtures .................................. 7,389 40 -- -- 7,429 ------- -------- -------- -------- ------- $31,180 $ 189 $- $- $31,369 ======= ======== ======== ======== ======= Field support spares .............................. $89,602 $ 8,293 $(31,928) $ (2,076) $63,891 ======= ======== ======== ======== ======= JULY 31, 1992 Leasehold improvements and equipment Leasehold improvements .......................... $ 4,299 $ 159 $ (18) $ (13) $ 4,427 Computer Equipment .............................. 19,432 281 -- (349) 19,364 Other machinery, equipment, furniture and fixtures .................................. 7,196 200 (7) -- 7,389 ------- -------- -------- -------- ------- $30,927 640 (25) (362) $31,180 ======= ======== ======== ======== ======= Field support spares .............................. $85,392 $ 12,220 $ (7,159) $ (851) $89,602 ======= ======== ======== ======== ======= "Other Changes" represents transfers to and from inventory and other classifications and a write down of field support spares to net realizable value in 1994.
68 SCHEDULE VI INTELOGIC TRACE, INC. AND SUBSIDIARY ACCUMULATED DEPRECIATION OF LEASEHOLD IMPROVEMENTS AND EQUIPMENT AND FIELD SUPPORT SPARES (In thousands)
BALANCE AT CHARGED TO BALANCE BEGINNING PROFIT OTHER AT END CLASSIFICATION OF YEAR AND LOSS RETIREMENT CHANGE OF YEAR - - ------------------------------------------------------------------------------------------------------------------------------------ JULY 31, 1994 Leasehold improvements and equipment: Leasehold improvements ............................................ $ 4,126 $ 135 $ -- $ -- $ 4,261 Computer equipment 18,240 580 (71) -- 18,749 Other machinery, equipment, furniture and fixtures .................................................... 6,927 292 (555) -- 6,664 ------- -------- -------- ------- ------- $29,293 $ 1,007 $ (626) $ -- $29,674 ======= ======== ======== ======= ======= Field support spares .................................................. $37,103 $ 10,187 $(14,140) $ -- $33,150 ======= ======== ======== ======= ======= JULY 31, 1993 Leasehold improvements and equipment: Leasehold improvements ............................................ $ 3,942 $ 184 $ -- $ -- $ 4,126 Computer equipment 17,744 496 -- -- 18,240 Other machinery, equipment, furniture and fixtures .................................................... 6,279 648 -- -- 6,927 ------- -------- ------- ------ ------- $27,965 $ 1,328 $ -- $ -- $29,293 ======= ======== ======= ======== ======= Field support spares .................................................. $58,940 $ 10,039 $(31,928) $ 52 $37,103 ======= ======== ======== ======== ======= JULY 31, 1992 Leasehold improvements and equipment: Leasehold improvements ............................................ $ 3,766 $ 216 $ (36) $ (4) $ 3,942 Computer equipment ................................................ 16,710 1,062 -- (28) 17,744 Other machinery, equipment, furniture and fixtures .................................................... 5,837 447 (5) -- 6,279 ------- -------- -------- -------- ------- $26,313 $ 1,725 $ (41) $ (32) $27,965 ======= ======== ======== ======== ======= Field support spares .................................................. $53,631 $ 12,468 $ (7,159) -- $58,940 ======= ======== ======== ======== ======= "Other Changes" represents transfers to and from inventory and other classifications.
69 SCHEDULE VIII INTELOGIC TRACE, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
ADDITIONS BALANCE AT --------------------------- BALANCE BEGINNING CHARGED TO CHARGED TO AT END CLASSIFICATION OF YEAR EXPENSES REVENUE DEDUCTIONS OF YEAR - - -------------------------------------------------------------------------------------------------------------- ALLOWANCE DEDUCTED FROM ASSETS FOR DOUBTFUL ACCOUNTS RECEIVABLE: YEAR ENDED JULY 31, 1994 $3,342 $1,650 $(1,171) $(941) $2,880 ====== ====== ======= ===== ====== YEAR ENDED JULY 31, 1993 $3,353 $335 $237 $(583) $3,342 ====== ====== ======= ===== ====== YEAR ENDED JULY 31, 1992 $2,437 $912 $54 $(750) $3,353 ====== ==== ====== ===== ====== VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS: YEAR ENDED JULY 31, 1994 $ - $ - $ - $ 18,710 $18,710 ===== ===== ===== ========= ======= YEAR ENDED JULY 31, 1993 $ - $ - $ - $ - $ - ===== ===== ===== ========= ======= YEAR ENDED JULY 31, 1992 $ - $ - $ - $ - $ - ===== ===== ===== ========= ======== Provision for bad debt. Provision for billing adjustments. Amounts written off net of recoveries. Valuation allowance recognized to offset deferred tax asset.
70 SCHEDULE IX INTELOGIC TRACE, INC. AND SUBSIDIARY SHORT TERM BORROWINGS (IN THOUSANDS)
WEIGHTED MAXIMUM AVERAGE AMOUNT WEIGHTED BALANCE AVERAGE AMOUNT OUTSTANDING AVERAGE CATEGORY OF AGGREGATE AT END INTEREST OUTSTANDING DURING INTEREST RATE SHORT TERM BORROWINGS OF YEAR RATE DURING PERIOD PERIOD DURING PERIOD 1994: PAYABLE TO BANK .............. $7,919 9.3% $10,080 $6,033 10.3% ====== ==== ======= ====== ===== 1993: PAYABLE TO BANK ............ $4,377 9.9% $9,730 $5,889 8.8% ====== ==== ======= ====== ===== 1992: PAYABLE TO BANK ............ $6,913 9.9% $6,913 $528 10.7% ====== ==== ======= ====== ===== Average amounts outstanding during the year were determined based on the daily amounts outstanding. The weighted average interest rate during the year was computed by dividing actual interest expense for the year by average short term borrowings during the year. Amounts are secured by accounts receivable, field support spares and equipment.
71 SCHEDULE X INTELOGIC TRACE, INC. AND SUBSIDIARY SUPPLEMENTARY INCOME STATEMENT INFORMATION (IN THOUSANDS) YEARS ENDED JULY 31, -------------------------------------------- 1994 1993 1992 -------------------------------------------- MAINTENANCE AND REPAIRS $ 9,506 $ 7,433 $10,101 ======= ======= ======= The majority of maintenance and repairs expenses relate to the repair of field support spares. Amounts for depreciation, amortization, taxes other than payroll and income taxes, royalties and advertising are not presented, as such amounts are either less than 1% of total revenue or have been disclosed in the consolidated financial statements. 72 SIGNATURES 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. INTELOGIC TRACE, INC. (REGISTRANT) DATED: NOVEMBER 14, 1994 BY: MIKE R. ELLIS MIKE R. ELLIS VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE CAPACITY DATE --------- -------- ---- * DIRECTOR, CHAIRMAN OF THE NOVEMBER 14, 1994 (ASHER B. EDELMAN) BOARD OF DIRECTORS, OFFICE OF THE PRESIDENT * DIRECTOR NOVEMBER 14, 1994 (GERALD N. AGRANOFF) * DIRECTOR NOVEMBER 14, 1994 (LEON BOTSTEIN) * DIRECTOR, OFFICE OF THE PRESIDENT, NOVEMBER 14, 1994 (MARK S. HELWEGE) AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) * DIRECTOR NOVEMBER 14, 1994 (DANIEL R. KAIL) * DIRECTOR NOVEMBER 14, 1994 (MICHAEL E. SCHULTZ) *BY MIKE R. ELLIS, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND ATTORNEY-IN-FACT. 73 EX-10.27 2 2ND AMEND. TO EMPLOYMENT AGREEMENT MARK S. HELWEGE EXHIBIT 10.27 SECOND AMENDMENT This Second Amendment to the Agreement of July 28, 1991 (the ("Agreement") is made as of June 1, 1994 by and between Intelogic Trace, Inc. and Mark S. Helwege ("Executive"). The parties agree as follows: 1. As of June 1, 1994, Executive's bi-weekly salary shall be increased to $6,346.15 and shall thereafter be increased to $7,692.30 per bi-weekly period upon the earlier of (i) I T generating a net profit before taxes in any quarter, or (ii) as of the closing date if I T is sold. 2. For the 1995 fiscal year, Executive shall be eligible to receive performance bonus incentives in accordance with the following based upon I T's earnings from operations: $ 0 - $ 5.0 Million .75% of such earnings $ 5+ - $10.0 Million 1.50% of such earnings $10+ Million 2.00% of such earnings This bonus is to be calculated and paid quarterly on a year- to-date basis at the .75% rate, less prior period payments. The bonus for annual performance above $5 million will be calculated and paid within thirty (30) days after the close of the fiscal year. All bonuses are considered earned when paid. 3. The Executive Medical Plan applicable to Executive is hereby increased to $15,000 per annum. 4. Executive shall be entitled to four (4) weeks of vacation per year. 5. Executive shall be entitled to tax preparation assistance. 6. Paragraph 10.a. of the Agreement is hereby amended to provide for a severance period of thirty-nine (39) consecutive bi-weekly pay periods, commencing on the date of termination of Executive's employment, plus $20,000 as a lump-sum on such date of termination plus a bonus of a pro rata amount based upon Executive's last preceding Management Incentive Compensation award. 7. The Board of Directors may also consider the granting of a discretionary bonus to Executive if Executive is employed by I T on the date such sale is consummated. 8. The terms of the Agreement and this Second Agreement shall be binding upon any successor company. 9. Except as expressly provided herein, the terms and conditions of the Agreement shall remain in full force and effect. INTELOGIC TRACE, INC. EXECUTIVE By: ASHER B. EDELMAN MARK S. HELWEGE Asher B. Edelman Mark S. Helwege Chairman EX-10.28 3 2ND AMEND. TO EMPLOYMENT AGREEMENT PHILIP FREEDMAN EXHIBIT 10.28 SECOND AMENDMENT This Second Amendment to the Agreement of January 27, 1986 (the ("Agreement") is made as of June 1, 1994 by and between Intelogic Trace, Inc. and Philip D. Freeman ("Executive"). The parties agree as follows: 1. Executive shall be entitled to a lump-sum payment of $10,000 upon the termination of Executive's employment. 2. For the 1995 fiscal year, Executive shall be eligible to receive performance bonus incentives in accordance with the following based upon I T's earnings from operations: $ 0 - $5.0 Million .25% of such earnings $ 5+ - $ 10 Million .50% of such earnings $10+ .75% of such earnings This bonus is to be calculated and paid quarterly on a year-to- date basis at the .25% rate, less prior period payments. The bonus for annual performance above $5 million will be calculated and paid within thirty (30) days of the close of the fiscal year. All bonuses are considered earned when paid and are subject to a maximum payment of $40,000. 3. The terms of the Agreement and this Second Amendment shall be binding on any successor company. 4. Except as expressly provided herein, the terms and conditions of the Agreement shall remain in full force and effect. INTELOGIC TRACE, INC. By: ASHER B. EDELMAN PHILIP D. FREEMAN Asher B. Edelman Philip D. Freeman Chairman EX-10.29 4 AGREEMENT BETWEEN THE COMPANY AND DATAPOINT EXHIBIT 10.29 AGREEMENT This Agreement (hereinafter "Agreement") is made by and between INTELOGIC TRACE, INC. ("I T") a New York corporation having its principal offices in San Antonio, Texas and DATAPOINT CORPORATION ("DPT") a Delaware corporation having its principal offices in San Antonio, Texas. WITNESSETH: WHEREAS, I T and DPT entered into an Acquisition Agreement (the "Acquisition Agreement") as of November 9, 1990 concerning the purchase by I T of all of the shares of stock of Datapoint Canada Inc., a Canadian corporation, and WHEREAS, pursuant to the Acquisition Agreement, I T and DPT entered into an Option Agreement (the "Option Agreement") as of November 9, 1990, and WHEREAS, pursuant to the Acquisition Agreement, I T entered into a Grantor Trust Agreement with Peter M. Bren (the "Trustee") as of May 6, 1991, (the "Grantor Trust Agreement"), and WHEREAS, on August 5, 1994, I T filed a Voluntary Petition in Bankruptcy in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division, Case No. 94-52172-C (the "Bankruptcy Case"), and WHEREAS, I T and DPT have mutually agreed to a division of the CORPUS in the trust in lieu of the provisions of the Option Agreement; and WHEREAS, I T and DPT desire to terminate the Option Agreement and have I T terminate the Grantor Trust Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: 1. I T and DPT hereby agree that appropriate motions shall be filed by I T in the bankruptcy Case to cause the Trustee to promptly transfer and distribute 2,400,000 shares of the Datapoint Common Stock held by the Trustee pursuant to the Grantor Trust Agreement to DPT and transfer and distribute 300,000 shares of the Datapoint Common Stock held by the Trustee pursuant to the Grantor Trust Agreement to I T. 2. I T and DPT hereby agree that once the Bankruptcy Court orders the aforementioned distribution of Datapoint Common Stock and such stock is distributed, the Option Agreement and the Grantor Trust Agreement shall be deemed terminated by mutual consent and be of no further force or effect. 3. I T and DPT agree that I T shall pay all costs and expenses required to effect the provisions of this Agreement. IN WITNESS WHEREOF, authorized representatives of the parties hereto have executed this Agreement as of the last date written below. INTELOGIC TRACE, INC. DATAPOINT CORPORATION By: MARK S. HELWEGE By: DORIS BENCSIK Mark S. Helwege Name: Doris Bencsik President & CEO Title: President Date: September 27, 1994 Date: September 27, 1994 EX-10.30 5 FINAL ORDER RE USE OF CASH COLLATERAL EXHIBIT 10.30 UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION In re: INTELOGIC TRACE, INC., Debtor. Case No. 94-52172-C Chapter 11 FINAL ORDER AUTHORIZING LIMITED USE OF CASH COLLATERAL, POST-PETITION FINANCING AND GRANT OF SECURITY INTERESTS Came on for consideration the motion of Intelogic Trace, Inc. (hereinafter referred to in its capacity as debtor and debtor in possession, "Debtor"), as debtor in possession, for the entry of a final order authorizing (i) post-petition financing, (ii) the limited use of Foothill Capital Corporation's Cash Collateral (as defined hereinafter), subject to the terms and conditions set forth herein and for purposes specified herein; and (iii) the granting of security interests, liens and superiority claims to Foothill Capital Corporation (hereinafter "Foothill") as more fully set forth herein. Based on the representations of the parties and the evidence adduced, The Court finds: A. On August 5, 1994, the Debtor filed with this Court a petition (the "Petition") for reorganization under Chapter 11 of the Bankruptcy Code (the "Code"). The Debtor has retained possession of its assets and is authorized to continue the operation and management of its business as debtor in possession. B. The Debtor is one of North America's largest independent support organizations for end users, manufacturers, and resellers of computer and telecommunications equipment. The Debtor provides technical support and on- site services and specializes in support for local area networks, WANG computing systems, microcomputers and peripherals. C. Pursuant to a General Loan and Security Agreement dated as of June 20, 1991, as amended from time to time, between Foothill and the Debtor (hereinafter, the "Loan Agreement," as attached to the Interim Order), Foothill made loans and advances to the Debtor in an approximate principal amount as of the filing of the Petition of $8,764,904.85 (such loans, advances, and obligations of Debtor, whether contingent, liquidated, or otherwise, to pay or reimburse Foothill as a result of or in connection with any expenses incurred, and any other such indebtedness to Foothill and all Obligations (as defined in the Loan Agreement), including, without limitation, the principal thereof, interest thereon, and costs and expenses owing in connection therewith shall hereinafter be referred to collectively as the "Pre-Petition Indebtedness"). To secure the Pre-Petition Indebtedness, the Debtor granted to Foothill liens and security interests in virtually all of Debtor's personal property of every kind and nature, wherever located, then owned or thereafter acquired or arising, including, but not limited to all Accounts, Equipment, Inventory, and General Intangibles (all as defined in the Loan Agreement) of the Debtor and the proceeds and products of all of the foregoing (all of the foregoing collateral generally described above together with all of the proceeds and products thereof shall be referred to herein collectively as the "Pre- Petition Collateral"). D. An immediate need exists for the Debtor to use Cash Collateral and to obtain funds in order to meet its payroll and payroll expenses, to obtain required goods and services, and to provide working capital for its ongoing operations. E. The Debtor is unable to obtain the required funds in the form of unsecured credit or unsecured debt, a claim arising from which would be allowable under Section 503(b)(1) of the Code as an administrative expense pursuant to Section 364(a) or (b) of the Code. As substantially all of the Debtor's assets are subject to the liens and security interests of Foothill, the Debtor cannot, except in the manner provided in this final order, provide adequate protection for Foothill's Pre-Petition Collateral. F. The terms of the post-petition financing arrangement contemplated by this final order have been negotiated in good faith by the Debtor and Foothill. Foothill has indicated a willingness to consent and agree to the Debtor's use of Foothill's Cash Collateral (as defined hereinafter) upon the terms and provisions and subject to the conditions set forth in this final order. Foothill also has indicated a willingness to extend additional financing to the Debtor upon the assurance by this Court that Foothill's security interests and liens granted pursuant to this final order will not be affected by any subsequent modification or reversal of this final order, as provided in Section 364(e) of the Code, which shall be deemed to be applicable to the post-petition financing arrangement contemplated by this final order. G. No creditors' committee has yet been appointed in this case pursuant to Section 1102 of the Code. H. Notice of the motion requesting the relief granted herein has been given to the twenty (20) largest unsecured creditors of the Debtor and the United States Trustee. Such notice constitutes sufficient notice under Bankruptcy Rule 4001 and no other notice need be given. I. Good cause has been shown for the entry of this final order. Among other things, entry of this final order will minimize disruption of the Debtor's business and operations and permit it to meet payroll and payroll expenses. The terms of the borrowings authorized hereby are fair and reasonable under the circumstances. Therefore, it is ordered that: 1. AUTHORITY TO USE CASH COLLATERAL AND TO INCUR POST-PETITION INDEBTEDNESS. Subject to the condition subsequent that the Debtor must obtain the funds from the Fidelity Loan, as defined below, on or before September 23, 1994, the Debtor is authorized pursuant to Section 363(c)(2)(A) of the Code to use cash collateral (as defined in Section 363(a) of the Code) (the "Cash Collateral") and to incur Post Petition Indebtedness (defined below) pursuant to Section 364: (i) so long as Sections 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.13, and 5.14 of the Loan Agreement are and remain true and correct in all material respects and the Debtor is in compliance therewith in all material respects, as the case may be; and (ii) for the purposes specified in decretal paragraph 3 of this final order. The Total Indebtedness to Foothill shall not exceed the lesser of (x) $7,000,000 or (y) the least of (1) an amount equal to 70% of the amount of Eligible Accounts as defined in the Loan Agreement, (2) an amount equal to the Debtor's cash collections for the prior 50 day period [based upon the average daily collections during the preceding three months], or (3) the Adjusted Service Value (as defined in the Loan Agreement), PLUS an amount equal to the Permitted Overadvance. The Total Indebtedness is defined as the sum of Pre-Petition Indebtedness and the Cash Collateral Claim (as hereinafter defined). The Permitted Overadvance is defined as an amount never to exceed the amount shown on "Remaining Avail/Overline" line in the budget attached as Exhibit "A" plus 10%. The Permitted Overadvance shall never exceed the amount of $4,000,000 except for the weeks ended October 21, October 28, November 18, and November 25, 1994 in which case the Permitted Overadvance shall not exceed $4,380,000, $4,562,000, $4,298,000 and $4,766,000, respectively. Foothill shall continue to make loans and advances pursuant to the Loan Agreement as modified by and pursuant to this final order. The Post-Petition Indebtedness shall be defined as Foothill's claims arising out of any outstanding balance, in excess of the Pre-Petition Indebtedness, under the Loan Agreement resulting from advances made pursuant to this final order. The claim arising from the use of Cash Collateral and Post-Petition Indebtedness shall sometimes be referred to herein as the "Cash Collateral Claim," which claim shall be in an amount equal to the aggregate amount of Cash Collateral expended, disbursed or otherwise used in any manner whatsoever, including by the Debtor's possession thereof, plus the amount of the Post-Petition Indebtedness, less the payments, credits and applications made pursuant to decretal paragraph 5 of this final order. 2. ADEQUATE PROTECTION. In order to adequately protect Foothill for any loans or advances made in excess of the initial Pre-Petition Indebtedness and the Debtor's use of Cash Collateral and to secure the Cash Collateral Claim, the Interest Claim (as defined hereinafter), and the Debtor's other obligations to Foothill hereunder, including the Debtor's payment obligation described in decretal paragraph 14 hereof, this Court authorizes the following: (a) Foothill is hereby granted a valid and perfected first priority lien and security interest in all presently owned or hereafter acquired personal property and assets of Debtor, of any kind or nature, wherever located, now owned or hereafter acquired or arising, and all accessions, additions, modifications, substitutions, replacements, renewals, proceeds and products thereof, including, without limitation, all goods (including, without limitation, equipment and inventory), accounts (including all accounts receivables, notes receivable and other debt instruments), contract rights, operating rights, rights to the payment of money including tax refund claims, insurance proceeds, chattel paper, documents, instruments, general intangibles, books and records (collectively, the "DIP Collateral"), subject only to valid prior and perfected liens and security interests, if any, existing in the DIP Collateral at the time of the filing of the Petition, or as provided in the Fidelity Loan, and the lien and security interest granted in this clause shall secure the Pre-Petition Indebtedness, the Cash Collateral Claim, the Interest Claim, and the Debtor's other obligations to Foothill hereunder under paragraph 14; (b) Interest shall accrue on the amount of (i) the Cash Collateral Claim (from and after the date any and all Cash Collateral is advanced to the Debtor) and (ii) the Pre-Petition Indebtedness (subject to further order of the Court) at the lesser of (A) the maximum non-usurious rate of interest permitted from time to time under applicable law (the "Maximum Rate"), or (B) the sum of the rate of interest announced from time to time by Bank of America, N.T. and S.A. at its San Francisco office, or its successor entity, as its reference rate plus 4.5% per annum (the "Reference Rate") (calculated on the basis of a 360 day year for the actual number of days elapsed), and the interest shall be an administrative expense which shall be payable in accordance with the terms of this final order but no later than the Termination Date (such claim, shall be referred to herein as the "Interest Claim"); and (c) To the extent, if any, that such first priority liens and security interests are inadequate to secure fully the Cash Collateral Claim together with the Interest Claim (such deficiency shall be referred to herein as the "Cash Collateral Deficiency"), the Cash Collateral Deficiency shall be entitled to a superpriority as provided in decretal paragraph 10 of this final order. Any change in the Reference Rate shall become effective as of the beginning of the day during which such change in the Reference Rate occurs. As further adequate protection for the Cash Collateral Claim and the Interest Claim, Foothill is granted liens and security interests in the Pre-Petition Collateral pari passu with the liens and security interests in favor of the Pre-Petition Indebtedness. 3. PERMITTED USES OF CASH COLLATERAL. Unless Foothill shall agree otherwise in writing, the Debtor shall use the Cash Collateral solely to pay the amounts owing for payroll and payroll expense, to pay for inventories and services, and to pay other permitted purposes pursuant to the budget submitted to Foothill and attached hereto as Exhibit "A." 4. PAYMENT OF ADMINISTRATION EXPENSES. Foothill's Cash Collateral and the DIP Collateral shall not, directly or indirectly, be used to pay administration expenses of the Debtor (or any entity) except for those operating expenses (including professional fees) that are set forth in the Debtor's budget attached as Exhibit "A." 5. COLLATERAL OF PROCEEDS OR PAYMENTS. The Debtor is authorized and directed to immediately remit to Foothill, or its designee, as received, all payments or proceeds constituting proceeds of the Cash Collateral, the Pre-Petition Collateral or the DIP Collateral that may be advanced to the Debtor subject to the terms, provisions and conditions of this final order, and pursuant to paragraph 2 of this final order. Such payments and proceeds received shall be applied by Foothill first to the Pre-Petition Indebtedness, and second to the Cash Collateral Claim and the Interest Claim (and the Pre-Petition Indebtedness, the Cash Collateral Claim or the Interest Claim, as the case may be, shall be provisionally reduced by the amounts so applied); PROVIDED, HOWEVER, that these applications shall be for the purpose of applying various formulas in the Loan Agreement, shall not change the character or nature of the Pre-Petition Indebtedness for the purpose of treating that claim under a chapter 11 plan, and shall be subject to final allowance by the Court. For purposes of this final order, and subject to the same limitations set forth in the preceding sentence, payments or proceeds of Pre-Petition Collateral or DIP Collateral applied against Pre-Petition Indebtedness shall be applied, first to accrued but unpaid interest and other charges, including, without limitation, reasonable attorney's fees and expenses, and second to principal. Nothing contained in this final order to the contrary shall change the legal nature or character (or the right to accrue or receive interest on) the amount of the initial Pre-Petition Indebtedness, provided, however, that the foregoing shall not apply to (x) the Post-Petition Indebtedness and (y) the Cash Collateral Deficiency. Foothill is authorized to deduct the interest and its fees and expenses as set forth herein. In addition to the foregoing, if at any time the amount of the Cash Collateral Claim and Interest Claim owed to Foothill is greater than the dollar or percentage limitations set forth in decretal paragraph 1 above, the Debtor shall immediately pay to Foothill an amount sufficient to reduce the Cash Collateral Claim and Interest Claim to an amount no greater than any such dollar or percentage limitation. 6. COLLECTION OF PROCEEDS OR PAYMENTS OTHER THAN IN THE ORDINARY COURSE OF BUSINESS. Subject to the terms of the Fidelity Loan, as defined below, any and all payments or proceeds realized upon the sale, liquidation, collection or disposition of Pre-Petition Collateral or the DIP Collateral (other than the collections of the Debtor's pre-petition and post-petition accounts receivable arising out of Debtor's sale of goods or provision of services in the ordinary course of business), including, but not limited to, any income tax refund and/or the net proceeds from the sale of Datapoint, Inc. stock shall be remitted to Foothill free and clear of any claim, charge, assessment or other liability including, without limitation, any such claim or charge arising out of or based on, directly or indirectly, Section 506(c) or 552(b) of the Code, other than a lien specifically placed on those assets by court order pursuant to the terms of the Fidelity Loan. 7. MODIFICATION OF AUTOMATIC STAY. The automatic stay extant under Section 362(a) of the Code shall be, and it hereby is, modified to the extent necessary to permit Foothill or its designee to receive, collect and apply payments and proceeds in respect of the Pre-Petition Collateral and the DIP Collateral in accordance with the terms and provisions of this final order. 8. TERMINATION DATE. Notwithstanding anything herein, the Debtor shall no longer be authorized to use Cash Collateral or DIP Collateral pursuant to this final order upon the earliest to occur of any of the following events (the date of any such event shall be referred to as the "Termination Date"): (i) non-compliance by the Debtor with any of the terms and provisions of this final order unless Foothill elects to continue its consent to the use of Cash Collateral or DIP Collateral; (ii) entry of an order by the Bankruptcy Court converting or dismissing the Debtor's chapter 11 case; (iii) the reversal, vacatur, stay, amendment, supplementation or other modification of this final order in a manner which shall, in the sole opinion of Foothill, materially and adversely affect the rights of Foothill hereunder or shall materially and adversely affect the priority of any or all of Foothill's security interests, liens or claims; (iv) December 31, 1994, unless extended by mutual agreement of the Debtor and Foothill; or (v) entry of an order by the Bankruptcy Court confirming a plan of reorganization. Notwithstanding anything herein, all of the rights, remedies, benefits and protections provided to Foothill under this final order shall survive the Termination Date. 9. REMEDIES. If it shall be necessary for Foothill, at any time, to exercise its rights and remedies hereunder or under applicable law in order to effect repayment of the Cash Collateral Claim or the Interest Claim, or any other amounts due hereunder, Foothill shall have the right, upon application to and further order of this Court, to exercise such rights and remedies as to all or such part of the Pre-Petition Collateral and the DIP Collateral, as the case may be, as Foothill shall, in its sole discretion, elect. Foothill shall be entitled to apply the payments or proceeds of the Pre-Petition Collateral and the DIP Collateral in accordance with the provisions of this final order. 10. SUPERPRIORITY CLAIM. The Post-Petition Indebtedness shall have priority in accordance with the provisions of Section 364(c)(1) of the Code over all administrative expenses of the kind specified in Sections 503(b) or 507(b) of the Bankruptcy Code. The Cash Collateral Deficiency shall have priority in accordance with Section 507(b) over all administrative expenses of the kind specified in Sections 503(b) and 507(b) of the Bankruptcy Code. 11. PROHIBITION AGAINST ADDITIONAL SECURED DEBT. Except pursuant to the terms of the Fidelity Loan, the Debtor is enjoined and prohibited from, at any time during its chapter 11 case, seeking Court authorization to grant mortgages, security interests or liens senior or pari-passu to Foothill in the Pre-Petition Collateral, the DIP Collateral or any portion thereof to other parties pursuant to Section 364(c) or Section 364(d) of the Code unless (i) Post-Petition Indebtedness and (ii) the amount of any diminution in the collateral coverage are paid in full. Such diminution in collateral coverage being defined as the difference between the amount of the overadvance on August 4, 1994 and on the date the Court grants an order pursuant to Section 364(c) or Section 364(d) as described above. Foothill shall retain all its rights to object to such financing proposal. The Debtor is enjoined and prohibited from at any time from using the Cash Collateral or the DIP Collateral except as expressly provided by this final order or further order of the Court. 12. OTHER DOCUMENTS REQUIRED. The Debtor shall execute and deliver to Foothill all such loan agreements, financing statements, instruments, stock and other documents as Foothill may request to evidence, confirm, validate or perfect the security interests and liens granted pursuant hereto. 13. INSPECTION AND ACCESS. The Debtor shall permit representatives, agents and/or employees of Foothill to have reasonable access to such entity's premises and its records during normal business hours and shall cooperate, consult with, and provide to such persons all such information as they may reasonably request. 14. PAYMENT OF FEES AND REIMBURSEMENT OF COSTS. The Debtor shall promptly reimburse Foothill for all reasonable costs and expenses incurred by it in connection with (i) the negotiation and administration of the post- petition financing facility implemented by this final order, (ii) the preparation of this final order, the Interim Order entered on August 5, 1994, and any other related documentation, (iii) the preservation and protection of their rights under this final order and any other related documentation, and (iv) the collection of the Cash Collateral Claim and the Interest Claim, and all other amounts due hereunder, including, without limitation, all filing and recording fees and reasonable attorneys' fees incurred in connection with each of the foregoing. These amounts will be subject to final allowance by the Court. All security interests and liens granted or created herein to secure repayment of the Cash Collateral Claim and the Interest Claim pursuant to this final order shall be, and they hereby are, deemed perfected, and no further notice, filing or other act shall be required to effect such perfection; PROVIDED, HOWEVER, if Foothill shall, in its sole discretion, choose to file such financing statements, notices of liens and security interests and other similar documents, all such financing statements or similar instruments shall be deemed to have been filed or recorded at the time and on the date of entry of this final order. 15. SUCCESSORS AND ASSIGNS. The provisions of this final order shall be binding upon and inure to the benefit of Foothill and the Debtor and their respective successors and assigns (including any trustee hereinafter appointed for the estate of the Debtor). 16. NOTICE. The Debtor shall promptly mail copies of this final order to its 20 largest unsecured creditors and all of its secured creditors of record and, after appointment thereof (if any), to its creditors' committee. The Court acknowledges its findings set forth in paragraph F above and orders, in accordance with Section 364(e) of the Code, in the event that any or all of the provisions of this final order relating to the Post-Petition Indebtedness are hereafter modified, amended or vacated, by a subsequent order of this or any other Court, such modification, amendment or vacation shall not affect the validity and enforceability of any security interest or lien or the perfection or priority authorized or created hereby in connection with the Post-Petition Indebtedness. 17. NO WAIVER. Notwithstanding anything herein, the entry of this final order is without prejudice to, and does not constitute a waiver of, expressly or impliedly, or otherwise impair, (x) any of the rights of Foothill under the Code or under non-bankruptcy law, including, without limitation, the right of Foothill to (i) request additional adequate protection of its interests in the Pre-Petition Collateral or the DIP Collateral or relief from or modification of the automatic stay extant under Section 362 of the Code, (ii) request conversion of the Debtor's chapter 11 case to chapter 7, and (iii) propose a chapter 11 plan or plans or (y) otherwise affect any of the rights, claims or privileges (whether legal, equitable or otherwise) of Foothill. 18. FIDELITY LOAN. The Fidelity Loan shall be defined as the loan of up to $1.3 million to be extended by Fidelity Income and Capital Funds ("Fidelity") to the Debtor, pursuant to an order of this Court (the "Fidelity Order") to be secured by a first lien on the Debtor's stock in Datapoint Corporation, the Debtor's stock in Canal Street Corporation, the Debtor's IRS tax refund, and the Debtor's inventory, and a junior loan on all of the Debtor's other assets, all as more fully set forth in the Fidelity Order. Done in San Antonio, Texas on _______ day of ____________, 1994. United States Bankruptcy Judge AGREED: INTELOGIC TRACE, INC., DEBTOR AND DEBTOR-IN-POSSESSION, by Its Attorney ______________________________ FOOTHILL CAPITAL CORPORATION, by Its Attorney FIDELITY INCOME AND CAPITAL FUND, by Its Attorney EX-10 6 FINAL ORDER RE SECURED INDEBTEDNESS EXHIBIT 10.31 THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION IN RE: BANKRUPTCY CASE INTELOGIC TRACE INC., NO. 94-52172-C-11 DEBTOR. (CHAPTER 11) FINAL ORDER (1) AUTHORIZING THE DEBTOR TO INCUR SECURED PRIORITY ADMINISTRATIVE INDEBTEDNESS PURSUANT TO SECTION 364(C) OF THE BANKRUPTCY CODE, (2) GRANTING SECURITY INTERESTS, (3) APPROVING AGREEMENT RELATED TO THE FOREGOING AND (4) GRANTING OTHER RELIEF On September 16, 1994, this Court considered the Motion Regarding Incurrence of Secured Priority Administrative Indebtedness Pursuant to Section 364(c) of the Bankruptcy Code, Granting Security Interests, Approving Agreement Related to the Foregoing, and Other Relief (the "Financing Motion") filed by Intelogic Trace, Inc. (the "Debtor"). After reviewing the Financing Motion and having heard the testimony presented and the arguments of counsel to the Debtor, Fidelity Capital & Income Fund ("Fidelity"), and such other parties in interest as reflected in the record of the interim hearing on the Financing Motion on September 16, 1994, this Court entered the Interim Order (1) Authorizing the Debtor to Incur Secured Priority Administrative Indebtedness Pursuant to Section 364(c) of the Bankruptcy Code, (2) Granting Security Interests, (3) Approving Agreement Related to the Foregoing and (4) Granting Other Relief, dated September 16, 1994 (the "Interim Order"). Pursuant -1- to the Interim Order, this Court set a final hearing on the Financing Motion for October 4, 1994. After further reviewing the Financing Motion, the Interim Order, the testimony presented, and the arguments of counsel to the Debtor, Fidelity Capital & Income Fund ("Fidelity"), and such other parties in interest as reflected in the record of the final hearing on the Financing Motion on October 4, 1994, this Court makes the following FINDINGS OF FACT: 1. On August 5, 1994 (the "Petition Date"), the Debtor filed a voluntary petition for relief under chapter 11, title 11, United States Code (the "Bankruptcy Code"). Pursuant to sections 1107 and 1108 of the Bankruptcy Code, the Debtor has retained possession of its assets and is authorized to continue the operation and management of their business. 2. No Unsecured Creditors' Committee has been formed by the United States Trustee. 3. The Debtor has provided actual notice of the terms of the Financing Motion, to the United States Trustee, the Internal Revenue Service, the largest unsecured creditors of the Debtor as listed pursuant to Rule 1007(d), and all counsel of record. Such notice is appropriate and adequate under the circumstances set forth herein and presented to this Court; consequently, adequate notice and opportunity for a hearing has been given in accordance with the provisions of sections 102, 105, 361, 362, 363, and 364 of the Bankruptcy Code and Rules 2002 and 4001 of the Bankruptcy Rules. -2- 4. The Debtor is one of North America's largest independent support organizations for end users, manufacturers, and resellers of computer and telecommunications equipment. The Debtor provides technical support and on- site services and specializes in support for local area networks, WANG computing systems, microcomputers and peripherals. 5. A need exists for the Debtor to obtain funds in order to continue operation of its business. Without such funds, the Debtor will not have sufficient funds to meet its operating expenses in the ordinary course of business. Failure to provide such financing could lead to disruption to a major portion of the Debtor's business and a loss of the going concern value. The relief sought in the Financing Motion is necessary to the Debtor, its creditors, and other parties in interest. 6. In order to continue the operation of the Debtor's business and to preserve the value of its assets, the Debtor requires the post-petition credit to be extended by Fidelity to the Debtor, in the form of a credit facility in the amount of $1.3 million, bearing interest at the annual rate of 15% (payable monthly), the proceeds of which will provide working capital needs. This loan facility is hereafter referred to as the "Post- Petition Credit." As provided in the DIP Financing Documents (as defined herein), the Debtor will execute documents, including security agreements and other collateral documents to secure the Debtor's obligations, deemed necessary by Fidelity. Without all of the credit described above, there is a substantial risk that the value of the Debtor's assets will immediately and substantially diminish, and that the Debtor will have no reasonable prospect of continuing to operate as a -3- going concern, preserving the value of its assets, or effecting a reorganization in these cases, and that the Debtor would suffer immediate and irreparable injury. All amounts lent or credit to be extended by Fidelity pursuant to this Order are sometimes referred to as the "Fidelity Post-Petition Indebtedness." The Fidelity Post-Petition Indebtedness is to be governed by the terms of this Order and the DIP Financing Documents (as defined herein). 7. The Debtor has been unable, pursuant to 11 U.S.C. 364(a), (b) or (c), despite substantial effort, to obtain unsecured credit or to obtain secured debtor-in-possession financing on terms equal to or more beneficial than those provided herein and as provided in the DIP Financing Documents. Representatives of the Debtor have sought to obtain credit from other sources. Neither Foothill Capital Corporation ("Foothill"), nor any other lender, is willing to extend new credit on the basis of administrative expense priority, on the basis of priority over any or all administrative expenses of the kind specified in sections 503(b) and 507(b) of the Bankruptcy Code, or on the basis of a lien on unencumbered property, or a lien junior to existing liens, or a lien equal to existing liens, on terms as favorable to the Debtor as those extended by Fidelity. 8. Due to the nature of the Debtor's business, without the Fidelity Post-Petition Indebtedness, trade credit is restricted due to the filing of the chapter 11 cases. -4- 9. Fidelity has indicated a willingness to extend credit and other financial accommodations to the Debtor only upon the terms and conditions set forth in this Order. 10. The terms of the Post-Petition Indebtedness sought by the Debtor are for reasonably equivalent value and fair consideration. The agreements and arrangements sought to be entered into have been negotiated at arm's length, are fair and reasonable under the circumstances, and have been entered into in good faith. 11. To secure repayment of the Post-Petition Indebtedness, the Debtor has agreed to grant to Fidelity (a) a junior lien on all of the Debtor's assets, subject to the existing lien of Foothill and (with respect to accounts receivable) Fidelity has agreed to a standstill until Foothill is paid in full, and (b) a senior lien on and security interest in inventory, the Debtor's IRS tax refund, and all stock owned by the Debtor in Datapoint Corporation and Canal Capital Corporation, with priority over the existing lien of Foothill (together, the "DIP Collateral"). 12. Except for such valid, perfected, enforceable and non-avoidable liens and security interests of Foothill as may have existed as of the Petition Date, or pursuant to specific order of this Court in, to, or against the Debtor's property or as provided by Court order ("Existing Liens"), there is no party with a security interest or lien in the property of the Debtor's estate, including the DIP Collateral. 13. All conclusions of law which are, or which could be deemed to be, findings of fact are hereby incorporated as findings of fact. -5- 14. The Court, having reviewed the Financing Motion and the evidence presented at the preliminary and final hearings, having heard the statements of counsel, and being otherwise fully advised of the premises, makes the following CONCLUSIONS OF LAW: 15. Consideration of the Financing Motion constitutes a core proceeding as defined in 28 U.S.C. S 157(b)(2)(A), (D), (G), (K), (M) and (0). Fidelity is entitled to the benefits of the provisions of section 364(e) of the Bankruptcy Code. 16. Good cause has been shown for the entry of this Order. Among other things, entry of this Order will minimize disruption of the Debtor's existing business, will increase the possibility for successful reorganization of the Debtor, and is in the best interests of the Debtor, its creditors, and other parties in interest. 17. The Post-Petition indebtedness is being extended by the Lender in good faith, as contemplated by section 364(e) of the Bankruptcy Code. 18. The Debtor has provided adequate notice under the circumstances pursuant to Bankruptcy Rule 4001 of the hearing to consider entry of this Order to all persons who are entitled to receive such notice. 19. Good cause has been shown for the entry of this Order. The entry of this Order is in the best interests of the Debtor, its creditors, and its estates. The terms of this Order, including the terms of the Post- Petition Credit, the DIP Financing Documents, and the security interests, liens, rights, and priorities granted hereunder, are fair under the circumstances. 20. This Order is immediately valid and fully effective upon its entry. -6- 21. Based upon the foregoing Findings of Fact and Conclusions of Law, which are fully incorporated by reference into this Order as set forth below, IT IS ORDERED THAT: 1. The paragraphs contained in the preamble to this Order are incorporated herein by this reference and the Debtor, Foothill and Fidelity consent to the entry of this Order. 2. The Debtor is hereby authorized to incur the Post-Petition Indebtedness and seek other financial accommodations from Fidelity in accordance with the provisions of this Order and the DIP Financing Documents (as defined herein). 3. Immediately upon the issuance of this Order, the Debtor is authorized to borrow up to $1.3 million under the terms of the DIP Financing Documents (as defined herein) to be executed and delivered by the Debtor to Fidelity. The Debtor is further authorized, empowered, and directed to execute and deliver any and all necessary documents or amendments to documents to ratify the DIP Financing Documents (as defined herein) or, where necessary, to modify, clarify or amend the DIP Financing Documents to conform to this Order or otherwise make nonmaterial changes to the DIP Financing Documents. The Promissory Note and the Pledge and Security Agreement attached hereto as Exhibits A and B respectively, and incorporated by reference herein, together with the other instruments and documents executed in connection therewith, are hereinafter referred to as the "DIP Financing Documents." The specific language contained in Exhibits A and B hereto, particularly regarding the description of the assets subject to Fidelity's security -7- interest, controls over the more general language contained in this Order. The Debtor is authorized, empowered, and directed to execute such other documents and agreements and to take all necessary actions to complete and effectuate the financing directed by this Order. 4. The Debtor shall make debt payments on the outstanding amount of the Post-Petition Indebtedness as set forth in the DIP Financing Documents. 5. Fidelity shall make the Post-Petition Credit available if, and only if, the Debtor (i) has complied with the terms of this Order; and (ii) has complied with the terms of the DIP Financing Documents. 6. Any diminution in value of the DIP Collateral that causes all or any part of the Post-Petition Indebtedness to become unsecured (the "Collateral Diminution") shall be and hereby is (a) deemed a claim entitled to the priority granted pursuant to section 507(b) of the Bankruptcy Code, and (b) deemed part of the amount which must be paid to Fidelity in order to adequately protect its interest in the DIP Collateral (the "Adequate Protection Amount"). 7. Fidelity's security interests in the DIP Collateral shall be (a) junior to the Existing Liens of Foothill on the DIP Collateral, (b) except that they will be senior to all Existing Liens on the inventory, tax refund, Datapoint stock, and the Canal Capital stock, including the Existing Liens (if any) of Foothill. Fidelity's security interests in the DIP Collateral shall at all times be senior to the rights of Debtor or its successors-in-interest, including, without limitation, any chapter 11 trustee appointed in any of this chapter 11 case or any trustee in a case under -8- chapter 7 of the Bankruptcy Code into which this chapter 11 case may be converted. Fidelity shall not be obligated to accept title to any portion of its DIP Collateral in payment of the Post-Petition Indebtedness or the Adequate Protection Amount in lieu of payment in cash or cash equivalents, nor shall Fidelity be obligated to accept payment in cash or cash equivalents that is encumbered by the interest of any party other than Fidelity. Foothill and Fidelity shall assert no right of marshalling to compel each other to proceed first against any assets as to which either believes the other has greater potential equity. 8. In addition to the liens and security interests granted pursuant to section 364(c), all Post-Petition Indebtedness and the Adequate Protection Amount shall have priority pursuant to the provisions of section 364(c)(1) of the Bankruptcy Code to the extent permitted by law over all administrative and priority expenses incurred in this chapter 11 or any subsequent chapter 7 case, including, without limitation, expenses of the kind specified in sections 503(b), 507(a), and 507(b) of the Bankruptcy Code, subject to the payment of professional fees and expenses and the statutory fees of the United States Trustee and shall at all times be senior to the rights of the Debtor, its creditors, or the successors-in- interest of the Debtor or its creditors, including, without limitation, any superseding trustee in this chapter 11 case or any trustee in a case under chapter 7 of the Bankruptcy Code into which this case may be converted. 9. The Debtor shall incur no post-petition obligations for borrowed money pursuant to section 364(c) and (d) of the Bankruptcy Code and shall grant no post-petition liens or superpriority claims, other than to Fidelity, unless provided for -9- under the DIP Financing Documents, or under the Final Cash Collateral Order entered by this Court with respect to Foothill or unless mutually agreed by Fidelity and the Debtor. 10. No costs or expenses of administration or other obligations which have been or may be incurred in these proceedings, any conversion of this case pursuant to section 1112 of the Bankruptcy Code, or in any other case or proceeding related hereto, and no priority claims, other than the Existing Liens of Foothill Capital Corporation, are or shall be prior to or on a parity with the claims of Fidelity against the Debtor arising out of the Post-Petition Indebtedness and the Adequate Protection Amount, or with the security interests and liens of Fidelity upon the DIP Collateral, and no such costs, expenses of administration, or other obligations shall be imposed or assessed against Fidelity, its claims, or its DIP Collateral. No costs shall be assessed or attributed to Fidelity or its DIP Collateral pursuant to the provisions of section 506(c) of the Bankruptcy Code, or otherwise. 11. All agreements, security interests, mortgages, deeds of trust, and liens contemplated or granted by this Order are effective, perfected, and enforceable as of the commencement of this chapter 11 case without further filing or recording by Fidelity in compliance with any state or federal law. Fidelity shall not be required to file financing statements or other documents in any jurisdiction or take any other actions in order to perfect its security interests and liens granted under or pursuant to this order. If Fidelity, in its sole discretion, chooses to file any financing statements, deeds of trust, mortgages, or other documents to otherwise confirm perfection of such -10- security interests and liens, all such documents shall be deemed to have been filed or recorded at the time and on the Petition Date. However, the failure of the Debtor to execute any such documentation, or the failure of Fidelity otherwise to attach or perfect its security interest in the DIP Collateral under state or federal law, shall in no way affect the validity, perfection, or priority of the security interests, mortgages, and liens granted to Fidelity by this Order or otherwise. Fidelity is authorized to file this Order in lieu of any financing statement or other document which may otherwise be specified by applicable law, to reflect the above security interests and liens, and all recording officers are directed to accept this Order for filing. 12. The terms and conditions of this Order relating to liens and priorities shall be binding upon the Debtor, its creditors, and all other parties in interest, and all successors in interest thereof, including, without limitation, any chapter 11 trustee that may be appointed in this chapter 11 case or any trustee in a case under chapter 7 of the Bankruptcy Code into which this chapter 11 case may be converted. This binding effect is an integral part of this financing transaction. 13. In addition to any notice required under applicable law, the Debtor shall transmit to Fidelity by telecopy or overnight mail a copy of any pleading, notice, or other document filed by the Debtor in this chapter 11 case, not later than the next business day following the filing of such pleading, notice, or other document. 14. The terms and conditions of this Order relating to liens and priorities cannot be materially modified or changed by any plan or plans of reorganization -11- relating to the Debtor, whether or not proposed by the Debtor, without the consent of Fidelity. 15. The automatic stay presently in effect in this case pursuant to section 362 of the Bankruptcy Code is modified with respect to Fidelity, (a) to the extent necessary to execute and render effective the DIP Financing Documents to be executed in connection with the transactions approved by this Order, and (b) to permit Fidelity to enforce against the Debtor such provisions of the DIP Financing Documents as are necessary to carry out the provisions of this Order SAVE and EXCEPT that Fidelity may not exercise any rights arising out of a default, except upon further application to and order by this Court. The Debtor is authorized and directed to do and perform all acts, to make, execute and deliver all instruments and documents (including, without limitation, the execution of additional security agreements, mortgages and financial statements), to pay fees which may be required pursuant to the terms of this Order, including, without limitation, (x) the execution and performance of the DIP Financing Documents and (y) the payments to Fidelity of the fees and amounts provided for in this Order and the and the DIP Financing Documents including, without limitation, reasonable attorneys' fees and disbursements incurred in transactions giving rise to the Post-Petition Credit and the preparation of the DIP Financing Documents. 16. Philip D. Freeman is hereby designated by this Court as authorized signatory for the Debtor for purposes of handling and disbursing all funds and -12- executing all documents in connection with the financing arrangements described herein. 17. Fidelity may petition this Court for such additional protection as it may reasonably require with respect to continued financing of the Debtor or otherwise. Except as otherwise specifically provided herein, Fidelity shall retain all rights available pursuant to the Bankruptcy Code or any other applicable law including, without limitation, Fidelity's right for the purpose of protecting its rights in the DIP Collateral and its rights under the DIP Financing Documents, to seek additional restrictions upon the Debtor's activities or use of proceeds of the Post-Petition Credit, to seek termination or modification of this Order, or to seek termination or modification of the automatic stay pursuant to section 362 of the Bankruptcy Code. 18. Any subsequent stay, modification, or vacation of this Order shall not affect the validity of any debt owed by the Debtor to Fidelity incurred pursuant to this Order or otherwise, nor shall any such stay, modification, or vacation affect the validity, enforceability, or perfection of any security interest, mortgage, lien, or priority in connection therewith. Notwithstanding any such stay, modification, or vacation of this Order, all rights of the Debtor and Fidelity up to and including the date of such stay, modification, or vacation of this Order shall be governed in all respects by the original provisions of this Order and the security agreements, deeds of trust, mortgages, and collateral mortgages between Debtor and Fidelity, and Fidelity shall be entitled to all the rights, privileges, and benefits, including the security interests, mortgages, liens, and priorities granted herein. -13- 19. In making decisions to advance monies or extend financial accommodations of any nature under this Order or the DIP Financing Documents, in administering the Debtor's use of any advances, loans, issuance of letters of credit, or financial accommodations of any sort under this Order or the DIP Financing Documents, or in taking any other action related to or in connection with any of the forgoing, Fidelity shall have no liability to any third party, and shall not be deemed to be in control of the operations of the Debtor, or to be acting as a "responsible person" or "owner or operator" with respect to the operation or management of the Debtor (as such terms or any similar terms, are used in the United States Comprehensive Environmental Response, Compensation and Liability Act, as amended or any similar federal or state statute). 20. The Post-Petition Credit will immediately cease and terminate without further notice, and the Post-Petition Indebtedness, together with any then outstanding interest, fees, costs, expenses, or other amounts payable in connection therewith shall be immediately due and payable without further notice, upon the earliest to a. December 31, 1994; b. The occurrence of a violation of the terms of this Order or the occurrence and continuation of an Event of Default under the Promissory Note attached hereto as Exhibit A, under the Pledge and Security Agreement attached hereto as Exhibit B, under the DIP Financing Documents, or under the Final Cash Collateral entered by this Court with respect to Foothill; or -14- c. The Effective Date of any plan of reorganization in this Chapter 11 case. 21. The Post-Petition Indebtedness, and any advances, borrowings or extension of credit thereunder by Fidelity to the Debtor shall be conditioned upon the observance and performance by the Debtor of the terms, conditions, covenants, and agreements specified in the DIP Financing Documents and this Order. Agreements by Fidelity to lend money or extend credit or other financial accommodations to the Debtor, to forebear from exercising remedies contained herein or the DIP Financing Documents, may be terminated by Fidelity according to the terms of this Order or the DIP Financing Documents; PROVIDED, HOWEVER, that the obligations and rights of Fidelity and the Debtor with respect to all transactions which have occurred prior to such termination by Fidelity shall remain unimpaired and unaffected by any such termination and shall survive any such termination. 22. If, for any reason, any or all of the provisions of this Order are hereafter modified, vacated or stayed, including by subsequent order of this or any other Court, then in such event: (a) Fidelity shall be under no obligation to provide loans, extension of credit, or financial accommodations hereunder or under the DIP Financing Documents; and (b) the then outstanding Post-Petition Indebtedness, together with all interest, fees, costs, expenses, and charges of any nature which may have accrued in connection therewith, shall be due and payable at the office of Fidelity in Boston Massachusetts, on the tenth (10th) day thereafter; all without notice, demand, motion, or any other action by Fidelity. -15- 23. If this chapter 11 case is dismissed, superseded, or consolidated, neither the entry of this Order nor the dismissal of the case shall affect Fidelity's rights under the DIP Financing Documents, and all of Fidelity's rights and remedies thereunder shall be and remain in full force and effect. Furthermore, notwithstanding any such dismissal, suppression, or consolidation, all of the terms and conditions of this Order including the security interests and liens granted hereunder shall remain in full force and effect. 24. This Order shall not operate to modify, alter, impair, affect, abrogate, amend, restrict, or nullify any rights of Fidelity with respect to any entity other than the Debtor, nor to release, alter, impair, affect, or abrogate any debts, claims, demands, actions, and causes of action in law and equity, whether known or unknown, which Fidelity may have as to any entity other than the Debtor. 25. The Debtor has determined, in the exercise of its independent business judgment, to enter into and comply with the terms of this Order and the DIP Financing Documents. The Debtor has covenanted that, to the extent required or reasonably requested by Fidelity, it will obtain all necessary approvals to enter into the DIP Financing Documents including, without limitation, approvals from its board of directors. 26. The Debtor has waived any right it may have to seek ex parte relief from this Court with respect to Fidelity. 27. In consideration of the loans and other financial accommodations made by Fidelity pursuant to this Order, the Debtor is hereby authorized without further -16- order of this Court to reimburse Fidelity for all filing and recording fees and the reasonable attorneys' fees incurred by Fidelity in connection with the Post-Petition Indebtedness and all matters related thereto. DATED: San Antonio, Texas October __, 1994 UNITED STATES BANKRUPTCY JUDGE -17- APPROVED AS TO FORM AND SUBSTANCE: WEIL, GOTSHAL & MANGES 700 Louisiana, Suite 1600 Houston, Texas 77002 (713) 546-5000 (713) 224-9511 (FAX) By: _________________________ Wendy K. Laubach Texas State Bar No. 119878000 ATTORNEYS FOR FIDELITY CAPITAL & INCOME FUND COX & SMITH INCORPORATED 112 East Pecan, Suite 1800 San Antonio, Texas 78205 (210) 554-5500 (210) 226-8395 (FAX) By: _________________________ Deborah D. Williamson Texas State Bar No. 21617500 Patrick L. Huffstickler Texas State Bar No. 10199250 ATTORNEYS FOR INTELOGlC TRACE, INC. BRACEWELL & PATTERSON, L.L.P. 2900 South Tower, Pennzoil Place Houston, Texas 77002 By: _________________________ ATTORNEYS FOR FOOTHILL CAPITAL CORPORATION -18- EX-11 7 COMPUTATION OF RATIOS EXHIBIT 11 INTELOGIC TRACE, INC. AND SUBSIDIARY COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED JULY 31, 1994 JULY 31, 1993 JULY 27, 1992 Common and common equivalent share: Weighted average shares outstanding .................. 12,342,776 11,994,248 11,938,787 Net effect of dilutive stock options Based on treasury stock method using average market price* ........................ -- -- -- ---------- ---------- ---------- Total shares .................................... 12,342,776 11,994,248 11,938,787 ========== ========== ========== Net loss, less preferred stock dividends ............ $(34,671) $(1,528) $(17,409) ========== ========== ========== Per share amount ..................................... $(2.81) $(.13) $(1.46) ========== ========== ==========
* The net dilutive effect of stock options is not considered because the effect would be to increase shares outstanding, which, in loss years, reduces the loss per share and is therefore antidilutive. 74 EX-21 8 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 INTELOGIC TRACE INC. AND SUBSIDIARIES INTELOGIC TRACE,INC. (NY) INTELOGIC TRACE CANADA INC. (CN) INTELOGIC TRACE SYSTEMS GROUP INC. (DE) TLA, INC. (TX) ITTG, INC. (TX) INTELOGIC TRACE MARION GROUP OF PUERTO RICO, INC. (NJ) EX-23 9 CONSENT ERNST & YOUNG EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-1808 and No. 33-1806) pertaining to the 1985 Employee Stock Option Plan and the 1985 Directors Stock Option Plan of Intelogic Trace, Inc. of our report dated October 14, 1994, except for Note 2 Paragraph 8 as to which the date is November 9, 1994, with respect to the consolidated financial statements and schedules of Intelogic Trace, Inc. included in this Annual Report (Form 10-K) for the year ended July 31, 1994. ERNST & YOUNG LLP San Antonio, Texas November 10, 1994 EX-25 10 POWER OF ATTORNEY EXHIBIT 25 POWER OF ATTORNEY We, the undersigned officers and/or directors of Intelogic Trace, Inc., hereby severally constitute and appoint Asher B. Edelman, Mark S. Helwege and Mike R. Ellis and each of them, our true and lawful attorneys with full power to each of them to sign for us and in our names in the capacities indicated below, the Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K filed herewith and any and all amendments to said Annual Report, and generally to do all such things in our names and on our behalf in our capacities as officers and/or directors to enable Intelogic Trace, Inc. to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney(s) to said Annual Report and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- ASHER B. EDELMAN Director, Chairman of November 10, 1994 (Asher B. Edelman) the Board of Directors, Office of the President ____________________ Director, Office of November __, 1994 (Mark S. Helwege) the President, Chief Executive Officer ____________________ Vice President and November __, 1994 (Mike R. Ellis) Chief Financial Officer (Principal Financial and Accounting Officer) ____________________ Director November __, 1994 (Gerald N. Agranoff) ____________________ Director November __, 1994 (Leon Botstein) ____________________ Director November __, 1994 (Daniel R. Kail) ____________________ Director November __, 1994 (Michael E. Schultz) EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF JULY 31, 1994 AND THE INCOME STATEMENT FOR THE YEAR ENDED JULY 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-31-1994 JUL-31-1994 605 0 10,072 2,880 0 9,621 66,662 62,824 15,569 21,714 0 199 4,691 0 (73,728) 15,569 1,167 72,555 2,329 99,833 1,205 0 7,096 (35,579) 1,191 (34,388) 505 0 0 (33,883) (2.81) (2.81)
EX-99 12 MODIFIED, AMENDED PLAN OF REORGANIZATION EXHIBIT 99 CHAPTER 11 PLAN OF INTELOGIC TRACE, INC. UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION IN RE: CHAPTER 11 CASE NO. 94-52172C INTELOGIC TRACE, INC., DEBTOR. MODIFIED FIRST AMENDED CHAPTER 11 PLAN OF INTELOGIC TRACE, INC. October 12, 1994 San Antonio, Texas COX & SMITH INCORPORATED Deborah D. Williamson 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205 (210) 554-5500 ATTORNEYS FOR DEBTOR 1 TABLE OF CONTENTS ARTICLE I Definitions and Interpretation........................... 2 ARTICLE II Provisions For Payment of Administrative and Priority Tax Claims.................................. 10 2.1 Administrative Claims.................................... 10 2.2 Priority Tax Claims...................................... 11 ARTICLE III Classifications of Claims................................ 12 3.1 Class 1.................................................. 12 3.2 Class 2.................................................. 12 3.3 Class 3.................................................. 12 3.4 Class 4.................................................. 12 3.5 Class 5.................................................. 12 3.6 Class 6.................................................. 12 3.7 Class 7.................................................. 12 3.8 Class 8.................................................. 12 ARTICLE IV Identification of Impaired Classes of Claims and Equity Interests................................................ 12 4.1 Unimpaired Classes of Claims............................. 12 4.2 Impaired Classes of Claims and Equity Interests.......... 12 4.3 Impairment Controversies................................. 12 ARTICLE V Provisions for Treatment of Classified Claims and Interests .............................................. 13 5.1 Class 1 - Priority Non-Tax Claims........................ 13 5.2 Class 2 - Working Capital Facility....................... 13 5.3 Class 3- Completion Bond Claims.......................... 13 5.4 Class 4 - Convenience Claims............................. 13 5.5 Class 5 - PBGC Claim..................................... 14 5.6 Class 6 - Other Unsecured Claims......................... 14 5.7 Class 7 - Old Preferred Stock............................ 14 5.8 Class 8 - Old Common Stock............................... 14 ARTICLE VI Acceptance or Rejection of Plan and Elections on Ballots. 14 6.1 Classes Entitled to Vote................................. 14 6.2 Class Acceptance Requirement............................. 15 6.3 Unsecured Claim Reduction Election....................... 15 ARTICLE VII Means for Implementation of Plan of Reorganization....... 15 7.1 Cash Payments on the Effective Date...................... 15 7.2 Contested Claim Reserve.................................. 15 7.3 New Preferred Stock...................................... 15 7.4 New Common Stock......................................... 16 7.5 Restated Charter......................................... 16 7.6 Board of Directors....................................... 17 7.7 Record Date for Holders of Note Claims................... 17 7.8 Cancellation of Note Claims.............................. 17 7.9 Surrender of Instruments Representing Note Claims........ 17 7.10 Distribution of New Preferred Stock and New Common Stock. 18 7.11 Means of Cash Payment.................................... 18 7.12 Delivery of Distributions................................ 18 7.13 Distributions from Contested Claim Reserve............... 19 7.14 Allocation of Distributions.............................. 19 7.15 Time Bar to Cash Payments................................ 19 7.16 Vesting of Assets........................................ 20 7.17 Effectuating Documents................................... 20 7.18 Avoidance Actions........................................ 20 7.19 Allowance of Note Claims................................. 20 7.20 Indemnity Insurance...................................... 20 ARTICLE VIII Conditions to Consummation of Plan ..................... 21 8.1 Release of Datapoint Option.............................. 21 8.2 Exit Financing........................................... 21 8.3 Resales of New Preferred Stock and New Common Stock...... 22 ARTICLE IX Treatment of Executory Contracts and Unexpired Leases.... 22 9.1 Rejected if not Assumed.................................. 22 9.2 Bar to Rejection Damages................................. 22 9.3 Employee Agreements...................................... 22 9.4 Assumption of Specified Contracts........................ 23 9.5 Claims Relating to Directors............................. 23 ARTICLE X Procedures for Resolving and Treating Contested Claims... 24 10.1 Objection Deadline....................................... 24 10.2 Prosecution of Objections................................ 24 10.3 No Distributions Pending Allowance....................... 24 10.4 Time for Filing Administrative Claims.................... 24 10.5 Time for Filing Reimbursement Claims..................... 24 ARTICLE XI Creditor's Committee and Counsel......................... 24 11.1 Dissolution of the Creditors' Committee.................. 24 ARTICLE XII Miscellaneous Provisions................................. 25 12.1 Compliance with Tax Requirements......................... 25 12.2 Compliance with All Applicable Laws...................... 25 12.3 Setoffs.................................................. 25 12.4 Maintenance of Causes of Action.......................... 25 12.5 Request for Cramdown under Section 1129(b) of the Bankruptcy Code...................................................... 25 ARTICLE XIII Consummation of Plan ................................... 26 13.1 Retention of Jurisdiction................................ 26 13.2 Modification of Plan..................................... 27 EXHIBITS Exhibit A List of Completion Bond Claims Exhibit B Option Release Agreement Exhibit C Registration Rights Agreement Exhibit D Restated Charter Exhibit E Modified Employee Agreement with Mark S. Helwege Exhibit F Modified Employee Agreement with Philip D. Freeman MODIFIED FIRST AMENDED CHAPTER 11 PLAN OF INTELOGIC TRACE, INC. Intelogic Trace, Inc. (the "Debtor"), proposes the following plan of reorganization. ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 "ADMINISTRATIVE CLAIM" shall mean a Claim or portion of a Claim that is a cost or expense of administration of the Chapter 11 Case allowed under section 503(b) or 507(b) of the Bankruptcy Code that is entitled to priority under section 507(a)(1) of the Bankruptcy Code, including, without limitation, (a) any actual and necessary costs and expenses of preserving the estate of the Debtor, (b) any actual and necessary costs and expenses of operating the business of the Debtor, (c) any indebtedness or obligations incurred or assumed by the Debtor in connection with the conduct of its business or for the acquisition or lease of property or the rendition of services, (d) any allowances of compensation and reimbursement of expenses to the extent allowed by Final Order under section 330 of the Bankruptcy Code, whether arising before or after the Effective Date, (e) any fees or charges assessed against the estate of the Debtor under section 1930, chapter 123, title 28, United States Code, and (f) the Fidelity and First Boston Expenses. 1.2 "ALLOWED," when used with respect to a Claim, shall mean (a) a claim against the Debtor, proof of which was filed on or before the date designated by the Bankruptcy Court as the last date for filing that category of proof of Claim, as to which no Objection has been interposed; or (b) if no proof of Claim was filed, a Claim that has been or hereafter is listed by the Debtor as liquidated in amount and not disputed or contingent, as to which no Objection has been interposed; or (c) a Claim as to which any Objection has been interposed, to the extent the Objection has been upheld by Final Order of the Bankruptcy Court. 1.3 "ASSUMED CONTRACTS" shall mean all contacts of the Debtor in the following categories: (i) Service Agreements with end users, major equipment manufacturers, and value added resellers; 2 (ii) Authorized Service Provider Agreements with manufacturers; (iii) Maintenance Spare Parts Agreements; (iv) Subcontracting Arrangements with manufacturers; (v) Solicitation and Commission Agreements with independent sales organizations, dealers, and distributors; and (vi) "Service Orders", which includes master maintenance agreements and maintenance reseller agreements, but only for the labor portion of such arrangements. 1.4 "AVOIDANCE ACTION" shall mean a cause of action assertable by the Debtor or its successors pursuant to sections 542, 543, 544, 545, 547, 548, 549, 550, or 553 of the Bankruptcy Code. 1.5 "BANKRUPTCY CODE" shall mean title I of the Bankruptcy Reform Act of 1978, as amended, and codified at title 11 of the United States Code, as applicable to the Chapter 11 Case and as in effect as of the date hereof or as hereafter amended. 1.6 "BANKRUPTCY COURT" shall mean the Bankruptcy Court unit of the United States District Court for the Western District of Texas, San Antonio Division, or such other court having jurisdiction over all or any part of the Chapter 11 Case. 1.7 "BANKRUPTCY RULES" shall mean the Federal Rules of Bankruptcy Procedure, as promulgated by the United States Supreme Court pursuant to 28 U.S.C. Section 2075 and, to the extent not inconsistent therewith, the local rules of the Bankruptcy Court, as amended from time to time. 1.8 "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday, or a day on which commercial banks in the City of New York, State of New York, are required or authorized to close. 1.9 "CASH" shall mean and include U.S. currency on hand, U.S. currency on deposit in any bank account, and cash equivalents including, but not limited, to any check or other similar negotiable instrument denominated in U.S. currency, shares in any money market or similar fund that are actively traded on any established securities market located within the United States, commercial paper having a maturity of 90 days or less and denominated in U.S. 3 currency, and any obligation of the United States of America (or any agency or instrumentality thereof) denominated in U.S. currency. 1.10 "CHAPTER 11 CASE" shall mean the case commenced by the Debtor under the Bankruptcy Code by a voluntary chapter 11 petition filed on the Petition Date. 1.11 "CLAIM" shall mean any right to payment from the Debtor, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, contested, uncontested, legal, equitable, secured, or unsecured; or any right to an equitable remedy for breach of performance if the breach gives rise to a right of payment from the Debtor, whether or not the right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, contested, uncontested, secured, or unsecured. 1.12 "CLASS" shall mean a category or group of holders of Claims or Equity Interests as designated pursuant to Article III of this Plan. 1.13 "COMPLETION BOND CLAIMS" shall mean the Claims of vendors or other parties to contracts with the Debtor under which the Debtor has posted a bond securing the completion of its obligations, as set forth on Exhibit "A" to this Plan. 1.14 "CONFIRMATION DATE" shall mean the date of entry of the Confirmation Order. 1.15 "CONFIRMATION ORDER" shall mean the order of the Bankruptcy Court confirming this Plan. 1.16 "CONTESTED CLAIM" shall mean a Claim against the Debtor, as to which an Objection to all or any part of the Claim has been interposed. 1.17 "CONTESTED CLAIM AMOUNT," with respect to any Contested Claim, shall mean the asserted amount of a Claim that was filed on or before the date designated by the Bankruptcy Court as the last date for filing that category of proof of Claim, which is a Contested Claim, and which has not been Allowed or Disallowed before the Effective Date. 1.18 "CONTESTED CLAIM RESERVE" shall mean the account maintained by the Reorganized Debtor for the benefit of holders of Contested Claims, containing Cash, New Preferred Stock, or New Common Stock, as appropriate, 4 in amounts necessary to reserve for the distributions allocable to the Contested Claims until they are Allowed or Disallowed. 1.19 "CONVENIENCE CLAIM" shall mean an Allowed Unsecured Claim (other than Note Claims) of $5,000 or less; PROVIDED, HOWEVER, that all Allowed Unsecured Claims of one holder (other than Note Claims held by that holder) shall be aggregated for determining this limit. 1.20 "CREDITOR" shall mean the holder of a Claim. 1.21 "CREDITORS' COMMITTEE" shall mean the Official Unsecured Creditors' Committee, if any, appointed in the Chapter 11 Case pursuant to section 1102 of the Bankruptcy Code, as reconstituted from time to time pursuant to order of the Bankruptcy Court or determination of the United States Trustee for the Western District of Texas. 1.22 "DATAPOINT" shall mean Datapoint Corporation, a Delaware corporation. 1.23 "DATAPOINT COMMON STOCK" shall mean the 2,700,000 shares of the common stock of Datapoint, $0.25 per share, held in trust for the benefit of the Debtor. 1.24 "DATAPOINT OPTION" shall mean the option granted by the Datapoint Option Agreement. 1.25 "DATAPOINT OPTION AGREEMENT" shall mean that certain Option Agreement dated November 9, 1990, between the Debtor and Datapoint. 1.26 "DEBTOR" shall mean Intelogic Trace, Inc., a New York corporation. 1.27 "DEBTOR IN POSSESSION" shall mean the Debtor in its capacity as debtor-in-possession under section 1101(1) of the Bankruptcy Code. 1.28 "DEFICIENCY AMOUNT" shall mean the amount by which the total amount of a Secured Claim exceeds the value of the collateral securing the Claim as of the date the determination is made. 1.29 "DISALLOWED," when used with respect to all or any part of a Claim, shall mean the status of that portion of a Claim that is Contested, upon entry of a Final Order by the Bankruptcy Court upholding the Objection. 5 1.30 "DISCLOSURE STATEMENT" shall mean the Disclosure Statement filed under Bankruptcy Code section 1125 in support of this Plan. 1.31 "DISTRIBUTION DATE" when used with respect to each Claim, shall mean the later of the Effective Date, or the date upon which the Claim becomes an Allowed Claim. 1.32 "EFFECTIVE DATE" shall mean the later of (a) the first Business Day on which no stay of the Confirmation Order is in effect and that is ten (10) days (as calculated in accordance with Bankruptcy Rule 9006(a)) after the Confirmation Date and (b) the date on which each of the conditions precedent set forth in Article VIII of this Plan have been either satisfied or waived in writing by the holders of a majority in amount of the Note Claims. 1.33 "EMPLOYEE AGREEMENT" shall mean an employment contract between the Debtor and any of its employees as of either the Petition Date or the Effective Date. 1.34 "EXIT FINANCING PROVIDER" shall mean the entity that enters into an agreement with the Debtor to provide a loan facility pursuant to Section 8.2 of this Plan. 1.35 "FINAL ORDER" shall mean an order or judgment of the Bankruptcy Court or any other court or adjudicative body, as to which the time to appeal or seek rehearing or petition for certiorari shall have expired or which order or judgment shall no longer be subject to appeal, rehearing or certiorari proceeding and with respect to which no appeal, motion for rehearing or certiorari proceeding or stay shall then be pending. 1.36 "FIDELITY" shall mean Fidelity Capital & Income Fund, a Massachusetts business trust. 1.37 "FIRST BOSTON" shall mean CS First Boston Asset Management Company. 1.38 "FIDELITY AND FIRST BOSTON EXPENSES" shall mean the fees or expenses of Fidelity and First Boston (including fees and expenses of professionals rendering services on their behalf) incurred in connection with the negotiation, documentation, implementation, and consummation of the transactions contemplated by this Plan in such amounts as determined and awarded by Final Order of the Bankruptcy Court, to the extent not satisfied by the Debtor as of the Effective Date by a payment not subject to reversal, modification, or avoidance for any reason. 6 1.39 "FOOTHILL" shall mean Foothill Capital Corporation, a California corporation. 1.40 "INDEMNIFICATION CLAIMS" shall mean the Claims of the Debtor's present and former directors and officers arising out of the Debtor's Indemnification Obligations. 1.41 "INDEMNIFICATION OBLIGATIONS" shall mean the obligations of the Debtor to indemnify its present and former directors and officers pursuant to any provisions of the Debtor's charter, its by-laws, and/or applicable state law to the extent such obligations are Allowed Claims. 1.42 "INDEMNIFICATION POLICIES" shall mean the insurance policy or policies obtained by the Debtor to cover its Indemnification Obligations. 1.43 "INDENTURE" shall mean that certain Indenture dated July 15, 1986, between the Debtor and Manufacturers Hanover Trust Company, as trustee, governing the Debtor's 11.99% Subordinated Debentures due July 15, 1996. 1.44 "INDENTURE TRUSTEE" shall mean Chemical Banking Corporation, as successor by merger to Manufacturers Hanover Trust Company, the trustee under the Indenture. 1.45 "IT CANADA" shall mean IT Canada Inc., a Canadian corporation, all of whose 1,000 issued and outstanding shares of common stock, zero par value per share, and 1,785 issued and outstanding shares of preferred stock, zero par value per share, are owned by the Debtor. 1.46 "LIEN" shall mean any lien, charge, encumbrance, or interest in or against property to secure payment of a debt or enforcement of an obligation. 1.47 "NEW PREFERRED STOCK" shall mean the shares of 10% Preferred Stock, with a liquidation preference per share equal to $15 plus accrued dividends, to be issued by the Reorganized Debtor on the Effective Date, having the rights, powers, privileges, and preferences more fully set forth in the Restated Charter. 1.48 "NEW COMMON STOCK" shall mean the additional shares of common stock, $0.01 par value per share, issued by the Reorganized Debtor on the Effective Date. 7 1.49 "NOTE CLAIM" shall mean an Unsecured Claim arising out of the Indenture, including any accrued but unpaid interest owing thereunder. 1.50 "OLD COMMON STOCK" shall mean the shares of common stock, $0.01 par value per share, issued by the Debtor and outstanding prior to the Effective Date. 1.51 "OLD PREFERRED STOCK" shall mean the $10 Redeemable Preferred Stock issued by the Debtor, all of which is owned by Datapoint. 1.52 "OBJECTION" shall mean an objection to the allowance of a Claim interposed within the applicable period of limitation fixed by this Plan, the Bankruptcy Code, the Bankruptcy Rules, or the Bankruptcy Court. 1.53 "OPTION RELEASE AGREEMENT" shall mean the Option Release Agreement between the Debtor and Datapoint in substantially the form attached to this Plan as Exhibit "B", which shall effectuate the provisions of Section 8.1 of this Plan. 1.54 "PERSON" shall mean an individual, corporation, partnership, joint venture, trust, estate, unincorporated association, unincorporated organization, governmental entity or unit or political subdivision thereof, or any other entity. 1.55 "PBGC" shall mean the Pension Benefit Guaranty Corporation. 1.56 "PBGC CLAIM " shall mean the Claim of the PBGC against the Debtor. 1.57 "PETITION DATE" shall mean August 5, 1994. 1.58 "PLAN" shall mean this chapter 11 plan for the Debtor, as it may be modified from time to time, and all exhibits and schedules thereto. 1.59 "PLAN BALLOT DEADLINE" shall mean the date fixed by the Bankruptcy Court by which the ballot that accompanies this Plan as validly executed by the holder of an Allowed Claim must be received by the Debtor or its solicitation agent, which date is set forth in the Disclosure Statement. 1.60 "PLAN DOCUMENTS" shall mean Exhibits "A" through "G" to this Plan, which Exhibits will be filed in the Bankruptcy Court not later than the conclusion of the hearing on confirmation of this Plan, unless specifically provided otherwise in this Plan. 8 1.61 "PRIORITY NON-TAX CLAIM" shall mean a Claim entitled to priority pursuant to section 507(a)(3), 507(a)(4), or 507(a)(6) of the Bankruptcy Code. 1.62 "PRIORITY TAX CLAIM" shall mean a Claim entitled to priority pursuant to section 507(a)(7) of the Bankruptcy Code. 1.63 "PRO RATA" shall mean the proportion that the amount of a Claim in a particular Class bears to the aggregate amount of all Claims in the Class. 1.64 "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement in substantially the form attached to this Plan as Exhibit "C". 1.65 "RELEASE" shall mean the release of Claims against officers and directors of the Debtor required to be executed and returned by holders of shares of Old Common Stock to avoid cancellation of such shares, as described in Section 7.4 of this Plan. 1.66 "REORGANIZED DEBTOR" shall mean the Debtor from and after the Effective Date. 1.67 "RESTATED CHARTER" shall mean the amended and restated certificate of incorporation of the Reorganized Debtor in substantially the form attached as Exhibit "D" to this Plan, which shall be in form and substance satisfactory to the holders of a majority in amount of the Note Claims. 1.68 "SECURED CLAIM" shall mean any Claim secured by a valid, perfected, and enforceable Lien on or against property of a Debtor, but only to the extent of the value of the collateral securing the Claim. 1.69 "SHAREHOLDER DERIVATIVE ACTION" shall mean any action brought by shareholders of the Debtor against the Debtor and its Board of Directors demanding that the Debtor seek damages from its Board of Directors. 1.70 "SHELF REGISTRATION STATEMENT" shall mean a registration statement relating to resales of the New Common Stock and the New Preferred Stock filed by the Debtor with the Securities and Exchange Commission under Rule 415 promulgated under the Securities Act of 1933. 1.71 "SUBORDINATED CLAIM" shall mean a Claim for damages arising from the purchase or sale of a security that would have been included in Class 6, whether such security is currently or formerly held by the holder of such Claim. 9 1.72 "TAX CODE" shall mean the Internal Revenue Code of 1986, as amended, or corresponding provisions of any subsequent federal revenue act. 1.73 "TAX RETURN" shall mean any consolidated federal income tax return filed by the Debtor or the Reorganized Debtor. 1.74 "TRANSFER AGENT" shall mean the person designated by the Debtor to distribute New Preferred Stock and New Common Stock under this Plan and to keep the registry of the holders thereof from and after the Effective Date. 1.75 "UNSECURED CLAIM" shall mean a Claim, other than an Administrative Claim, a Priority Tax Claim, a Priority Non-Tax Claim, a Secured Claim, or a Convenience Claim, including any Unsecured Claim awarded to the PBGC in settlement or satisfaction of all or any part of the PBGC Claim. 1.76 "WORKING CAPITAL FACILITY" shall mean the General Loan and Security Agreement entered into as of June 20, 1991, between Foothill and the Debtor. 1.77 INTERPRETATION. Unless otherwise specified, all section, article, and exhibit references in this Plan are to the respective section in, article of, or exhibit to, this Plan, as the same may be amended, waived, or modified from time to time. The exhibits annexed to this Plan and each of the Plan Documents is incorporated into and is a part of this Plan as if fully set forth in this Plan. The headings in this Plan are for convenience of reference only and shall not limit or otherwise affect the provisions hereof. Words denoting the singular number shall include the plural number and vice versa, and words denoting one gender shall include the other gender. ARTICLE II PROVISIONS FOR PAYMENT OF ADMINISTRATIVE AND PRIORITY TAX CLAIMS 2.1 ADMINISTRATIVE CLAIMS. (a) Except as set forth in subsection (b) below, each Administrative Claim shall be paid in full in Cash on the Effective Date; PROVIDED, HOWEVER, that Allowed Administrative Claims representing obligations incurred in the ordinary course of business or otherwise assumed by the Debtor pursuant to this Plan shall be paid or performed by the Debtor in accordance with the terms 10 and conditions of each agreement relating thereto and consistent with past practice. The Debtor consents to the compensation and reimbursement of the Fidelity and First Boston Expenses and acknowledges that Fidelity and First Boston have made and will continue to make a "substantial contribution" to the Chapter 11 Case as that term is used in section 503(b) of the Bankruptcy Code. The Indenture Trustee shall receive no payment of fees or expenses accrued under the Trust Indenture through the Effective Date except as specifically authorized by the Bankruptcy Court upon proper application. All professional fees and expenses of the Indenture Trustee, whether sought pursuant to Section 2.1(b) of the Plan or pursuant to the Trust Indenture, shall be subject to a determination of reasonableness by the Bankruptcy Court in accordance with 11 U.S.C. Section 1129(a)(4). The Debtor, the Reorganized Debtor, or any party in interest shall have the right to object to any such request filed by the Indenture Trustee. (b) COMPENSATION AND REIMBURSEMENT. All holders of Administrative Claims that are awarded compensation or reimbursement of expenses by the Bankruptcy Court under sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the Bankruptcy Code shall be paid in Cash in full in such amounts as are allowed by the Bankruptcy Court, (a) upon the later of (i) the Effective Date and (ii) the date upon which the Bankruptcy Court enters an order with respect to any Administrative Claim or (b) upon such other terms as the holder of the Administrative Claim may accept. 2.2 PRIORITY TAX CLAIMS. (a) Except as set forth in subsection (b) below, each holder of an Allowed Priority Tax Claim shall receive at the option of the Debtor (i) the amount of the holder's Allowed Claim in one Cash payment on the Distribution Date or (ii) the amount of the holder's Allowed Claim, with interest thereon, as the Bankruptcy Code requires, in equal annual Cash payments on each anniversary of the Distribution Date, until the last anniversary of the Distribution Date that precedes the sixth anniversary of the date of assessment of the Allowed Claim. (b) A Priority Tax Claim that is a Contested Claim shall neither receive any distribution on the Effective Date nor be discharged by the confirmation of this Plan, but instead shall be resolved by the Debtor via litigation or other means appropriate to the character of the Priority Tax Claim and satisfied by the Reorganized Debtor upon its resolution. 11 ARTICLE III CLASSIFICATION OF CLAIMS Claims and Equity Interests in the Debtor are classified as follows: 3.1 CLASS 1. Class 1 shall contain all Priority Non-Tax Claims. 3.2 CLASS 2. Class 2 shall contain the claim of Foothill arising out of the Working Capital Facility. 3.3 CLASS 3. Class 3 shall contain all Completion Bond Claims. 3.4 CLASS 4. Class 4 shall contain all Convenience Claims. 3.5 CLASS 5. Class 5 shall contain the PBGC Claim. 3.6 CLASS 6. Class 6 shall contain all Unsecured Claims not specifically classified in other Classes. 3.7 CLASS 7. Class 7 shall contain the Old Preferred Stock. 3.8 CLASS 8. Class 8 shall contain the Old Common Stock. ARTICLE IV IDENTIFICATION OF IMPAIRED CLASSES OF CLAIMS AND EQUITY INTERESTS 4.1 UNIMPAIRED CLASSES OF CLAIMS. Classes 1 and 3 are not impaired under this Plan. 4.2 IMPAIRED CLASSES OF CLAIMS AND EQUITY INTERESTS. With the exception of the unimpaired Classes specified in Section 4.1 of this Plan, all Classes of Claims and all Equity Interests are impaired under this Plan. 4.3 IMPAIRMENT CONTROVERSIES. If a controversy arises as to whether any Class of Claims or Equity Interests is impaired under this Plan, the Bankruptcy Court shall, after notice and a hearing, determine the controversy. 12 ARTICLE V PROVISIONS FOR TREATMENT OF CLASSIFIED CLAIMS AND INTERESTS 5.1 CLASS 1 - PRIORITY NON-TAX CLAIMS. Each holder of an Allowed Priority Non-Tax Claim shall receive the amount of its Allowed Claim in one Cash payment on the Distribution Date. The Pro Rata share of Cash allocable to holders of Priority Non-Tax Claims that are Contested Claims shall be distributed to the Contested Claim Reserve pursuant to Sections 7.2 and 7.3 of this Plan. 5.2 CLASS 2 - WORKING CAPITAL FACILITY. The Secured Claim of Foothill arising out of the Working Capital Facility shall be satisfied by the Exit Financing Provider, which shall succeed to the interest of Foothill's Secured Claim. The terms and conditions on which the Exit Financing Provider shall satisfy Foothill's Secured Claim shall be negotiated and disclosed to the Bankruptcy Court not later than ten (10) days prior to the date set for hearing of confirmation of this Plan and shall be such as to be satisfactory in form and substance to the holders of a majority in amount of the Note Claims. Any Deficiency Amount arising on account of the Secured Claim of Foothill shall be deemed zero and shall receive no distribution under this Plan as an Unsecured Claim or otherwise, other than as set forth above. 5.3 CLASS 3 - COMPLETION BOND CLAIMS. The Completion Bond Claims shall be unimpaired. 5.4 CLASS 4 - CONVENIENCE CLAIMS. (a) DISTRIBUTIONS. On the Distribution Date, each holder of an Allowed Convenience Claim shall receive a payment in Cash equal to the lesser of (i) 50% of its Allowed Convenience Claim or (ii) its pro rata share of $650,000. A payment of Cash equal to the same percentage of each Convenience Claim that is a Contested Claim shall be distributed to the Contested Claim Reserve pursuant to Sections 7.2 and 7.3 of this Plan. (b) TIME AND MANNER OF ELECTION. Any holder of an Allowed Unsecured Claim other than a Note Claim that desires treatment of its Claim as a Convenience Claim in accordance with Section 6.3 of this Plan shall make the election on the ballot to be provided to holders of Unsecured Claims and return the ballot before the Plan Ballot Deadline. Any election made after the Plan 13 Ballot Deadline shall not be binding unless the Plan Ballot Deadline is expressly waived in writing by the Debtor. 5.5 CLASS 5 - PBGC CLAIM. The PBGC Claim shall be satisfied by settlement with the PBGC on terms and conditions agreed to between the Debtor and holders of a majority in amount of the Note Claims; provided, however, that if no settlement is reached, the Allowed Unsecured Claims of the PBGC shall be treated as a Class 6 Claim. 5.6 CLASS 6 - OTHER UNSECURED CLAIMS. As soon as practicable after the Effective Date, but in no event more than twenty (20) Business Days thereafter, each holder of an Allowed Unsecured Claim shall receive pursuant to the provisions of Article VII of this Plan its Pro Rata share of the New Preferred Stock and New Common Stock issued under this Plan. The Pro Rata share of New Preferred Stock and New Common Stock allocable to holders of Unsecured Claims that are Contested Claims shall be distributed to the Contested Claim Reserve pursuant to Sections 7.2 and 7.3 of this Plan. 5.7 CLASS 7 - OLD PREFERRED STOCK. No distributions shall be made on account of the Old Preferred Stock. All of the Old Preferred Stock shall be cancelled as of the Effective Date. 5.8 CLASS 8 - OLD COMMON STOCK. The existing holders of Old Common Stock who execute and return the Release as described in Section 7.4 of this Plan shall retain their Old Common Stock under this Plan, subject to the four-for-one reverse stock split provided for in the Restated Charter, and then subject to dilution by the issuance of the New Common Stock under this Plan and potentially subject to dilution by Allowed Subordinated Claims. All other shares of Old Common Stock shall be cancelled as of the Effective Date. All options to purchase Old Common Stock or New Common Stock in the Debtor shall be cancelled as of the Effective Date. ARTICLE VI ACCEPTANCE OR REJECTION OF PLAN AND ELECTIONS ON BALLOTS 6.1 CLASSES ENTITLED TO VOTE. Each impaired Class of Claims shall be entitled to vote separately to accept or reject this Plan. Any unimpaired Class of Claims shall not be entitled to vote to accept or reject this Plan. 14 6.2 CLASS ACCEPTANCE REQUIREMENT. Whether a Class of Claims or Equity Interests has accepted this Plan shall be determined in accordance with section 1126 of the Bankruptcy Code. 6.3 UNSECURED CLAIM REDUCTION ELECTION. By voting to accept this Plan, and marking the ballot in the space provided for electing the treatment, the holder of an Allowed Unsecured Claim other than a Note Claim may elect to reduce the amount of the holder's Allowed Claim to $5,000 and receive treatment as an Allowed Convenience Claim having a value of $5,000 on the terms provided in this Plan. Such an election shall constitute a waiver of the amount of the Allowed Unsecured Claim in excess of $5,000, and the holder of the Allowed Claim shall be deemed to release the Debtor from any and all liability for the excess amount. The holder of an Allowed Convenience Claim that elects to reduce the amount of its Allowed Claim shall be deemed the holder of an Allowed Convenience Claim for classification, voting, or other purposes under this Plan. ARTICLE VII MEANS FOR IMPLEMENTATION OF PLAN OF REORGANIZATION 7.1 CASH PAYMENTS ON THE EFFECTIVE DATE. Payments of Cash to holders of Administrative Claims, Priority Tax Claims, Priority Non-Tax Claims, and Convenience Claims as set forth in Article V shall be made on the Effective Date. 7.2 CONTESTED CLAIM RESERVE. As soon as practicable after the Effective Date, but in no event more than twenty (20) Business Days thereafter, the Contested Claim Reserve shall be established and funded with an amount of Cash, New Preferred Stock, and New Common Stock allocable to the Pro Rata share of each Contested Claim Amount in relation to the total Claims in any Class. 7.3 NEW PREFERRED STOCK. A total of 1,133,333 shares of New Preferred Stock shall be issued as soon as practicable after the Effective Date, but in no event more than twenty (20) Business Days thereafter; PROVIDED, HOWEVER, that if the aggregate Unsecured Claims other than the Note Claims exceed $5 million, the total number of shares of New Preferred Stock to be issued shall be increased such that the aggregate liquidation preference is increased by 80% of the amount by which the aggregate Unsecured Claims other than Note Claims exceed $5 million; and PROVIDED, FURTHER, that if holders of 15 the Note Claims elect to serve as the Exit Financing Providers as provided in Section 8.2 of this Plan, additional shares of New Preferred Stock shall be issued to them as provided in that section. The New Preferred Stock shall be delivered to the Transfer Agent for further distribution pro rata to the holders of Unsecured Claims. The New Preferred Stock shall have the rights, powers, privileges, and preferences set forth in the Restated Charter; PROVIDED, HOWEVER, that if any person or group (as those terms are defined in Rule 13d promulgated under the Securities Exchange Act of 1934, as amended) shall become the owner (whether pursuant to a stock purchase, merger, consolidation, other business combination, or otherwise) of a majority of the outstanding common stock of the Debtor after the Petition Date and before the issuance of the New Preferred Stock, then the holders of the New Preferred Stock shall have the right to cause the Reorganized Debtor to redeem the New Preferred Stock in accordance with Section 3(c) of the Restated Charter immediately upon issuance of the New Preferred Stock. The New Preferred Stock shall bear no restrictive legends of any kind. 7.4 NEW COMMON STOCK. As soon as practicable after the Effective Date, but in no event more than ten (10) Business Days thereafter, the Debtor shall effectuate a reverse split of Old Common Stock as set forth in the Restated Charter. A number of shares of New Common Stock equal to three (3) times the number of shares of Old Common Stock outstanding after the reverse split shall then be issued pro rata to the holders of Unsecured Claims. The New Common Stock shall be of the same class as the Old Common Stock and have the same rights, powers, and privileges pertaining thereto. The New Common Stock shall be delivered to the Transfer Agent for further distribution pro rata to the holders of Unsecured Claims. Holders of Old Common Stock shall receive a form of Release of Claims releasing all claims they may have against the Debtor and its current and former officers and members of the Board of Directors of the Debtor for acts, omissions, or conduct arising out of or related to the business of the Debtor or the Chapter 11 Case (the "Release"). The Debtor shall not cancel the shares of Old Common Stock held by Holders of Old Common Stock who execute the Release and return it to the Debtor within thirty (30) days of receipt pursuant to the instructions set forth on the Release; however, all other shares of Old Common Stock shall be cancelled. The Debtor shall use its best efforts to establish and/or maintain the listing of the New Common Stock and the Old Common Stock on the New York Stock Exchange. The New Common Stock shall bear no restrictive legends of any kind. 7.5 RESTATED CHARTER. On the Effective Date, the Debtor's corporate charter shall be amended as provided in the Restated Charter. 16 7.6 BOARD OF DIRECTORS. The Board of Directors of the Reorganized Debtor shall be reconstituted on the Effective Date in a manner consistent with the Restated Charter and acceptable to the holders of a majority in amount of the Note Claims. 7.7 RECORD DATE FOR HOLDERS OF NOTE CLAIMS. The record date for purposes of distributing New Preferred Stock and New Common Stock to holders of Unsecured Claims under this Plan shall be the close of business on the Effective Date. 7.8 CANCELLATION OF NOTE CLAIMS. As of the Distribution Date, the instruments that previously evidenced ownership of the Note Claims and the rights of the holders of the Note Claims shall be canceled and shall be null and void, the holders thereof shall have no further rights thereunder, and the instruments shall evidence no rights except the right to receive the distributions provided herein. 7.9 SURRENDER OF INSTRUMENTS REPRESENTING NOTE CLAIMS. (a) No holder of a Note Claim shall be entitled to distributions from under this Plan, unless and until the holder either (i) has first surrendered or caused to be surrendered to the Transfer Agent the original instruments evidencing the Note Claim held by it or, (ii) if the instruments have been lost, destroyed, stolen or mutilated, has first executed and delivered to the Transfer Agent an affidavit of loss and indemnity with respect thereto in form customarily utilized for such purposes that is reasonably satisfactory to the Reorganized Debtor and, if requested by the Reorganized Debtor, has first furnished a bond in form, substance, and amount reasonably satisfactory to the Reorganized Debtor; PROVIDED, HOWEVER, that no affidavit of loss and indemnity shall be required in respect of Note Claims held by any institutional investor whose stockholders' equity or net assets exceed $100 million. (b) In accordance with section 1143 of the Bankruptcy Code, any holder of a Note Claim that fails to surrender its instruments or deliver an affidavit of loss and indemnity as provided herein within five (5) years from and after the Distribution Date shall be deemed to have forfeited all rights and claims and shall not participate in any distribution on account of the Note Claims hereunder. 17 (c) Upon the expiration of the five (5) year period referenced in subsection (b) above, all Note Claims shall be voided; any New Preferred Stock or New Common Stock then held by the Reorganized Debtor and available for distribution in respect of the Note Claims shall be distributed Pro Rata to the members of the Class 6 other than the holders of Note Claims referenced in subsection (b) above. 7.10 DISTRIBUTION OF NEW PREFERRED STOCK AND NEW COMMON STOCK. (a) New Preferred Stock and New Common Stock shall be distributed to holders of Unsecured Claims other than Note Claims as soon as practicable after the Effective Date, but in no event more than twenty (20) Business Days thereafter. (b) New Preferred Stock and New Common Stock shall be distributed to holders of Note Claims as soon as practicable after the surrender or delivery of the original instruments evidencing the applicable Note claim or an affidavit of loss and indemnity and the furnishing of any bond requested by the Debtor, as provided in Section 7.9 of this Plan. (c) Each holder of New Preferred Stock and New Common Stock shall have recorded in the books of the Reorganized Debtor in exchange for its Unsecured Claim or Old Common Stock, as the case may be, the number of New Preferred Stock or New Common Stock to which it is entitled. 7.11 MEANS OF CASH PAYMENT. Cash payments made pursuant to this Plan shall be in United States funds, by check drawn on a domestic bank, or by wire transfer from a domestic bank. 7.12 DELIVERY OF DISTRIBUTIONS. (a) Distributions and deliveries to holders of Allowed Claims and Equity Interests shall be made at the addresses set forth on the proofs of claim or proofs of interest filed by the holders (or at the last known addresses of the holders if no proof of claim or proof of interest is filed or if the Debtor has been notified of a change of address), or in the case of holders of Allowed Note Claims, shall be made at the addresses contained in the records of the Debtor. (b) If any holder's distribution is returned as undeliverable, no further distributions to the holder shall be made unless and until the Debtor or the Transfer Agent, as the case may be, is notified of the holder's then current address, at which time all missed distributions shall be made to the holder without interest. 18 (c) Amounts in respect of undeliverable distributions made by the Debtor or the Transfer Agent shall be returned to the Debtor or the Transfer Agent, as the case may be, until the distributions are claimed. (d) All claims for undeliverable distributions shall be made on or before the fifth anniversary of the Distribution Date, after which time all unclaimed property shall be treated under section 347(b) of the Bankruptcy Code, and then all Claims against the Debtor or the Reorganized Debtor shall be discharged and forever barred. 7.13 DISTRIBUTIONS FROM CONTESTED CLAIM RESERVE. All Cash, New Preferred Stock, and New Common Stock held in the Contested Claim Reserve shall be distributed as follows. (a) On the date that all or part of any Contested Claim is Allowed, the Reorganized Debtor shall withdraw from the Contested Claim Reserve an amount of Cash, or a number of shares of New Preferred Stock and New Common Stock, allocable to the portion of the Contested Claim that has been Allowed. (b) On the date that all or part of any Contested Claim is Disallowed, any New Preferred Stock and New Common Stock corresponding to the Disallowed portion shall be cancelled, and any Cash corresponding to the Disallowed portion shall be released from the Contested Claim Reserve and retained by the Reorganized Debtor. 7.14 ALLOCATION OF DISTRIBUTIONS. All consideration distributed under the Plan to a holder of an Allowed Note Claim shall be allocated first to the principal balance of the Allowed Note Claim and then, to the extent the consideration exceeds the amount of that principal balance, shall be allocated next to the accrued but unpaid interest that is included in the Allowed Note Claim. 7.15 TIME BAR TO CASH PAYMENTS. (a) Checks issued by the Reorganized Debtor in respect of Administrative Claims, Priority Non-Tax Claims, Priority Tax Claims, and Convenience Claims shall be null and void if not cashed within ninety days of the date of issuance thereof. 19 (b) Requests for reissuance of any check shall be made directly to the Reorganized Debtor by the holder of the Allowed Claim with respect to which the check originally was issued. (c) Any Claim in respect of such a voided check shall be made on or before the later of the fifth anniversary of the Distribution Date or ninety days after the date of issuance of the check, after which time all Claims in respect of void checks shall be discharged and forever barred, and the funds or distributions shall be distributed pro rata to holders of Unsecured Claims unless the Reorganized Debtor elects to deposit them with the clerk of the Bankruptcy Court under section 347 of the Bankruptcy Code because the expense of redistribution is impracticable. 7.16 VESTING OF ASSETS. As of the Effective Date, all property of the Debtor shall vest in the Reorganized Debtor free and clear of all Claims and Equity Interests, except as specifically provided in this Plan. 7.17 EFFECTUATING DOCUMENTS. Prior to the conclusion of the Confirmation Hearing, the Debtor shall file the Plan Documents with the Bankruptcy Court. 7.18 AVOIDANCE ACTIONS. Avoidance Actions belonging to the Debtor shall vest in the Reorganized Debtor and be retained and litigated thereby as deemed appropriate by the Reorganized Debtor. 7.19 ALLOWANCE OF NOTE CLAIMS. The entry of the Confirmation Order shall be deemed a finding and determination by this Court that each of the Note Claims which is not a Subordinated Claim is an Allowed Claim that is not subject to any counterclaim, offset, right of recoupment, or other reduction or alteration. 7.20 INDEMNITY INSURANCE. The Debtor shall use its best efforts to maintain its Indemnification Policies from and after the Effective Date, to the extent available at a reasonable cost, to cover Indemnification Obligations arising on, after, or before the Effective Date. The Debtor's officers and directors shall have no Claims against the Debtor for Indemnification Obligations arising on or before the Effective Date, but instead shall be restricted to their rights to assert claims under the Indemnification Policies; PROVIDED, HOWEVER, that Indemnification Claims arising out of indemnifiable liability in connection with any Shareholder Derivative Action shall constitute an Administrative Claim against the Debtor; provided further, however, that recovery under any such Administrative Claim shall be limited to (a) the proceeds of the Indemnification Policies received by the Debtor and (b) any recovery obtained by the Debtor as a result of any Shareholder Derivative Action. Therefore, the cost of any 20 Indemnification Claim shall be borne either by Debtor's Indemnification Policies or by the Debtor's applying any recovery from shareholder derivative litigation to cancel the associated Indemnification Obligation. In the event the Debtor does not maintain the Indemnification Policies, the Debtor shall institute an escrow arrangement to fund the Indemnification Obligations, which shall be funded in an amount to be agreed upon by the Debtor and the holders of a majority in amount of the Note Claims, solely from the proceeds, if any, from the Shareholder Derivative Action. ARTICLE VIII CONDITIONS TO CONSUMMATION OF PLAN 8.1 RELEASE OF DATAPOINT OPTION. It shall be a condition to the consummation of this Plan on the Effective Date that the Option Release Agreement shall have been approved by the Bankruptcy Court and executed and delivered to the Debtor on or before the Effective Date. If the Option Release Agreement has not been approved by the Bankruptcy Court by the Confirmation Date, entry of the Confirmation Order shall constitute the Bankruptcy Court's approval of the Option Release Agreement. Under the Option Release Agreement, on the Effective Date, the Debtor shall transfer 2,400,000 shares of the Datapoint Common Stock to Datapoint, in exchange for which Datapoint shall transfer to the Debtor all of the Old Preferred Stock owned by Datapoint and release all of its rights thereunder. In addition, Datapoint shall release the Datapoint Option and any other rights under the Datapoint Option Agreement, and there shall be no further restrictions on the Debtor's right and power to sell or issue the remaining 300,000 shares of the Datapoint Common Stock to any person. 8.2 EXIT FINANCING. It shall be a condition to the consummation of this Plan on the Effective Date that the Debtor shall have obtained a firm commitment for a working capital facility from the Exit Financing Provider on terms and conditions satisfactory to the holders of a majority in amount of the Note Claims; PROVIDED, HOWEVER, that if no firm commitment has been obtained from an Exit Financing Provider by the Effective Date, the holders of a majority in amount of the Note Claims shall have the option, but not the obligation, to extend to the Debtor a working capital facility of up to $10 million, on terms and conditions no less favorable to the holders of Note Claims extending the facility than those that were offered by the Debtor to other potential Exit Financing Providers, in addition to which, the holders of Note Claims extending the working capital facility shall be entitled to a loan commitment fee equal to 5% of the 21 principal amount advanced, payable in the form of additional New Preferred Stock. 8.3 RESALES OF NEW PREFERRED STOCK AND NEW COMMON STOCK. Entry of the Confirmation Order shall constitute a finding and determination by the Bankruptcy Court that the issuance of the New Preferred Stock and New Common Stock under this Plan is entitled to exemption from the securities laws under Bankruptcy Code section 1145. It shall be a condition to the consummation of this plan that the Debtor shall have executed and delivered the Registration Rights Agreement to the holders of a majority in amount of the Note Claims. ARTICLE IX TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES 9.1 REJECTED IF NOT ASSUMED. This Plan shall be deemed to constitute and incorporate a motion by the Debtor to reject all executory contracts and unexpired leases to which the Debtor is a party or is otherwise bound, except for the contracts and leases that (a) have been assumed or rejected pursuant to an order of the Bankruptcy Court, (b) are specifically treated otherwise in this Plan, or (c) are the subject of a motion to assume that is pending before the Bankruptcy Court on the Confirmation Date. The Confirmation Order shall represent and reflect an order of the Bankruptcy Court approving the assumptions or rejections as of the Confirmation Date, unless otherwise provided in this Section 9.1. 9.2 BAR TO REJECTION DAMAGES. If the rejection of an executory contract or unexpired lease by the Debtor results in damages to the other party or parties to the contracts or leases, a Claim for the damages, if not evidenced by a filed proof of claim as of the Effective Date, shall be forever barred and shall not be enforceable against the Debtor, its successors, or its properties unless a proof of claim is filed with the Bankruptcy Court and served upon the Debtor or the Reorganized Debtor by thirty days after entry of the Confirmation Order or by such earlier date as may be fixed by an order of the Bankruptcy Court authorizing rejection of the contract or lease. 9.3 EMPLOYEE AGREEMENTS. Each Employee Agreement shall be rejected, and any claim for damages for the breach or termination under the Employee Agreement shall be treated as an Unsecured Claim subject to any applicable limitations under the Bankruptcy Code, except as follows: 22 (a) The Reorganized Debtor shall assume modified Employee Agreements as of the Confirmation Date with Mark S. Helwege and Philip D. Freeman in substantially the forms attached to this Plan as Exhibits "E" and "F", which must be in a form and of a substance satisfactory to the holders of a majority in amount of the Note Claims. These modified agreements shall reflect no material modifications other than a revised bonus compensation plan and a revised stock option plan, to provide for release of any claims against the Debtor under this Plan or otherwise. Mr. Helwege and Mr. Freeman shall have no Claim against the Debtor except as specifically set forth in the modified Employee Agreements, other than any claim they may have by virtue of any indemnification rights. The Debtor shall also release any claims and causes of action against Mr. Helwege and/or Mr. Freeman. (b) The Reorganized Debtor shall assume a modified Employee Agreement as of the Confirmation Date with Asher B. Edelman which must be in a form and of a substance satisfactory to the holders of a majority in amount of the Note Claims. This modified agreement shall provide only for a severance benefit payable over 24 months in equal monthly installments of $15,000, for a total of $360,000; and for release of any claims against the Debtor under this Plan or otherwise. Mr. Edelman shall have no Claim against the Debtor except as specifically set forth in the modified Employee Agreement, other than any claim he may have by virtue of any indemnification rights. The Debtor shall also release any claims and causes of action against Mr. Edelman. 9.4 ASSUMPTION OF SPECIFIED CONTRACTS. Entry of the Confirmation Order shall constitute authorization of the Bankruptcy Court to the Debtor to assume the Assumed Contracts. 9.5 CLAIMS RELATING TO DIRECTORS. At their election and except as otherwise provided herein, members of the Board of Directors may enter into mutual release(s) with the Debtor, releasing any and all claims and/or causes of action, save and except any claim by a member of the Board of Directors by virtue of any indemnification right. 23 ARTICLE X PROCEDURES FOR RESOLVING AND TREATING CONTESTED CLAIMS 10.1 OBJECTION DEADLINE. As soon as practicable, but in no event later than ninety (90) days following the Effective Date, the Reorganized Debtor shall file Objections to Claims with the Bankruptcy Court and serve copies of the Objections upon the holders of each of the Claims to which Objections are made. This Section 10.1 shall not limit the Reorganized Debtor's right to object to Claims, if any, filed or amended more than ninety (90) days after the Effective Date. 10.2 PROSECUTION OF OBJECTIONS. The Reorganized Debtor shall litigate to judgment, settle, or withdraw Objections to Contested Claims. 10.3 NO DISTRIBUTIONS PENDING ALLOWANCE. Notwithstanding any other provision of this Plan, no payments or distributions shall be made to the holder of a Contested Claim to which an Objection has been interposed unless and until the Contested Claim has been Allowed. 10.4 TIME FOR FILING ADMINISTRATIVE CLAIMS. Administrative Claims against the Debtor must be filed no later than thirty (30) days after the Effective Date. 10.5 TIME FOR FILING OF REIMBURSEMENT CLAIMS. Claims seeking reimbursement and/or approval of fees and expenses incurred by Foothill or any other holder of a Secured Claim must be filed no later than thirty (30) days after the Effective Date. ARTICLE XI CREDITORS' COMMITTEE AND COUNSEL 11.1 DISSOLUTION OF THE CREDITORS' COMMITTEE. Any Creditors' Committee shall be dissolved as of the Effective Date. 24 ARTICLE XII MISCELLANEOUS PROVISIONS 12.1 COMPLIANCE WITH TAX REQUIREMENTS. In connection with this Plan, the Reorganized Debtor shall comply with all withholding and reporting requirements imposed by federal, state, local, and foreign taxing authorities and all distributions hereunder shall be subject to the withholding and reporting requirements. 12.2 COMPLIANCE WITH ALL APPLICABLE LAWS. If notified by any governmental authority that it is in violation of any applicable law, rule, regulation, or order of the governmental authority relating to its business, the Reorganized Debtor shall comply with the law, rule, regulation, or order; PROVIDED, HOWEVER, that nothing contained herein shall require such compliance if the legality or applicability of the requirement is being contested in good faith in appropriate proceedings and, if appropriate, for which an adequate reserve has been set aside on the books of the Reorganized Debtor. 12.3 SETOFFS. Except as otherwise provided in this Plan, the Reorganized Debtor may, but shall not be required to, set off against any Claim and the payments or other distributions to be made pursuant to this Plan in respect of the Claim, claims of any nature whatsoever the estate may have against the holder of the Claim, but neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by the Reorganized Debtor of any Claim that the estate may have against the holder; PROVIDED, HOWEVER, the Reorganized Debtor will not seek to set off any obligation that is not yet due. 12.4 MAINTENANCE OF CAUSES OF ACTION. From and after the Effective Date, the Reorganized Debtor may litigate any Avoidance Action or any other causes of action, rights to payments, or claims that belong to the estate, that may be pending on the Effective Date or instituted by the Reorganized Debtor after the Effective Date. 12.5 REQUEST FOR CRAMDOWN UNDER SECTION 1129(B) OF THE BANKRUPTCY CODE. This Plan shall be deemed a request for cramdown under section 1129(b) of the Bankruptcy Code of any other Class or Classes entitled to vote that do not accept this Plan under section 1126 of the Bankruptcy Code. 25 ARTICLE XIII CONSUMMATION OF PLAN 13.1 RETENTION OF JURISDICTION. The Bankruptcy Court shall retain and have exclusive jurisdiction over the Chapter 11 Case for the following purposes, except to the extent the Bankruptcy Court elects to retain concurrent jurisdiction or decides to relinquish jurisdiction: (a) To determine any and all required applications for allowances of compensation and reimbursement of expenses and any other fees and expenses authorized to be paid or reimbursed under the Bankruptcy Code or this Plan; (b) To determine any applications pending on the Effective Date for the rejection or assumption of executory contracts or unexpired leases or for the assumption and assignment, as the case may be, of executory contracts or unexpired leases to which the Debtor is a party or with respect to which the Debtor may be liable, and to hear and determine, and if need be to liquidate, any and all claims arising therefrom; (c) To determine any and all applications, adversary proceedings, and contested or litigated matters that may be pending on the Effective Date; (d) To consider any modifications of this Plan, remedy any defect or omission or reconcile any inconsistency in any order of the Bankruptcy Court, including the Confirmation Order, to the extent authorized by the Bankruptcy Code; (e) To determine all controversies, suits, and disputes that may arise in connection with the interpretation, enforcement, or consummation of this Plan or any person's obligations under this Plan; (f) To issue such orders in aid of execution of this Plan to the extent authorized by section 1142 of the Bankruptcy Code; and (g) To determine such other matters as may be set forth in the Confirmation Order or which may arise in connection with this Plan or the Confirmation Order. 26 13.2 MODIFICATION OF PLAN. Modifications of this Plan (including the Plan Documents) may be proposed in writing by the Debtor at any time before confirmation, provided that the Plan, as modified, (a) is in form and substance satisfactory to holders of a majority in amount of the Note Claims, and (b) meets the requirements of sections 1122 and 1123 of the Bankruptcy Code, and the Debtor shall have complied with section 1125 of the Bankruptcy Code. This Plan may be modified at any time after confirmation and before its substantial consummation, provided that the Plan, as modified, meets the requirements of sections 1122 and 1123 of the Bankruptcy Code and the Bankruptcy Court, after notice and a hearing, confirms the Plan, as modified, under section 1129 of the Bankruptcy Code, and the circumstances warrant the modification. A holder of a Claim or Equity Interest that has accepted or rejected this Plan shall be deemed to have accepted or rejected this Plan as modified, unless, within the time fixed by the Bankruptcy Court, the holder changes its previous acceptance or rejection. Dated: San Antonio, Texas October 12, 1994 Respectfully submitted, INTELOGIC TRACE, INC., Debtor By: PHILIP D. FREEMAN, Senior Vice President, General Counsel and Secretary 27 -----END PRIVACY-ENHANCED MESSAGE-----