-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R5RCKtaYxTqs3YXLEM1aF7NIFuz2+Rk1tp0cVPtDkTeNt3GoZwno5BNiKFKgzxx3 kOGcbEojtwyMqurBZM8JBQ== 0000814430-98-000006.txt : 19980408 0000814430-98-000006.hdr.sgml : 19980408 ACCESSION NUMBER: 0000814430-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980407 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELLIGENT ELECTRONICS INC CENTRAL INDEX KEY: 0000814430 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 232208404 STATE OF INCORPORATION: PA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11673 FILM NUMBER: 98588926 BUSINESS ADDRESS: STREET 1: 411 EAGLEVIEW BLVD CITY: EXTON STATE: PA ZIP: 19341 BUSINESS PHONE: 6104585500 MAIL ADDRESS: STREET 1: 411 EAGLEVIEW BLVD CITY: EXTON STATE: PA ZIP: 19341 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-15991 INTELLIGENT ELECTRONICS, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2208404 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 411 Eagleview Boulevard, Exton, PA 19341 (Address of principal executive offices, including zip code) (610)458-5500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value [Title of Class] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 1998: Common Stock, $.01 Par Value - $277,943,766 The number of shares outstanding of the issuer's common stock as of March 31, 1998: Common Stock, $.01 Par Value - 41,798,091 Documents Incorporated by Reference None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] PAGE PART I Item 1. BUSINESS Introduction Intelligent Electronics, Inc. (the "Company") provides information technology products, services and solutions to corporate customers, educational institutions and governmental agencies in the United States, primarily through its branch locations. The Company was founded in 1982 and is a Pennsylvania corporation. In March 1984, the Company commenced the wholesale distribution of microcomputers. On August 17, 1995, the Company exchanged shares of its Common Stock for all of the remaining shares (approximately 69%) of The Future Now, Inc. ("FNOW"), not then owned by the Company. The acquisition of FNOW, a computer sales and services company, expanded the Company's offerings through the addition of a direct computer products sales organization ("XLSource") and a professional services organization providing a wide range of sophisticated customer support and consulting services. The professional services organization was combined with one of the Company's existing subsidiaries to form XLConnect Solutions, Inc. ("XLConnect"), which was incorporated in January 1996. On October 17, 1996, XLConnect completed an initial public offering with the Company retaining an 80%-ownership interest. On July 18, 1997, the Company sold certain assets of XLSource and XLConnect sold certain specified managed services contracts and related assets (the "XL Transaction"). Also, on July 18, 1997, the Company sold its business (the "Indirect Business") of providing information technology products, services and solutions to network integrators and resellers in the RND Transaction (as defined below) and, accordingly, the Indirect Business is treated as a discontinued operation in the accompanying financial statements. The principal products sold, installed and serviced by the Company include microcomputers, workstations, local and wide area network systems, computer software and peripherals and telecommunications equipment. The Company also offers a wide range of sophisticated customer support and consulting services. The Company's principal executive offices are located at 411 Eagleview Boulevard, Exton, Pennsylvania, 19341, telephone (610)458-5500. As used herein and unless otherwise required by the context, the "Company" shall mean Intelligent Electronics, Inc. and its majority-owned subsidiaries. The matters discussed in this Form 10-K that are forward-looking statements are based on current management expectations that involve risks and uncertainties. Potential risks and uncertainties include, without limitation: the impact of economic conditions generally and in the industry for microcomputer products and services; the potential decline generally in the level of demand for the Company's products and services; the potential termination or non-renewal of a supply or services agreement with a major vendor or customer; continued competitive and pricing pressures in the industry; billable technical employee and product supply shortages; open sourcing of products from vendors; changes in the mix of utilization to provide billable services between employees and contractors; rapid product improvement and technological change, short product life cycles and resulting obsolescence risks; legal proceedings; the potential for year 2000-related expenditures; the risk factors described in "Quarterly Results and Seasonality" in XLConnect's Form 10-K for the year ended December 31, 1997 and in "Risk Factors" in XLConnect's Prospectus dated October 17, 1996 filed with the Securities and Exchange Commission in connection with its initial public offering; and the risks of unavailability of adequate products, credit, capital or financing. Sale of the Company and XLConnect On March 4, 1998, the Company and XLConnect executed an Agreement and Plan of Merger with Xerox Corporation ("Xerox"), whereby Xerox, using acquisition subsidiaries, will acquire through mergers (i) all of the outstanding capital stock of the Company in exchange for cash in the amount of $7.60 per share and (ii) all of the outstanding capital stock of XLConnect not owned by the Company in exchange for cash in the amount of $20.00 per share (collectively, the "Mergers"). The closing of the Mergers is subject to shareholder approval of both the Company and XLConnect at meetings currently anticipated to occur no later than June 30, 1998 and other customary terms and conditions. However, there can be no assurance that the Mergers will be completed. After the closing of the Mergers, the Company and XLConnect will be wholly-owned subsidiaries of Xerox. XLSource Through its acquisition of certain branch locations of FNOW in December 1994 and the 69% of FNOW's outstanding capital stock that it did not already own in August 1995, the Company acquired a direct computer products sales organization, which in 1996 was renamed XLSource. As part of the XL Transaction which was consummated on July 18, 1997, the Company sold to a subsidiary of GE Capital Information Technology Solutions, Inc. certain assets, consisting primarily of the inventory, accounts receivable and customer contracts relating to 20 of the 24 XLSource locations (comprising approximately two-thirds of XLSource's historical revenues) and real property leases and fixed assets relating to six of such 20 locations. After the XL Transaction, XLSource continued to operate in 4 locations in Cincinnati, Cleveland, Indianapolis and Pittsburgh. These four locations comprised approximately one-third of XLSource's historical revenues prior to the transaction. XLSource is an authorized dealer for or a reseller of the products of over 80 manufacturers. XLSource has substantially outsourced its distribution, handling and inventory logistics to Ingram Micro Inc. ("Ingram"), a leading distributor of computer-related products, substantially reducing the need for XLSource to carry inventory and lease warehouse space. As a result, XLSource is able to provide the delivery of products from most of the leading technology vendors with minimal operational risk or technology exposure. XLSource, in conjunction with XLConnect (described below), focuses its sales and marketing efforts towards selling computer-related products and services to Fortune 1000 corporations, professional firms, and governmental and educational institutions. These customers are relying more on business partners and suppliers to provide a complete solution to their information technology needs, in addition to competitive pricing. Also, many larger customers are outsourcing their information technology needs. In order to meet these complex needs, XLSource supplies the hardware and partners with XLConnect, which provides sophisticated information technology services. Sales to targeted customers are generated primarily by XLSource's sales representatives. These sales representatives generally have three or more years of microcomputer sales experience involving multi-product authorizations and are assigned to accounts on the basis of skill, experience and prior results. Successful operations will depend in part on the Company's ability to attract, hire and retain highly skilled and motivated sales personnel. Compensation programs for sales representatives include both salary and commission. Commissions are based on a percentage of the gross profit generated by the sale, thereby allowing the sales representative to participate in XLSource's gross profit. XLSource's operations are managed by XLConnect pursuant to the Amended and Restated Services Agreement dated as of September 30, 1997 by and among the Company, XLConnect and XLSource (the "Services Agreement"). The Services Agreement provides for XLConnect to perform certain management, marketing and administrative services for the Company for $225,000 per month. These services include executive oversight, operations management at the corporate and branch levels, practice development, sales and sales management, marketing services, professional recruitment and legal, financial and accounting services. XLSource purchases the majority of the products its sells through a supply agreement with Ingram. In the event the Company is unable to continue its relationship with Ingram, it believes it could establish a similar relationship with another company in a reasonable period of time. Because of the competitive nature of the microcomputer distribution industry, the Company believes it could ultimately obtain terms as beneficial as those currently offered by Ingram. Ingram also provides configuration services, for a fee. The majority of the products purchased from Ingram are shipped directly from an Ingram warehouse to XLSource's customer. XLSource must be authorized by the manufacturer to sell that manufacturer's products, whether the product is purchased from Ingram, another source or the manufacturer. The purchasing operations of XLSource are centralized in one of its branches. This enables XLSource to more easily monitor and authorize purchases. It also limits the number of vendors used, so that overhead is minimized. XLSource's arrangements with the major manufacturers generally provide protection against declines in the dealer list price of products held in inventory by XLSource. These arrangements typically take the form of cash payments or credits against purchases in the amount equal to the difference between the price paid by XLSource and the new dealer list price. XLSource's manufacturers permit XLSource to pass through to its customers all warranties and return policies. XLSource subcontracts with XLConnect for any warranty work performed for customers. XLSource's customers operate in a variety of industries, and therefore, XLSource is not dependent on any single industry as a source for customers. No customer accounted for more than 10% of revenues generated by the four remaining XLSource branches. Sales to XLSource's top 25 customers accounted for approximately 50% of its revenue for the four branches in the year ended January 31, 1998 ("fiscal 1997"). The Company does not believe that the loss of any one customer would have a material adverse effect on its business. XLConnect Following the acquisition of FNOW, XLConnect was formed by combining the operations of one of the Company's existing subsidiaries with FNOW's professional services organization. XLConnect, an 80%-owned subsidiary of the Company, became a Nasdaq-traded company as a result of its initial public offering on October 17, 1996. XLConnect provides enterprise-wide solutions to clients with complex computing and communications requirements. As a single-source provider, XLConnect offers comprehensive internetworking services, applications development services, managed services and telecommunication services, as described below. XLConnect's solutions are custom designed to integrate computing and communications devices and equipment with software applications and systems to develop local area networks ("LANs") and to link LANs through public and private communications networks and the Internet to form wide area networks ("WANs"). Internetworking Services XLConnect designs and implements internetworking solutions to connect all segments of clients' networks using the proven products of leading hardware and software vendors. Through its internetworking services, XLConnect integrates computing and communications devices and equipment, such as PCs, workstations, databases, routers and hubs, with software applications and systems to develop LANs and to link LANs through public and private communications networks and the Internet to form WANs. LAN/WAN Consulting and Design. LAN/WAN consulting and design services involve assessing clients' information-sharing needs, evaluating existing infrastructure, analyzing current network performance and designing optimal system and network solutions. Implementation and Project Management. XLConnect implements network design solutions and assumes responsibility for managing entire projects. Elements of project management include configuring and installing desktop devices and networking equipment, configuring network operating systems and applications software, installing Internet web servers and implementing the infrastructure required for telecommunications services. XLConnect also provides services to enhance clients' information security over the Internet by customizing and implementing firewalls. Applications Development Services XLConnect's applications development services include customization and adaptation of proven software to meet clients' specific needs and training to support XLConnect's applications and internetworking solutions. Applications services provide clients with software solutions to improve productivity through more timely and accurate information-sharing and decision-making processes. XLConnect's applications solutions minimize development times while delivering quality solutions by using proven project management methodologies, risk assessment practices and software development techniques. Projects start with detailed needs assessments, requirements definitions and designs. The projects then involve prototype development, testing, implementation, training and support. Applications Development and Integration. XLConnect custom designs groupware, client/server and intranet software applications. In particular, XLConnect customizes IBM/Lotus Notes applications into comprehensive intranet group communications solutions, such as electronic messaging, bulletin boards and video and voice communications capabilities. XLConnect also customizes Microsoft Exchange to help clients exchange information seamlessly. XLConnect adapts Netscape and Microsoft software to enable clients to implement electronic mail, electronic commerce and other Internet applications over the World Wide Web. XLConnect also provides Internet applications to develop web pages using programming languages such as Java and HTML. Finally, XLConnect offers its own suite of proprietary, intranet-based applications which it bundles together with customization and other services such as training and refers to as "XLConnectNets." End-user Training. XLConnect offers comprehensive training through cooperative relationships with vendors such as Microsoft, Novell and IBM/Lotus to support its applications and internetworking solutions. Training is provided to end-users through programs designed to address the client's custom applications. In order to deliver training in an efficient and effective manner, XLConnect uses proven methodologies, assesses end- user training requirements and develops customized curricula. Additionally, technical certification training centers are located in eight of the Company's 27 locations and provide vendor-certified instructors. Managed Services XLConnect's managed services help clients to organize and manage their technology resources, enable them to outsource multiple aspects of their information technology functions and minimize their support costs from the desktop through the LAN and WAN. XLConnect's managed services reduce clients' costs of technology ownership, allowing them to focus on their core competencies and reduce their in-house support staffs. Technology Selection, Deployment and Management Services. XLConnect provides technology selection, procurement and deployment, asset management, software distribution and other support services. XLConnect places personnel on-site and dispatches personnel as needed to provide desktop and LAN support services. In addition, XLConnect also provides hardware repair services when requested by clients. Typically, XLConnect subcontracts a significant amount of these services to nationally recognized hardware repair providers. Network Management. XLConnect provides remote network monitoring and diagnostics through its Network Management Center, minimizing the client's need for costly on-site service. The Network Management Center is able to detect failures throughout clients' LANs and WANs, to troubleshoot routers, hubs, file servers and desktop devices remotely and to dispatch technicians if necessary. In addition, XLConnect will provide remote network management over the Internet for Microsoft NT and Novell based file server environments. XLConnect also provides network management services at clients' sites. Help Desk. XLConnect's help desk services provide software and network administration support, 24 hours a day, seven days a week, both on-site at the client and remotely from the Company's Help Desk Centers. Most of the calls involve software support for the clients' end-users. Telecommunications Services XLConnect's telecommunications services include the provision of data, microwave and voice transmission services. To provide these services, XLConnect has alliances with several leading telecommunications carriers and Internet service providers. XLConnect is a non-facilities-based sales agent, and in limited circumstances a reseller, of value-enhanced services including voice, Internet access, ISDN and frame relay services, utilizing public switched and dedicated private networks. Customers No customer accounted for more than 10% of XLConnect's revenues during fiscal 1997. Sales to XLConnect's top 25 customers accounted for approximately 37% of its revenues. XLConnect does not believe that the loss of any one customer would have a material adverse effect on its business. Indirect Business (Discontinued Operation) The Company provided the distribution of microcomputers and related equipment to network integrators and resellers, through a business-to- business approach. Although the Indirect Business had historically generated positive cash flows for the Company, it more recently had experienced a trend of declining sales caused by the Company's inability to retain and attract customers resulting from a number of factors and, accordingly, it was no longer generating positive cash flow. These factors included: fewer product lines offered by the Company compared to its larger competitors; a less favorable allocation of constrained products (which can command a higher gross margin) compared to prior years; increased competition; and continued consolidation in the reseller channel. Additionally, the Indirect Business was no longer able to take advantage of cash incentives offered by vendors due to the limited financial resources available to the Company. As a result, gross margin and product availability were negatively impacted. Product allocation and cash incentives are used by many vendors as an incentive for early payment. In the past, certain vendors of the Company required resellers to purchase products from only one source. All of the Company's major vendors changed their policy, allowing either "open sourcing" or "second sourcing" (collectively "open sourcing") which permits resellers to purchase products from more than one source. The decision to adopt open sourcing was made by two of the Company's largest vendors during the third quarter of fiscal 1996. These vendors' products historically totaled approximately 30% to 36% of the Company's revenues. As a result of open sourcing, competitive pricing pressures throughout the industry intensified and customer and brand loyalty was reduced. The Company believes that this change had an adverse effect on the Indirect Business' (and therefore the Company's) results from operations and its financial position. On April 29, 1997, the Company entered into a definitive agreement with Ingram to sell the stock and related assets and liabilities of the Indirect Business for $78.0 million (the "RND Transaction"). On July 16, 1997, the shareholders of the Company approved the RND Transaction and on July 18, 1997, the sale was consummated. The purchase price was paid by assumption of liabilities, based on the estimated balance sheet of the Indirect Business at the time of closing. The Company paid to Ingram approximately $4.5 million, which was the amount by which the estimated net assumed liabilities exceeded the purchase price. Three separate escrow accounts were established as part of the RND Transaction. An escrow in the amount of $10.0 million was established for final settlement of any purchase price adjustments and indemnity claims. This escrow was funded by an intercompany payable due from the Indirect Business to the Company, which was paid by Ingram into escrow. Another escrow account in the amount of $2.5 million was established pending resolution of certain issues between the Company and Ingram relating to pre-closing revenues. A third escrow account in the amount of $5.0 million was established to secure the Company's obligations under the Amended and Restated Volume Purchase Agreement (the "Supply Agreement"). This escrow was to be released after the Company completed its obligations under the Supply Agreement. Under the terms of the Supply Agreement, XLSource agreed to order 100% of its product requirements available from Ingram, of no less than $1.8 billion, over a three-year period. The Company was also required to provide a $7.5 million irrevocable letter of credit in favor of Ingram to secure further the Company's obligations under the Supply Agreement. On January 7, 1998, the Company and Ingram reached an agreement, dated as of November 21, 1997, whereby the material outstanding issues relating to the RND Transaction were settled. As a part of the agreement, which became effective as of January 7, 1998, the Company and Ingram agreed to the following: (a) The Supply Agreement was terminated and the Company and Ingram entered into a standard primary source supply agreement. The new supply agreement has no minimum purchase requirements or other volume purchase commitments and can be terminated with 30 days written notice by either party. (b) The escrow account in the amount of $5.0 million plus accrued interest, which was established to secure the Company's obligations under the Supply Agreement, was released to Ingram. (c) The escrow account in the amount of $2.5 million plus accrued interest, which was established pending resolution of certain issues between the Company and Ingram relating to revenues, was released to the Company. (d) All closing balance sheet issues and purchase price adjustments have been resolved. With respect to the escrow account in the amount of $10.0 million, which was established for final settlement of any purchase price adjustments and indemnity claims, Ingram received approximately $3.6 million plus accrued interest thereon, the Company received approximately $4.4 million plus accrued interest thereon and $2.0 million remained in escrow to cover any indemnity claims. Subsequent to January 31, 1998, the remaining $2.0 million escrow was released to the Company. (e) The $7.5 million irrevocable letter of credit used to secure the Company's obligations under the Supply Agreement was terminated and replaced by a $5.0 million irrevocable letter of credit to cover any indemnity claims. The letter of credit will expire no later than July 18, 2000. Competition Competition in the microcomputer industry is intense, principally in the areas of price, product availability and technical consulting, support and service. The Company competes with computer aggregators, distributors, resellers and retailers in the sale of its products and services as well as firms offering information technology implementation consulting services. The Company faces competition from microcomputer manufacturers that sell their products through direct sales forces and from distributors that emphasize mail order and telemarketing. Certain competitors have greater technical, marketing and financial resources than the Company. XLConnect competes in rapidly changing markets that are intensely competitive. These markets are highly fragmented with many direct and indirect competitors in each of them. XLConnect believes that the principal competitive factors for its services include technical expertise, breadth of service offerings, geographic reach, quality performance, client service and support, reputation, price of services and financial stability. XLConnect's competitors include the services organizations of established computer product manufacturers, value-added resellers, systems integrators and consultants, aggregators, distributors, specific service providers and long distance carriers and RBOCs. Many of XLConnect's current and potential competitors have substantially longer operating histories and financial, sales, marketing, technical and other competitive resources which are substantially greater than those of XLConnect. As a result, such competitors may be better able to respond or adapt to new or emerging technologies and changes in client requirements or to devote greater resources than XLConnect to XLConnect's markets, either through internal efforts or by forming strategic alliances with hardware or software vendors, telecommunication providers or other competitors of XLConnect, to offer new and improved services to XLConnect's clients or to increase their efforts to gain and retain market share through competitive pricing. There can be no assurance that XLConnect will be able to continue to compete successfully. Trademarks and Service Marks The trademarks or service marks "The Future Now, Inc.," "IE," "IE Intelligent Electronics," "XLConnect," "XLConnect Solutions," "XLConnectNets," "XLSource," and the design of the XLConnect logo are in use and are currently registered or are in the process of registration in the United States Patent and Trademark Office by the Company. Although the marks may not be registered with any states, the Company claims common law rights to the marks based on adoption and use. To the Company's knowledge, there are no pending interference, opposition or cancellation proceedings, or litigation, threatened or claimed, with respect to the marks in any jurisdiction. The Company holds no patents. Management believes that the Company's marks are valuable; however, the loss of use of any of the marks would not have a material adverse effect on the Company's business. Employees As of January 31, 1998, the Company had 1,646 full-time employees, of which approximately 1,500 were employed by XLConnect. No employee is represented by a labor union and the Company believes that its employee relations are good. Item 2. PROPERTY The Company leases approximately 16,000 square feet in Exton, Pennsylvania, primarily for its principal executive offices with a lease term expiring on December 31, 1998. In addition, the Company leases facilities for the XLConnect and XLSource branch locations expiring at various dates between 1998 and 2007. The Company believes that its facilities are adequate for its present needs. Item 3. LEGAL PROCEEDINGS In December 1994, several class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania (Civil Action Nos. 94-3753, 94-CV-7410, 94-CV-7388, and 94-CV-7405) against the Company and certain directors and officers. These lawsuits were consolidated with a class action lawsuit filed in 1992 against the Company, certain directors and officers, and the Company's auditor's in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 92-CV-1905). A derivative lawsuit was also filed in December 1994 in the Court of Common Pleas of Philadelphia County (No. 803) against the Company and certain of its directors and officers. These lawsuits alleged violations of certain disclosure and related provisions of the federal securities laws and breach of fiduciary duties, including allegations relating to the Company's practices regarding vendor marketing funds, and sought damages in unspecified amounts as well as other monetary and equitable relief. The Company reached a settlement of the class and derivative actions, without admitting any liability, under which the class and derivative plaintiffs will receive a total of $10 million. This settlement was approved by the Court on November 26, 1997 and became final upon the expiration of the thirty day appeal period. Of the $10 million, the Company contributed $3.8 million and the balance was funded by insurance. In addition, the Company is involved in various litigation and arbitration matters in the ordinary course of business. The Company believes that it has meritorious defenses in and is vigorously defending against all such matters. Management believes the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq Stock Market (symbol INEL). As of March 26, 1998, there were 972 shareholders of record. Set forth below is the range of the high and low sale prices for the Company's Common Stock as reported by the Nasdaq Stock Market during each fiscal quarter within the two most recent fiscal years: Quarter ended High Low ----------------- ----------- --------- January 31, 1998 $ 5 5/8 $ 4 7/16 November 1, 1997 $ 5 13/16 $ 3 1/32 August 2, 1997 $ 3 3/4 $ 2 3/8 May 3, 1997 $ 4 3/4 $ 2 1/4 February 1, 1997 $ 9 1/8 $ 3 3/4 November 2, 1996 $ 10 3/4 $ 5 3/4 August 3, 1996 $ 11 1/2 $ 5 May 4, 1996 $ 9 7/8 $ 3 1/2 The Company instituted a quarterly dividend of $0.08 per share on Common Stock in the second quarter of the year ended January 29, 1994 ("fiscal 1993"). On June 1, 1993, the Company paid a one-time special cash dividend of $2.00 per share on Common Stock. In the second quarter of the year ended January 28, 1995 ("fiscal 1994"), the quarterly dividend was increased to $0.10 per share on Common Stock. In the fourth quarter of the year ended February 3, 1996 ("fiscal 1995"), the quarterly dividend on Common Stock was suspended. It is unlikely that the quarterly dividend on Common Stock will be resumed. PAGE Item 6. SELECTED FINANCIAL DATA STATEMENT OF OPERATIONS DATA(1) for fiscal 1997, the year ended February 1, 1997 ("fiscal 1996"), fiscal 1995, fiscal 1994 and fiscal 1993 (in thousands, except per share data)
Fiscal Fiscal Fiscal Fiscal Fiscal 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Revenues from continuing operations $ 557,912 $ 779,642 $ 469,266 $ 10,357 $ -- Loss from continuing operations applicable to common shareholders (39,373) (44,340) (22,557) (22,649) (882) Basic and diluted loss from continuing operations per common share applicable to common shareholders $ (1.00) $ (1.27) $ (0.69) $ (0.65) $ (0.02) Cash dividends declared per share of Common Stock -- -- $ 0.30 $ 0.38 $ 2.24
BALANCE SHEET DATA
Fiscal Fiscal Fiscal Fiscal Fiscal 1997 1996 1995 1994 1993 -------- --------- --------- --------- --------- Total assets $ 207,489 $ 699,081 $ 839,349 $ 670,774 $ 577,011 Long-term debt reclassified as current -- 55,000 -- -- -- Long-term debt 5,152 3,496 80,025 -- -- Total shareholders' equity 91,854 135,471 178,036 167,484 218,850
(1) See Notes 3 and 4 to the Consolidated Financial Statements for information regarding the RND Transaction on July 18, 1997, the sale of certain assets of XLSource and certain specified managed services contracts and related assets of XLConnect on July 18, 1997 and the acquisition of FNOW on August 17, 1995. As a result of the RND Transaction, the results of operations presented have been restated to show the Indirect Business as a discontinued operation. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Continuing Operations Fiscal 1997 compared to Fiscal 1996 Revenues for fiscal 1997 decreased as compared to fiscal 1996 due to the XL Transaction, whereby the Company sold certain assets of locations generating approximately two-thirds of XLSource's historical revenues. On a pro forma basis (assuming the XL Transaction was consummated at the beginning of fiscal 1996), revenues would have been approximately $336.6 million in fiscal 1997 compared to approximately $305.4 million in fiscal 1996. Pro forma revenues generated by XLSource increased by 4.6% and XLConnect pro forma revenues increased by 21.5%. The XLConnect increases resulted from growth in most of its service areas. The gross margin percent for fiscal 1997 was 14.4% compared to 9.6% for fiscal 1996. During fiscal 1996, a major customer of the Company's rental program announced the adoption of a new technology platform resulting in the reassessment by the Company of the estimated future revenue stream under this program. This resulted in an estimated shortfall, of approximately $8 million, in future rental revenue compared to the Company's future related lease obligations. In addition, charges for changes in estimates for inventory reserves ($4.5 million) and vendor payables and receivable issues ($3.2 million) were also recorded. Excluding these charges, the gross margin percent for fiscal 1996 would have been 11.6%. The increase in gross margin percent was primarily attributable to an increase in revenues from the services section (XLConnect), which generates a higher gross margin percent. On a pro forma basis (assuming the XL Transaction was consummated at the beginning of fiscal 1996), the gross margin percent for fiscal 1997 would have been 18.6% compared to 15.5% for fiscal 1996, reflecting an increase in revenues from XLConnect. The pro forma gross margin percent for XLSource increased from 7.5% in fiscal 1996 to 9.5% in fiscal 1997. The increase reflects certain of the charges, as described above, taken in fiscal 1996, offset, in part by continued competitive pricing pressures and the loss of certain vendor discounts and funding as a result of decreased purchase volumes. The pro forma gross margin percent for XLConnect increased to 34.4% in fiscal 1997 compared to 31.7% in fiscal 1996. The increase was primarily due to the sale of certain lower-margin services contracts as part of the XL Transaction. Selling, general and administrative ("SG&A") expenses decreased to approximately $81.7 million (14.7% of revenues) in fiscal 1997 compared to approximately $101.5 million (13.0% of revenues) in fiscal 1996. The decrease in SG&A expenses is primarily due to the XL Transaction in July 1997 and the reduction of the corporate staff as a result of the XL and RND Transactions, offset in part by an increase in XLConnect's SG&A expenses to support continued growth of the services business. On a pro forma basis (assuming the XL Transaction was consummated at the beginning of fiscal 1996), SG&A expenses would have been approximately $60.8 million (18.1% of revenues) in fiscal 1997 compared to approximately $60.0 million (19.7% of revenues) in fiscal 1996. The pro forma increase in SG&A expenses was primarily due to an increase in XLConnect's SG&A expenses to support continued growth of the services business, partially offset by headcount reductions in the Company's corporate staff and at XLSource. It is anticipated that the decrease in the corporate staff and at XLSource will somewhat mitigate the continued increase in expenses related to XLConnect's growth. Amortization of intangibles decreased in fiscal 1997 compared to fiscal 1996 as a result of the XL Transaction which eliminated a portion of the goodwill associated with the FNOW acquisition. Interest expense decreased in fiscal 1997 compared to fiscal 1996 as a result of the proceeds from the XLConnect initial public offering in October 1996, the sale of Preferred Stock in October 1996 and January 1997 and the proceeds from the XL Transaction, which were used to repay outstanding debt. Investment and other income increased as the Company's investable cash increased due to the factors above. For fiscal 1997, the Company's effective tax rate was a 13.2% provision compared to a 11.8% benefit in fiscal 1996. The change in the Company's effective tax rate was primarily due to the write-off of non-deductible goodwill as part of the XL Transaction, partially offset by the use of the Company's net operating losses to offset taxable income in the second half of fiscal 1997. Fiscal 1996 Compared to Fiscal 1995 Revenues increased 66.1% in fiscal 1996 compared to fiscal 1995 as a result of the acquisition of FNOW in August 1995 and the subsequent inclusion of its operating results for the full year in fiscal 1996 compared to only 24 weeks in fiscal 1995. The gross margin percent for fiscal 1996 was 9.6% compared to 11.2% for fiscal 1995. The decrease in gross margin percent in fiscal 1996 compared to fiscal 1995 was primarily due to approximately $15.7 million of charges recorded in fiscal 1996. Excluding these charges, the gross margin percent for fiscal 1996 would have been 11.6%, reflecting an increase in revenues from the services sector (XLConnect), which generates a higher gross margin percent. SG&A expenses increased to approximately $101.5 million (13.0% of revenues) in fiscal 1996 compared to approximately $64.3 million (13.7% of revenues) in fiscal 1995. The increase in SG&A expenses is due primarily to the inclusion of FNOW's operating costs for the full year in fiscal 1996 compared to only 24 weeks in fiscal 1995, partially offset by savings realized as a result of workforce reductions which took place in fiscal 1995. Amortization of intangibles increased in fiscal 1996 compared to fiscal 1995 due to a full year of goodwill amortization associated with the FNOW acquisition. Investment and other income declined in fiscal 1996 compared to fiscal 1995 primarily due to the use of available cash during fiscal 1995 for the payment of cash dividends, capital expenditures and the repayment of FNOW's bank and finance company debt following the acquisition in August 1995. Interest expense increased in fiscal 1996 compared to fiscal 1995 as a result of the Company's more frequent use of its available financing arrangements for inventory financing and working capital purposes, higher average borrowing rates and the addition of $75 million of long-term debt in October 1995. The long-term debt was reduced to $55 million in October 1996. The Company's effective tax rate for fiscal 1996 was an 11.8% benefit compared to a 34.3% benefit for fiscal 1995. The change in the effective tax rate was due primarily to the increase in the valuation allowance for deferred tax assets. Results of Discontinued Operation and the RND Transaction For fiscal 1997, fiscal 1996 and fiscal 1995, the pre-tax income (loss) on discontinued operations was approximately $(19.0) million, $(60.5) million and $7.8 million, respectively. These changes were due to lower revenues and gross margin percent as a result of increased competitive pressures throughout the industry primarily due to open sourcing and the uncertainty of the future of the Indirect Business. The Indirect Business experienced a trend of declining sales caused by the Company's inability to retain and attract customers resulting from a number of factors. These factors included: fewer product lines offered by the Company compared to its larger competitors; a less favorable allocation of constrained products (which can command a higher gross margin); increased competition due to open sourcing; and continued consolidation in the reseller channel. In addition, the Indirect Business was no longer able to take advantage of cash incentives offered by vendors due to the limited financial resources available to the Company. During the third quarter of fiscal 1996, a decision to adopt open sourcing was made by two of the Company's largest vendors. These vendors' products historically totaled approximately 30% to 36% of the Company's revenues. This change and a trend of declining sales, gross margins, earnings and cash flows in the Indirect Business caused the Company to undertake a review of its long-lived assets in this business unit. As a result of this review, which was based on estimated undiscounted future cash flows of the business, it was determined that certain assets were impaired. The Company determined that the carrying value of its goodwill relative to the Indirect Business would not be recovered from future operations. Accordingly, this goodwill, amounting to approximately $55.5 million, was written-off as of November 2, 1996. This goodwill was recorded in 1988 and 1989 with the acquisitions of Entre Computer Centers, Inc. ("Entre") and Connect Point of America, Inc. ("CPA"), respectively. Both Entre and CPA had substantial franchise operations when they were acquired. Also, as a result of this review, the Company determined that certain technology investments would not be fully recovered from estimated future cash flows. The Company's configuration software, primarily consisting of licenses purchased from a third party in 1994 for the use of this system, was written down to its estimated recoverable value. This fiscal 1996 write-down, approximating $6 million, was due to a continuing trend of expenses exceeding revenues in this portion of the business and the introduction of competitive technology available through the use of the Internet. On April 29, 1997, the Company entered into a definitive agreement with Ingram to sell the stock and related assets and liabilities of the Indirect Business for $78.0 million. On July 16, 1997, the shareholders of the Company approved the sale of the Indirect Business as part of the RND Transaction and on July 18, 1997, the sale was consummated. The purchase price was paid by assumption of liabilities, based on the estimated balance sheet of the Indirect Business at the time of closing. The Company paid to Ingram approximately $4.5 million, which was the amount by which the estimated net assumed liabilities exceeded the purchase price. Three separate escrow accounts were established as part of the RND Transaction. An escrow in the amount of $10.0 million was established for final settlement of any purchase price adjustments and indemnity claims. This escrow was funded by an intercompany payable due from the Indirect Business to the Company, which was paid by Ingram into escrow. Another escrow account in the amount of $2.5 million was established pending resolution of certain issues between the Company and Ingram relating to pre-closing revenues. A third escrow account in the amount of $5.0 million was established to secure the Company's obligations under Supply Agreement. This escrow was to be released after the Company completed its obligations under the Supply Agreement. Under the terms of the Supply Agreement, XLSource agreed to order 100% of its product requirements available from Ingram, of no less than $1.8 billion, over a three-year period. The Company was also required to provide a $7.5 million irrevocable letter of credit in favor of Ingram to secure further the Company's obligations under the Supply Agreement. On January 7, 1998, the Company and Ingram reached an agreement, dated as of November 21, 1997, whereby the material outstanding issues relating to the RND Transaction were settled. As a part of the agreement, which became effective as of January 7, 1998, the Company and Ingram agreed to the following: (a) The Supply Agreement was terminated and the Company and Ingram entered into a standard primary source supply agreement. The new supply agreement has no minimum purchase requirements or other volume purchase commitments and can be terminated with 30 days written notice by either party. (b) The escrow account in the amount of $5.0 million plus accrued interest, which was established to secure the Company's obligations under the Supply Agreement, was released to Ingram. (c) The escrow account in the amount of $2.5 million plus accrued interest, which was established pending resolution of certain issues between the Company and Ingram relating to revenues, was released to the Company. (d) All closing balance sheet issues and purchase price adjustments have been resolved. With respect to the escrow account in the amount of $10.0 million, which was established for final settlement of any purchase price adjustments and indemnity claims, Ingram received approximately $3.6 million plus accrued interest thereon, the Company received approximately $4.4 million plus accrued interest thereon and $2.0 million remained in escrow to cover any indemnity claims. Subsequent to January 31, 1998, the remaining $2.0 million escrow was released to the Company. (e) The $7.5 million irrevocable letter of credit used to secure the Company's obligations under the Supply Agreement was terminated and replaced by a $5.0 million irrevocable letter of credit to cover any indemnity claims. The letter of credit will expire no later than July 18, 2000. As a result of the RND Transaction, the Company has recorded a pre-tax gain of approximately $11.5 million, net of transaction costs, and a tax provision of approximately $4.6 million. Results of the Indirect Business have been reported separately as a discontinued operation in the accompanying Consolidated Statements of Operations. Liquidity and Capital Resources The Company has financed its operations to date from stock offerings, bank and subordinated borrowings, inventory financing, sales of businesses and internally generated funds. The principal uses of its cash have been to fund its accounts receivable and inventory, make acquisitions, repurchase common stock, invest in systems technology, and pay cash dividends. During fiscal 1997, cash used by operating activities totaled approximately $21.3 million compared to approximately $34.0 million of cash used in fiscal 1996. This change can be attributed primarily to the lower operating loss and an increase in accounts payable and accrued liabilities, partially offset by an increase in accounts receivable in fiscal 1997 compared to fiscal 1996. At January 31, 1998, the Company had cash and cash equivalents of $46.6 million compared to $42.9 million at February 1, 1997. The increase is primarily due to the proceeds from the XL Transaction, partially offset by the repayment of the long-term debt reclassified as current, operating losses in the first and second quarters of fiscal 1997 and losses attributed to the discontinued operation. In addition, at January 31, 1998, the Company had approximately $15.8 million in escrow classified as a current asset pending resolution of the XL Transaction closing balance sheet and accounts receivable issues and indemnity claims related to the RND Transaction. Subsequent to January 31, 1998, the closing balance sheet and accounts receivable issues related to the XL Transaction were resolved with approximately $13.8 million of the escrow being released to the Buyer and the Company paying approximately $4.6 million to the Buyer. In addition, the $2.0 million escrow related to indemnity claims from the RND Transaction was released to the Company. Working capital was positive $43.6 million at January 31, 1998 compared to negative working capital of $18.3 million at February 1, 1997. The reason for the negative working capital was the reclassification of $55 million of long-term debt to a current liability. Without this reclassification, the Company would have had positive working capital of $36.7 million as of February 1, 1997. The increase in working capital at January 31, 1998 is due primarily to proceeds from the XL Transaction and the sale of the Indirect Business (which had negative working capital at February 1, 1997) in the RND Transaction, partially offset by the repayment of the long-term debt reclassified as current. At January 31, 1998, the Company had a $55 million financing agreement with a finance company, of which $17.7 million was available after considering the borrowing base formula (including the reduction due to the $5.0 million irrevocable letter of credit to secure any indemnity claims brought by Ingram) and trade payables outstanding to a vendor related to the finance company. In the fourth quarter of fiscal 1995, the Board of Directors suspended the Company's quarterly dividend. If the Mergers are not completed, based on the Company's expected level of operations, including plans to improve the performance of the remaining locations of XLSource, and capital expenditure requirements, management believes that the Company's cash, internally generated funds and available financing arrangements will be sufficient to meet the Company's cash requirements at least for the next twelve months. Sale of the Company and XLConnect On March 4, 1998, the Company and XLConnect executed an Agreement and Plan of Merger with Xerox, whereby Xerox, will acquire through the Mergers (i) all of the outstanding capital stock of the Company in exchange for cash in the amount of $7.60 per share and (ii) all of the outstanding capital stock of XLConnect not owned by the Company in exchange for cash in the amount of $20.00 per share. The closing of the Mergers is subject to shareholder approval of both the Company and XLConnect at meetings currently anticipated to occur no later than June 30, 1998 and other customary terms and conditions. However, there can be no assurance that the Mergers will be completed. After the closing of the Mergers, the Company and XLConnect will be wholly-owned subsidiaries of Xerox. Inflation and Seasonality The Company believes that inflation has not had a material impact on its operations or liquidity to date. The Company believes that its business is subject to some seasonality, and that weaker sales in the services part of the business (XLConnect) may be experienced during the fourth quarter due to fewer business days and plant closings around the holidays. The computer products part of the business (XLSource) follows a seasonal pattern with peaks occurring near the end of the calendar year. Year 2000 Issues The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information in the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or systems failures. Based on preliminary information, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, they could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Intelligent Electronics, Inc. and its subsidiaries, listed under Item 14(a)(1) are filed as part of this Annual Report on Form 10-K. REPORTS OF INDEPENDENT ACCOUNTANTS - ---------------------------------- The Board of Directors and Shareholders Intelligent Electronics, Inc. We have audited the accompanying consolidated balance sheet of Intelligent Electronics, Inc. and subsidiaries as of January 31, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Electronics, Inc. and subsidiaries as of January 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Philadelphia, PA April 2, 1998 - --------------------------------------------------------------------------- To the Board of Directors and Shareholders Intelligent Electronics, Inc. In our opinion, the consolidated balance sheet and the related consolidated statements of operations, of shareholders' equity and of cash flows as of and for each of the two years in the period ended February 1, 1997 present fairly, in all material respects, the financial position, results operations and cash flows of Intelligent Electronics, Inc. and its subsidiaries as of and for each of the two years in the period ended February 1, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Intelligent Electronics, Inc. for any period subsequent to February 1, 1997. PRICE WATERHOUSE LLP Philadelphia, Pennsylvania April 30, 1997
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Balance Sheets (in thousands, except share-related data) January 31, February 1, 1998 1997 ----------- ----------- Assets ------ Current assets: Cash and cash equivalents $ 46,586 $ 42,881 Escrow receivables 15,813 -- Accounts receivable (net of allowance for doubtful accounts of $3,994 in 1997 and $8,101 in 1996) 63,323 149,107 Inventory 2,628 311,669 Prepaid expenses and other current assets 1,656 4,834 Deferred income taxes 7,617 11,861 ----------- ---------- Total current assets 137,623 520,352 Property and equipment, net 9,885 58,712 Intangible assets, primarily goodwill (net of accumulated amortization of $7,014 in 1997 and $7,389 in 1996) 43,576 91,914 Other assets 16,405 28,103 ----------- ---------- Total assets $ 207,489 $ 699,081 =========== ========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $ 16 $ 3,486 Accounts payable 40,473 430,107 Accrued liabilities 32,561 49,434 Income taxes payable 7,695 600 Accrued liabilities for sale of business 13,269 -- Long-term debt reclassified as current -- 55,000 ----------- ---------- Total current liabilities 94,014 538,627 Long-term debt 5,152 3,496 Other long-term liabilities 4,935 11,015 Minority interest 11,534 10,472 Commitments and contingencies (Notes 3, 6, 7, 10, 14, 15 and 16) Shareholders' equity: Preferred stock $1.00 par value per share: Authorized 15,000,000 shares, none issued and outstanding -- -- Series B convertible preferred stock $50.00 par value per share: Authorized 200,000 shares, issued and outstanding: none in 1997 and 15,000 in 1996 -- 750 Common stock $.01 par value per share: Authorized 100,000,000 shares; issued: 47,052,959 in 1997 and 41,352,973 in 1996 471 413 Additional paid-in capital 286,210 284,666 Treasury stock, at cost (5,254,868 shares in 1997 and 5,303,332 shares in 1996) (66,696) (67,311) Retained deficit (128,131) (83,047) ----------- ---------- Total shareholders' equity 91,854 135,471 ----------- ---------- Total liabilities and shareholders' equity $ 207,489 $ 699,081 =========== ==========
See accompanying notes to consolidated financial statements.
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data) Year ended -------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Revenues $ 557,912 $ 779,642 $ 469,266 Cost of goods sold 477,412 704,926 416,882 ----------- ----------- ----------- Gross profit 80,500 74,716 52,384 ----------- ----------- ----------- Operating expenses: Selling, general and administrative expenses 81,719 101,499 64,283 Amortization of intangibles, primarily goodwill 3,781 4,960 2,300 Branch closure costs -- 9,790 -- ----------- ----------- ----------- Total operating expenses 85,500 116,249 66,583 ----------- ----------- ----------- Loss from operations (5,000) (41,533) (14,199) Other income (expense): Investment and other income, net 1,493 200 2,099 Interest expense (3,327) (8,712) (5,838) Loss on XL Transaction (26,749) -- -- ----------- ----------- ----------- Loss from continuing operations before provision (benefit) for income taxes, equity in loss of affiliate, and minority interest (33,583) (50,045) (17,938) Provision (benefit) for income taxes 4,443 (5,895) (6,143) ----------- ----------- ----------- Loss from continuing operations before equity in loss of affiliate and minority interest (38,026) (44,150) (11,795) Equity in loss of affiliate (net of benefit of $1,123) -- -- (10,762) ----------- ----------- ----------- Loss from continuing operations before minority interest (38,026) (44,150) (22,557) Minority interest (990) (70) -- ----------- ----------- ----------- Loss from continuing operations (39,016) (44,220) (22,557) Discontinued operation: Income (loss) from discontinued operation (net of tax provision (benefit) of $(6,875), $(623) and $4,694) (12,095) (59,834) 3,069 Gain on sale of discontinued operation (net of tax provision of $4,582) 6,875 -- -- ----------- ----------- ----------- Net loss (44,236) (104,054) (19,488) Preferred stock dividend 357 120 -- ----------- ----------- ----------- Net loss applicable to common shareholders $ (44,593) $ (104,174) $ (19,488) =========== =========== =========== Basic and diluted loss per share: Continuing operations $ (1.00) $ (1.27) $ (0.69) Discontinued operation (0.30) (1.71) 0.10 Sale of discontinued operation 0.17 -- -- ----------- ----------- ----------- Basic and diluted net loss per share applicable to common shareholders $ (1.13) $ (2.98) $ (0.59) =========== =========== =========== Weighted average number of common shares and share equivalents outstanding: 39,539 34,988 32,794
See accompanying notes to consolidated financial statements.
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Statements of Shareholders' Equity (in thousands, except share-related data) Series B Total Convertible Additional share- Common preferred paid-in Treasury Retained holders' stock stock capital stock deficit equity ---------- ---------- ---------- ---------- ---------- ---------- Balance at January 28, 1995 $ 395 $ 221,008 $(105,677) $ 51,758 $ 167,484 Issuance of 390,700 shares on exercise of options and related tax benefit 4 2,986 -- -- 2,990 Reissuance of 2,952,282 shares of treasury stock for the acquisition of FNOW -- -- 37,470 (936) 36,534 Cash dividends ($0.30 per share) -- -- -- (9,750) (9,750) Net change in unrealized loss on securities and investments -- 266 -- -- 266 Net loss -- -- -- (19,488) (19,488) ---------- ---------- ---------- ---------- ---------- ---------- Balance at February 3, 1996 399 224,260 (68,207) 21,584 178,036 Issuance of 222,172 shares on exercise of options and related tax benefit 2 1,982 -- -- 1,984 Issuance of 807,415 shares for acquisition of E-C 8 7,208 -- -- 7,216 Issuance of 412,737 shares for acquisition of RCK 4 3,014 -- -- 3,018 Issuance of 15,000 shares of preferred stock -- $ 750 13,456 -- -- 14,206 Reissuance of 70,586 shares of treasury stock for employee stock purchase plan -- -- -- 896 (457) 439 Sale of stock by subsidiary -- -- 34,708 -- -- 34,708 Net change in unrealized loss on securities and investments -- -- 38 -- -- 38 Net loss applicable to common shareholders -- -- -- -- (104,174) (104,174) ---------- ---------- ---------- ---------- ---------- ---------- Balance at February 1, 1997 413 750 284,666 (67,311) (83,047) 135,471 Issuance of 5,699,986 shares upon conversion of preferred stock 58 (750) 1,188 -- -- 496 Reissuance of 48,464 shares of treasury stock for employee stock purchase plan -- -- -- 615 (491) 124 Warrants and common stock issued by subsidiary -- -- 356 -- -- 356 Net loss applicable to common shareholders -- -- -- -- (44,593) (44,593) ---------- ---------- ---------- ---------- ---------- ---------- Balance at January 31, 1998 $ 471 -- $ 286,210 $ (66,696) $(128,131) $ 91,854 ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Year ended ------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (44,236) $(104,054) $ (19,488) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 9,425 11,605 5,911 Write-off of property and equipment 2,849 227 -- Branch closure costs -- 9,790 -- Deferred taxes 2,865 (4,293) 3,242 Provision for losses on trade receivables 5,694 1,794 857 Provision for write-down of inventory 2,919 3,842 446 Minority interest in net income of XLConnect 990 70 -- (Income) loss from discontinued operation 12,095 59,834 (3,069) Gain on RND Transaction (6,875) -- -- Equity in loss of affiliate -- -- 11,885 Changes in assets and liabilities excluding effects of business sales and acquisitions: Accounts receivable (34,064) 30,073 (26,341) Inventory (7,630) 21,820 1,491 Other current assets 402 753 5,225 Accounts payable 13,426 (57,457) (47,524) Accrued and other current liabilities 20,845 (8,018) (3,024) ---------- ----------- ---------- Net cash used for operating activities (21,295) (34,014) (70,389) ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales and maturities of marketable securities -- -- 8,675 Proceeds from XL Transaction 135,740 -- -- Transfers to escrow receivables (50,313) -- -- Transfers from escrow receivables 34,500 -- -- Acquisition of property and equipment, net of disposals (7,920) (5,163) (2,994) Other (744) (560) (779) ---------- ----------- ---------- Net cash provided by (used for) investing activities 111,263 (5,723) 4,902 ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayments) from working capital advances -- (7,540) -- Proceeds from long-term debt 5,500 -- 75,000 Cash dividends paid -- -- (12,869) Net proceeds from XLConnect initial public offering -- 45,110 -- Net proceeds from sale of preferred stock -- 14,206 -- Repayment of long-term debt reclassified as current (55,000) -- -- Repayment of long-term debt -- (20,000) -- Repayment of FNOW's bank debt -- -- (50,009) Proceeds from exercise of stock options 84 1,984 2,990 Proceeds from employee stock purchase plan 124 439 -- Reduction in capital lease obligations (606) (437) (270) ---------- ----------- ---------- Net cash provided by (used for) financing activities (49,898) 33,762 14,842 ---------- ----------- ---------- Net cash provided by (used for) continuing operations 40,070 (5,975) (50,645) Cash provided by (used for) discontinued operation (36,365) 14,238 16,236 ---------- ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,705 8,263 (34,409) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,881 34,618 69,027 ---------- ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 46,586 $ 42,881 $ 34,618 ========== =========== ==========
See accompanying notes to consolidated financial statements. INTELLIGENT ELECTRONICS, INC. and Subsidiaries Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Intelligent Electronics, Inc. (the "Company") provides information technology products, services and solutions to corporate customers, educational institutions and governmental agencies in the United States, primarily through its branch locations. The Company was founded in 1982 and is a Pennsylvania corporation. In March 1984, the Company commenced the wholesale distribution of microcomputers. On August 17, 1995, the Company exchanged shares of its Common Stock for all of the remaining shares (approximately 69%) of The Future Now, Inc. ("FNOW"), not then owned by the Company (See Note 4). The acquisition of FNOW, a computer sales and services company, expanded the Company's offerings through the addition of a direct hardware sales organization ("XLSource") and a professional services organization providing a wide range of sophisticated customer support and consulting services. The professional services organization was combined with one of the Company's existing subsidiaries to form XLConnect Solutions, Inc. ("XLConnect"), which was incorporated in January 1996. On October 17, 1996, XLConnect completed an initial public offering with the Company retaining an 80%-ownership interest (See Note 5). On July 18, 1997, the Company sold certain assets of XLSource and XLConnect sold certain specified managed services contracts and related assets (see Note 3). Also on July 18, 1997, the Company sold its business (the "Indirect Business") of providing information technology products, services and solutions to network integrators and resellers and, accordingly, the Indirect Business is treated as a discontinued operation in the accompanying financial statements (see Note 3). The principal products sold, installed and serviced by the Company include microcomputers, workstations, local and wide area network systems, computer software and peripherals and telecommunications equipment. The Company also offers a wide range of sophisticated customer support and consulting services. Unless otherwise indicated, amounts and disclosures referred to herein relate to continuing operations. Preparation of Financial Statements The consolidated financial statements include the accounts of the Company and its subsidiaries. Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. All material intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform with the current year presentation. Definition of Fiscal Year The fifty-two week periods ended January 31, 1998 and February 1, 1997 and the fifty-three week period ended February 3, 1996 are referred to herein as "fiscal 1997," "fiscal 1996" and "fiscal 1995," respectively. Cash and Cash Equivalents Cash and cash equivalents comprise the Company's cash balances and short- term investments with an initial maturity of less than ninety days and include money-market funds and commercial paper. Short-term investments totaled approximately $35.9 million and $37.5 million at January 31, 1998 and February 1, 1997, respectively. The carrying amount of cash and short- term investments approximates fair market value due to the short-term maturity of these instruments. Inventory Inventory consists of microcomputers, related peripheral products and software, and is valued at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment are carried at cost. The cost of additions and improvements is capitalized, while maintenance and repairs are charged to operations when incurred. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (three to ten years). Leasehold improvements are amortized over the shorter of their useful lives or the remaining lease term. Leases meeting the capitalization requirements of the Statement of Financial Accounting Standards No. 13 are capitalized and depreciated over the lease term. Depreciation expense totaled approximately $5.6 million, $6.6 million and $3.6 million for fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Accumulated depreciation was approximately $20.4 million at January 31, 1998 and $40.3 million (including accumulated depreciation of assets which were part of the discontinued operation) at February 1, 1997. Goodwill Goodwill, resulting from acquisitions accounted for under the purchase method, is amortized using the straight-line method over a 20-year period. The Company continually evaluates the carrying value of the goodwill by comparing it to the estimated undiscounted cash flows of the operations which gave rise to such goodwill. Accordingly, during fiscal 1996, the Company wrote-off $55.5 million of goodwill relating to acquisitions made in 1988 and 1989, which were part of the discontinued operation (See Note 3), and wrote-down an additional $8 million of goodwill relating to the portion of the goodwill associated with closed XLSource branch locations (See Note 8). Revenue Recognition Revenue from product sales is recognized at the time of shipment to the customer. Revenue associated with maintenance service contracts is recorded ratably over the service period of the contract. Costs related to these contracts are recorded when incurred. Revenue from professional service contracts is recognized as the services are provided to the customer on a percentage-of-completion basis. The Company receives various marketing development funds from vendors for marketing programs and product rebates which are accounted for as revenue, a reduction in product cost or a reduction of selling, general and administrative expenses ("SG&A"), according to the nature of the program. The amounts classified as SG&A offset marketing program costs that were incurred to administer and implement the marketing program designed to promote the sale of vendors' products. The amounts recorded for fiscal 1997, fiscal 1996 and fiscal 1995 for vendor supported marketing programs are as follows (in thousands): Fiscal 1997 Fiscal 1996 Fiscal 1995 ------------ ----------- ----------- Revenues $ 1,545 $ -- $ -- Product cost 80 3,406 1,865 SG&A 1,594 1,452 2,445 ------------ ----------- ----------- Total funding $ 3,219 $ 4,858 $ 4,310 ============ =========== =========== Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"). Pursuant to SFAS No. 109, deferred tax assets and liabilities are recorded for temporary differences which enter into the determination of taxable income in different periods for financial reporting and income tax purposes. A valuation allowance has been provided to reduce deferred tax assets to their estimated net realizable amount. Fair Value of Financial Instruments The following disclosures of the estimated fair value of financial instruments were made in accordance with the requirements of Statement of Financial Accounting Standards No. 107. Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Cash and cash equivalents, accounts receivable and accounts payable - The carrying amount of these items are a reasonable estimate of their fair value due to the short-term maturity of these instruments. Long-term debt - Rates currently available to the Company for debt with similar terms is used to estimate its fair value. Accordingly, the carrying amount of debt is a reasonable estimate of its fair value. Loss Per Share Applicable to Common Shareholders The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"), which is designed to simplify the existing computational guidelines for the earnings per share ("EPS") information provided in financial statements, to revise the disclosure requirements and to increase the comparability of EPS data on an international basis. Pursuant to SFAS 128, the Company reflected on its Consolidated Statements of Operations basic EPS and diluted EPS for fiscal 1997, fiscal 1996 and fiscal 1995. Adoption of SFAS No. 128 did not impact the amount of EPS reported and, due to the Company's losses in each of the past three years, there is no difference in the amounts calculated as basic EPS and diluted EPS. The weighted average number of shares used to calculate the basic and diluted loss per share was 39,538,949 in fiscal 1997, 34,987,262 in fiscal 1996 and 32,794,047 in fiscal 1995. There were no options included in the diluted EPS calculation for the years presented as the inclusion of options would have been anti-dilutive. Accrued cumulative preferred stock dividends (6% per annum) are deducted from the net loss in determining net loss applicable to common shareholders. Treasury stock transactions are recorded on their trade date and reduce weighted average shares outstanding from that date. Recent Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"), which is effective for financial statements issued for periods beginning after December 15, 1997. SFAS No. 130 requires the presentation of comprehensive income and establishes standards for reporting its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company does not expect the adoption of SFAS No. 130 to have a material effect on its reported financial condition or results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"), which is effective for financial statements issued for periods beginning after December 15, 1997. SFAS No. 131 establishes standards for the way publicly-traded companies report information about operating segments as well as disclosures about products and services, geographic areas and major customers. The Company does not expect the adoption of SFAS No. 131 to have a material effect on its reported financial condition or results of operations. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, Employer's Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132"), which is effective for financial statements issued for periods beginning after December 15, 1997. SFAS No. 132 standardizes the disclosure requirements of previous standards. The Company does not expect the adoption of SFAS No. 132 to have a material effect on its reported financial condition or results of operations. (2) SUBSEQUENT EVENT - SALE OF THE COMPANY AND XLCONNECT On March 4, 1998, the Company and XLConnect executed an Agreement and Plan of Merger with Xerox, whereby Xerox, will acquire through the Mergers (i) all of the outstanding capital stock of the Company in exchange for cash in the amount of $7.60 per share and (ii) all of the outstanding capital stock of XLConnect not owned by the Company in exchange for cash in the amount of $20.00 per share. The closing of the Mergers is subject to shareholder approval of both the Company and XLConnect at meetings currently anticipated to occur no later than June 30, 1998 and other customary terms and conditions. However, there can be no assurance that the Mergers will be completed. After the closing of the Mergers, the Company and XLConnect will be wholly- owned subsidiaries of Xerox. (3) SALES OF BUSINESSES XL Transaction On July 18, 1997, the Company and certain of its direct and indirect wholly-owned subsidiaries and XLConnect consummated the sale of certain assets under an Asset Purchase Agreement, as amended (the "Purchase Agreement") with GE Capital Information Technology Solutions Acquisition Corp. (the "Buyer"), a subsidiary of GE Capital Information Technology Solutions, Inc. ("GECITS"), pursuant to which: (a) The Company sold to the Buyer certain assets related to XLSource, consisting primarily of the inventory, accounts receivable and customer contracts relating to 20 of the 24 XLSource locations and real property leases and fixed assets related to six of such 20 locations; and (b) XLConnect sold to the Buyer certain specified managed services contracts and related assets, consisting principally of accounts receivable and fixed assets. The purchase price paid by the Buyer in the transaction pursuant to the Purchase Agreement (the "XL Transaction") was approximately $136.5 million, based on the estimated net book value of the assets being sold of approximately $95.0 million. Of the total purchase price paid in the XL Transaction, XLConnect received approximately $10.3 million (based on the estimated net book value of the assets acquired from it of approximately $5.6 million). Of the purchase price, approximately $102.9 million was paid in cash at closing, with approximately $32.8 million paid into escrow. Approximately $22.8 million of the total escrow was subject to release if and when the consent of two customers, whose contracts with XLSource were assigned in the transaction, are obtained. On September 15, 1997, $19.0 million was released as a result of obtaining one of the required consents. The remaining $10.0 million in escrow was to be retained for up to 240 days to fund purchase price adjustments and obligations of the Company and XLConnect under the Purchase Agreement, including the obligation to repurchase from the Buyer any accounts receivable which were sold to the Buyer and remain uncollected 120 days after the closing date. The Company and the Buyer reached an agreement, dated as of February 6, 1998, whereby the outstanding issues related to the XL Transaction have been settled. As part of the agreement, the Company and the Buyer agreed to the following: (a) All closing balance sheet issues have been resolved. The Buyer will receive a payment from the Company of approximately $4.4 million. (b) The Buyer assigned to the Company uncollected receivables of approximately $14.1 million. The Company will use the balance in escrow, approximately $13.8 million, plus a cash payment of approximately $0.3 million to fund this repurchase. (c) The above payments will be treated as a reduction in the purchase price. As a result of the XL Transaction, the Company recorded a pre-tax loss of approximately $26.7 million, net of transaction costs, plus a tax provision of approximately $2.7 million. The tax provision is due to differences between the tax bases of the assets being sold and their amounts for financial reporting purposes (primarily goodwill). RND Transaction On April 29, 1997, the Company entered into a definitive agreement with Ingram to sell the stock and related assets and liabilities of the Indirect Business for $78.0 million (the "RND Transaction"). On July 16, 1997, the shareholders of the Company approved the RND Transaction and on July 18, 1997, the sale was consummated. The purchase price was paid by assumption of liabilities, based on the estimated balance sheet of the Indirect Business at the time of closing. The Company paid to Ingram approximately $4.5 million, which was the amount by which the estimated net assumed liabilities exceeded the purchase price. Three separate escrow accounts were established as part of the RND Transaction. An escrow in the amount of $10.0 million was established for final settlement of any purchase price adjustments and indemnity claims. This escrow was funded by an intercompany payable due from the Indirect Business to the Company, which was paid by Ingram into escrow. Another escrow account in the amount of $2.5 million was established pending resolution of certain issues between the Company and Ingram relating to pre-closing revenues. A third escrow account in the amount of $5.0 million was established to secure the Company's obligations under the Amended and Restated Volume Purchase Agreement (the "Supply Agreement"). This escrow was to be released after the Company completed its obligations under the Supply Agreement. Under the terms of the Supply Agreement, XLSource agreed to order 100% of its product requirements available from Ingram, of no less than $1.8 billion, over a three-year period. The Company was also required to provide a $7.5 million irrevocable letter of credit in favor of Ingram to secure further the Company's obligations under the Supply Agreement. On January 7, 1998, the Company and Ingram reached an agreement, dated as of November 21, 1997, whereby the material outstanding issues relating to the RND Transaction were settled. As a part of the agreement, which became effective as of January 7, 1998, the Company and Ingram agreed to the following: (a) The Supply Agreement was terminated and the Company and Ingram entered into a standard primary source supply agreement. The new supply agreement has no minimum purchase requirements or other volume purchase commitments and can be terminated with 30 days written notice by either party. (b) The escrow account in the amount of $5.0 million plus accrued interest, which was established to secure the Company's obligations under the Supply Agreement, was released to Ingram. (c) The escrow account in the amount of $2.5 million plus accrued interest, which was established pending resolution of certain issues between the Company and Ingram relating to revenues, was released to the Company. (d) All closing balance sheet issues and purchase price adjustments have been resolved. With respect to the escrow account in the amount of $10.0 million, which was established for final settlement of any purchase price adjustments and indemnity claims, Ingram received approximately $3.6 million plus accrued interest thereon, the Company received approximately $4.4 million plus accrued interest thereon and $2.0 million remained in escrow to cover any indemnity claims. Subsequent to January 31, 1998, the remaining $2.0 million escrow was released to the Company. (e) The $7.5 million irrevocable letter of credit used to secure the Company's obligations under the Supply Agreement was terminated and replaced by a $5.0 million irrevocable letter of credit to cover any indemnity claims. The letter of credit will expire no later than July 18, 2000. As a result of the RND Transaction, the Company has recorded a pre-tax gain of approximately $11.5 million, net of transaction costs, and a tax provision of approximately $4.6 million. Results of the Indirect Business have been reported separately as a discontinued operation in the accompanying Consolidated Statements of Operations. The results of operations of the Indirect Business excluded from continuing operations are summarized as follows (in thousands): Fiscal Fiscal Fiscal 1997 1996 1995 --------- ---------- ---------- Revenues $ 787,821 $2,566,915 $3,118,833 Costs and expenses 806,791 2,627,372 3,111,070 --------- ---------- ---------- Income (loss) before taxes (18,970) (60,457) 7,763 Income tax provision (benefit) (6,875) (623) 4,694 --------- ---------- ---------- Income (loss) from discontinued operation $(12,095) $ (59,834) $ 3,069 ========= ========== ========== The assets and liabilities related to the Indirect Business in the February 1, 1997 Consolidated Balance Sheet consisted of the following (in thousands): Cash $ 41,102 Accounts receivable 32,891 Inventory 301,433 Other current assets 8,277 Property and equipment 43,674 Other long-term assets 7,335 Short-term debt (2,873) Accounts payable (401,562) Accrued liabilities (22,549) Long-term debt (3,463) Other long-term liabilities (1,084) ---------- Net assets of discontinued operation $ 3,181 ========== Unaudited pro forma results of operations of the Company for fiscal 1997 and fiscal 1996, assuming the XL Transaction and the RND Transaction were consummated on February 4, 1996, are as follows (in thousands except per share data): Fiscal Fiscal 1997 1996 ----------- ----------- Revenues from continuing operations $ 336,615 $ 305,367 Loss from continuing operations (1,616) (12,829) Loss from continuing operations per share (0.04) (0.37) Unaudited pro forma financial information presented above is not necessarily indicative of the results of operations that would have occurred had the XL Transaction and the RND Transaction taken place at the beginning of the periods presented or of future results of operations. 1996 Asset Impairment During the third quarter of fiscal 1996, a decision to adopt open sourcing was made by two of the Company's largest vendors. These vendors' products historically totaled approximately 30% to 36% of the Company's revenues. Under open sourcing, franchisees and other resellers are no longer required to purchase product exclusively from the Company. This change and a trend of declining sales, gross margins, earnings and cash flows in the Indirect Business caused the Company to undertake a review of its long-lived assets in this business unit. As a result of this review, which was based on estimated undiscounted future cash flows of the business, it was determined that certain assets were impaired. The Company determined that the carrying value of its goodwill relative to the Indirect Business would not be recovered from future operations. Accordingly, this goodwill, amounting to approximately $55.5 million, was written-off as of November 2, 1996. This goodwill was recorded in 1988 and 1989 with the acquisitions of Entre and CPA, respectively. Both Entre and CPA had substantial franchise operations when they were acquired. Also, as a result of this review, the Company determined that certain technology investments would not be fully recovered from estimated future cash flows. The Company's configuration software, primarily consisting of licenses purchased from a third party in 1994 for the use of this system, was written down to its estimated recoverable value. This write-down, approximating $6.0 million, was due to a continuing trend of expenses exceeding revenues in this portion of the business and the introduction of competitive technology available through the use of the Internet. (4) ACQUISITIONS On October 23, 1996, the Company issued 807,415 shares of its Common Stock (valued at $7.2 million) in exchange for all of the common stock of E-C Computer Technical Services, Inc. ("E-C"), a computer reseller. On December 23, 1996, the Company issued 412,737 shares of its Common Stock (valued at $3.0 million) in exchange for all of the common stock of RCK Computers, Inc. ("RCK"), a computer reseller. The acquisition of E-C was originally accounted for as a pooling of interests transaction during the third quarter of 1996 and was subsequently changed to the purchase method in the fourth quarter of 1996. This change occurred as a result of the decision by the Company's Board of Directors to explore strategic alternatives including the possible sale of all or a portion of XLConnect, the spin-off of XLConnect to the Company's shareholders or the sale of one or more of the Company's operations or business segments. The acquisition of E-C, therefore, no longer qualified for the use of the pooling of interests method. The acquisition of RCK was accounted for using the purchase method. The operating results of E-C and RCK have been included in the consolidated operating results since their dates of acquisition. The allocation of the purchase price for both E-C and RCK was based on the estimated fair value of the assets acquired and liabilities assumed. The purchase price was allocated as follows (in thousands): Accounts receivable $ 6,135 Inventory 911 Other current assets 216 Property and equipment 274 Goodwill 8,353 Short-term debt (1,780) Accounts payable (3,160) Accrued liabilities (697) Long-term debt (18) ---------- Total purchase price $ 10,234 ========== The acquisitions of E-C and RCK had no material effect on the consolidated results of operations in fiscal 1996. Additionally, if the acquisitions had occurred at the beginning of fiscal 1996, they would not have had a material effect on the consolidated results of operations. The businesses of E-C and RCK were sold as part of the XL Transaction (See Note 3). On August 17, 1995, the Company acquired FNOW by issuing 2,952,282 shares of its Common Stock (valued at approximately $36.5 million, excluding acquisition-related costs of approximately $1.7 million) in exchange for all of the remaining shares (approximately 69%) of FNOW Common Stock not then owned by the Company. The acquisition was accounted for using the purchase method and, accordingly, the operating results of FNOW have been included in the consolidated operating results since the date of acquisition. Prior to August 17, 1995, as a result of the Company's July 1992 sale of its Company Center Division and subsequent purchases of shares of FNOW's common stock, the Company owned approximately 31% of FNOW, which was accounted for by the equity method. During fiscal 1995, the Company recorded equity in loss of affiliate of approximately $10.8 million in the accompanying Consolidated Statements of Operations. (5) INITIAL PUBLIC OFFERING OF XLCONNECT On October 17, 1996, XLConnect, formerly a wholly-owned subsidiary, completed an initial public offering of 3,330,000 shares of its common stock at $15 per share, raising approximately $45.1 million, net of offering costs. As a result of this offering, the Company, through one of its wholly-owned subsidiaries, owns 80% of XLConnect. The net proceeds were primarily used by XLConnect to repay intercompany obligations to the Company. The Company used the proceeds to repay $20 million of its long- term debt and used the remainder for working capital purposes. The excess of the proceeds over the minority interest in XLConnect was credited to additional paid-in capital. (6) CREDIT FACILITIES In September 1997, the Company's financing agreement was amended to reduce the allowable borrowings from $225 million to $55 million, subject to a borrowing base formula, as a result of the RND and XL Transactions and the Company's resultant decreased need for financing. This financing agreement was originally signed in April 1996, has a rolling eighteen month term and is renewable for six-month periods with the consent of the lender. This financing agreement expires on October 5, 1998. The facility can be used for inventory financing, equipment financing and working capital purposes. As of January 31, 1998, the interest rate was prime plus 1.0%. The Company repaid the $55 million long-term debt reclassified as current plus all current interest-bearing borrowings with proceeds from the XL Transaction. This facility imposes certain financial covenants relating to the Company's current ratio, working capital, and tangible net worth. The Company was in compliance with these covenants as of January 31, 1998 and believes that it will remain in compliance during fiscal 1998. In connection with this financing arrangement, the lender has a lien on all of the Company's assets. In March 1997, the financing agreement was amended to remove the assets of XLConnect and XLConnect's subsidiaries from the borrowing base. In conjunction with the March 1997 amendment, XLConnect entered into a separate secured credit agreement with this lender in the amount of $25 million, which the Company has guaranteed. On May 15, 1997, the Company, through XLSource, pledged its 80%-ownership of XLConnect's common stock to the above lender as security for the Company's obligations to such lender. The Company can borrow under the financing agreement up to 25% of the market value (calculated daily) of the XLConnect pledged stock. On July 18, 1997, the Company obtained a $7.5 million irrevocable letter of credit to secure the Company's obligations under the Supply Agreement (see Note 3). In January 1998, the above letter of credit was canceled and replaced by a $5.0 million irrevocable letter of credit to secure any indemnity claims brought by Ingram. A portion of the financing agreement has been reserved for the letter of credit and 120% of the face amount of the letter of credit is subtracted from the borrowing base. All borrowings under this agreement are included in accounts payable in the Company's Consolidated Balance Sheets. As of January 31, 1998, approximately $17.7 million was available after considering the borrowing base formula (including the reduction due to the $5.0 million irrevocable letter of credit) and trade payables outstanding to a vendor affiliated with the lender. On February 28, 1997, XLConnect entered into a transaction with a third party whereby the third party agreed to provide an unsecured loan of up to $11 million (the "Loan") to be used for specific business purposes. Interest is payable at an initial annual rate of 4% for the first two years, adjusts to 5% for the next two years and then adjusts to 6% for the remaining term. Principal payments of $0.75 million will be made quarterly beginning in August 1999 with a final payment of $1.25 million due on August 28, 2002. As of January 31, 1998, $5.5 million was outstanding under the Loan. In connection with the Loan, XLConnect issued to the third party a warrant to purchase up to 325,000 shares of XLConnect's common stock, which became exercisable on February 28, 1998, at a per share exercise price of $6.65 and expires on February 27, 2007. The third party has agreed not to exercise the warrant prior to the earlier of the closing of the Mergers or June 30, 1998. After considering the effects of the issuance of the warrant and the resultant discounting of the Loan, the effective interest rate is 7.5%. Subsequent to January 31, 1998, XLConnect borrowed the remaining $5.5 million. (7) LEASE OBLIGATIONS The Company has non-cancelable operating leases for offices and equipment that expire over the next nine years. Most of the facilities' leases include renewal options and certain of the equipment leases have purchase options. Rent expense recorded for fiscal 1997, fiscal 1996 and fiscal 1995 was approximately $4.0 million, $4.0 million and $2.4 million, respectively. Future minimum lease payments under non-cancelable operating leases are as follows (in thousands): fiscal 1998, $4,022; fiscal 1999, $3,372; fiscal 2000, $2,826; fiscal 2001, $2,283; fiscal 2002, $1,637; and thereafter, $2,304. (8) BRANCH CLOSURE COSTS During the third quarter of fiscal 1996, the Company closed the XLSource portion of five branch locations. Four of these branches were acquired from FNOW in December 1994 and one was acquired from FNOW in August 1995. As a result of these closures, the Company recorded an $8 million charge relating to the allocable portion of goodwill for these locations. In addition to the goodwill write-down, the Company also recorded a charge of approximately $1.8 million to reflect the write-off of property and equipment and remaining lease obligations related to these branches. At January 31, 1998, the remaining reserve was $0.4 million. (9) THIRD QUARTER OF FISCAL 1996 CHARGES During the third quarter of 1996, the Company recorded charges totaling approximately $20.1 million. Approximately $15.7 million of these charges were recorded as cost of sales and relate to the following. A major customer of the Company's rental program announced the adoption of a new technology platform resulting in the reassessment by the Company of the estimated future revenue stream under this program. This resulted in an estimated shortfall, of approximately $8 million, in future rental revenue compared to the Company's future related lease obligations. In addition, the Company provided for changes in estimates for inventory reserves ($4.5 million) and vendor payables and receivable issues ($3.2 million). Charges recorded as selling, general and administrative expenses consisted of write-offs for unutilized property and equipment and miscellaneous accruals totaling approximately $4.4 million. At January 31, 1998, the remaining reserve was $8.2 million. (10) CAPITAL STOCK Preferred Stock During fiscal 1996, the Company sold 15,000 shares of its Series B Convertible Preferred Stock ("Preferred Stock") and warrants to purchase 450,000 shares of its Common Stock in a private placement to an institutional buyer. The transaction was closed on two different dates. On October 16, 1996, the Company issued 5,000 shares of its Preferred Stock and warrants to purchase 225,000 shares of its Common Stock. On January 13, 1997, the Company issued 10,000 shares of its Preferred Stock and warrants to purchase 225,000 shares of its Common Stock. During fiscal 1997, the holder of the Preferred Stock converted all 15,000 shares of Preferred Stock into 5,699,986 shares of Common Stock. The warrants are exercisable for five years at exercise prices of $11.469 per share for those issued on October 16, 1996 and $10.094 per share for those issued on January 13, 1997. A dividend of 6% per annum on the Preferred Stock was accrued until the Preferred Stock was converted into Common Stock, at which time the cumulative dividend was paid in Common Stock. Stock Options On June 8, 1995, the Company adopted the 1995 Long-Term Incentive Plan, permitting the grant of stock, stock-related and performance-based awards to employees and directors of the Company. A total of five million shares of the Company's Common Stock have been reserved for grant under the 1995 Long-Term Incentive Plan. The Company also has a non-qualified stock option plan for employees and directors. After June 8, 1995, no new options may be granted under this plan. However, previous options granted will continue to vest as per the original terms of the grant. These stock option plans are intended to provide an incentive for employees to maximize their efforts and enhance the success of the Company. Options are generally granted at option prices equivalent to fair market value on the date of grant. The options are exercisable commencing one year after the date of grant in five equal annual installments (unless otherwise provided in the grant) and expire ten years after the date of grant, subject to earlier termination and other rules relating to the cessation of employment. As of January 31, 1998, the weighted average remaining contractual life was approximately 7 years. On February 25, 1995, the Board of Directors of the Company authorized the repricing of all outstanding options with exercise prices in excess of $13.25 per share to $13.25 per share. As of that date, 2,067,370 options were repriced. On March 4, 1996, the Board of Directors of the Company authorized the repricing of all outstanding options, with exercise prices in excess of $8.00 per share to $8.00 per share, held by currently-active employees, except certain executive officers. As of that date, 1,767,447 options were repriced. Changes in stock options are summarized as follows:
Weighted Average Number of Option price Price Shares Range per Share Per Share ---------- --------------- ---------- Balance outstanding - January 28, 1995 3,110,390 $ 5.75 - $24.88 $15.85 Granted 3,618,695 $ 6.25 - $13.38 $12.39 Exercised (370,700) $ 5.75 - $13.25 $ 7.44 Canceled (2,710,230) $ 5.75 - $24.88 $18.01 ----------- Balance outstanding - February 3, 1996 3,648,155 $ 6.25 - $13.38 $11.67 Granted 3,798,635 $ 6.50 - $ 8.94 $ 7.51 Exercised (77,650) $ 8.00 - $ 9.25 $ 8.16 Canceled (2,939,625) $ 6.69 - $13.38 $10.84 ----------- Balance outstanding - February 1, 1997 4,429,515 $ 6.25 - $13.25 $ 8.72 Granted 25,000 $ 4.25 $ 4.25 Exercised -- -- -- Canceled (1,548,615) $ 6.69 - $13.25 $ 7.97 ----------- Balance outstanding - January 31, 1998 2,905,900 $ 4.25 - $13.25 $ 9.08 ===========
As of January 31, 1998, there were 2,148,760 options exercisable under the 1995 Long-Term Incentive Plan and the employee and director stock option plan at exercise prices ranging from $6.25 to $13.25 per share, with a weighted average exercise price of $9.54 per share. Information related to stock options issued under the 1995 Long-Term Incentive Plan and the employee and director stock option plan at January 31, 1998 is as follows:
$4.25 - $6.01 - $ 9.01 - Exercise Price Range $6.00 $9.00 $13.25 - ---------------------------------- -------- ---------- ---------- Number of stock options: Outstanding 25,000 1,800,900 1,080,000 Exercisable -- 1,190,760 958,000 Weighted average exercise price: Outstanding $ 4.25 $ 7.32 $ 12.14 Exercisable -- 7.27 12.38 Weighted average remaining contractual life 9.60 years 7.76 years 5.49 years
In connection with the acquisition of FNOW, all outstanding options and warrants to purchase FNOW common stock were converted into options and warrants to purchase the Company's Common Stock. Generally, these options and warrants will continue to vest in accordance with the original terms of the grant expiring at various dates between 2001 and 2004. As of January 31, 1998, there were 219,960 options outstanding and exercisable at prices ranging from $8.00 to $21.94 per share, with a weighted average exercise price of $18.27 per share. Information related to stock options issued with the acquisition of FNOW at January 31, 1998 is as follows: $15.07 - Exercise Price Range $ 8.00 $21.94 - -------------------------------------------- -------- --------- Number of stock options: Outstanding 18,330 201,630 Exercisable 18,330 201,630 Weighted average exercise price: Outstanding $ 8.00 $ 19.20 Exercisable 8.00 19.20 Weighted average remaining contractual life 5.22 years 4.85 years As of January 31, 1998, shares of Common Stock are reserved for issuance for the following stock options: Shares --------- Exercise of employee and director stock options 6,336,580 Exercise of other stock options 219,960 --------- Total 6,556,540 ========= The Company accounts for stock option awards in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. In accordance with this Opinion, no compensation cost has been recognized in the Company's Consolidated Statements of Operations. Had the Company recorded compensation expense for the fair value of the options granted and repriced, as provided by Statement of Financial Accounting Standards No. 123, the Company's net loss and net loss per share would have been as follows (in thousands except per share data):
Fiscal Fiscal Fiscal 1997 1996 1995 ---------- ---------- ---------- Net loss applicable to common shareholders As reported $ (44,593) $(104,174) $ (19,488) Pro forma (49,208) (109,391) (23,707) Basic and diluted net loss per share applicable to common shareholders As reported $ (1.13) $ (2.98) $ (0.59) Pro forma (1.24) (3.13) (0.72)
In order to calculate the fair value of stock options at date of grant or repricing, the Company used the Black-Scholes option pricing model. The following assumptions were used for fiscal 1997, fiscal 1996 and fiscal 1995: expected option term of 5 years from date of original grant; risk free interest rates ranging from 5.39% to 7.16%; stock price volatility factor of 71.5% in fiscal 1997 and 62% in fiscal 1996 and fiscal 1995; and dividend yield of 0.0%. The weighted average fair value at grant date of options granted in fiscal 1997, fiscal 1996 and fiscal 1995 was $2.72, $4.18 and $6.42, respectively. Employee Stock Purchase Plan In June 1995, shareholders approved the 1995 Employee Stock Purchase Plan ("ESPP"). Under the ESPP, a total of 500,000 shares of the Company's Common Stock may be purchased by employees (except executive officers) of the Company through payroll deductions. There are two separate six-month offering periods per year, whereby the purchase price per share is equal to 90% of the lower of the beginning or ending quoted closing market price of each offering period. During fiscal 1997 and fiscal 1996, a total of 119,050 shares of treasury stock were re-issued pursuant to this plan. Effective December 31, 1997, the Company terminated this plan. The impact of the ESPP on the pro forma amounts in the preceding paragraph was immaterial. Shareholders' Rights Plan On March 8, 1996, the Board of Directors of the Company adopted a Shareholders' Rights Plan (the "Plan") and declared a distribution of one right for each outstanding share of the Company's Common Stock to shareholders of record at the close of business on March 25, 1996 and for each share of Common Stock issued by the Company thereafter and prior to the subsequent distribution date of the rights. Under the Plan, each right entitles the holder to buy one-thousandth of a share of Series A Junior Participating Preferred Stock (a "Unit") at a purchase price of $28.00 per unit, subject to adjustment. The rights will expire in ten years unless redeemed earlier and will not be exercisable or transferable separately from the shares of Common Stock to which the rights are attached until the earlier of (i) ten business days following a public announcement ("Stock Acquisition Date") that a person or group of affiliated or associated persons (other than the Company, any subsidiary of the Company or any employee benefit plan of the Company or such subsidiary) (an "Acquiring Person") has acquired, obtained the right to acquire, or otherwise obtained beneficial ownership of 15% or more of the then outstanding shares of the Company Common Stock, and (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of the then outstanding shares of Company Common Stock. At any time until ten business days following the Stock Acquisition Date, a majority of independent directors of the Company may redeem the rights in whole, but not in part, at a price of $0.001 per right, subject to adjustment. In the event that (i) the Company is the surviving corporation in a merger with an Acquiring Person and shares of Company Common Stock remain outstanding, (ii) a person becomes the beneficial owner of 15% or more of the then outstanding shares of Company Common Stock, (iii) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the Rights Agreement, or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1%, then each holder of a right will have the right to receive, upon exercise, Units of Preferred Stock having a current market value equal to two times the exercise price of the right. The exercise price is the purchase price multiplied by the number of Units of Preferred Stock issuable upon exercise of a right prior to the events described in this paragraph. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, all rights that were beneficially owned by any Acquiring Person will be null and void. In the event that, at any time following the Stock Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction and the Company is not the surviving corporation, (ii) any person consolidates or merges with the Company and all or part of the Company Common Stock is converted or exchanged for securities, cash or property of any other person or (iii) 50% or more of the Company's assets or earning power is sold or transferred, then each holder of a right will have the right to receive, upon exercise, common stock of the Acquiring Person having a current market value equal to two times the exercise price of the right. On March 3, 1998, the Company amended the Plan to designate Xerox, including any of its wholly-owned direct and indirect subsidiaries, as a party exempt from the provisions of the Plan. As such, the Plan will have no effect on the proposed transaction with Xerox. (11) INCOME TAXES The provision (benefit) for income taxes on continuing operations consists of the following (in thousands): Current Deferred Total --------- --------- --------- Fiscal 1997 Federal $ 901 $ 2,314 $ 3,215 State 677 551 1,228 --------- --------- --------- Total $ 1,578 $ 2,865 $ 4,443 ========= ========= ========= Fiscal 1996 Federal $ (1,269) $ (4,293) $ (5,562) State (333) - (333) --------- --------- --------- Total $ (1,602) $ (4,293) $ (5,895) ========= ========= ========= Fiscal 1995 Federal $ (8,303) $ 3,312 $ (4,991) State (1,082) (70) (1,152) --------- --------- --------- Total $ (9,385) $ 3,242 $ (6,143) ========= ========= ========= Deferred income tax balances, and the deferred component of the provision for income taxes, relate to the following cumulative temporary differences (in thousands): January 31, February 1, 1998 1997 ---------- ---------- Inventory $ 180 $ 4,452 Accounts receivable reserves 2,176 5,772 Sales and acquisitions accruals 10,808 9,362 Employee benefits 1,302 2,385 Depreciation 604 413 Litigation and related contingencies 193 1,683 Net operating loss carryforwards 19,288 24,933 Other accruals 1,976 8,196 ---------- ---------- 36,527 57,196 Valuation allowance (19,010) (27,575) ---------- ---------- Deferred tax asset $ 17,517 $ 29,621 ========== ========== In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, potential limitations with respect to the utilization of loss carryforwards and tax planning strategies in making this assessment. Based upon the projections for future taxable income over the periods in which deferred tax assets are deductible and the potential limitations of loss carryforwards, management believes that it is more likely than not the Company will realize a portion of these deductible differences, net of remaining valuation allowances at January 31, 1998. The Company will periodically assess and re-evaluate the status of its recorded deferred tax assets. The Company has available approximately $53 million of net operating loss carryforwards that expire in various years ranging from 2008 to 2013. Utilization of certain of these losses is subject to an annual limit. A valuation allowance has been provided to the extent the Company has estimated that it is more likely than not that a portion of the gross deferred tax asset will not be realized. In the event that the tax benefits related to the acquisition of FNOW are subsequently realized, in excess of previously recorded amounts, the benefit will be recorded as a credit to goodwill. The long-term portion of the deferred tax asset ($9,9 million at January 31, 1998 and $17.8 million at February 1, 1997) is recorded in other assets in the Consolidated Balance Sheets. A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Fiscal Fiscal Fiscal 1997 1996 1995 ------ ------ ------ Federal statutory rate (35.0)% (35.0)% (35.0)% State income taxes, net of federal benefit 4.4 (2.2) (3.3) Amortization/write-off of intangibles 39.7 4.2 4.5 Change in valuation allowance (3.0) 21.2 -- Change in estimate of accrued taxes 6.2 -- -- Tax-exempt investment income -- -- (0.4) Other 0.9 -- -- ------ ------ ------ 13.2 % (11.8)% (34.2)% ====== ====== ====== Pursuant to the terms of the Stock Registration and Option Agreement between the Company and XLConnect, the Company has been provided, by XLConnect, with a continuous, cumulative option, upon the original issuance of shares by XLConnect, to purchase from XLConnect the number of shares of common stock as necessary for the Company to continue to own at least 80% of XLConnect's outstanding shares of common stock. The purchase price of such shares will be at the then-current market price. If exercised, this option is intended to permit the Company to continue to include XLConnect in its consolidated federal income tax return. The Company and XLConnect have entered into a Tax Allocation Agreement to provide for (i) the allocation of payments of taxes for periods during which the Company and XLConnect are included in the same consolidated group for federal income tax purposes or the same consolidated, combined or unitary tax returns for state, local or foreign tax purposes, (ii) the allocation of responsibility for the filing of tax returns, (iii) the conduct of tax audits and the handling of tax controversies, and (iv) various related matters. For periods during which XLConnect is included in the aforementioned returns, XLConnect will be required to pay to the Company its allocable portion of the consolidated federal income and state tax liability and will be entitled to receive from the Company its allocable share of any tax benefit attributable to the use of XLConnect's losses, if any. XLConnect will be responsible for the filing of federal, state, local and foreign tax returns and related liabilities for itself for all periods, to the extent not included in the Company's combined or consolidated tax returns. Notwithstanding the Tax Allocation Agreement, under federal income tax law, each member of a consolidated group for federal income tax purposes is also jointly and severally liable for federal income tax liability of each other member of the consolidated group. Similar rules may apply under state income tax laws. (12) SUPPLEMENTAL CASH FLOW INFORMATION The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows (in thousands):
Fiscal Fiscal Fiscal 1997 1996 1995 -------- -------- -------- Details of acquisitions: Fair value of assets acquired -- $15,889 $245,250 Liabilities assumed and acquisition-related accruals -- 5,655 208,716 Details of other financing activities: Accrual of Preferred Stock dividends $ 357 120 -- Conversion of Preferred Stock 15,000 -- -- Cash paid during the year for: Interest 4,505 8,524 4,470 Income taxes 480 172 2,526
(13) EMPLOYEE BENEFIT PLAN The Company has a 401(k) tax deferred savings plan (the "Plan") permitting eligible employees to defer a portion of their total compensation through contributions to the Plan. FNOW also had a 401(k) tax deferred savings plan prior to the acquisition. These plans were merged on January 1, 1996. The Company matches $0.50 for each dollar contributed by participants subject to certain limitations. (14) MAJOR SUPPLIER AND CUSTOMERS The Company purchases the majority of the products its sells through a supply agreement with Ingram, which either party may terminate upon 30 days' written notice. In the event the Company is unable to continue its relationship with Ingram, it believes it could establish a similar relationship with another company in a reasonable period of time. Because of the competitive nature of the microcomputer distribution industry, the Company believes it could ultimately obtain terms as beneficial as those currently offered by Ingram. The Company's customers operate in a variety of industries, and therefore, the Company is not dependent on any single industry as a source for customers. No customer accounted for more than 10% of revenues of the Company. Sales to XLSource's top 25 customers accounted for approximately 50% of its revenues for the four branches in fiscal 1997. Sales to XLConnect's top 25 customers accounted for approximately 37% of its revenues in fiscal 1997. The Company does not believe that the loss of any one customer would have a material adverse effect on its business. (15) CONTINGENCIES In December 1994, several class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania (Civil Action Nos. 94-3753, 94-CV-7410, 94-CV-7388, and 94-CV-7405) against the Company and certain directors and officers. These lawsuits were consolidated with a class action lawsuit filed in 1992 against the Company, certain directors and officers, and the Company's auditor's in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 92-CV-1905). A derivative lawsuit was also filed in December 1994 in the Court of Common Pleas of Philadelphia County (No. 803) against the Company and certain of its directors and officers. These lawsuits alleged violations of certain disclosure and related provisions of the federal securities laws and breach of fiduciary duties, including allegations relating to the Company's practices regarding vendor marketing funds, and sought damages in unspecified amounts as well as other monetary and equitable relief. The Company reached a settlement of the class and derivative actions, without admitting any liability, under which the class and derivative plaintiffs will receive a total of $10 million. This settlement was approved by the Court on November 26, 1997 and became final upon the expiration of the thirty day appeal period. Of the $10 million, the Company contributed $3.8 million and the balance was funded by insurance. In addition, the Company is involved in various litigation and arbitration matters in the ordinary course of business. The Company believes that it has meritorious defenses in and is vigorously defending against all such matters. Management believes the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. (16) RELATED PARTY TRANSACTIONS The Company is a party to split-dollar life insurance agreements with a trust established by Richard D. Sanford, Chairman of the Board and Chief Executive Officer of the Company (of which Barry M. Abelson, a member of the Board of Directors, is the trustee), under which the trust pays the portion of the premiums attributable to the term life insurance component of permanent life insurance policies insuring the life of Mr. Sanford and owned by the trust, and the Company pays the balance of the premiums. Upon the termination of the agreements or Mr. Sanford's death, all premiums previously advanced by the Company under the policies are required to be repaid by the trust. The Company retains an interest in the policies' cash values and excess death benefits to secure the trust's repayment obligation. In addition, in fiscal 1994, the Company entered into a deferred compensation agreement with Mr. Sanford which provides for the Company to credit $716,715 annually for Mr. Sanford's account for five years commencing in fiscal 1994, together with interest at an annual rate of 7%, compounded annually. On August 2, 1997, the Company paid to Mr. Sanford, all amounts accrued up to that date, including interest, of $2,743,170. The remaining amount of approximately $1,145,000, was accrued as part of the RND Transaction and will be paid to Mr. Sanford upon the sale of the Company to Xerox. On January 23, 1998, Mr. Sanford entered into an agreement with the Company which provides for Mr. Sanford to receive certain benefits and payments upon a change in control of the Company. Upon a change in control, Mr. Sanford will be entitled to receive continued health and medical benefits for him and his family for one year, a $40,000 lump sum payment to cover administrative support for one year, a $30,000 lump sum payment to cover office rent for one year and the receipt of two vehicles and certain other miscellaneous equipment from the Company with a book value of approximately $75,000. In addition, the Company will exercise its right to terminate the split-dollar agreements discussed above, and the Company has agreed that it will not be entitled to reimbursement for any excess of the premiums paid by the Company over the cash surrender value of the life insurance policies to which the split-dollar agreements pertain. The Company estimates this excess to be approximately $138,000. The Company and XLConnect have entered into a number of intercompany agreements for the purpose of defining certain relationships. Amended and Restated Intercompany Debt Agreement Pursuant to the Amended and Restated Intercompany Debt Agreement dated as of March 26, 1997, the Company will reimburse XLConnect for the difference between LIBOR plus 0.75% and the interest rate paid by XLConnect for the current financing agreement and other direct expenses that XLConnect would not have been required to incur if it had entered into its own unsecured credit facility. Amended and Restated Services Agreement Pursuant to the Amended and Restated Services Agreement dated as of September 30, 1997 (the "Services Agreement"), the Company has provided XLConnect various services including insurance coverage, employee benefits coverage, human resources, administration and tax management services that the Company has historically provided to XLConnect. XLConnect pays the direct costs of these services. To the extent that the direct costs of the services provided by the Company cannot be separately measured, XLConnect pays its allocable portion of the total cost to the Company for such services. The Services Agreement also provides for the Company to furnish additional services as may be reasonably requested by XLConnect and for the Company to permit the employees of XLConnect to continue to participate in the benefits plans and programs sponsored by the Company. Effective July 1, 1997, XLSource's operations are being managed by XLConnect. The Services Agreement provides for XLConnect to perform certain management, marketing and administrative services for the Company for $225,000 per month. These services include executive oversight, operations management at the corporate and branch levels, practice development, sales and sales management, marketing services, professional recruitment and legal, financial and accounting services. Space Sharing Agreement The Space Sharing Agreement provides for the sharing by the Company and XLConnect of certain office facilities. Under this agreement, the costs associated with leasing and maintaining facilities will, in general, be allocated between the Company and XLConnect on a pro rata basis determined by the square footage utilized by each company or the number of employees of each company at the specified location, in accordance with historical practices. XLConnect's rights to use portions of the shared facilities leased from third parties and the corresponding obligations to pay for such use may be terminated as to any such facility by either the Company or XLConnect on 90 days' prior written notice. Indemnification Agreement The Indemnification Agreement provides for, among other things and subject to limited exceptions, XLConnect to indemnify the Company and its directors, officers, employees, agents and representatives for all liabilities relating to XLConnect's business and operations and for all liabilities arising out of or based upon alleged misrepresentations in or omissions from the Registration Statement with respect to XLConnect's initial public offering. Stock Registration and Option Agreement XLConnect has provided the Company with certain registration rights, including demand registration rights and certain "piggy-back" registration rights, with respect to common stock owned by the Company. XLConnect is obligated to pay all expenses incidental to such registration, excluding underwriters' discounts and commissions and certain legal fees and expenses. This agreement also grants to the Company a continuous, cumulative option, upon the original issuance of shares by XLConnect, to purchase from XLConnect the number of shares of common stock as necessary for the Company to continue to own at least 80% of XLConnect's outstanding shares of common stock. The purchase price of such shares will be at the then-current market price. Tax Allocation Agreement The Tax Allocation Agreement to provides for (i) the allocation of payments of taxes for periods during which the Company and XLConnect are included in the same consolidated group for federal income tax purposes or the same consolidated, combined or unitary tax returns for state, local or foreign tax purposes, (ii) the allocation of responsibility for the filing of tax returns, (iii) the conduct of tax audits and the handling of tax controversies, and (iv) various related matters. For periods during which XLConnect is included in the aforementioned returns, XLConnect will be required to pay to the Company its allocable portion of the consolidated federal income and state tax liability and will be entitled to receive from the Company its allocable share of any tax benefit attributable to the use of XLConnect's losses, if any. XLConnect will be responsible for the filing of federal, state, local and foreign tax returns and related liabilities for itself for all periods, to the extent not included in the Company's combined or consolidated tax returns. Notwithstanding the Tax Allocation Agreement, under federal income tax law, each member of a consolidated group for federal income tax purposes is also jointly and severally liable for federal income tax liability of each other member of the consolidated group. Similar rules may apply under state income tax laws. Existing Telecommunications Services Agreement The Company has agreed to purchase from XLConnect all of the telecommunications services required by the Company. The services provided by XLConnect under this agreement include the transmission of voice, data, video and other information as well as enhanced telecommunications services and capacity planning, call accounting, network design and similar services. The agreement requires the Company to purchase sufficient telecommunications services to permit XLConnect to meet minimum volume requirements imposed by XLConnect's agreement with a third party, which expired on December 31, 1997. The agreement between the Company and XLConnect has a term of five years from January 1, 1996 and will renew automatically for six successive two-year periods, unless terminated earlier in accordance with its terms. The Company may terminate the agreement at the conclusion of any such term if its provides XLConnect with at least 90 days' prior notice that it has received a bona fide offer to provide telecommunications services that in quantity, quality and duration are equal to or better than the services then being provided by XLConnect at a price 5% or more below the price XLConnect charges for such services and XLConnect does not match the offer. The Company has in the past met the minimum purchase requirements. (17) QUARTERLY FINANCIAL DATA (unaudited) Selected quarterly financial data for fiscal 1997 and fiscal 1996, are as follows (in thousands):
First Second Third Fourth Fiscal Fiscal 1997 Quarter Quarter(1) Quarter Quarter(2) Year - -------------- ---------- ---------- ---------- ---------- ---------- Revenues $199,452 $186,755 $ 85,636 $ 86,069 $557,912 Gross profit 24,853 25,008 15,335 15,304 80,500 Loss from discontinued operation (6,255) (5,840) -- -- (12,095) Sale of discontinued operation -- 6,875 -- -- 6,875 Net income (loss) (12,114) (34,366) 1,021 866 (44,593) Basic and diluted income (loss) per share: Continuing operations $ (0.16) $ (0.92) $ 0.02 $ 0.02 $ (1.00) Discontinued operation (0.18) (0.15) -- -- (0.30) Sale of discontinued operation -- 0.18 -- -- 0.17 ---------- ---------- ---------- ---------- ---------- Basic and diluted income (loss) per share $ (0.34) $ (0.89) $ 0.02 $ 0.02 $ (1.13) =========== ========== ========== ========== ==========
First Second Third Fourth Fiscal Fiscal 1997 Quarter Quarter Quarter(3) Quarter Year - ------------------------ ---------- ---------- ---------- ---------- ---------- Revenues $188,673 $220,215 $189,637 $181,117 $779,642 Gross profit 21,704 23,873 9,657 19,482 74,716 Income (loss) from discontinued operation 542 1,409 (60,642) (1,143) (59,834) Net loss (3,194) (2,376) (93,440) (5,164) (104,174) Basic and diluted income (loss) per share: Continuing operations $ (0.11) $ (0.11) $ (0.92) $ (0.11) $ (1.27) Discontinued operation 0.02 0.04 (1.70) (0.03) (1.71) ---------- ---------- ---------- ---------- ---------- Basic and diluted income (loss) per share $ (0.09) $ (0.07) $ (2.62) $ (0.14) $ (2.98) ========== ========== ========== ========== ==========
(1) The Company recorded a pre-tax loss of approximately $27.2 million related to the XL Transaction (See Note 3). (2) The Company recorded a pre-tax gain of approximately $0.5 million related to the XL Transaction (See Note 3) and recorded adjustments related to the settlement of year-end reserves and capitalization of internal costs associated with capitalized software costs totaling $0.7 million before taxes. (3) The Company recorded branch closure costs of $9.8 million (See Note 8) and other charges totaling $20.1 million (See Note 9) which consisted of charges to cost of goods sold of $15.7 million and write-offs for unutilized property and equipment and miscellaneous accruals totaling $4.4 million from continuing operations. The Company also recorded impairment losses of $61.6 million and other charges totaling $1.6 million from its discontinued operation (See Note 3). The sum of the quarterly net income (loss) per share amounts does not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year based on the respective weighted average common shares outstanding. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The following table sets forth certain information regarding the directors and executive officers of the Company. Name Age Position with the Company - ---------------------------------------------------------------------------- Barry M. Abelson (3) 51 Director Christopher T.G. Fish (1), (3) 55 Director Roger J. Fritz (1), (2), (3) 69 Director Arnold S. Hoffman (1), (2), (3) 62 Director Eugene E. Marinelli, Jr. 40 Vice President, Chief Financial Officer and Treasurer Michael A. Norris 47 Director Gregory A. Pratt 49 Director William L. Rulon-Miller (1), (2), (3) 49 Director Richard D. Sanford (3) 54 Chairman of the Board and Chief Executive Officer - ---------------------------------------------------------------------------- (1) Member of the Audit Committee (2) Member of the Compensation and Stock Option Committee (3) Member of the Executive Committee Barry M. Abelson has been a director of the Company since January 1989. In May 1992, he joined the law firm of Pepper Hamilton LLP, Philadelphia, Pennsylvania, as a partner. Prior thereto, Mr. Abelson had been a partner of the law firm of Braemer Abelson & Hitchner, Philadelphia, Pennsylvania (and its predecessor firms). Mr. Abelson also serves on the Board of Directors of Acsys, Inc. and XLConnect. Christopher T.G. Fish has been a director of the Company since its incorporation in 1982. For more than five years, Mr. Fish has been a principal of Sprint Investments, S.A., an investor company which is a holder of the Company's Common Stock. Mr. Fish resides in the Channel Islands, U.K. and is a citizen of the United Kingdom. Roger J. Fritz has been a director of the Company since its incorporation in 1982. For more than five years, Mr. Fritz has been President of Organization Development Consultants of Naperville, Illinois, an organizational development/management consulting firm. Arnold S. Hoffman has been a director of the Company since August 1985. In January 1992, Mr. Hoffman became a Senior Managing Director of Legg Mason Wood Walker Incorporated, an investment banking firm ("Legg Mason"). From September 1990 to that date, Mr. Hoffman was Chairman of the Middle Market Group, L.P., an investment banking firm. Mr. Hoffman also serves on the Board of Directors of SunSource L.P. Eugene E. Marinelli, Jr. was named Vice President, Chief Financial Officer and Treasurer in September 1997. Mr. Marinelli joined the Company in January 1996 as its Director of Taxation. Prior to joining the Company, Mr. Marinelli was a partner in the accounting firm of Marinelli and Kemmey. Michael A. Norris has been a director of the Company since September 1996. From August 1996 to September 1997, Mr. Norris was President of the Company and Chief Executive Officer of its Reseller Network. Prior to joining the Company, Mr. Norris held various executive positions at Compaq Computer Corporation since July 1992, the most recent as Vice President of North American Sales. Prior to that, Mr. Norris held the position of Executive Vice President for Murata Business Systems from 1988 through July 1992. Gregory A. Pratt has been a director of the Company since May 1994. Mr. Pratt joined the Company in March 1992 as Executive Vice President and was appointed to the position of President and Chief Operating Officer shortly thereafter. Mr. Pratt resigned as President and Chief Operating Officer and was elected Executive Vice President in April 1996. Mr. Pratt resigned as the Company's Executive Vice President on December 6, 1996. Since that time, Mr. Pratt has been President and Chief Executive Officer of Pratt Capital Advisors, Inc., a private investment company. William L. Rulon-Miller serves as Senior Vice President and Co-Director of Corporate Finance for Janney Montgomery Scott Inc., an investment banking firm with which he has held several positions since 1979. Mr. Rulon-Miller was a director of the Company from April 1983 until December 1986, and was re-elected to the Board in November 1987. Mr. Rulon-Miller also serves on the Board of Directors of Mothers Work, Inc., The JPM Company and Metrologic Instruments, Inc. Richard D. Sanford has been the Company's Chairman and Chief Executive Officer since he founded the Company in May 1982. Mr. Sanford was named President of the Company in April 1996, a position which he relinquished when Mr. Norris joined the Company in August 1996. Mr. Sanford is also the Chairman of the Board of Directors of XLConnect. Effective July 1, 1997, XLSource's operations are being managed by XLConnect. The Services Agreement provided for XLConnect to perform certain management, marketing and administrative services for the Company for $225,000 per month. These services include executive oversight, operations management at the corporate and branch levels, practice development, sales and sales management, marketing services, professional recruitment and legal, financial and accounting services. Timothy W. Wallace is President, Chief Operating Officer and a Director of XLConnect. Mr. Wallace joined XLConnect upon its formation as Executive Vice President, Field Operations. He was promoted to President in December 1996 and elected to the Board of Directors in February 1997. Between 1991 and March 1996, Mr. Wallace served in various management positions with FNOW, rising from Assistant Vice President to Vice President, Strategic Planning and Development, to Vice President, Professional Services in 1995. Prior to joining FNOW, Mr. Wallace was employed by Arthur Andersen & Co. as a managing director of business systems consulting. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Such persons are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it with respect to fiscal 1997, or written representations from certain reporting persons, the Company believes that all filing requirements applicable to its directors, officers and persons who own more than 10% of a registered class of the Company's equity securities have been met and were filed on a timely basis. Item 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid during fiscal 1997, fiscal 1996 and fiscal 1995 to the Chief Executive Officer and each of the Company's four other most highly compensated executive officers based on salary and bonus earned during fiscal 1997 (the "named executive officers").
SUMMARY COMPENSATION TABLE Long-term Compensation Awards Securities Name and Principal Fiscal Annual Compensation Underlying All Other Position(1) Year Salary($) Bonus($) Options (#)(2) Compensation ($)(3) - -------------------------------------------------------------------------------------------------- Richard D. Sanford 1997 $675,000 $175,000 -- $421,824 Chairman of the 1996 500,000 350,000 -- 442,758 Board and Chief 1995 850,000 0 500,000 453,879 Executive Officer Michael A. Norris (4) 1997 343,462 975,000 -- 156,808 Former President and Chief 1996 193,654 125,000 750,000 243,843 Executive Officer of the Reseller Network Timothy D. Cook (5) 1997 174,714 350,000 -- 313,967 Former Senior Vice President 1996 300,385 0 150,000 39,789 1995 250,000 67,500 100,000 1,251 Thomas J. Coffey (6) 1997 223,462 100,000 -- 606,984 Former Senior Vice President, 1996 340,385 100,000 150,000 2,019 Treasurer and Chief 1995 177,846 100,000 100,000 0 Financial Officer Eugene E. Marinelli, Jr. (7) 1997 82,773 19,508 25,000 2,147 Vice President, Treasurer 1996 74,908 -- 10,000 -- and Chief Financial Officer
______________________________________________________________ (1) In each instance, the position indicated is the position held by the executive officer on the last day of fiscal 1997 or, in the case of executive officers not employed by the Company on such date, the final position held by such executive officer with the Company. (2) The amounts included in this column for fiscal 1996 includes stock options repriced on March 4, 1996 (Mr. Coffey, 100,000 and Mr. Cook, 100,000). (3) Except as indicated below, the amount included in the column for fiscal 1997 represent the matching contribution under the Company's 401(k) Plan (Mr. Sanford, $2,942, Mr. Cook, $1,367, Mr. Coffey, $1,212 and Mr. Marinelli, $2,147), director's fees (Mr. Sanford, $7,500 and Mr. Norris, $7,000), consulting services (Mr. Cook, $12,600 and Mr. Coffey, $80,772) and severance payments (Mr. Norris, $149,808, Mr. Cook, $300,000 and Mr. Coffey, $525,000). The Company is a party to split-dollar life insurance agreements with a trust established by Mr. Sanford (of which Mr. Abelson, a member of the Board of Directors, is the trustee), under which the trust pays the portion of the premiums attributable to the term life insurance component of permanent life insurance policies insuring the life of Mr. Sanford and owned by the trust, and the Company pays the balance of the premiums. Upon the termination of the agreements or Mr. Sanford's death, all premiums previously advanced by the Company under the policies are required to be repaid by the trust. The Company retains an interest in the policies' cash values and excess death benefits to secure the trust's repayment obligation. Included in the amounts shown for Mr. Sanford in fiscal 1997, fiscal 1996 and fiscal 1995 are amounts representing the value of the premium payments by the Company in such years, projected on an actuarial basis assuming that Mr. Sanford retires at age 65 and the agreements are then terminated. In addition, in fiscal 1994, the Company entered into a deferred compensation agreement with Mr. Sanford which provides for the Company to credit $716,715 annually for Mr. Sanford's account for five years commencing in fiscal 1994, together with interest at an annual rate of 7%, compounded annually. On August 2, 1997, the Company paid to Mr. Sanford, all amounts accrued up to that date, including interest, totaling $2,743,170. The remaining amount of approximately $1,145,000, was accrued as part of the RND Transaction and will be paid to Mr. Sanford upon the sale of the Company to Xerox. (4) Mr. Norris began his employment with the Company on August 27, 1996 and resigned on September 30, 1997. See "Employment and Severance Agreements." (5) Mr. Cook began his employment with the Company on October 10, 1994 and resigned on July 18, 1997. See "Employment and Severance Agreements." (6) Mr. Coffey began his employment with the Company on July 3, 1995 and resigned on September 12, 1997. See "Employment and Severance Agreements." (7) Mr. Marinelli began his employment with the Company on January 2, 1996 and was appointed Vice President, Treasurer and Chief Financial Officer on September 12, 1997. See "Employment and Severance Agreements." OPTION GRANTS DURING FISCAL 1997 The following table provides information related to options to purchase Common Stock which were granted to the named executive officers during fiscal 1997.
Potential Realizable Value at Assumed Annual Rates of Stock Individual Grants Price Appreciation for ----------------------------------------- Option Terms ----------------------- % of Total Options Granted Exercise or Options to Employees in Base Price Expiration Name Granted Fiscal Year Per Share Date 5%(1) 10%(1) - -------------------------- ---------- ---------------- ----------- ---------- ----------------------- Richard D. Sanford -- -- -- -- -- -- Michael A. Norris -- -- -- -- -- -- Timothy D. Cook -- -- -- -- -- -- Thomas J. Coffey -- -- -- -- -- -- Eugene E. Marinelli, Jr. 25,000(2) 100.0% $ 4.25 9/4/07 $ 66,820 $169,335 ____________________
(1) The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation of the Company's Common Stock over the term of the options. (2) The options are exercisable in five equal annual installments beginning September 4, 1998. AGGREGATED OPTION EXERCISES DURING FISCAL 1997 AND OPTION VALUES AT JANUARY 31, 1998 The following table provides information related to options to purchase Common Stock which were exercised by the named executive officers during fiscal 1997 and the number and value of options held on January 31, 1998.
Value of Unexercised Number of Unexercised In-the-Money Options/SARs Options/SARs Shares Acquired Value at FY-End (#) at FY-End ($)(1) Name on Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ----------------------------------------------------------------------------------------------------------- Richard D. Sanford 0 0 470,000 30,000 0 0 Michael A. Norris 0 0 750,000 0 0 0 Timothy D. Cook 0 0 70,000 80,000 0 0 Thomas J. Coffey 0 0 50,000 100,000 0 0 Eugene E. Marinelli, Jr. 0 0 2,000 33,000 0 $ 20,313
(1) Value based on the closing price of $5.0625 per share on January 31, 1998. EMPLOYMENT AND SEVERANCE AGREEMENTS On January 23, 1998, Mr. Sanford entered into an agreement with the Company which provides for Mr. Sanford to receive certain benefits and payments upon a change in control of the Company. Upon a change in control, Mr. Sanford will be entitled to receive continued health and medical benefits for him and his family for one year, a $40,000 lump sum payment to cover administrative support for one year, a $30,000 lump sum payment to cover office rent for one year and the receipt of two vehicles and certain other miscellaneous equipment from the Company with a book value of approximately $75,000. In addition, the Company will exercise its right to terminate certain split-dollar agreements for Mr. Sanford, and the Company has agreed that it will not be entitled to reimbursement for any excess of the premiums paid by the Company over the cash surrender value of the life insurance policies to which the split-dollar agreements pertain. The Company estimates this excess to be approximately $138,000. Also as a result of a change in control, Mr. Sanford is entitled to an acceleration of certain deferred compensation payments under a 1995 agreement. The Company estimates the amount subject to acceleration to be approximately $1,145,000. In August 1996, Mr. Norris entered into an employment agreement (the "Initial Agreement") with the Company. The agreement provided for Mr. Norris to receive a base annual salary of $475,000, with an opportunity to receive a bonus of up to an additional $250,000 per year. Mr. Norris also received reimbursement of his relocation expenses, unused country club dues and private school tuition and related tax gross-up. In addition, the Company agreed to pay for the premiums on Mr. Norris' life insurance policy. The Company also agreed to reimburse Mr. Norris for any interest expense incurred, for a period of one year, in connection with a loan the proceeds of which were used to purchase stock options granted by his former employer. Pursuant to the agreement, Mr. Norris received options to purchase 750,000 shares of the Company's Common Stock, with an exercise price of $7.00 per share (the "Initial Options"). These Initial Options are exercisable in four equal installments, commencing August 27, 1997. The agreement also provided that if Mr. Norris was employed by the Company on January 30, 1999 or the Company terminated Mr. Norris' employment without cause on or before January 30, 1999, the Company was obligated to pay a bonus up to $1,700,000, less any proceeds from the exercise of the Initial Options, based on the price of the Company's Common Stock on January 30, 1999 compared to the exercise price of the Initial Options. Upon termination without cause, Mr. Norris' stock options would continue to vest in accordance with their terms. The agreement provided that for a period of 12 months following the termination of his employment without cause within the first 36 months of his employment, Mr. Norris would continue to receive payment equal to his then-current base salary. In connection with Mr. Norris' resignation from the Company, the Company and Mr. Norris amended the Initial Agreement. This amendment provides for Mr. Norris to receive salary continuation of $593,750, which was equal to his base salary for fifteen months, medical benefits for fifteen months, reimbursement of relocation expenses, a payment of $975,000, acceleration of the vesting of his 750,000 stock options, and continuation of a life insurance policy. The Company will then be obligated to make a payment on January 31, 1999 (or earlier upon a change in control) of $850,000 less the aggregate net amount that Mr. Norris had received upon the exercise or other disposition of his stock options prior to that time. Also upon a change in control, Mr. Norris will receive an acceleration of his unpaid salary continuation. In March 1996, Mr. Coffey entered into an employment agreement with the Company. The agreement provided for Mr. Coffey to receive a base annual salary of $350,000, with a minimum bonus of $100,000 for fiscal 1996. The agreement also provided that if the Company terminated Mr. Coffey's employment without cause on or before April 1, 1999, the Company would be obligated to continue to pay Mr. Coffey's base annual salary plus all benefits then in effect until April 1, 1999, provided that in the event such termination occurred before April 1, 1998, the amount of total compensation in excess of $350,000 included in such severance payments would be reduced by all compensation earned by Mr. Coffey from all sources from the date of such termination until March 31, 1999. The agreement also provided that if Mr. Coffey's base annual compensation for fiscal 1997 was less than $450,000 and he voluntarily terminated his employment after the Company filed its Annual Report on Form 10-K for that fiscal year, then the Company would be obligated to continue to pay Mr. Coffey's base annual salary plus all benefits then in effect until April 1, 1999. In April 1997, Mr. Coffey's employment agreement was replaced by an agreement pursuant to which Mr. Coffey agreed that his employment with the Company would terminate on May 15, 1997 or upon the filing of the Company's Form 10-K for fiscal 1996 with the Securities and Exchange Commission, whichever occurred first (the "Separation Date"). The Separation Date was extended upon mutual agreement of Mr. Coffey and the Company until September 12, 1997. The Company agreed to pay Mr. Coffey, as salary continuation, a sum equal to $525,000 during the 18 months following the Separation Date (the "Severance Period"), subject to acceleration upon a change of control of the Company or certain other events. In addition, Mr. Coffey will receive up to $20,000 for outplacement services and certain legal expenses. Mr. Coffey is entitled to receive medical benefits during the Severance Period, unless he is covered by a new employer. Mr. Coffey's stock options will continue to vest in accordance with their terms during the Severance Period. In December 1997, Mr. Coffey received a lump sum payment of his remaining salary continuation. In May 1996, Mr. Cook entered into an employment agreement with the Company. The agreement provided for Mr. Cook to receive a base annual salary of $300,000 and reflected the grant to Mr. Cook of options to purchase 50,000 shares of Common Stock on April 24, 1996. The agreement provided that if Mr. Cook's employment was terminated by the Company without cause: (i) the Company would be required to pay Mr. Cook his base annual salary as in effect at the time of termination in 12 monthly installments during the one-year period following termination and (ii) Mr. Cook would be prohibited from working for certain of the Company's competitors and from soliciting the Company's employees during such period. In April 1997, Mr. Cook entered into another agreement with the Company providing for his retention as an executive until the earlier of a sale of the Indirect Business and July 31, 1997 or, at the option of the Company and subsequent to certain conditions, September 15, 1997 (the "Retention Period"). During the Retention Period, the Company was required to pay Mr. Cook an annual base salary of $300,000. In addition, if Mr. Cook remained with the Company through the Retention Period, he was entitled to a $150,000 bonus. Furthermore, pursuant to the agreement, Mr. Cook earned a $100,000 bonus upon the execution of an agreement for the sale of the Indirect Business and would earn an additional $100,000 bonus if the RND Transaction was completed before October 31, 1997. If Mr. Cook remained employed by the Company through the Retention Period, Mr. Cook would receive as salary continuation his base salary of $300,000 for the 12 month period following the subsequent termination of his employment with the Company, other than a termination by the Company with cause. In December 1997, Mr. Cook received a lump sum payment of his remaining salary continuation. In February 1997, Mr. Marinelli entered into a retention agreement with the Company. The retention agreement was amended in February 1998 by a letter agreement. The letter agreement provides for Mr. Marinelli to receive salary continuation of $97,000 and also the continuation of medical benefits for one year upon the termination, for any reason, of Mr. Marinelli's employment by either Mr. Marinelli or the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Arnold S. Hoffman, a member of the Compensation and Stock Option Committee, is a Senior Managing Director of Legg Mason, an investment banking firm that provided advisory services to the Company. Legg Mason provided financial advisory services to the Company and rendered the fairness opinion to the Board of Directors in connection with the RND Transaction. William L. Rulon-Miller, a member of the Compensation and Stock Option Committee, is a Senior Vice President and Co-Director of Corporate Finance for Janney Montgomery Scott Inc. ("JMS"), an investment banking firm that provided advisory services to the Company. JMS rendered fairness opinions to the Board of Directors in connection with certain transactions in fiscal 1996 and provided investment advisory services in connection with the issuance of the Company's Series B Convertible Preferred Stock in fiscal 1996. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS AND HOLDINGS OF OFFICERS AND DIRECTORS The following table sets forth the number and percentage of shares of Common Stock which, according to information supplied to the Company, are beneficially owned by: (i) each person who is the beneficial owner of more than 5% of the Common Stock; (ii) each of the directors of the Company individually; (iii) the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers for fiscal 1997; and (iv) all directors and current officers of the Company as a group. Under rules of the Securities and Exchange Commission, a person is deemed to be the beneficial owner of Common Stock with respect to which such person has or shares voting power or investment power. A person is also deemed to be the beneficial owner of shares of Common Stock as of a given date with respect to which such person has the right to obtain voting or investment power within 60 days of such given date, such as upon the exercise of options or warrants. Unless otherwise indicated, the information in the following table is as of March 31, 1998. Percentage Amount and Nature of Shares of Beneficial Outstanding Name of Beneficial Owner Ownership(1) (if 1% or greater) - ----------------------------------------------------------------------------- Barry M. Abelson 371,864 (2) -- Thomas J. Coffey (3) 63,100 -- Timothy D. Cook (4) 84,000 -- Christopher T. G. Fish 575,908 (5) 1.4% Roger J. Fritz 60,004 -- Arnold S. Hoffman 6,000 -- Eugene E. Marinelli, Jr. 4,000 -- Michael A. Norris 750,000 1.8% Gregory A. Pratt 330,000 -- William L. Rulon-Miller 14,136 -- Richard D. Sanford 3,640,751 (6) 8.6% Strome Susskind Investment Management L.P. 3,893,460 (7) 9.3% The TCW Group Inc. 2,301,400 (8) 5.5% All directors and current officers as a group (9 persons) 5,551,961 (9) 12.8% _________________________________ (1) The number of shares of Common Stock indicated in this table as beneficially owned by the following individuals includes the respective number of shares purchasable upon the exercise of stock options which are exercisable within 60 days of March 31, 1998: Mr. Coffey, 60,000; Mr. Cook, 80,000; Mr. Marinelli, 4,000; Mr. Norris, 750,000; Mr. Pratt, 330,000; Mr. Sanford, 480,000; and all directors and current officers as a group, 1,564,000. The table does not reflect the following respective number of shares purchasable upon the exercise of stock options that are not exercisable within 60 days of March 31, 1998: Mr. Coffey, 90,000; Mr. Cook, 70,000; Mr. Marinelli, 31,000; Mr. Norris, 0; Mr. Pratt, 20,000; Mr. Sanford, 20,000; and all directors and current officers as a group, 71,000. (2) Includes 71,710 shares held in a trust (the beneficiary of which is a child of Mr. Sanford) of which Mr. Abelson and Mr. Fish are co-trustees; 128,262 shares held by Mr. Abelson as custodian for the benefit of two children of Mr. Sanford; and 128,992 shares held by two charities established by Mr. Sanford, of which Mr. Abelson is a director or trustee. Mr. Abelson disclaims beneficial ownership as to the shares held by the trust and charities and as custodian. (3) Mr. Coffey resigned as the Company's Senior Vice President, Chief Financial Officer and Treasurer on September 12, 1997. (4) Mr. Cook resigned as the Company's Senior Vice President on July 18, 1997. (5) Includes 470,198 shares owned by Sprint Investments, S.A. The sole shareholder of Sprint Investments, S.A. is a trust, the beneficiaries of which are the wife and children of Mr. Fish. Also includes 71,710 shares held in a trust (the beneficiary of which is a child of Mr. Sanford) of which Mr. Fish and Mr. Abelson are co-trustees (as to which shares Mr. Fish disclaims beneficial ownership) and 4,000 shares held by Mr. Fish as custodian for the benefit and in the name of Mr. Fish's daughter. (6) Includes 128,992 shares held by two charities established by Mr. Sanford, of which Mr. Sanford is a director or trustee. Mr. Sanford disclaims beneficial ownership as to the shares held by the charities. (7) The information with respect to Strome Susskind Investment Management L.P. was reported on a Schedule 13-G filed by Strome Susskind Investment Management L.P. with the Securities and Exchange Commission on February 11, 1998, a copy of which was received by the Company and relied upon in making this disclosure. The address of Strome Susskind Investment Management L.P. is 100 Wilshire Blvd., 15th Floor, Santa Monica, CA 90401. (8) The information with respect to The TCW Group, Inc. was reported on a Schedule 13-G filed by The TCW Group, Inc. with the Securities and Exchange Commission on February 12, 1998, a copy of which was received by the Company and relied upon in making this disclosure. The address of The TCW Group, Inc. is 865 South Figueroa Street, Los Angeles, CA 90017. (9) Excludes shares owned by Messrs. Coffey and Cook, who are no longer employed by the Company. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Barry M. Abelson is a partner in the law firm of Pepper Hamilton LLP, which provides legal services to the Company. The Company believes that the fees charged by Pepper Hamilton LLP are comparable to those charged by other law firms for comparable services. Gregory A. Pratt is the President and Chief Executive Officer of Pratt Capital Advisors, Inc., a private investment company. Pratt Capital Advisors, Inc. provided financial advisory services to the Company in connection with the XL Transaction. The Company believes that the fees charged by Pratt Capital Advisors, Inc. are comparable to those charged by other firms for comparable services. Arnold S. Hoffman, a member of the Compensation and Stock Option Committee, is a Senior Managing Director of Legg Mason, an investment banking firm that provided services to the Company. Legg Mason provided financial advisory services to the Company and rendered the fairness opinion to the Board of Directors in connection with the RND Transaction. The Company believes that the fees charged by Legg Mason are comparable to those charged by other investment banking firms for comparable services. William L. Rulon-Miller, a member of the Compensation and Stock Option Committee, is a Senior Vice President and Co-Director of Corporate Finance for Janney Montgomery Scott Inc. ("JMS"), an investment banking firm that provided advisory service to the Company. JMS rendered fairness opinions to the Board of Directors in connection with certain transactions in fiscal 1996 and provided investment advisory services in connection with the issuance of the Company's Series B Convertible Preferred Stock in fiscal 1996. The Company believes that the fees charged by JMS are comparable to those charged by other investment banking firms for comparable services. The Company and XLConnect have entered into a number of intercompany agreements for the purpose of defining certain relationships. These agreements are described in Note 16 to the Company's Consolidated Financial Statements in this Annual Report on Form 10-K. The discussion regarding these agreements is hereby incorporated herein by this reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial statements: Reports of Independent Accountants Consolidated Balance Sheets, January 31, 1998 and February 1, 1997 Consolidated Statements of Operations, Years ended January 31, 1998, February 1, 1997 and February 3, 1996 Consolidated Statements of Shareholders' Equity, Years ended January 31, 1998, February 1, 1997 and February 3, 1996 Consolidated Statements of Cash Flows, Years ended January 31, 1998, February 1, 1997 and February 3, 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Report of Independent Accountants Schedule II - Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Exhibits: * 2.1 Agreement and Plan of Merger dated as of April 28, 1995 among the Company, IE Ohio Acquisition Corp. and The Future Now, Inc. (Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995). * 2.2 Amendment No. 1 to Agreement and Plan of Merger dated July 6, 1995 (Exhibit 2.2 of the Company's Registration Statement No. 33-61605 filed on August 4, 1995). * 2.3 Stock Purchase Agreement between Ingram Micro Inc. and the Company dated April 29, 1997 (Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended February 1, 1997 [the "1996 Form 10-K"]). * 2.4 Amendment No. 1 to the Stock Purchase Agreement between Ingram Micro Inc. and the Company dated as of July 2, 1997 (Exhibit 2.2 to the Company's Report on Form 8-K dated July 18, 1997 [the "July 18, 1997 Form 8-K"]). * 2.5 Asset Purchase Agreement between GE Capital Information Technology Solutions Acquisition Corp. and the Company dated as of July 1, 1997 (Exhibit 2.3 to the July 18, 1997 Form 8-K). * 2.6 First Amendment to the Asset Purchase Agreement between GE Capital Information Technology Solutions Acquisition Corp. and the Company dated as of July 18, 1997 (Exhibit 2.4 to the July 18, 1997 Form 8-K). * 2.7 Second Amendment to the Asset Purchase Agreement between GE Capital Information Technology Solutions Acquisition Corp. and the Company dated as of February 6, 1998 (Exhibit 10 to the Company's Report on Form 8-K dated March 4, 1998). 2.8 Agreement and Plan of Merger dated as of March 4, 1998 among Xerox Corporation, TDC Subsidiary Corporation, TDC Two Subsidiary Corporation, the Company and XLConnect Solutions, Inc. * 3.1 Articles of Incorporation of the Company, as amended. (Exhibit 3.1 of the Company's Registration Statement No. 33-14436 filed on May 20, 1987 [the "1987 Registration Statement"]). * 3.2 Amendment to the Articles of Incorporation of the Company effective June 22, 1987. (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987 [the "1987 Form 10-K"]). * 3.3 By-Laws of the Company. (Exhibit 3.3 to the 1987 Registration Statement). * 3.4 Specimen Certificate of Common Stock, $.01 par value. (Exhibit 3.4 to the 1987 Registration Statement). * 3.5 Amendments to By-Laws of the Company effective June 2, 1987. (Exhibit 3.5 to the 1987 Form 10-K). * 3.6 Amendments to By-Laws of the Company effective March 28, 1990. (Exhibit 3.6 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990 [the "1990 Form 10-K"]). * 3.7 Amendments to By-Laws of the Company effective July 4, 1990. (Exhibit 3.7 to the 1990 Form 10-K). * 3.8 Articles of Amendment to the Articles of Incorporation of the Company filed on April 9, 1990. (Exhibit 3.8 to the 1990 Form 10-K). * 3.9 Statement with Respect to Shares of the Company, filed with the Pennsylvania Secretary of State on October 16, 1996 (Exhibit 99.2 to the Company's Report on Form 8-K dated October 16,1996). * 4 Rights Agreement dated as of March 22, 1996, between the Company and Chemical Mellon Shareholder Services L.L.C., including Form of Series A Rights Certificate (Exhibit A), Form of Certificate of Designation (Exhibit B), and Form of Summary of Rights (Exhibit C). (Exhibit 4.1 to the Company's Report on Form 8-K dated March 8, 1996). 4.1 Amendment No. 1 to Rights Agreement dated as of March 3, 1998 between the Company and ChaseMellon Shareholder Services L.L.C., formerly Chemical Mellon Shareholder Services L.L.C. *10.1 Amended and Restated Non-Qualified Stock Option Plan for Employees and Directors. (Exhibit 10.1 to the 1990 Form 10-K). ** *10.2 Lease Agreement dated January 20, 1989 between the Company and Hankin/Crow Associates. (Exhibit 10.13 to the 1989 Registration Statement). *10.3 Richard D. Sanford Deferred Compensation Agreement. (Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the Quarter ended July 30, 1994). ** *10.4 1995 Long-Term Incentive Plan (Exhibit 4.1 of the Company's Registration Statement No. 33-60771 filed on June 30, 1995 [the "1995 Registration Statement"]). ** *10.5 1995 Employee Stock Purchase Plan (Exhibit 4.2 to the 1995 Registration Statement). ** *10.6 Amended and Restated Inventory and Working Capital Financing Agreement dated as of April 5, 1996 by and among the Company and IBM Credit Corporation (Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 1996). *10.7 Letter Agreement between Michael A. Norris and the Company dated August 8, 1996 (Exhibit 10.19 to the 1996 Form 10-K).** *10.8 Agreement dated as of November 21, 1997 between the Company and Ingram Micro Inc. (Exhibit 10 to the Company's Report on Form 8-K dated January 7, 1998). 10.9 Separation Agreement dated as of September 11, 1997 between the Company and Michael A. Norris. ** 10.10 Agreement dated as of January 23, 1998 between the Company and Richard D. Sanford. ** 10.11 Letter Agreement dated as of February 27, 1998 between the Company and Eugene E. Marinelli, Jr. ** *16 Letter dated September 8, 1997 from Price Waterhouse LLP to the Securities and Exchange Commission (Exhibit 16 to the Company's Report on Form 8-K dated September 3, 1997). 21 Subsidiaries of the Company. 23 Consent of KPMG Peat Marwick LLP. 23.1 Consent of Price Waterhouse LLP. * Incorporated by reference ** Management contract or compensatory plan or arrangement (b) Reports filed on Form 8-K during last fiscal quarter of 1997. The Company's Report on Form 8-K dated January 7, 1998 relating to the agreement between the Company and Ingram Micro Inc. resolving all material outstanding issues as part of the sale of the Company's Reseller Network to Ingram Micro Inc. on July 18, 1997. REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Intelligent Electronics, Inc. Under date of April 2, 1998, we reported on the consolidated balance sheet of Intelligent Electronics, Inc. and subsidiaries as of January 31, 1998, and the related consolidated statements of operations, cash flows and shareholders' equity for the year then ended, which are included in this Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Philadelphia, PA April 6, 1998
Schedule II INTELLIGENT ELECTRONICS, INC. and Subsidiaries Valuation and Qualifying Accounts and Reserves Years ended February 3, 1996, February 1, 1997 and January 31, 1998 Additions ----------------------- Balance at Charged to Charged to Balance at beginning costs and other Deductions/ end Description of period expenses accounts write-offs of period - --------------------------- ---------- ---------- ----------- ----------- ---------- Allowance for doubtful accounts: Year ended February 3, 1996 $ 298,000 $3,875,000 $5,748,000* ($1,012,000) $8,909,000 ========== ========== ========== ============ ========== Year ended February 1, 1997 $8,909,000 $4,721,000 -- ($5,529,000) $8,101,000 ========== ========== ========== ============ ========== Year ended January 31, 1998 $8,101,000 $5,694,000 ($3,898,000)** ($5,903,000) $3,994,000 ========== ========== ========== ============ ========== * Allowance for doubtful accounts acquired as part of the acquisition of The Future Now, Inc. ** Allowance for doubtful accounts sold as part of the RND Transaction.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTELLIGENT ELECTRONICS, INC. Date: April 6, 1998 By: /s/ Richard D. Sanford --------------------------------- Richard D. Sanford, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 6, 1998 By: /s/ Richard D. Sanford --------------------------------- Richard D. Sanford, Chief Executive Officer and Chairman of the Board Date: April 6, 1998 By: /s/ Eugene E. Marinelli, Jr. --------------------------------- Eugene E. Marinelli, Jr. Chief Financial Officer Date: April 6, 1998 By: /s/ Barry M. Abelson --------------------------------- Barry M. Abelson, Director Date: April 6, 1998 By: /s/ Roger J. Fritz --------------------------------- Roger J. Fritz, Director Date: April 6, 1998 By: /s/ Arnold S. Hoffman --------------------------------- Arnold S. Hoffman, Director Date: April 6, 1998 By: /s/ Michael A. Norris --------------------------------- Michael A. Norris, Director Date: April 6, 1998 By: /s/ William L. Rulon-Miller --------------------------------- William L. Rulon-Miller, Director EX-2 2 Exhibit 2.8 _______________________________________________________________________________ AGREEMENT AND PLAN OF MERGER Dated as of March 4, 1998 Among Xerox Corporation TDC Subsidiary Corporation TDC Two Subsidiary Corporation Intelligent Electronics, Inc. and XLConnect Solutions, Inc. _______________________________________________________________________________ Execution AGREEMENT AND PLAN OF MERGER Agreement and Plan of Merger (the "Agreement") entered into as of March 4, 1998 by and among Xerox Corporation, a New York corporation ("Purchaser"), TDC Subsidiary Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Purchaser ("Acquisition Sub One"), TDC Two Subsidiary Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Purchaser ("Acquisition Sub Two"), Intelligent Electronics, Inc., a Pennsylvania corporation ("Parent"), and XLConnect Solutions, Inc., a Pennsylvania corporation ("Sub"). Purchaser, Acquisition Sub One, Acquisition Sub Two, Parent and Sub are referred to individually herein as a "Party" and collectively herein as the "Parties". Recitals -------- WHEREAS, this Agreement contemplates a transaction in which Purchaser will indirectly acquire, through a reverse triangular merger of Acquisition Sub One with and into Sub (the "Sub Merger"), all of the capital stock of Sub that is not owned directly or indirectly by Parent; WHEREAS, this Agreement contemplates that immediately after completion of the Sub Merger, Purchaser will acquire, through a reverse triangular merger of Acquisition Sub Two with and into Parent (the "Parent Merger") all of the capital stock of Parent; WHEREAS, the Board of Directors of Sub (the "Sub Board") has determined that the Sub Merger is fair to and in the best interests of the holders of Sub's common stock and has resolved to recommend the acceptance and approval of the Sub Merger by the holders of Sub Shares and Parent- Owned Sub Shares (as defined in Section 1.2); WHEREAS, the Independent Committee of the Board of Directors of Sub (the "Independent Committee") has determined that the Sub Merger is fair to and in the best interests of the holders of Sub Shares and has resolved to recommend the acceptance and approval of the Sub Merger by the holders of Sub Shares; WHEREAS, the Sub Board, the Independent Committee and the respective Boards of Directors of Purchaser and Acquisition Sub One have approved the Sub Merger pursuant to and subject to the terms and conditions of this Agreement; WHEREAS, the Board of Directors of Parent (the "Parent Board") has determined that the Parent Merger is fair to and in the best interests of the holders of Parent's common stock and has resolved to take all necessary action to approve the Sub Merger and to recommend the acceptance and approval of the Parent Merger by the holders of Parent Shares (as defined in Section 2.2); WHEREAS, the Parent Board and the respective Boards of Directors of Purchaser and Acquisition Sub Two have approved the Parent Merger pursuant to and subject to the terms and conditions of this Agreement; WHEREAS, the Parties desire to make certain representations, warranties, covenants and agreements in connection with this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises set forth herein, and in consideration of the representations, warranties and covenants set forth herein, intending to be legally bound hereby, the Parties agree as follows: ARTICLE I The Sub Merger -------------- 1.1 The Sub Merger. Subject to the terms and conditions of this Agreement, at the Sub Effective Time (as defined in Section 1.8), Acquisition Sub One shall be merged with and into Sub pursuant to the Sub Merger and the separate corporate existence of Acquisition Sub One shall thereupon cease. Sub shall be the surviving corporation in the Sub Merger (sometimes hereinafter referred to as the "Sub Surviving Corporation") and shall continue to be governed by the laws of the Commonwealth of Pennsylvania, with all of Sub's rights, privileges, immunities, powers and franchises unaffected by the Sub Merger except as set forth in Sections 3.1 and 3.2 hereof. The Sub Merger shall have the effects specified in the Pennsylvania Business Corporation Law of 1988, as amended (the "PABCL"). 1.2 Conversion of Securities. At the Sub Effective Time, by virtue of the Sub Merger and without any action on the part of the holder of any shares of capital stock of Sub or common stock of Acquisition Sub One: (i) each share of common stock of Sub issued and outstanding immediately before the Sub Effective Time ("Sub Shares") shall as of the Sub Effective Time be converted into and become the right to receive from Purchaser the Sub Share Conversion Price, as provided in Section 1.3; provided, however, that Sub Shares shall not include any shares of common stock of Sub which immediately before the Sub Effective Time are owned directly or indirectly by Parent ("Parent- Owned Sub Shares"); (ii) each option or warrant to purchase a share of common stock of Sub that is outstanding as of the Sub Effective Time ("Sub Options") shall as of the Sub Effective Time be converted into and become the right to receive from Purchaser the applicable Sub Option Conversion Price, if any, as provided in Section 1.4; (iii) each share of common stock of Sub issued and held in the treasury of Sub at the Sub Effective Time shall as of the Sub Effective Time be cancelled and no such shares shall be converted into rights to receive the Sub Share Conversion Price; (iv) each Parent-Owned Sub Share shall remain issued, outstanding and unchanged, which shares shall be the only capital stock of Sub outstanding after the Sub Effective Time, and as of the Sub Effective Time Sub shall be a wholly-owned subsidiary of XLSource, Inc., an Arkansas corporation and indirect wholly-owned subsidiary of Parent; and (v) the shares of common stock of Acquisition Sub One issued and outstanding at the Sub Effective Time shall be surrendered and cancelled. 1.3 Sub Share Conversion Price. The "Sub Share Conversion Price" shall be an amount equal to $20.00. 1.4 Sub Option Conversion Price. The "Sub Option Conversion Price" means, in the case of any Sub Option, the excess, if any, of $20.00 over the exercise price of each such Sub Option, which excess shall be payable at such time or times, if any, as shall be determined pursuant to the terms and conditions of the applicable plan and/or agreement pursuant to which such Sub Option is governed. 1.5 Payment for Sub Shares and Sub Options. Prior to the Sub Effective Time, Purchaser shall designate a bank or trust company reasonably acceptable to Sub to act as Paying Agent in connection with the Sub Merger ("Paying Agent") and to receive and disburse the cash to which holders of Sub Shares or Sub Options become entitled pursuant to Section 1.2. At the Sub Effective Time, Purchaser will provide Paying Agent with sufficient cash to allow the Sub Share Conversion Price and the Sub Option Conversion Price to be paid to the holders of each Sub Share or Sub Option then entitled to be so paid. Promptly after the Sub Effective Time, the Sub Surviving Corporation shall cause to be mailed to each Person who was, at the Sub Effective Time, a holder of record of Sub Shares or Sub Options forms (in a form mutually agreed to by Purchaser and Sub) of letters of transmittal, with instructions for use in effecting the surrender of certificates that represented Sub Shares before the Sub Effective Time in exchange for payment of the Sub Share Conversion Price or in connection with the payment of the applicable Sub Option Conversion Price. Upon surrender to Paying Agent of such certificates and proper submittal of the related letter of transmittal (in connection with Sub Shares), or upon proper submittal of the letter of transmittal (in connection with Sub Options), the Sub Surviving Corporation shall promptly cause to be paid to the Persons entitled thereto a check in the amount of the Sub Share Conversion Price and/or Sub Option Conversion Price to which such Persons are entitled, after giving effect to any required tax withholdings. No interest will be paid or will accrue on the amount payable to any such Person. If payment of any Sub Share Conversion Price is to be made to a Person other than the registered holder of the certificate surrendered, it shall be a condition of such payment that the certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the Person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a Person other than the registered holder of the certificate surrendered or establish to the satisfaction of the Sub Surviving Corporation or the Paying Agent that such tax has been paid or is not applicable. The Sub Surviving Corporation shall pay all charges and expenses, including those of the Paying Agent, in connection with the exchange of cash for Sub Shares and Sub Options. In the event any certificate representing Sub Shares shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed, the Paying Agent will issue in exchange for such lost, stolen or destroyed certificate the Sub Share Conversion Price payable in respect thereof; provided, however, the Person to whom the Sub Share Conversion Price is paid shall, as a condition precedent to the payment thereof, give the Sub Surviving Corporation a bond in such sum as it may direct or otherwise indemnify the Sub Surviving Corporation in a manner satisfactory to it against any claim that may be made against the Sub Surviving Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Promptly following the first anniversary of the Sub Effective Time, the Paying Agent shall deliver to the Sub Surviving Corporation all cash held for payment for Sub Shares or Sub Options and all other documents in its possession relating to the transactions described in this Agreement, and the Paying Agent's duties shall terminate. Thereafter each holder of a certificate representing Sub Shares, and each holder of a Sub Option, may surrender such certificate and/or other appropriate documentation to the Sub Surviving Corporation (subject to applicable abandoned property, escheat and similar laws) and receive in exchange therefor the Sub Share Conversion Price or Sub Option Conversion Price in respect thereof, without interest thereon. 1.6 Transfers After the Sub Effective Time. No transfers of Sub Shares or Sub Options shall be made on the stock transfer or other applicable books of Sub at or after the Sub Effective Time. 1.7 Sub Closing. The closing of the Sub Merger (the "Sub Closing") shall take place at the offices of Pepper Hamilton LLP, 3000 Two Logan Square, Philadelphia, PA 19103-2799 at 10:00 A.M. on the first business day after the last of the conditions set forth in Article 7 hereof shall be fulfilled or waived in accordance with this Agreement, or at such other place and time and/or on such other date as Sub and Purchaser may agree; provided that the Sub Closing and the Parent Closing shall occur on the same day. 1.8 Filing of Sub Merger Documents; Sub Effective Time. In connection with the Sub Closing, Sub and Acquisition Sub One will execute and file, and Purchaser will cause Acquisition Sub One to execute and file, Articles of Merger relating to the Sub Merger ("Sub Articles of Merger") with the Secretary of State of Pennsylvania as provided in the PABCL. The Sub Merger shall become effective at the time at which the Sub Articles of Merger have been duly filed with the Secretary of State of Pennsylvania (the "Sub Effective Time"), which shall occur immediately prior to the Parent Effective Time. 1.9 Dissenters Rights. Notwithstanding any provision of this Article I to the contrary, shares held of record by shareholders who shall not have voted such shares in favor of the Sub Merger and who shall have properly exercised rights to demand payment of the fair value of such shares in accordance with the applicable provisions of the PABCL ("Sub Dissenting Shares") shall not be converted into the right to receive the Sub Share Conversion Price, but the holders thereof shall be entitled to payment of the fair value of such shares in accordance with the applicable provisions of the PABCL; provided, however, that (i) if such a holder fails to file a notice of election to dissent in accordance with the PABCL, or after having done so delivers an effective withdrawal of such notice or fails to establish (if he is required to do so) his entitlement to dissenters rights as provided in the PABCL, or (ii) if a court shall determine that such holder is not entitled to receive payment for his shares or such holder shall otherwise lose his dissenters rights, each Sub Share held of record by such holder shall automatically be converted into and represent only the right to receive the Sub Share Conversion Price, upon the surrender of the certificate or certificates representing such Sub Shares. Sub will give Purchaser prompt notice of any demands received by Sub for payment of the fair value of such shares, and Purchaser shall have the right to participate in all negotiations and proceedings with respect to such demands, Sub will not, except with the prior written consent of Purchaser, make any payment (except to the extent that any such payment is made pursuant to a court order) with respect to, or settle or offer to settle, any such demands. 1.10 PABCL. Section 1906 of the PABCL shall apply to the Sub Merger. Dissenters rights shall be available to the holders of Sub Shares as provided in Section 1.9. ARTICLE II The Parent Merger ----------------- 2.1 The Parent Merger. Subject to the terms and conditions of this Agreement, at the Parent Effective Time (as defined in Section 2.8), Acquisition Sub Two shall be merged with and into Parent pursuant to the Parent Merger and the separate corporate existence of Acquisition Sub Two shall thereupon cease. Parent shall be the surviving corporation in the Parent Merger (sometimes hereinafter referred to as the "Parent Surviving Corporation") and shall continue to be governed by the laws of the Commonwealth of Pennsylvania, with all of Parent's rights, privileges, immunities, powers and franchises unaffected by the Parent Merger except as set forth in Sections 3.1 and 3.2 hereof. The Parent Merger shall have the effects specified in the PABCL. 2.2 Conversion of Securities. At the Parent Effective Time, by virtue of the Parent Merger and without any action on the part of the holder of any shares of capital stock of Parent or common stock of Acquisition Sub Two: (i) each share of common stock of Parent (and related Right, as defined in the Rights Agreement) issued and outstanding immediately before the Parent Effective Time ("Parent Shares") shall as of the Parent Effective Time be converted into and become the right to receive from Purchaser the Parent Share Conversion Price, as provided in Section 2.3; (ii) each option or warrant to purchase a share of common stock of Parent that is outstanding as of the Parent Effective Time ("Parent Options") shall as of the Parent Effective Time be converted into and become the right to receive from Purchaser the applicable Parent Option Conversion Price, if any, as provided in Section 2.4; (iii) each share of common stock of Parent issued and held in the treasury of Parent at the Parent Effective Time shall as of the Parent Effective Time be cancelled and no such shares shall be converted into rights to receive the Parent Share Conversion Price; and (iv) the shares of common stock of Acquisition Sub Two issued and outstanding at the Parent Effective Time shall be converted into and become the number of shares of common stock of Parent issued and outstanding at the Parent Effective Time, which shares shall be the only capital stock of Parent outstanding after the Parent Effective Time, and as of the Parent Effective Time Parent shall become a wholly-owned subsidiary of Purchaser. 2.3 Parent Share Conversion Price. The "Parent Share Conversion Price" shall be an amount equal to $7.60. 2.4 Parent Option Conversion Price. The "Parent Option Conversion Price" means, in the case of any Parent Option, the excess, if any, of $7.60 over the exercise price of each such Parent Option, or such other amount, if any, and which excess or other amount shall be payable at such time or times, if any, as shall be determined pursuant to the terms and conditions of the applicable plan and/or agreement pursuant to which such Parent Option is governed. 2.5 Payment for Parent Shares and Parent Options. The Paying Agent shall receive and disburse the cash to which holders of Parent Shares or Parent Options become entitled pursuant to Section 2.2. At the Parent Effective Time, Purchaser will provide Paying Agent with sufficient cash to allow the Parent Share Conversion Price and the Parent Option Conversion Price to be paid to the holders of each Parent Share or Parent Option then entitled to be so paid. Promptly after the Parent Effective Time, the Parent Surviving Corporation shall cause to be mailed to each Person who was, at the Parent Effective Time, a holder of record of Parent Shares or Parent Options forms (in a form mutually agreed to by Purchaser and Parent) of letters of transmittal, with instructions for use in effecting the surrender of certificates that represented Parent Shares before the Parent Effective Time in exchange for payment of the Parent Share Conversion Price or in connection with the payment of the applicable Parent Option Conversion Price. Upon surrender to Paying Agent of such certificates and proper submittal of the related letter of transmittal (in connection with Parent Shares), or upon proper submittal of the letter of transmittal (in connection with Parent Options), the Parent Surviving Corporation shall promptly cause to be paid to the Persons entitled thereto a check in the amount of the Parent Share Conversion Price and/or Parent Option Conversion Price to which such Persons are entitled, after giving effect to any required tax withholdings. No interest will be paid or will accrue on the amount payable to any such Person. If payment of any Parent Share Conversion Price is to be made to a Person other than the registered holder of the certificate surrendered, it shall be a condition of such payment that the certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the Person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a Person other than the registered holder of the certificate surrendered or establish to the satisfaction of the Parent Surviving Corporation or the Paying Agent that such tax has been paid or is not applicable. The Parent Surviving Corporation shall pay all charges and expenses, including those of the Paying Agent, in connection with the exchange of cash for Parent Shares and Parent Options. In the event any certificate representing Parent Shares shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed, the Paying Agent will issue in exchange for such lost, stolen or destroyed certificate the Parent Share Conversion Price payable in respect thereof; provided, however, the Person to whom the Parent Share Conversion Price is paid shall, as a condition precedent to the payment thereof, give the Parent Surviving Corporation a bond in such sum as it may direct or otherwise indemnify the Parent Surviving Corporation in a manner satisfactory to it against any claim that may be made against the Parent Surviving Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Promptly following the first anniversary of the Parent Effective Time, the Paying Agent shall deliver to the Parent Surviving Corporation all cash held for payment for Parent Shares or Parent Options and all other documents in its possession relating to the transactions described in this Agreement, and the Paying Agent's duties shall terminate. Thereafter each holder of a certificate representing Parent Shares, and each holder of a Parent Option, may surrender such certificate and/or other appropriate documentation to the Parent Surviving Corporation (subject to applicable abandoned property, escheat and similar laws) and receive in exchange therefor the Parent Share Conversion Price or Parent Option Conversion Price in respect thereof, without interest thereon. 2.6 Transfers After the Effective Time. No transfers of Parent Shares or Parent Options shall be made on the stock transfer or other applicable books of Parent at or after the Parent Effective Time. 2.7 Parent Closing. The closing of the Parent Merger (the "Parent Closing") shall take place at the offices of Pepper Hamilton LLP, 3000 Two Logan Square, Philadelphia, PA 19103-2799 at 10:00 A.M. on the first business day after the last of the conditions set forth in Article 7 hereof shall be fulfilled or waived in accordance with this Agreement, or at such other place and time and/or on such other date as Parent and Purchaser may agree; provided that the Parent Closing and the Sub Closing shall occur on the same day. 2.8 Filing of Parent Merger Documents; Parent Effective Time. In connection with the Closing, Parent and Acquisition Sub Two will execute and file, and Purchaser will cause Acquisition Sub Two to execute and file, Articles of Merger relating to the Parent Merger ("Parent Articles of Merger") with the Secretary of State of Pennsylvania as provided in the PABCL. The Parent Merger shall become effective at the time at which the Parent Articles of Merger have been duly filed with the Secretary of State of Pennsylvania (the "Parent Effective Time"), which shall occur immediately after the Sub Effective Time. 2.9 Dissenters Rights. Notwithstanding any provision of this Article II to the contrary, and to the extent required under the applicable provisions of the PABCL, Parent Shares held of record by shareholders who shall not have voted such shares in favor of the Parent Merger and who shall have properly exercised rights to demand payment of the fair value of such shares in accordance with the applicable provisions of the PABCL ("Parent Dissenting Shares") shall not be converted into the right to receive the Parent Share Conversion Price, but the holders thereof shall be entitled to payment of the fair value of such shares in accordance with the applicable provisions of the PABCL; provided, however, that (i) if such a holder fails to file a notice of election to dissent in accordance with the PABCL, or after having done so delivers an effective withdrawal of such notice or fails to establish (if he is required to do so) his entitlement to dissenters rights as provided in the PABCL, or (ii) if a court shall determine that such holder is not entitled to receive payment for his shares or such holder shall otherwise lose his dissenters rights, each Parent Share held of record by such holder shall automatically be converted into and represent only the right to receive the Parent Share Conversion Price, upon the surrender of the certificate or certificates representing such Parent Shares. Parent will give Purchaser prompt notice of any demands received by Parent for payment of the fair value of such shares, and Purchaser shall have the right to participate in all negotiations and proceedings with respect to such demands, Parent will not, except with the prior written consent of Purchaser, make any payment (except to the extent that any such payment is made pursuant to a court order) with respect to, or settle or offer to settle, any such demands. ARTICLE III Articles of Incorporation and By-Laws of the Surviving Corporations ----------------------------- 3.1 Articles of Incorporation. The Articles of Incorporation of the Sub Surviving Corporation shall, upon the Sub Effective Time, be and remain unchanged until further amended in accordance with the terms thereof and the PABCL, subject, however, to the provisions of Section 6.2(f)(i) hereof. The Articles of Incorporation of the Parent Surviving Corporation shall, upon the Parent Effective Time, be and remain unchanged until further amended in accordance with the terms thereof and the PABCL, subject, however, to the provisions of Section 6.2(f)(i) hereof. 3.2 By-Laws. The By-Laws of the Sub Surviving Corporation in effect at the Sub Effective Time shall be and remain unchanged until duly amended in accordance with the terms thereof and the PABCL, subject, however, to the provisions of Section 6.2(f)(i) hereof. The By-Laws of Parent Surviving Corporation in effect at the Parent Effective Time shall be and remain unchanged until duly amended in accordance with the terms thereof and the PABCL, subject, however, to the provisions of Section 6.2(f)(i) hereof. ARTICLE IV Officers and Directors ---------------------- 4.1 Sub. At the Sub Effective Time, the directors of Acquisition Sub One shall be all the directors of the Sub Surviving Corporation, each of such directors to hold office, subject to the applicable provisions of the Articles of Incorporation and By-Laws of the Sub Surviving Corporation, until their respective successors shall be duly elected or appointed and qualified. At the Sub Effective Time, the officers of Acquisition Sub One immediately prior to the Sub Effective Time shall, subject to the applicable provisions of the Articles of Incorporation and By-Laws of the Sub Surviving Corporation, be the officers of the Sub Surviving Corporation until their respective successors shall be duly elected or appointed and qualified. 4.2 Parent. At the Parent Effective Time, the directors of Acquisition Sub Two shall be all the directors of the Parent Surviving Corporation, each of such directors to hold office, subject to the applicable provisions of the Articles of Incorporation and By-Laws of the Parent Surviving Corporation, until their respective successors shall be duly elected or appointed and qualified. At the Parent Effective Time, the officers of Acquisition Sub Two immediately prior to the Parent Effective Time shall, subject to the applicable provisions of the Articles of Incorporation and By-Laws of the Parent Surviving Corporation, be the officers of the Parent Surviving Corporation until their respective successors shall be duly elected or appointed and qualified. ARTICLE V Representations and Warranties ------------------------------ 5.1 Representations and Warranties of Parent and Sub. Parent and Sub hereby jointly and severally (but subject to Section 5.1(bb)) represent and warrant to Purchaser that, except as set forth in the disclosure letter of even date herewith delivered by Parent to Purchaser in conjunction with execution of this Agreement (the "Disclosure Letter"): (a) Organization, Qualification and Corporate Power. Each of Parent and its subsidiaries (direct or indirect) (such subsidiaries, including Sub, being collectively referred to as "Parent Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required, except where the lack of such qualification would not result in a Material Adverse Change. Each of the Parent and the Parent Subsidiaries has full corporate power and corporate authority, and all foreign, federal, state and local governmental permits, licenses and consents (collectively, "Permits"), to carry on the businesses in which it is engaged and to own and use the properties owned and used by it, except where the failure to have Permits would not result in a Material Adverse Change. The Disclosure Letter contains an accurate list of the Parent Subsidiaries and the Sub Subsidiaries, their jurisdiction, date of incorporation and date of acquisition directly or indirectly by Parent, and their respective material Permits as well as material Permits the applicable entity does not have and which Parent or Sub has knowledge that it is required to have. (b) Capitalization. (I) The authorized capital stock of Parent consists of 100,000,000 shares of common stock, par value $.01 per share (the "Parent Common Stock") and 15,000,000 shares of preferred stock, par value $50.00 per share (the "Parent Preferred Stock"). As of March 3, 1998, (i) 41,798,091 shares of Parent Common Stock are issued and outstanding, and (ii) 7,006,540 shares of Parent Common Stock have been reserved for issuance upon the exercise of outstanding options and warrants. No shares of Parent Preferred Stock are issued and outstanding, and 200,000 shares of Series A Junior Participating Preferred Stock have been reserved for issuance upon exercise of the outstanding Rights (as defined in the Rights Agreement), none of which is or will be outstanding at or before the Parent Effective Time. All issued and outstanding shares of Parent's capital stock and all issued and outstanding shares of each Parent Subsidiary's capital stock, have been validly issued and are fully paid and nonassessable, and are not subject to, nor were they issued in violation of, any preemptive rights. Except as detailed in the Disclosure Letter, neither Parent nor any of the Parent Subsidiaries has any outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other agreements relating to the acquisition of capital stock, or any cash settlement option, phantom stock, stock appreciation right or similar instrument (the "Stock Rights") relating to any capital stock of Parent or any Parent Subsidiary. (II) The authorized capital stock of Sub consists of 100,000,000 shares of common stock, par value $.01 per share (the "Sub Common Stock") and 10,000,000 shares of preferred stock, par value $.01 per shares (the "Sub Preferred Stock"). As of March 3, 1998, (i) 16,684,100 shares of Sub Common Stock are issued and outstanding, (ii) 13,348,280 shares of Sub Common Stock are owned by XLSource, Inc., an indirect wholly- owned subsidiary of Parent, and (iii) 2,791,645 shares of Sub Common Stock have been reserved for issuance upon the exercise of outstanding options and warrants. No shares of Sub Preferred Stock are issued and outstanding. All issued and outstanding shares of Sub's capital stock have been validly issued and are fully paid and nonassessable, are entitled to full voting rights as to the election of directors and other matters, and are not subject to, nor were they issued in violation of, any preemptive rights. Except as detailed in the Disclosure Letter, there exist no Stock Rights relating to any capital stock of Sub. No stock of Sub or of any Sub Subsidiary owned by Parent or any Parent Subsidiary is subject to any put option, redemption agreement (including a right to cause redemption of stock) or any other instrument that provides for the right to transfer such stock. Disregarding the execution of this Agreement, the Parent Merger and the Sub Merger, (x) neither the shares of Sub capital stock directly or indirectly owned by Parent nor the holders of any such shares are subject to any limitations, pursuant to any provision of Chapter 25 of the PABCL, of voting rights afforded generally to holders of shares of such class or series of capital stock, and (y) no transaction has occurred or state of facts exists which has triggered dissenters rights or any other right on the part of a shareholder under the PABCL to receive payment in respect of such shares. Since December 1, 1997, neither Parent nor any Parent Subsidiary has purchased or otherwise acquired any shares of common stock of Sub for a per share price in excess of the Sub Share Conversion Price. (III) The Disclosure Letter describes the equity capitalization of each Parent Subsidiary, including the authorized capital stock, the issued and outstanding capital stock, and the ownership thereof. With the exception of Sub and the Sub Subsidiaries, Parent is directly or indirectly the owner of all shares of capital stock of each Parent Subsidiary. All Sub Subsidiaries are 100% owned by Sub. (c) Authorization of Transaction. Each of Parent and Sub has the requisite corporate power and authority, and has taken all required action necessary, to properly execute and deliver this Agreement and to perform its obligations hereunder, and this Agreement constitutes the valid and legally binding obligation of each of Parent and Sub, enforceable in accordance with its terms and conditions, except as limited by (i) applicable bankruptcy, insolvency reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law; provided, however, that Parent cannot consummate the Parent Merger and Sub cannot consummate the Sub Merger unless and except upon receipt of the approval of the holders of Parent Common Stock and Sub Common Stock to the extent required by the PABCL. (d) Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation by Parent or Sub of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree or other restriction of any government, governmental agency or court to which Parent or any of the Parent Subsidiaries is subject or any provision of the charter or bylaws of Parent or any of the Parent Subsidiaries, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel or require any notice under any contract required to be listed on the Disclosure Letter or under any other material agreement, contract, lease, license, instrument or other arrangement to which Parent or any of the Parent Subsidiaries is a party or by which any of them is bound or to which any of their respective assets is subject (or result in the imposition of any lien, encumbrance or other security interest (a "Security Interest") upon any of their respective assets), except in the case of clause (ii) as disclosed in the Disclosure Letter. Other than filings required in connection with the provisions of the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"), the PABCL and the Exchange Act, neither Parent nor any of the Parent Subsidiaries needs to give any notice to, make any filing with or obtain any authorization, consent or approval of any government or government agency in order for the Parties to consummate the transactions contemplated by this Agreement. (e) Filings with the SEC. Since January 1, 1992, Parent and Sub have made all filings with the SEC that either of them has been required to make under the Securities Act and the Exchange Act (collectively, the "Public Reports"). Each of the Public Reports complied with the requirements of the Securities Act and the Exchange Act in all material respects and none of the Public Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (f) Financial Statements. (I) Parent has filed an Annual Report on Form 10-K, as amended by its Form 10-K/A (the "Parent 10-K"), for the fiscal year ended on February 1, 1997 and a Quarterly Report on Form 10-Q (the "Parent 10-Q") for the fiscal quarter ended November 1, 1997 (the "Parent Most Recent Quarter End"). The financial statements included in the Parent 10-K and the Parent 10-Q (including the related notes and schedules) have been prepared from the books and records of Parent and the Parent Subsidiaries in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods covered thereby, and present fairly in all material respects the financial condition of Parent and the Parent Subsidiaries as of the indicated dates and the results of operations and cash flows of Parent and the Parent Subsidiaries for the indicated periods. In the opinion of Parent's management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of operating results for the interim periods presented have been made. (II) Sub has filed an Annual Report on Form 10-K (the "Sub 10-K") for the fiscal year ended on December 31, 1996 and a Quarterly Report on Form 10-Q, as amended by its Form 10-Q/A (the "Sub 10-Q") for the fiscal quarter ended September 30, 1997 (the "Sub Most Recent Quarter End"). The financial statements included in the Sub 10-K and the Sub 10-Q (including the related notes and schedules) have been prepared from the books and records of Sub and the Sub Subsidiaries in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, and present fairly in all material respects the financial condition of Sub and the Sub Subsidiaries as of the indicated dates and the results of operations and cash flows of Sub and the Sub Subsidiaries for the indicated periods. In the opinion of Parent's and Sub's management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of operating results for the interim periods presented have been made. (g) Events Subsequent to Most Recent Quarter End. (I) Since the Parent Most Recent Quarter End, there has not been any Material Adverse Change or any development or combination of developments relating to Parent or any of the Parent Subsidiaries of which Parent has knowledge and which would result in a Material Adverse Change. (II) Since the Sub Most Recent Quarter End, there has not been any Material Adverse Change or any development or combination of developments relating to Sub or any of the Sub Subsidiaries of which Parent or Sub has knowledge and which would result in a Material Adverse Change. (h) Compliance. Parent and the Parent Subsidiaries are in compliance with all applicable laws, rules and regulations, except where the failure to be in compliance would not result in a Material Adverse Change. (i) Litigation and Liabilities. There are (i) no actions, suits or proceedings pending or, to the knowledge of Parent or Sub, threatened against Parent or any of the Parent Subsidiaries which (x) if adversely determined against Parent or any of the Parent Subsidiaries could reasonably be expected to result in a Material Adverse Change, or (y) could reasonably be expected to materially impair or delay the Parties' ability to consummate the transactions contemplated by this Agreement, and (ii) no obligations or liabilities of Parent or any of the Parent Subsidiaries known to Parent or Sub and not disclosed in the Disclosure Letter or reflected in the financial statements or related notes included in the Parent 10-K, the Parent 10-Q, the Sub 10-K or the Sub 10-Q which could reasonably be expected to result in a Material Adverse Change. The Disclosure Letter lists all pending and, to the knowledge of Parent or Sub, threatened EEOC and similar investigations, actions, suits or proceedings against Parent or any Parent Subsidiary (regardless of the materiality thereof) and copies of the pleadings for each such pending matter have been made available to Purchaser by Parent. (j) Taxes. (I) Each of Parent and the Parent Subsidiaries has duly filed all federal, state, local and foreign tax returns required to be filed by it and has duly paid, caused to be paid or made adequate provision for the payment of all Taxes (as hereinafter defined) required to be paid in respect of the periods covered by such returns. No claims for Taxes have been asserted against Parent or any of the Parent Subsidiaries, and no deficiency for any Taxes has been proposed, asserted or assessed against Parent or any of the Parent Subsidiaries, in either case which has not been resolved or paid in full. To Parent's knowledge, no Tax return for any taxable period of Parent or any Parent Subsidiary is under examination by any taxing authority, Parent has not received written notice of any pending audit by any taxing authority against the Parent or any of the Parent Subsidiaries, and there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any Tax return for any taxable period of Parent or any of the Parent Subsidiaries. "Taxes" means all federal, state, territorial, local, foreign and other net income, gross income, gross receipts, sales, use, value added, ad valorem, transfer, franchise, profits, license, lease, service, use, withholding, payroll, employment, unemployment insurance, workers compensation, social security, excise, severance, stamp, business license, occupation, premium, property, environmental, windfall profits, customs, duties, alternative minimum, estimated or other taxes, fees, premiums, assessments or charges of any kind whatever imposed or collected by any governmental entity or political subdivision thereof. (II) Each of Sub and the Sub Subsidiaries has duly filed all federal, state, local and foreign tax returns required to be filed by it and has duly paid, caused to be paid or made adequate provision for the payment of all Taxes required to be paid in respect of the periods covered by such returns. No claims for Taxes have been asserted against Sub or any of the Sub Subsidiaries, and no deficiency for any Taxes has been proposed, asserted or assessed against Sub or any of the Sub Subsidiaries, in either case which has not been resolved or paid in full. To Parent's and Sub's knowledge, no Tax return for any taxable period of Sub is under examination by any taxing authority, Sub has not received written notice of any pending audit by any taxing authority against the Sub or any of the Sub Subsidiaries, and there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any Tax return for any taxable period of Sub or any of the Sub Subsidiaries. (III) Parent and each Parent Subsidiary has been a continuous member of the consolidated group of companies of which Parent is the common parent for Federal income tax purposes since the time such Subsidiary first became affiliated with the Parent's consolidated group. (k) Brokers' and Other Fees. Except for the fees and expenses of Lazard Freres & Co. LLC ("Lazard") for Parent and NationsBanc Montgomery Securities LLC ("Montgomery") for Sub, none of Parent or the Parent Subsidiaries has any liability or obligation to pay any fees or commissions to any investment adviser, broker, finder or agent with respect to the transactions contemplated by this Agreement. (l) Fairness Opinions. Montgomery has delivered to the Independent Committee of the Board of Directors of Sub, and not withdrawn, its opinion that the consideration being paid to the holders of Sub Shares (other than shares held directly or indirectly by Parent) pursuant to Section 1.2 hereof is fair to such holders, as of the date of such opinion, from a financial point of view (the "Sub Fairness Opinion"), and a true and complete copy thereof has been furnished to Purchaser. Lazard has delivered to the Board of Directors of Parent, and not withdrawn, its opinion that the consideration being paid pursuant to Section 2.2 hereof is fair to the shareholders of Parent, as of the date of such opinion, from a financial point of view (the "Parent Fairness Opinion"), and a true and complete copy thereof has been furnished to Purchaser. (m) Rights Plan. Parent has amended the Rights Agreement to provide that the Purchaser and all direct and indirect wholly-owned subsidiaries thereof and their respective Associates and Affiliates (as such terms are defined in the Rights Agreement), for purposes of entering into and consummating the transactions contemplated by this Agreement, are considered an "Exempt Person", as defined in the Rights Agreement, until such time as this Agreement shall terminate, if at all. Parent has taken all necessary action so that none of the execution and delivery of this Agreement or the consummation of the Sub Merger or Parent Merger contemplated hereby will (i) cause the Rights (as such term is defined in the Rights Agreement) issued pursuant to the Rights Agreement to become exercisable, (ii) cause any Person to become an Acquiring Person (as such term is defined in the Rights Agreement) or (iii) give rise to a Distribution Date (as such term is defined in the Rights Agreement). (n) Management Letters. There is no management letter of outside auditors for the year ended February 1, 1997 (in the case of Parent) or for the year ended December 31, 1996 (in the case of Sub). (o) Environmental Matters. The conduct or operation of Parent and Parent Subsidiaries and any condition of property presently or previously owned, leased or operated by any of them violates or violated no Environmental Laws in any material respect and no condition has existed or event has occurred with respect to any of them or any such property that, with notice or the passage of time, or both, is reasonably likely to result in any material liability under Environmental Laws. Neither Parent nor any of the Parent Subsidiaries has received any notice from any person or entity that Parent or any Parent Subsidiary or the operation or condition of any property ever owned, leased or operated by any of them are or were in violation of or otherwise are alleged to have liability under any Environmental Law. "Environmental Laws" means all applicable local, state and federal environmental, health and safety laws and regulations, including, without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Federal Clean Air Act, and the Occupational Safety and Health Act, each as amended, regulations promulgated thereunder, and state counterparts. (p) Other Interests. Neither Parent nor any Parent Subsidiary owns any shares of capital stock in any corporation (other than in the Parent Subsidiaries as disclosed herein) or holds any debt or equity interest in any joint venture, partnership or other entity. (q) Intellectual Property. (I) Parent and each Parent Subsidiary owns, or is licensed or otherwise possesses legally enforceable rights to use, all material patents, trademarks, trade names, service marks, copyrights, technology, know-how, computer software programs (which shall exclude off-the-shelf software programs) that are used in the business of Parent and each of the Parent Subsidiaries as currently conducted (the "Intellectual Property"). (II) No claim against Parent or any Parent Subsidiary has been asserted in writing or, to Parent's or Sub's knowledge, orally by a third party respecting or related to the Intellectual Property or related to the alleged infringement by Parent or any Parent Subsidiary of the intellectual property of others and, in either case, Parent and the Parent Subsidiaries do not know of any reasonable grounds for any such claim. (III) To the knowledge of Parent and Sub, there is no material unauthorized use, infringement or misappropriation of any Intellectual Property by any third party, including any employee or former employee of Parent or any Parent Subsidiary. (r) Employment Matters. (I) The Disclosure Letter identifies all stock options, restricted stock rights and other Stock Rights outstanding under Parent's 1995 Long-Term Incentive Plan and Parent's Non- Qualified Stock Option Plan for employees and directors and Sub's 1996 Long-Term Incentive Plan (the "Sub Plan") or any other agreement, plan or arrangement of Parent or any Parent Subsidiary. Parent has provided Purchaser with copies of all such agreements, plans and arrangements, except for agreements utilizing a standard form of agreement, in which case Parent has provided Purchaser with a copy of such standard form. (II) Except as described in the Disclosure Letter, neither Parent nor any Parent Subsidiary (i) is a party or subject to any contract of employment with any person which is not terminable at will without penalty (other than standard severance policies offered to all employees generally), or which would entitle any person to any payment (severance or otherwise) as a result of the Merger, or any collective bargaining agreement, or (ii) maintains or contributes to any profit sharing, pension, retirement, thrift, savings, incentive compensation, deferred compensation, bonus, stock option, stock purchase, restricted stock, stock appreciation right, performance share, performance unit, severance, salary continuation, holiday, vacation, disability, insurance, medical or other employee benefit, incentive or welfare plan, policy, material contract or material arrangement (collectively, the "Employee Benefit Plans"). (III) During the last three years there have been no actual or threatened strikes or labor stoppages involving any employees of Parent or any Parent Subsidiary, and neither Parent nor any Parent Subsidiary is aware of any organizing activity actively seeking to certify a collective bargaining unit or representative for any employees. (IV) All retirement and employee benefit or welfare plans of Parent or any Parent Subsidiary have been maintained and operated in accordance with their terms in all material respects, and all such plans which are subject to the Employee Retirement Income Security Act of 1974 ("ERISA") or the Internal Revenue Code ("IRC") have been maintained and operated in material compliance with all applicable provisions of ERISA and the IRC and the regulations thereunder and are not subject to any accumulated funding deficiency within the meaning of ERISA and the regulations thereunder or to any outstanding liability to the Pension Benefit Guaranty Corporation (other than for routine premium payments). All such plans are identified in the Disclosure Letter. No "prohibited transaction" has occurred with respect to any such plan, nor has any "reportable event" occurred in respect thereof, as such terms are defined in ERISA and the regulations thereunder, and no such plan is a "Multiemployer Plan" or a "Multiple Employer Plan", as such terms are defined in ERISA and the regulations thereunder. (s) Credit Support Arrangements. Neither the Parent nor any Parent Subsidiary has issued any currently existing guarantee or credit support or has obtained any currently existing letter of credit or bond with respect to, or has directly or indirectly made any currently existing promise, agreement or undertaking to fund, support, guarantee or otherwise backstop any obligation or liability, contingent or otherwise, of any person or entity other than Parent or a Parent Subsidiary. (t) Changes. Since November 1, 1997 Parent and each Parent Subsidiary has been operated only in the ordinary course of business and there has not been any: (i) Material Adverse Change; (ii) casualty loss, whether or not covered by insurance, involving in any instance an amount in excess of $50,000; (iii) obligation or liability, contingent or otherwise, incurred by Parent or any Parent Subsidiary other than obligations and liabilities incurred in the ordinary course of business and consistent with past practice, or loss of a customer otherwise required to be listed on the Disclosure Letter pursuant to Section 5.1(v)(II); (iv) payment, discharge or settlement of any claim against or obligation or liability of Parent or any Parent Subsidiary except in the ordinary course of business and consistent with past practice; (v) capital expenditures or commitment to make any capital expenditure by the Parent or any Parent Subsidiary not included in Parent's or Sub's capital budget as set forth in the Disclosure Letter; (vi) issuance, sale, transfer or pledge by Parent or any Parent Subsidiary of any capital stock of Parent or any Parent Subsidiary; (vii) sale, lease, transfer, pledge, mortgage or encumbrance by Parent or any Parent Subsidiary of any capital assets in an aggregate amount exceeding $100,000; (viii) write-down or write off of any tangible or intangible assets in an aggregate amount exceeding $100,000 except with respect to accounts receivable and inventory in the ordinary course of business and consistent with past practices; or (ix) event which, if this Agreement were in effect, would have required the consent of Purchaser pursuant to Section 6.1(a) (other than (viii), (xiii) or (xiv) of Section 6.1(a)) and with respect to which such consent was not obtained. (u) Assets and Property. Parent and each Parent Subsidiary has good and marketable title to all the assets it purports to own, free and clear of all liens, claims and encumbrances, and valid leasehold interests in all assets it purports to lease. Neither Parent nor any Parent Subsidiary owns any real property. (v) Contracts. (I) The Disclosure Letter lists all agreements and arrangements pursuant to which Parent or any Parent Subsidiary has any rights, obligations or liabilities with respect to (i) borrowed money, (ii) real property leases, (iii) royalty agreements, (iv) joint venture or product development agreements, (v) indemnification agreements, (vi) limitations or restrictions on the use of assets it may own, the businesses it may conduct, the persons or entities with whom it may do business or whom it may hire or retain, or the locations in which it may own assets or conduct business, or (vii) the performance of intercompany services or other arrangements between or among Parent and any of the Parent Subsidiaries. (II) The Disclosure Letter lists all contracts and arrangements to which Parent or any of the Parent Subsidiaries is a party with vendors or customers that involve payments for services in excess of, for any vendor or customer, $250,000 in the last fiscal year. (III) Neither Parent or any Parent Subsidiary nor, to the knowledge of Parent or Sub, any other party thereto is in breach or default under any contract, agreement or instrument where the effect of such breach or default would, singly or in the aggregate with breaches and defaults under other contracts, agreements or instruments, result in a Material Adverse Change. (IV) Parent has provided Purchaser with a complete and correct copy of each contract, agreement and instrument disclosed in the Disclosure Letter (in the case of customer contracts, to the extent available to Parent or Sub), and all such contracts, agreements and instruments are in full force and effect, and are valid, binding and enforceable in accordance with their terms subject, as to enforcement, to laws of general applicability relating to or affecting creditors' rights and to general equity principles. (w) Insurance. The Disclosure Letter lists all insurance policies insuring Parent or any Parent Subsidiary or any of their respective assets or operations. All such policies are and will be in full force and effect through the Parent Effective Time except to the extent such policies expire and cannot be renewed on a commercially reasonable basis. Except as disclosed in the Disclosure Letter there are no pending or threatened disputes or communications with or from any insurance carrier denying or disputing any claim or coverage or regarding cancellation or nonrenewal of any such policy. (x) Related Party Transactions. Except as described in the Disclosure Letter, no executive officer of Parent or any Parent Subsidiary, nor any entity in which any of the foregoing has a 1% or more equity interest is a party to any contract, agreement or other financial or business arrangement with Parent or any Parent Subsidiary. (y) Reserves etc. (I) Parent has previously furnished to Purchaser a list of (i) all reserves maintained on the unaudited books and records of Parent or any Parent Subsidiary as of January 31, 1998, (ii) each item in respect of which such reserves are maintained, and (iii) the amount of reserves maintained for each such item. Parent management believes no additional material reserves are required under GAAP. (II) Neither Parent nor any Parent Subsidiary has any liability in respect of the Novaquest or Pacific On Line notes receivable totalling approximately $5.9 million as of May 1, 1997 that have been sold to Ingram Micro. (III) The reserves maintained on the unaudited books and records of Parent and the Parent Subsidiaries respecting the sale transaction with GE Capital are sufficient to satisfy any claims which might reasonably be expected to arise out of either of those transactions. (z) Board Action. The Boards of Directors of Parent and Sub have duly and validly approved and taken all corporate action required to be taken by the Boards of Directors for the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement. The Boards of Directors of Parent and Sub have determined that it is advisable and in the best interest of their respective stockholders for the Parent Merger and the Sub Merger to occur upon the terms and subject to the conditions of this Agreement and the Parent's Board of Directors has resolved to recommend that Parent's stockholders approve and adopt the Parent Merger and Sub's Board of Directors and Independent Committee thereof have resolved to recommend that Sub's stockholders approve and adopt the Sub Merger. The Board of Directors of Sub has determined that the shareholders of Sub shall be entitled to dissenters rights under Subchapter D of Chapter 15 of the PABCL in connection with the Sub Merger in lieu of providing for a statutory class vote pursuant to Section 1906(b) of the PABCL. The Board of Directors of Sub and the Independent Committee thereof have approved an amendment to Sub's Articles of Incorporation to provide that Subchapter E of Chapter 25 of the PABCL shall not be applicable to Sub. (aa) Expenses. Parent and Sub have provided to Purchaser a good faith estimate and description of the expenses which either of them has incurred or which either of them expects to incur in connection with the transactions contemplated by this Agreement. (bb) Effect of Certain Representations and Warranties. (i) Insofar as any of the foregoing representations and warranties are inaccurate with respect to or as a result of circumstances involving Sub, and if Parent did not have knowledge of such inaccuracy, Parent will have no liability for damages to Purchaser or Acquisition Sub One or Two for breach of such representation and warranty; provided, however, that this subparagraph shall have no effect on whether the condition set forth in Section 7.2(b) has been satisfied, or on any right of Purchaser to terminate this Agreement under Section 8.3, or on any obligation of Parent and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b). (ii) Insofar as any of the foregoing representations and warranties are inaccurate with respect to or as a result of circumstances involving Parent or any Parent Subsidiary (other than Sub or any Sub Subsidiary), and if Sub did not have knowledge of such inaccuracy, Sub will have no liability for damages to Purchaser or Acquisition Sub One or Two for breach of such representation and warranty; provided, however, that this subparagraph shall have no effect on whether the condition set forth in Section 7.2(b) has been satisfied, or on any right of Purchaser to terminate this Agreement under Section 8.3, or on any obligation of Parent and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b). 5.2 Representations and Warranties of Purchaser, Acquisition Sub One and Acquisition Sub Two. Purchaser, Acquisition Sub One and Acquisition Sub Two jointly and severally represent and warrant to Parent and Sub that: (a) Corporate Organization. Each of Purchaser, Acquisition Sub One and Acquisition Sub Two is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of Acquisition Sub One and Acquisition Sub Two is a direct, wholly-owned subsidiary of Purchaser and was formed solely for the purpose of engaging in the transactions contemplated by this Agreement. Except for obligations or liabilities incurred in connection with its incorporation or other agreements or arrangements contemplated by this Agreement, neither Acquisition Sub One nor Acquisition Sub Two has and will not have incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any Person. (b) Corporate Authority. Purchaser, Acquisition Sub One and Acquisition Sub Two each has the requisite corporate power and authority, and has taken all required action necessary, to properly execute and deliver this Agreement and to perform its obligations hereunder, and this Agreement constitutes the valid and legally binding obligation of each of Purchaser, Acquisition Sub One and Acquisition Sub Two, enforceable in accordance with its terms and conditions, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law. (c) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation by Purchaser, Acquisition Sub One or Acquisition Sub Two of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree or other restriction of any government, governmental agency or court to which Purchaser, Acquisition Sub One or Acquisition Sub Two or any of their respective subsidiaries is subject or any provision of the charter or bylaws of the Purchaser, Acquisition Sub One or Acquisition Sub Two or any of their respective subsidiaries, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Purchaser, Acquisition Sub One or Acquisition Sub Two or any of their respective subsidiaries is a party or by which any of them is bound or to which any of their respective assets is subject, and which would have a material adverse effect on the ability of the Parties to consummate the transactions contemplated by this Agreement. Other than filings required in connection with the provisions of the HSR Act, the PABCL and the Exchange Act, neither Purchaser nor Acquisition Sub One nor Acquisition Sub Two needs to give any notice to, make any filing with or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement. (d) Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the executive officers of Purchaser, Acquisition Sub One or Acquisition Sub Two, threatened against Purchaser, Acquisition Sub One or Acquisition Sub Two which if adversely determined against Purchaser, Acquisition Sub One or Acquisition Sub Two would materially impair or delay the Parties' ability to consummate the transactions contemplated by this Agreement. (e) Funds. Purchaser has all of the funds in its control and possession required in order to consummate the Parent Merger and the Sub Merger and to pay all fees and expenses as contemplated by this Agreement (the "Payment Funds"). (f) Brokers' and Other Fees. Neither Parent nor any Parent Subsidiary has or will have any liability or obligation to pay any fees or commissions to any investment advisor, broker, finder or agent engaged by Purchaser, Acquisition Sub One or Acquisition Sub Two with respect to the transactions contemplated by this Agreement. Any such fees or commissions will be paid by Purchaser. (g) Proxy Statement. None of the information supplied in writing by Purchaser or any subsidiary of Purchaser specifically for inclusion in the Proxy Statements (as defined in Section 6.1(c)), including all amendments and supplements thereto, shall, in the case of the Proxy Statements, at the date thereof and at the time of the meetings of shareholders to vote on the matters covered thereby, contain any untrue statement of a material fact, or omit a state material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they are made, not misleading. ARTICLE VI Covenants --------- 6.1 Covenants of the Parent and Sub. Parent and Sub jointly and severally (but subject to Section 6.4) covenant and agree that, except as otherwise required by this Agreement: (a) Interim Operations of Parent and Sub. From the date hereof and continuing until the earlier of (i) the termination of this Agreement or (ii) the Sub Effective Time (in the case of Sub) or (iii) the Parent Effective Time (in the case of Parent), the business of Parent and Sub and their respective subsidiaries, as applicable, shall be conducted only in the ordinary and usual course and, to the extent consistent therewith, Parent and Sub each shall use all commercially reasonable efforts to preserve its business organization intact and maintain its existing relations with customers, suppliers, employees and business associates. Without limiting the generality of the foregoing from the date hereof and continuing until the earlier of (i) the termination of this Agreement or (ii) the Sub Effective Time (in the case of Sub) or (iii) the Parent Effective Time (in the case of Parent), Parent and Sub will not with respect to themselves or any Parent Subsidiary without the prior written consent of Purchaser (or except as expressly permitted by the Disclosure Letter or as required by this Agreement) do or commit to do any of the following: (i) authorize or effect any change in its charter or bylaws; (ii) grant, amend or modify any Stock Rights or issue, sell or otherwise dispose of any of its capital stock (except, in the case of Parent, upon the exercise of Stock Rights outstanding as of the date of this Agreement; it being understood, however, that Sub shall not issue any capital stock, whether or not upon the exercise of Stock Rights); (iii) declare, set aside or pay any dividend or distribution with respect to its capital stock (whether in cash or in kind), or redeem, repurchase or otherwise acquire any of its capital stock or any Stock Rights; (iv) issue any note, bond or other debt security or create, incur, assume or guarantee any indebtedness for borrowed money or capitalized lease obligation other than borrowings and reborrowings under existing credit facilities to fund current obligations in the ordinary course of business; (v) impose or allow to be imposed any Security Interest upon any of its assets except pursuant to after-acquired property clauses in existing security arrangements disclosed in the Disclosure Letter or purchase money security interests on inventory financed in the ordinary course of business; (vi) make any expenditure for a capital asset or lease any real property except in accordance with the Parent or Sub capital budget as disclosed in the Disclosure Letter; (vii) implement or adopt any change in its accounting principles, practices or methods, other than as may be required by generally accepted accounting principles and provided that same is promptly disclosed to Purchaser; (viii) (I) enter into or amend or renew any written employment, consulting, severance, "golden parachute" or similar agreement or arrangement with any director, officer or employee of Parent or of a Parent Subsidiary, or (II) grant any salary or wage increase, or (III) increase any employee benefit (including incentive or bonus payments), except in the case of "(II)" for normal individual increases in compensation to employees (other than officers and directors of Parent or a Parent Subsidiary) in the ordinary course of business consistent with past practice; (ix) enter into, establish, adopt or amend (except as may be required by applicable law) any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, in respect of any director, officer or employee of Parent or any Parent Subsidiary, or take any action to accelerate the vesting or exercisability of stock options, restricted stock or other compensation or benefits payable thereunder; (x) knowingly or negligently take or fail to take any action, if such action or failure to act would, directly or indirectly, cause any of the Parent Subsidiaries to cease to be a member of the consolidated group of companies of which Parent is the common parent for Federal income tax purposes; it being understood that compliance with Section 6.1(g)(iii) and (iv) will not constitute a violation of this Section 6.1(a)(x); and it being further understood that except as contemplated by Section 6.1(g)(iv) or as otherwise agreed by Purchaser in writing, Parent shall comply with this Section 6.1(a)(x) without resort to exercising its rights to acquire additional shares of Sub pursuant to that certain Stock Registration and Option Agreement dated as of May 31, 1996 among Parent, Sub and The Future Now of Arkansas, Inc., as amended; (xi) take any action that would materially alter the strategic business plan and/or services delivery capability of Sub; (xii) make any capital investment in or make any loan to or acquire the securities or assets of any other Person other than to or from its subsidiaries in the ordinary course of business; (xiii) make any change in employment terms for any of its directors, officers and employees other than customary increases to non- director or non-officer employees awarded in the ordinary course of business consistent with past practices; or (xiv) except as may be required by law, intentionally take or fail to take any action the reasonably foreseeable effect of which would be to cause any representation or warranty in this Agreement to be or become inaccurate. In the event Parent or Sub shall request Purchaser to consent in writing to an action otherwise prohibited by this Section 6.1(a), Purchaser shall use all reasonable efforts to respond in a prompt and timely fashion, but may otherwise respond affirmatively or negatively in its sole discretion exercised in good faith. (b) Acquisition Proposals. (1) Neither the Parent nor the Sub or any of their respective officers and directors shall, and the Parent and Sub will cause their respective employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by the Parent or Sub) not to, solicit, initiate or encourage (including by way of furnishing information), or take any other action designed or reasonably likely to facilitate (including, without limitation, any amendment, modification or termination, or any agreement to do any of the foregoing, to the Rights Agreement or any redemption of rights issued thereunder) any inquiries or the submission or any proposal or offer from any Person relating to an Acquisition Proposal (as defined below) involving Parent, Sub or any other Parent Subsidiary or participate in any discussions or negotiations regarding any such Acquisition Proposal; provided, however, that subject to compliance with this Section 6.1(b), the Parent, the Sub and their respective directors and officers may participate in any discussions or negotiations regarding, furnish any information with respect to, assist or facilitate any effort or attempt by any Person to do or seek, an Acquisition Proposal, solely to the extent that the Board of Directors of Parent or Sub, as applicable, determines in good faith, that such actions are necessary in order for the Board of Directors of Parent or Sub, as applicable, to comply with its fiduciary obligations under applicable law in response to an Acquisition Proposal or material modification to an Acquisition Proposal, which Acquisition Proposal or material modification was made after the date hereof and was not solicited after the date hereof. As used herein, the term "Acquisition Proposal" means, with respect to a particular Person, a merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, or any tender offer or exchange offer for shares of any class of equity securities of, such Person. The transactions contemplated by this Agreement shall not be deemed an Acquisition Proposal. The Parent and Sub will cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal and will notify Purchaser promptly if any such Acquisition Proposal is received by, any such information is requested from, or any such negotiations or discussions are sought to be instituted or continued with, the Parent or the Sub. (2) Except as set forth in this paragraph (2), neither the Board of Directors of Parent nor the Board of Directors of Sub nor any committee of either of them shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Purchaser, or take any action not explicitly permitted by this Agreement that would be inconsistent with, the approval or recommendation by such Board of Directors or such committee of the Parent Merger or the Sub Merger, (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal, or (iii) cause Parent or Sub to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Acquisition Proposal. Notwithstanding the foregoing, in the event that the Board of Directors of Parent or Sub has received a Superior Proposal (defined below) and determines in good faith, after receipt of advice from outside counsel, that it is necessary to do so in order to comply with its fiduciary obligations under applicable law, the Board of Directors of Parent or Sub, as applicable, may (subject to compliance with this Section 6.1(b) and subject to payment of any Termination Fee (as hereinafter defined) then required pursuant to this Agreement), (x) withdraw or modify its approval or recommendation of the Parent Merger or the Sub Merger or (y) terminate this Agreement (and concurrently with or after such termination, if it so chooses, cause Parent or Sub, as applicable, to enter into any Acquisition Agreement with respect to any Superior Proposal), but in any such case set forth in this clause (y), only at a time that is after the fifth (5th) day following Purchaser's receipt of written notice advising Purchaser that the Board of Directors of Parent or Sub or any such committee has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the Person making such Superior Proposal. For purposes of this Agreement, a "Superior Proposal" means any bona fide proposal made by a third party to acquire, directly or indirectly, for consideration consisting of cash and/or securities, all or substantially all of the voting power of the shares of Parent Common Stock or Sub Common Stock then outstanding or all or substantially all of the assets of Parent (which proposal may include as a component thereof the purchase of all or substantially all of the shares of capital stock of Sub) or Sub and otherwise on terms which the Board of Directors of Parent or Sub or such committee determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation) to be materially more favorable to Parent's or Sub's stockholders than the Parent Merger and the Sub Merger and for which financing, to the extent required, is then committed or which, in the good faith judgment of the Board of Directors of Parent or Sub or such committee, is reasonably capable of being furnished by such third party. (c) Meetings of the Shareholders. Each of Parent and Sub will take all action necessary in accordance with applicable law and its Articles of Incorporation and By-Laws to convene a meeting of its stockholders as promptly as practicable to consider and vote upon the approval of this Agreement and the Parent Merger or Sub Merger, as applicable (the "Stockholder Meetings"). Subject to Section 6.1(b)(2), the Board of Directors of Parent shall recommend approval of the Parent Merger, and the Board of Directors of Sub and the Independent Committee of Sub's Board shall recommend approval of the Sub Merger, and the Parent and Sub shall take all lawful action to solicit such approvals, as applicable. Each of the Parent and Sub hereby severally represents, warrants and covenants that the proxy or information statement with respect to such meeting of its shareholders (each, a "Proxy Statement"), at the date thereof and at the date of such meetings, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, the foregoing shall not apply to the extent that any such untrue statement of a material fact or omission to state a material fact was made in reliance upon and in conformity with written information concerning the Purchaser, Acquisition Sub One or Acquisition Sub Two furnished by Purchaser specifically for use in the Proxy Statement. No Proxy Statement shall be filed, and no amendment or supplement to such Proxy Statement will be made by the Parent or Sub, without consultation with Purchaser and its counsel. (d) Exchange Act Filings. Unless an exemption shall be expressly applicable to the Parent or the Sub, or unless Purchaser agrees otherwise in writing, the Parent and the Sub will each file with the SEC and NASDAQ National Market System ("NASDAQ") all reports required to be filed by it pursuant to the rules and regulations of the SEC (including, without limitation, all required financial statements). Such reports and other information shall comply in all material respects with all of the requirements of the SEC rules and regulations and, when filed, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Purchaser and its counsel, shall be given a reasonable opportunity to review and to comment on such filings prior to their being filed with the SEC and NASDAQ. (e) Access. Upon reasonable notice, the Parent and the Sub shall afford Purchaser's officers, employees, counsel, accountants and other authorized representatives access, during reasonable business hours throughout the period prior to the Parent Effective Time and in a manner which will not unreasonably interfere with the management of the business of Parent or any Parent Subsidiary, to its officers, employees, agents, independent auditors, representatives, properties, books and records and, during such period, the Parent and the Sub each shall furnish promptly to Purchaser all information concerning its business, properties and personnel as Purchaser may reasonably request provided, however, neither the Parent nor the Sub shall be obligated to furnish Purchaser with information respecting any negotiations referred to in the last sentence of Section 6.1(b)(1) of this Agreement. (f) Takeover Statutes. If any "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation enacted under state or federal laws in the United States, including, without limitation, Subchapter E, F, G or H of the PABCL (each, a "Takeover Statute" and, collectively, "Takeover Statutes"), is or becomes applicable to the Parent Merger or the Sub Merger or the transactions contemplated hereby, Parent, Sub and their respective Boards or Directors will use all commercially reasonable efforts (a) to grant such approvals and take such actions as are reasonably necessary, lawful and requested or consented to by Purchaser so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated hereby and thereby, and (b) to otherwise act to eliminate the effects of any Takeover Statute on any of the transactions contemplated hereby and thereby. Parent and Sub will use all commercially reasonable efforts to effect, prior to the Sub Effective Time, the amendment to Sub's Articles of Incorporation described in Section 5.1(z) hereof. (g) Options and Warrants. (i) Prior to the Parent Effective Time, the Parent shall take such actions (including obtaining any required consents) as may be necessary such that at the Parent Effective Time each Stock Right issued by the Parent shall be cancelled or converted into the right to receive, as the case may be, and the holder thereof, upon surrender thereof, shall receive, the Parent Option Conversion Price to which such holder is entitled, if any. (ii) Prior to the Sub Effective Time, Sub shall take such actions (including obtaining any required consents) as may be necessary such that at the Sub Effective Time each Stock Right issued by Sub shall be cancelled or converted into the right to receive, as the case may be, and the holder thereof, upon surrender thereof, shall receive, the Sub Option Conversion Price to which such holder is entitled, if any. (iii) In connection with the exercise, prior to the Sub Effective Time, of any employee stock options issued by Sub, Sub shall (unless otherwise agreed by Purchaser in writing), in accordance with the cash-out option of Sub under Section 3(l) of its 1996 Long-Term Incentive Plan (the "XLC Plan"), pay to each holder of an option, upon notice of any exercise thereof, cash in an amount equal to the spread between the exercise price and the fair market value of the underlying common share or the Spread Value (as defined in the XLC Plan), and will take all other action as may be necessary to ensure that in no event will any capital stock of Sub be issued upon or in connection with the exercise of any such option. Parent will, if necessary, lend sufficient funds to Sub on commercially reasonable terms to enable Sub to pay such cash in a timely manner. (iv) In connection with the exercise, prior to the Sub Effective Time, of any Stock Rights issued by Sub (other than employee stock options), Sub shall not issue or permit to be issued any shares of capital stock of Sub upon the exercise thereof other than simultaneously with or after Parent (or a direct or indirect wholly-owned subsidiary of Parent) shall have purchased (which Parent hereby agrees to do or cause to be done), and Sub shall have issued (which Sub agrees to do or cause to be done) that number of validly issued shares of the same class to Parent or such subsidiary that is equal to four times the number of shares of capital stock issuable upon such exercise of such Stock Rights, it being understood that Parent, Sub and Purchaser expect such purchase and issuance to occur pursuant to that certain Stock Registration and Option Agreement dated as of May 31, 1996 among Parent, Sub and The Future Now of Arkansas, Inc., as amended; provided, however, that in no event will Parent or any Parent Subsidiary purchase or otherwise acquire any such shares of Sub for a per share amount in excess of the Sub Share Conversion Price. (h) [intentionally left blank] (i) IBMCC. Parent and Sub shall request that IBM Credit Corporation ("IBMCC") give any consent to the Sub Merger or the Parent Merger necessary under Parent's and Sub's credit arrangements with IBMCC. If Purchaser so requests, Parent and Sub will take all action necessary to pay, at the time the Parent Merger and Sub Merger are consummated, any or all of the balance of any amounts owed to IBMCC, subject, however, to Purchaser making available to Parent and Sub the cash necessary to do so. (j) Third Party Consents. Parent and Sub shall use their commercially reasonable efforts to obtain all necessary consents to the transactions contemplated by this Agreement as may be required under contracts to which Parent or any Parent Subsidiary is a party and as to which Purchaser requests that such consents be obtained, including without limitation the real property leases required to be listed in Section 5.1(v) of the Disclosure Letter. 6.2 Covenants of the Parties. Each of the Parties, severally and not jointly, covenants and agrees as to itself, as follows: (a) Confidentiality. The terms and conditions of that certain letter agreement dated December 8, 1997 entered into by the Purchaser and the Parent (the "Confidentiality Agreement") are ratified and confirmed and shall remain in full force and effect. Notwithstanding the foregoing, the Parent and Purchaser hereby amend the Confidentiality Agreement such that the provisions of the paragraph 2(c) thereof do not apply to any public announcement effected in accordance with the provisions of Section 6.2(d) below regarding the Parties' execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. (b) Hart-Scott-Rodino Filings. Each Party will file any Notification and Report Forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the HSR Act, will use commercially reasonable efforts to obtain termination of the applicable waiting period under the HSR Act, and will make any further filings pursuant thereto that may be necessary or appropriate. (c) Notification of Certain Matters. Each Party will give prompt written notice to the others of any development causing a breach of any of its own representations and warranties set forth in this Agreement. (d) Publicity. The initial press release relating to the transactions contemplated hereby shall be a joint press release and thereafter the Parent, the Sub and Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any federal or state governmental or regulatory agency or with any national securities exchange with respect thereto. None of the Parties shall issue any such press release or make any such public statement or filing prior to such consultation, except as may be required by law or by obligations pursuant to any listing agreement with any national securities exchange or the NASDAQ. (e) Cooperation. Each Party shall upon the request of another Party provide its commercially reasonable cooperation and assistance to the requesting Party in the latter's efforts to obtain any consents, approvals and amendments to contracts required or to take such actions as may be required to comply with any applicable laws to effect the Sub Merger, the Parent Merger or otherwise required under this Agreement. (f) Indemnification; Directors' and Officers' Insurance. (i) The Parties agree that all rights to indemnification and advancement of expenses by the Parent or the Sub now existing in favor of each present and former director and officer of the Parent or the Sub (acting in their capacities as directors and/or officers of the Parent or the Sub, as applicable, the "Indemnified Parties") as provided in (i) the Parent's or the Sub's respective Articles of Incorporation or By-Laws, or (ii) the indemnification agreements listed in the Disclosure Letter as in effect on the date thereof (the "Indemnification Agreements"), shall, with respect to matters occurring at or prior to the Parent or Sub Effective Time, as applicable, continue in full force and effect, shall survive the Sub Merger and Parent Merger and shall continue in full force and effect thereafter until the date which is six (6) years from the Sub Effective Time or Parent Effective Time, as applicable; provided, however, in the event any claim or claims are asserted or threatened within such period, all rights to indemnification in respect of any such claim or claims shall continue until final disposition of any and all such claims. (ii) Subject to the provisions of Section 6.2(f)(iii) below, after the Sub Effective Time or Parent Effective Time, as applicable, the Purchaser shall, subject to the further terms set forth herein, indemnify and hold harmless, to the fullest extent permitted under applicable law (and shall also advance expenses as incurred to the fullest extent permitted under applicable law provided the Person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Person is not entitled to indemnification), each Indemnified Party against any costs or expenses (including reasonable attorneys' fees and disbursements), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the transactions contemplated by this Agreement (and whether commenced prior to or after the Sub Effective Time or the Parent Effective Time), for a period of six (6) years after the Sub Effective Time or Parent Effective Time, as applicable, in each case regardless of by whom asserted and regardless of whether such claim, action, suit, proceeding or investigation arises out of, pertains to or results from, solely or in part, the active, passive or concurrent negligence of any Indemnified Party; provided, however, in the event any claim or claims are asserted or threatened within such six-year period, all right to indemnification in respect of any such claim or claims shall continue until final disposition of any and all such claims. Any Indemnified Party wishing to claim indemnification under this Section 6.2(f)(ii), and notwithstanding the provisions set forth in the Parent's or the Sub's respective Articles of Incorporation or By-Laws, or in the Indemnification Agreements, upon learning of any such claim, action, suit, proceeding or investigation, such Indemnified Party shall promptly notify Purchaser thereof, but the failure to so notify shall not relieve Purchaser of any liability it may have to such Indemnified Party if such failure does not materially prejudice the indemnifying party. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Sub Effective Time or the Parent Effective Time), (i) Purchaser shall have the right to assume the defense thereof and Purchaser shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if Purchaser fails to assume such defense or counsel for Purchaser advises that there are issues which raise conflicts of interest between the Parties, on the one hand, and the Indemnified Parties, on the other hand, or that there are additional defenses available to the Indemnified Parties which are not otherwise available to the Parties, the Indemnified Parties may retain counsel satisfactory to them, and the Purchaser shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that Purchaser shall be obligated pursuant to this paragraph (ii) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest, in which case Purchaser need only pay for separate counsel to the extent necessary to resolve such conflict, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) Purchaser shall not be liable for any settlement effectuated without its prior written consent. Purchaser shall not settle any action or claim identified in this Section 6.2(f)(ii) in any manner that would impose any liability on an Indemnified Party not paid by Purchaser or the Sub Surviving Corporation or the Parent Surviving Corporation without such Indemnified Party's prior written consent. (iii) Notwithstanding any thing contained in paragraph (ii) of this Section 6.2(f), Purchaser shall not have any obligation hereunder to any Indemnified Party if the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law, or the conduct of the Indemnified Party relating to the matter for which indemnification is sought involved willful misconduct. (iv) Parent and Sub shall maintain their respective existing officers' and directors' liability insurance ("D&O Insurance") for a period of three (3) years after the Sub Effective Time or Parent Effective Time, as applicable, so long as the annual premium therefor, in the aggregate, is not in excess of 150% of the last annual premium paid prior to the date hereof (the "Maximum Premium"); provided, however, if the existing D&O Insurance expires, or is terminated or cancelled by the insurance carrier during such three-year period, the Parent and Sub will use their commercially reasonable efforts to obtain as much D&O Insurance as can be obtained for the remainder of such period for a premium not in excess (on an annualized basis) of the Maximum Premium. (v) To the fullest extent not prohibited by applicable New York law or federal securities laws, Purchaser agrees to guarantee the payment and performance of the Parent's, Sub's, Acquisition Sub One's and Acquisition Sub Two's obligations under this Section 6.2(f). This Section 6.2(f) shall survive the closing of the transactions contemplated hereby and is intended to benefit each of the Indemnified Parties (each of whom shall be entitled to enforce this Section against the Parties). If any Party, or any of their respective successors or assigns (i) reorganizes or consolidates with or merges into any other Person and is not the resulting, continuing or surviving corporation or entity of such consolidation or merger or (ii) liquidates, dissolves or transfers all or substantially all of its properties and assets to any Person, then, and in each such case, prior to such action, proper provision will be made so that the successors and assigns of such party assume the obligations of such party set forth in this Section. 6.3 Covenants of Purchaser. Purchaser covenants and agrees as follows: (a) Maintenance of Payment Funds. Prior to the Sub Effective Time and Parent Effective Time, as applicable, Purchaser shall cause the Payment Funds to be available to effect payment of the Sub Share Conversion Price, the Sub Option Conversion Price, the Parent Share Conversion Price and the Parent Option Conversion Price and neither Purchaser, Acquisition Sub One nor Acquisition Sub Two will enter into any transaction, commitment or obligation which could reasonably result in the Payment Funds not being so available as and when required for such payments pursuant to the terms and conditions of this Agreement. (b) Purchaser Shares. At the Parent Stockholders' Meeting, all Parent Shares then owned by Purchaser or any of its direct or indirect wholly-owned subsidiaries shall be voted in favor of the Parent Merger. At the Sub Stockholders' Meeting, all Sub Shares then owned by Purchaser or any of its direct or indirect wholly-owned subsidiaries shall be voted in favor or the Sub Merger. 6.4 Effect of Certain Covenants. (i) Insofar as any covenants in this Article VI relate specifically to Sub, Parent shall have no obligation to force Sub to comply therewith, but shall take such actions as may reasonably assist and facilitate Sub in complying therewith. If Parent has done so and Sub has nonetheless failed to comply with such covenant, Parent will have no liability for damages to Purchaser, Acquisition Sub One or Acquisition Sub Two for breach of such covenant; provided, however, that this subparagraph shall have no effect on whether the condition set forth in Section 7.2(a) has been satisfied, or on any right of Purchaser to terminate this Agreement under Section 8.3, or on any obligation of Parent and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b). (ii) Insofar as any Covenants in this Article VI relate specifically to Parent or any Parent Subsidiaries (other than Sub or any Sub Subsidiaries), Sub shall have no obligation to force Parent to comply therewith, but shall take such actions as may reasonably assist and facilitate Parent in complying therewith. If Sub has done so and Parent has nonetheless failed to comply with such covenant, Sub will have no liability for damages to Purchaser, Acquisition Sub One or Acquisition Sub Two for breach of such covenant; provided, however, that this subparagraph shall have no effect on whether the condition set forth in Section 7.2(a) has been satisfied, or on any right of Purchaser to terminate this Agreement under Section 8.3, or on any obligation of Parent and Sub to pay the Termination Fee to Purchaser pursuant to Section 9.1(b). ARTICLE VII Conditions ---------- 7.1 Conditions to Obligations of the Parties. The obligations of the Parties to consummate the Sub Merger and the Parent Merger are subject to the fulfillment of each of the following conditions, any or all of which may be waived in whole or in party by any of the Parties, as the case may be, to the extent permitted by applicable law: (a) Parent Shareholder Approval. The Parent Merger shall have been duly approved by the holders of the outstanding stock of Parent in accordance with the PABCL and the Articles of Incorporation and By-Laws of the Parent. (b) Sub Shareholder Approval. The Sub Merger and the amendment to Sub's Articles of Incorporation described in Section 5.1(z) hereof shall have been duly approved by the holders of the outstanding stock of Sub in accordance with the PABCL and the Articles of Incorporation and By-Laws of the Sub. (c) Governmental and Regulatory Consent. (i) The HSR waiting period shall have expired or been terminated, and (ii) other than the filings provided for in Section 1.8, all other filings required to be made prior to the Sub Effective Time or Parent Effective Time, as applicable, by the Parties with, and all consents, approvals and authorizations required to be obtained prior to the applicable Effective Time by the Parties from, governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained (as the case may be). (d) Statutes; Injunctions. Neither any statute, rule, regulation, order, stipulation or injunction (each an "Order") shall be enacted, promulgated, entered, enforced or deemed applicable to the Sub Merger or the Parent Merger, nor shall any other action have been taken by any governmental authority, administrative agency or court of competent jurisdiction which (i) prohibits the consummation of the transactions contemplated by this Agreement, or (ii) prohibits Purchaser's direct or indirect ownership or operation of all or any material portion of the business or assets of Parent or Sub, or (iii) could compel Purchaser to dispose of or hold separate all or any material portion of such business or assets as a result of the transactions contemplated by this Agreement. (e) Both Mergers. No Party shall be obligated to consummate the Parent Merger if the Sub Merger shall not have been consummated. No Party shall be obligated to consummate the Sub Merger unless all conditions to the Parent Merger have been satisfied or waived. (f) Amendment to Articles. The Articles of Incorporation of Sub shall have been amended as described in Section 5.1(z). 7.2 Conditions to Obligations of Purchaser, Acquisition Sub One and Acquisition Sub Two. The obligation of Purchaser, Acquisition Sub One and Acquisition Sub Two to consummate the Sub Merger and Parent Merger is further subject to the fulfillment of the following conditions, which may be waived by Purchaser, Acquisition Sub One or Acquisition Sub Two: (a) Compliance. The Parent and the Sub each shall have performed and complied with, in all material respects, all obligations and covenants required to be performed or completed with by it under, respectively, this Agreement at or prior to the Sub Effective Time or Parent Effective Time, as applicable, and Parent and Sub shall each have delivered to Purchaser a certificate of an executive officer so certifying. (b) Representations. Each of the representations and warranties of Parent and of Sub made in this Agreement shall be true and correct in all material respects as of the date when made and shall be deemed to be made again at and as of the Sub Closing and the Parent Closing and shall then be true and correct in all material respects, except to the extent changes are required, permitted or contemplated pursuant to this Agreement, and Parent and Sub shall each have delivered to Purchaser a certificate of an executive officer so certifying. (c) Opinion of Counsel. Purchaser shall have received an opinion of counsel to Parent and Sub in form and substance substantially the same as previously agreed by Purchaser, Parent and Sub. (d) Proceedings. No action or proceeding shall have been instituted and be pending before any court or governmental body to restrain or prohibit, or to obtain substantial damages in respect of, the consummation of this Agreement and the transactions contemplated hereby which, in the reasonable opinion of Purchaser based upon advice of counsel respecting the likelihood of an adverse outcome in such action or proceeding, may reasonably be expected to result in a preliminary or permanent injunction against such consummation or damages which would constitute a Material Adverse Change. (e) Material Adverse Change. There shall not have occurred a Material Adverse Change. (f) Liens. With the exception of the Security Interest of IBMCC as disclosed in the Disclosure Letter, in all instances and respects Parent (or the applicable Parent Subsidiaries as the case may be) shall hold all shares of stock in all Parent Subsidiaries free and clear of any restrictions, liens, claims and encumbrances whatsoever. (g) Tax Consolidation. Each of the Parent Subsidiaries shall be, and shall have been at all times from the date hereof to the Parent Effective Time, a member of the consolidated group of companies of which Parent is the common parent for Federal income tax purposes, it being understood that compliance with Section 6.1(g)(iii) and (iv) will (for purposes only of Sub Stock Rights) be deemed to satisfy this subparagraph (g). (h) Employment Agreements. The employees of Sub previously identified in writing by Purchaser shall be employees of Sub and shall have entered into employment agreements on terms and conditions previously identified in writing by Purchaser to Parent and Sub, and such employment agreements shall be in full force and effect.. (i) Letter from Auditors. Purchaser shall have received a letter (the "Agreed Upon Procedures Letter") from Parent's independent certified public accountants substantially in the form previously agreed by Purchaser, Parent and Sub. (j) Stock Issuance, etc. Neither Parent, Sub nor any Parent Subsidiary shall (I) after the date of this Agreement have granted, amended or modified any Stock Rights (except as required pursuant to Section 6.1(g)(iii) or (iv)) or issued any capital stock (except, in the case of Parent, but not Sub, upon the exercise of Stock Rights outstanding as of the date of this Agreement), or (II) after December 1, 1997 have purchased or otherwise acquired any shares of common stock of Sub for a per share price in excess of the Sub Share Conversion Price. (k) Stock Rights. There shall be outstanding no Stock Right which by its terms does not either terminate upon the completion of the Sub Merger or the Parent Merger or convert into the right to receive only the Sub Option Conversion Price or the Parent Option Conversion Price, as the case may be. (l) Dividends, etc. After the date of this Agreement, neither Parent nor Sub shall have declared, set aside or paid any dividend or distribution with respect to its capital stock (whether in cash or in kind), or shall have redeemed, repurchased or otherwise acquired any of its capital stock or, except as required by this Agreement, any Stock Rights. (m) XLSource Transition. Those portions of the XLSource Transition Plan to have been implemented prior to the Sub Effective Time shall have been implemented on a timely basis in all material respects, and there shall not have occurred a material adverse effect on the ability of Parent or any Parent Subsidiary to implement the XLSource Transition Plan on a timely basis. 7.3 Conditions to Obligations of Parent. The obligation of Parent to consummate the Parent Merger and of Parent and Sub to consummate the Sub Merger is further subject to the fulfillment of the following conditions, which may be waived by Parent and Sub: (a) Compliance. Purchaser, Acquisition Sub One and Acquisition Sub Two each shall have performed and complied with, in all material respects, all obligations and covenants required to be performed or completed with by it under this Agreement at or prior to the Sub Effective Time or Parent Effective Time, as applicable, and Purchaser shall have delivered to Parent and Sub a certificate of an officer of Purchaser so certifying. (b) Representations. Each of the representations and warranties of Purchaser, Acquisition Sub One and Acquisition Sub Two made in this Agreement shall be true and correct in all material respects as of the date when made and shall be deemed to be made again at and as of the Sub Closing and the Parent Closing and shall then be true and correct in all material respects, except to the extent changes are required, permitted or contemplated pursuant to this Agreement, and Purchaser shall have delivered to Parent and Sub a certificate of an officer of Purchaser so certifying. (c) Opinion of Counsel. Parent shall have received an opinion of counsel to Purchaser in form and substance substantially the same as previously agreed by Purchaser, Parent and Sub. ARTICLE VIII Termination ----------- 8.1 Termination by Mutual Consent. This Agreement may be terminated and the Sub Merger and the Parent Merger may be abandoned at any time prior to consummation thereof, before or after the approval by the stockholders of Parent or Sub, by the written mutual consent of Purchaser, Sub and Parent. 8.2 Termination by Purchaser, Sub or Parent. This Agreement may be terminated and the Merger may be abandoned by Purchaser, Sub or Parent if (i) the Sub Merger or the Parent Merger shall not have been consummated by July 31, 1998 (unless the failure to consummate by such date is due to the wrongful action or failure to act of the party seeking to terminate), or (ii) the stockholders of Parent disapprove the Parent Merger at the Parent Stockholder Meeting, or (iii) any Order shall have become final and non- appealable. 8.3 Termination by Purchaser. This Agreement may be terminated by Purchaser and the Sub Merger and the Parent Merger may be abandoned at any time prior to consummation thereof, before or after the approval by stockholders of Parent or Sub if (a) the Parent Board shall have withdrawn or modified in a manner adverse to Purchaser its approval or recommendation of this Agreement, or the Parent Board, upon request by Purchaser, shall fail to reaffirm its approval or recommendation, or shall have resolved to do any of the foregoing, or at the Sub Stockholders' Meeting all shares of Sub Common Stock owned directly or indirectly by Parent shall not have been voted in favor of the Sub Merger and in favor of the amendment to Sub's Articles of Incorporation described in Section 5.1(z) hereof; or (b) Parent shall have failed to perform in any material way any of its covenants under this Agreement in a manner so as not to satisfy the condition to closing in Section 7.2(a), which failure to perform is incapable of being cured or has not been cured within twenty (20) days after the giving of notice thereof to Parent; or (c) Parent shall have breached any of its representations or warranties in any material respect in a manner so as not to satisfy the condition to closing in Section 7.2(b), which breach is incapable of being cured or has not been cured within twenty (20) days after the giving of notice thereof to Parent; or (d) the Board of Directors of Sub, or the Independent Committee thereof, shall have withdrawn or modified in a manner adverse to Purchaser its approval or recommendation of this Agreement, or the Board of Directors of Sub, or the Independent Committee thereof, upon request by Purchaser, shall fail to reaffirm its approval or recommendation, or shall have resolved to do any of the foregoing; or (e) Sub shall have failed to perform in any material way any of its covenants under this Agreement in a manner so as not to satisfy the condition to closing in Section 7.2(a), which failure to perform is incapable of being cured or has not been cured within twenty (20) days after the giving of notice thereof to Sub; or (f) Sub shall have breached any of its representations or warranties in any material respect in a manner so as not to satisfy the condition to closing in Section 7.2(b), which breach is incapable of being cured or has not been cured within twenty (20) days after the giving of notice thereof to Sub. 8.4 Termination by the Parent. This Agreement may be terminated by Parent and the Sub Merger and the Parent Merger may be abandoned at any time (i) prior to the consummation thereof, before or after the approval by stockholders of Parent or Sub, by action of the Parent Board if the Parent Board receives an unsolicited written offer with respect to a Superior Proposal, or if an unsolicited tender or exchange offer for the Parent Shares (with respect to a Superior Proposal) is commenced, and the Parent Board determines to accept such Superior Proposal or recommend that its shareholders accept such tender or exchange offer, but only after the Parent Board has been advised by counsel that approval, acceptance or recommendation of such transaction is necessary in order for the Parent Board to act in a manner consistent with its fiduciary obligations under applicable law, in accordance with clause "(y)" of Section 6.1(b)(2) provided that Parent has complied with all provisions thereof, including the notice provisions therein, and that Parent and Sub comply with applicable requirements relating to the payment (including the timing of any payment) of the Termination Fee, or (ii) before the Parent Effective Time, if Purchaser shall have breached or failed to perform in any material way any of its representations, warranties or covenants under this Agreement which breach or failure to perform is incapable of being cured or has not been cured within twenty (20) days after the giving of notice thereof to Purchaser. 8.5 Termination by the Sub. This Agreement may be terminated by Sub and the Sub Merger and the Parent Merger may be abandoned at any time (i) prior to the consummation thereof, before or after the approval by stockholders of Parent or Sub, by action of the Sub Board if the Sub Board receives an unsolicited written offer with respect to a Superior Proposal, or if an unsolicited tender or exchange offer for the Sub Shares (with respect to a Superior Proposal) is commenced, and the Sub Board determines to accept such Superior Proposal or recommend that its shareholders accept such tender or exchange offer, but only after the Sub Board has been advised by counsel that approval, acceptance or recommendation of such transaction is necessary in order for the Sub Board to act in a manner consistent with its fiduciary obligations under applicable law, in accordance with clause "(y)" of Section 6.1(b)(2) provided that Sub has complied with all provisions thereof, including the notice provisions therein, and that Parent and Sub comply with applicable requirements relating to the payment (including the timing of any payment) of the Termination Fee, or (ii) before the Sub Effective Time, if Purchaser shall have breached or failed to perform in any material way any of its representations, warranties or covenants under this Agreement in a manner so as not to satisfy the condition to closing in Section 7.3(a) or (b) which breach or failure to perform is incapable of being cured or has not been cured within twenty (20) days after the giving of notice thereof to Purchaser. 8.6 Effect of Termination and Abandonment. In the event of termination of this Agreement and abandonment of the Merger pursuant to this Article 8, no party thereto (or any of its directors or officers) shall have any liability or further obligation to any other party to this Agreement, except as provided in Sections 9.1 and 9.2. No termination of this Agreement shall result in the termination of the obligations of the parties under Sections 5.1(k), 5.2(f), 6.2(a) or 9.1. ARTICLE IX Miscellaneous and General ------------------------- 9.1 Payment of Expenses. (a) Except as set forth in subsection (b) below, whether or not the Merger shall be consummated, each Party hereto shall pay its own expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the Merger, except that and provided the Merger is consummated, the expenses of Sub shall be borne by Parent. (b) In the event that this Agreement is terminated by Purchaser pursuant to Section 8.3(a), (b), (d) or (e), Parent and Sub shall pay Purchaser an aggregate fee equal to $12,300,000 (the "Termination Fee"), payable by wire transfer in immediately available funds, within one (1) business day of the date of such termination in the respective proportions set forth below, and such payment shall constitute Purchaser's and its affiliates' exclusive remedy and be a limit on any damages to which Purchaser and such affiliates may be entitled for any loss or injury incurred with respect to any such termination. In the event that this Agreement is terminated by Purchaser pursuant to Section 8.3(c) or (f), and if the applicable breach of representation by Parent or Sub was intentional, reckless or grossly negligent, Parent and Sub shall pay Purchaser the Termination Fee, payable by wire transfer in immediately available funds, within one (1) business day of the date of such termination in the respective proportions set forth below, and such payment shall constitute Purchaser's and its affiliates' exclusive remedy and be a limit on any damages to which Purchaser and such affiliates may be entitled for any loss or injury incurred with respect to any such termination. Prior to any termination of this Agreement by Parent pursuant to Section 8.4(i) or by Sub pursuant to Section 8.5(i), Parent and Sub shall pay Purchaser the Termination Fee, payable by wire transfer of immediately available funds in the respective proportions set forth below, and such payment shall constitute Purchaser's and its affiliates exclusive remedy and be a limit on any damages to which Purchaser and such affiliates may be entitled for any loss or injury incurred with respect to any such termination. Parent and Sub acknowledge that the agreements contained in this Section 9.1(b) are an integral part of the transactions contemplated by this Agreement, that Parent and Sub will derive substantial benefits from the transactions involving Sub contemplated by this Agreement, and that, without the agreements contained in this Section 9.1(b), Purchaser would not enter into this Agreement; accordingly, if Parent or Sub fails to promptly pay any amount due pursuant to this Section 9.1(b), and, in order to obtain such payment, Purchaser commences a suit which results in a judgment against Parent or Sub for the applicable portion of the Termination Fee or damages in excess thereof (to the extent permitted hereunder), Parent or Sub, as applicable, shall also pay to Purchaser its costs and expenses (including reasonable attorneys' fees) in connection with such suit, together with interest on the amount of the Termination Fee at the prime rate of Citibank N.A. in effect on the date such payment was required to be made. If Purchaser terminates this Agreement pursuant to Section 8.3(a), (b), (d) or (e), or if Purchaser terminates this Agreement pursuant to Section 8.3(c) or (f) and is entitled to be paid the Termination Fee, or if Parent terminates this Agreement pursuant to Section 8.4(i), or if Sub terminates this Agreement pursuant to Section 8.5(i), then 80% of the Termination Fee shall be paid to Purchaser by Parent and 20% of the Termination Fee shall be paid to Purchaser by Sub. Notwithstanding the foregoing, if the breach by Parent which gave rise to the ability to terminate this Agreement under Section 8.3(b) or (c) or if the breach by Sub which gave rise to the ability to terminate this Agreement under Section 8.3(e) or (f) constituted a bad faith attempt by Parent or Sub to avoid its contractual obligations under this Agreement, nothing in this Agreement shall limit the relief (in addition to the Termination Fee) which Purchaser shall be entitled to recover under applicable law. A good faith dispute as to whether the Termination Fee is payable shall not constitute evidence of such bad faith. (c) In the event that this Agreement is terminated by Parent pursuant to Section 8.4(ii) or by Sub pursuant to Section 8.5(ii), Purchaser shall pay Parent and Sub an aggregate amount equal to the Termination Fee, payable by wire transfer in immediately available funds, within one (1) business day of the date of such termination, payable 80% to Parent and 20% to Sub, and such payment shall constitute Parent's and Sub's any of their respective affiliates' exclusive remedy and be a limit on any damages to which Parent or any such affiliate may be entitled for any loss or injury incurred with respect to any such termination or breach or failure to perform that gave rise to such termination. Notwithstanding the foregoing, if the breach by Purchaser which gave rise to the ability to terminate this Agreement under Section 8.4(ii) or 8.5(ii) constituted a bad faith attempt by Purchaser to avoid its contractual obligations under this Agreement, nothing in this Agreement shall limit the relief (in addition to the Termination Fee) which Parent or Sub shall be entitled to recover under applicable law. A good faith dispute as to whether the Termination Fee is payable shall not constitute evidence of such bad faith. Purchaser acknowledges that the agreements contained in this Section 9.1(c) are an integral part of the transactions contemplated by this Agreement, that Purchaser will derive substantial benefits from the transactions contemplated by this Agreement, and that, without the agreements contained in this Section 9.1(c), Parent and Sub would not enter into this Agreement; accordingly, if Purchaser fails to promptly pay any amount due pursuant to this Section 9.1(c), and, in order to obtain such payment, Parent or Sub commences a suit which results in a judgment against Purchaser for the Termination Fee or damages in excess thereof (to the extent permitted hereunder), Purchaser shall also pay to Parent or Sub, as applicable, its costs and expenses (including reasonable attorneys' fees but only for the attorneys of either Parent or Sub, as the case may be, and not both) in connection with such suit, together with interest on the amount of the Termination Fee at the prime rate of Citibank N.A. in effect on the date such payment was required to be made. 9.2 Survival. The representations, warranties, agreements and covenants in this Agreement shall not survive the consummation of the Sub Merger and the Parent Merger or the termination of this Agreement unless the terms of a specific agreement or covenant specify otherwise, in which case it shall survive in accordance with its terms. Without limiting the foregoing, the provisions of Section 6.2(f) shall survive the consummation of the Sub Merger and the Parent Merger. 9.3 Cooperation. The Parties will cooperate with one another in effecting the transactions contemplated hereby, in the making of all necessary governmental filings (including, without limitation, filings with any applicable taxing authority) and in connection with the prosecution or defense of any investigation, claim, suit, arbitration or other proceeding brought by or against any governmental authority or other third party. 9.4 Modification or Amendment. Subject to the applicable provisions of the PABCL, at any time prior to the Parent Effective Time or Sub Effective Time, as applicable, the Parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective Parties. 9.5 Waiver of Conditions. The conditions to each of the Parties' obligations to consummate the transactions contemplated hereby are for the sole benefit of such Party and may be waived by such Party in whole or in part to the extent permitted hereby and by applicable law. 9.6 Counterparts and Facsimile Signatures. For the convenience of the Parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Execution of this Agreement may be made by facsimile signature which, for all purposes, shall be deemed to be an original signature. 9.7 GOVERNING LAW; JURISDICTION; AND SERVICE OF PROCESS. EXCEPT AS EXPRESSLY SET FORTH BELOW, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF THE PARENT, THE PURCHASER AND ACQUISITION SUB HEREBY AGREE THAT ANY DISPUTE ARISING OUT OF THIS AGREEMENT OR THE MERGER SHALL BE HEARD IN THE COURT OF COMMON PLEAS, COUNTY OF CHESTER, OF THE COMMONWEALTH OF PENNSYLVANIA, OR IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA AND, IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT OR THE MERGER MAY BE GIVEN TO ANY OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AT THE RESPECTIVE ADDRESSES SET FORTH IN SECTION 9.8 BELOW. 9.8 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the others shall be in writing and shall be deemed delivered upon receipt, if to Purchaser, Acquisition Sub One or Acquisition Sub Two, addressed to Purchaser, Acquisition Sub One or Acquisition Sub Two, as the case may be, Attention: Barry D. Romeril, P.O. Box 1600, 800 Long Ridge Road, Stamford, CT 06904, facsimile: (203) 968- 3633 (with a copy to Attention: Richard S. Paul, facsimile: (203) 968-3446; and with a copy to Nixon, Hargrave, Devans & Doyle LLP, 437 Madison Avenue, New York, NY 10022-7001, Attention: Richard F. Langan, Esq., facsimile (212) 940-3111); and if to the Parent, addressed to the Parent c/o Pepper Hamilton LLP, 3000 Two Logan Square, Philadelphia, Pennsylvania 19103-2799, Attention Barry M. Abelson, facsimile (215) 981-4750 (with a copy to Pepper Hamilton LLP, 3000 Two Logan Square, Philadelphia, PA 19103-2799, Attention: Elam M. Hitchner, III, Esq., facsimile (215) 981-4750); and if to the Sub, addressed to the Sub at 411 Eagleview Boulevard, Exton, Pennsylvania 19341, Attention: Timothy W. Wallace, facsimile (610) 458-6530 (with a copy to McCausland, Keen & Buckman, Radnor Court, 259 Radnor- Chester Road, Suite 160, Radnor, Pennsylvania 19087-5240, Attention Robert H. Young, facsimile (610) 341-1099); or to such other Persons or addresses as may be designated in writing by the party to receive such notice. 9.9 Entire Agreement, etc. This Agreement (including any schedules, exhibits or Annexes hereto) and the Confidentiality Agreement (i) constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties both written and oral among the parties, with respect to the subject matter hereof, (ii) shall not be assignable by operation of law or otherwise and are not intended to create any obligations to, or rights in respect of, any Persons other than the parties hereto; provided, however, Purchaser may cause Acquisition Sub One and/or Acquisition Sub Two to assign its rights and obligations hereunder to Purchaser or any other wholly-owned subsidiary of Purchaser, but no such assignment shall relieve Purchaser, Acquisition Sub One and Acquisition Sub Two of their obligations hereunder. 9.10 Obligation of Purchaser. Whenever this Agreement requires Acquisition Sub One or Acquisition Sub Two to take any action (including, without limitation, the making of payment for the Parent Shares or the Sub Shares), such requirement shall be deemed to include an undertaking on the part of Purchaser to cause Acquisition Sub One and/or Acquisition Sub Two to take such action. 9.11 Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 9.12 Specific Performance. The parties hereto agree that if any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached, irreparable damage would occur, no adequate remedy at law would exist, and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. 9.13 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect except to the extent that the enforcement of such remaining provisions would be inequitable. 9.14 Certain Definitions. (a) As used herein, the term "knowledge" of a particular Person shall mean the actual knowledge of any such individual or the actual knowledge of the executive officers (which, or purposes hereof, shall mean those individuals who are required to file reports under Section 16(a) of the Exchange Act) of any Person which is a corporation or other entity. (b) As used in this Agreement, the following terms shall have the meanings set forth below: "Acquisition Agreement" is defined in Section 6.1(b)(2). "Acquisition Proposal" is defined in Section 6.1(b)(1). "Acquisition Sub One" means TDC Subsidiary Corporation, a Pennsylvania corporation. "Acquisition Sub Two" means TDC Two Subsidiary Corporation, a Pennsylvania corporation. "Agreed Upon Procedures Letter" is defined in Section 7.2(j). "Auditors" is defined in Section 7.2(j). "Confidentiality Agreement" is defined in Section 6.2(a). "D & O Insurance" is defined in Section 6.2(f)(iv). "Disclosure Letter" is defined in Section 5.1. "Employee Benefit Plans" is defined in Section 5.1(r)(II). "Environmental Laws" is defined in Section 5.1(o). "ERISA" is defined in Section 5.1(r)(II). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" is defined in Section 5.1(f). "HSR Act" is defined in Section 5.1(d). "IBMCC" is defined in Section 6.1( "Indemnification Agreements" is defined in Section 6.2(f)(i). "Indemnified Parties" is defined in Section 6.2(f)(i). "Independent Committee" means the Independent Committee of the Sub Board. "Intellectual Property" is defined in Section 5.1(q). "IRC" is defined in Section 5.1(r)(IV). "January 1998 Financial Statements" is defined in Section 7.2(j). "Lazard" is defined in Section 5.1(k). "Material Adverse Change" means a material adverse effect on the assets, property, prospects, business condition (financial or otherwise) or results of operations of either Parent and the Parent Subsidiaries (including Sub and the Sub Subsidiaries) taken as a whole or Sub and the Sub Subsidiaries taken as a whole, or on the ability of the Parties to consummate the transactions contemplated by this Agreement. Whenever a representation, warranty, covenant, agreement or condition involves a determination as to whether there has been a Material Adverse Change, the market price of Parent Common Stock and Sub Common Stock on NASDAQ shall not constitute evidence as to whether or not a Material Adverse Change has occurred. "Maximum Premium" is defined in Section 6.2(f)(iv). "Montgomery" is defined in Section 5.1(k). "Most Recent Financial Statements" is defined in Section 7.2(j). "NASDAQ" is defined in Section 6.1(d). "Order" is defined in Section 7.1(d). "PABCL" is defined in Section 1.1. "Parent" means Intelligent Electronics, Inc., a Pennsylvania corporation. "Parent Articles of Merger" is defined in Section 2.8. "Parent Board" is defined in the recitals. "Parent Closing" is defined in Section 2.7. "Parent Common Stock" is defined in Section 5.1(b)(I). "Parent Dissenting Shares" is defined in Section 2.9. "Parent Effective Time" is defined in Section 2.8. "Parent Fairness Opinion" is defined in Section 5.1(l). "Parent Merger" is defined in the recitals. "Parent Most Recent Quarter End" is defined in Section 5.1(f)(I). "Parent Option Conversion Price" is defined in Section 2.4. "Parent Options" is defined in Section 2.2(ii). "Parent-Owned Sub Shares" is defined in Section 1.2(i). "Parent Preferred Stock" is defined in Section 5.1(b). "Parent Share Conversion Price" is defined in Section 2.3. "Parent Shares" is defined in Section 2.2(i). "Parent Subsidiaries" is defined in Section 5.1(a). "Parent Surviving Corporation" is defined in Section 2.1. "Parent 10-K" is defined in Section 5.1(f)(I). "Parent 10-Q" is defined in Section 5.1(f)(I). "Party" is defined in the introduction. "Paying Agent" is defined in Section 1.5. "Payment Funds" is defined in Section 5.2(e). "Permits" is defined in Section 5.1(a). "Person" means an individual, a partnership (general or limited), a joint venture, a corporation, a trust, an unincorporated organization, a limited liability company, a group and a government or other department or agency thereof. "Proxy Statement" is defined in Section 6.1(c). "Public Reports" is defined in Section 5.1(e). "Purchaser" means Xerox Corporation, a New York corporation. "Purchaser Companies" means Purchaser and all direct and indirect subsidiaries thereof. "Rights Agreement" means the Rights Agreement dated as of March 22, 1996 between Parent and Chemical Mellon Shareholder Services L.L.C. "Securities Act" means the Securities Act of 1933, as amended. "Security Interest" is defined in Section 5.1(d). "Stock Rights" is defined in Section 5.1(b)(I). "Stockholders Meeting" is defined in Section 6.1(c). "Sub" means XLConnect Solutions, Inc., a Pennsylvania corporation. "Sub Articles of Merger" is defined in Section 1.8. "Sub Board" is defined in the recitals. "Sub Closing" is defined in Section 1.7. "Sub Common Stock" is defined in Section 5.1(b)(II). "Sub Dissenting Shares" is defined in Section 1.9. "Sub Effective Time" is defined in Section 1.8. "Sub Fairness Opinion" is defined in Section 5.1(l). "Sub Merger" is defined in the recitals. "Sub Most Recent Quarter End" is defined in Section 5.1(f)(II). "Sub Option Conversion Price" is defined in Section 1.4. "Sub Options" is defined in Section 1.2(ii). "Sub Plan" is defined in Section 5.1(r)(I). "Sub Preferred Stock " is defined in Section 5.1(b)(II). "Sub Share Conversion Price" is defined in Section 1.3. "Sub Shares" is defined in Section 1.2(i). "Sub Subsidiaries" means all direct and indirect subsidiaries of Sub. "Sub Surviving Corporation" is defined in Section 1.1. "Sub 10-K" is defined in Section 5.1(f)(II). "Sub 10-Q" is defined in Section 5.1(f)(II). "Superior Proposal" is defined in Section 6.1(b)(2). "Takeover Statutes" is defined in Section 6.1(f). "Taxes" is defined in Section 5.1(j)(I). "Termination Fee" is defined in Section 9.1(b). "XLC Plan" is defined in Section 6.1(g)(iii). "XLSource Transition Plan" means the plan Parent has previously delivered to Purchaser regarding the pending transition of certain business of XLSource, Inc. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto on the date first hereinabove written. INTELLIGENT ELECTRONICS, INC. By: /s/ Richard D. Sanford ---------------------------------- Title: Chairman and CEO XLCONNECT SOLUTIONS, INC. By: /s/ Richard D. Sanford ---------------------------------- Title: Chairman XEROX CORPORATION By: /s/ W. F. Buehler ---------------------------------- Title: Executive Vice President TDC SUBSIDIARY CORPORATION By: /s/ Charles P. Gilliam ---------------------------------- Title: President TDC TWO SUBSIDIARY CORPORATION By: /s/ Charles P. Gilliam ---------------------------------- Title: President EX-4 3 Exhibit 4.1 AMENDMENT NO. 1 TO RIGHTS AGREEMENT ---------------- THIS AMENDMENT NO. 1, dated as of March 3, 1998 (the "Amendment") to the Rights Agreement dated as of March 22, 1996 (the "Rights Agreement"), between INTELLIGENT ELECTRONICS, INC., a Pennsylvania corporation (the "Company") and CHASE MELLON SHAREHOLDER SERVICES L.L.C., formerly CHEMICAL MELLON SHAREHOLDER SERVICES L.L.C. (the "Rights Agent"). WHEREAS, the Company desires to amend the Rights Agreement to designate Xerox Corporation, a New York corporation, including any of its wholly-owned direct and indirect subsidiaries now existing or hereafter formed (together, "Xerox"), as an Exempt Person, provided that Xerox shall immediately and thereafter cease to be an Exempt Person if it shall become the Beneficial Owner (as defined in the Rights Agreement) of 15% or more of the shares of Company Common Stock (as defined in the Rights Agreement) then outstanding, other than pursuant to an agreement of merger to which Xerox and the Company are both parties; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: SECTION 1. Section 1, paragraph (i) of the Rights Agreement is amended to read in its entirety as follows: (i) "Exempt Person" means: (1) Company, any Subsidiary of the Company, any employee benefit plan or employee stock plan of the Company or of any Subsidiary of the Company, or any person or entity organized, appointed, established or holding Company Common Stock for or pursuant to the terms of any such plan; (2) Xerox Corporation, a New York corporation, including any of its wholly-owned direct and indirect subsidiaries now existing or hereafter formed and their respective Associates and Affiliates (together, "Xerox"); provided, however, that Xerox shall immediately and thereafter cease to be an Exempt Person if it shall become the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding, other than pursuant to an agreement of merger to which Xerox and the Company are both parties; and (3) any Person who would otherwise become an Acquiring Person solely by virtue of a reduction in the number of outstanding shares of Company Common Stock; provided, however, that such Person shall not be an Exempt Person if, subsequent to such reduction, such Person shall become the Beneficial Owner of any additional shares of Company Common Stock. SECTION 2. Notwithstanding any provision of the Rights Agreement to the contrary, the execution and delivery of the Agreement and Plan of Merger dated as of March 4, 1998 by and among Xerox Corporation, TDC Subsidiary Corporation, TDC Two Subsidiary Corporation, the Company and XLConnect Solutions, Inc. (the "Merger Agreement") or the consummation of the Sub Merger or Parent Merger (as such terms are defined in the Merger Agreement) contemplated thereby will not (i) cause the Rights to become exercisable, (ii) cause any Person to become an Acquiring Person or (iii) give rise to a Distribution Date. SECTION 3. The form of Summary of Rights set forth in Exhibit C attached to the Rights Agreement is hereby amended to read in its entirety as set forth in Exhibit C attached hereto. SECTION 4. The terms "Agreement" and "Rights Agreement" as used in the Rights Agreement shall be deemed to refer to the Rights Agreement as amended hereby. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings ascribed thereto in the Rights Agreement. This Amendment shall be effective as of the date hereof and, except as set forth herein, the Rights Agreement shall remain in full force and effect and be otherwise unaffected hereby. SECTION 5. This Amendment may be executed (including by facsimile) in one or more counterparts and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, all as of the date first above written. ATTEST: INTELLIGENT ELECTRONICS, INC. By: /s/ Paula Worn By: /s/ Gene Marinelli -------------------------- -------------------------------- Name: Paula Worn Name: Gene Marinelli Title: Paralegal Title: CFO ATTEST: CHASE MELLON SHAREHOLDER SERVICES L.L.C. By: /s/ Jared Fassler By: /s/ Joseph Flood --------------------------- --------------------------------- Name: Jared Fassler Name: Joseph Flood Title: Assistant Vice President Title: Assistant Vice President EXHIBIT C --------- SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK On March 8, 1996, the Board of Directors of Intelligent Electronics, Inc., a Pennsylvania corporation (the "Company"), declared a distribution of one Right (as defined below) for each outstanding share of Common Stock, par value $.01 per share (the "Company Common Stock"), to shareholders of record at the close of business on March 25, 1996 (the "Record Date") and for each share of Company Common Stock issued by the Company thereafter and prior to the Distribution Date. Each Right entitles the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one one-thousandth of a share (a "Unit") of Series A Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a Purchase Price of $28.00 per Unit, subject to adjustment (the "Right"). The Purchase Price is payable in cash or by certified or bank check or money order payable to the order of the Company. As of March 3, 1998, the Company entered into an amendment ("Amendment No. 1") to its Rights Agreement that designates Xerox Corporation, a New York corporation, including any of its wholly-owned direct and indirect subsidiaries now existing or hereafter formed (together, "Xerox"), an Exempt Person (as defined in the Rights Agreement, as amended), provided that Xerox shall immediately and thereafter cease to be an Exempt Person if it shall become the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding, other than pursuant to an agreement of merger to which Xerox and the Company are both parties. The description and terms of the Rights are set forth in a Rights Agreement between the Company and Chase Mellon Shareholder Services L.L.C. (formerly Chemical Mellon Shareholder Services L.L.C.), as Rights Agent (the "Rights Agreement"). Copies of the Rights Agreement and the Certificate of Designation for the Preferred Stock have been filed with the Securities and Exchange Commission as exhibits to a Registration Statement on Form 8-A dated March 20, 1996 (the "Form 8-A"). Copies of Amendment No. 1 to the Rights Agreement have been filed with the Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K dated __________, 1998 (the "Form 8-K"). Copies of the Rights Agreement, Amendment No. 1 to the Rights Agreement and the Certificate of Designation are available free of charge from the Company. This summary description of the Rights and the Preferred Stock does not purport to be complete and is qualified in its entirety by reference to all the provisions of the Rights Agreement, as amended, and the Certificate of Designation, including the definitions therein of certain terms, which Rights Agreement and Certificate of Designation are incorporated herein by reference. The Rights Agreement - -------------------- Initially, the Rights will attach to all certificates representing shares of outstanding Company Common Stock, and no separate Rights Certificates will be distributed. The Rights will separate from the Company Common Stock and the "Distribution Date" will occur upon the earlier of (i) 10 business days following a public announcement (the date of such announcement being the "Stock Acquisition Date") that a person or group of affiliated or associated persons (other than an Exempt Person) (an "Acquiring Person") has acquired, obtained the right to acquire, or otherwise obtained beneficial ownership of 15% or more of the then outstanding shares of Company Common Stock, and (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer that would result in a person or group beneficially other than an Exempt Person owning 15% or more of the then outstanding shares of Company Common Stock. Until the Distribution Date, (i) the Rights will be evidenced by Company Common Stock certificates and will be transferred with and only with such Company Common Stock certificates, (ii) new Company Common Stock certificates issued after the Record Date (also including shares distributed from Treasury) will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates representing outstanding Company Common Stock will also constitute the transfer of the Rights associated with the Company Common Stock represented by such certificates. The Rights are not exercisable until the Distribution Date and will expire at the close of business on the tenth anniversary of the Rights Agreement unless earlier redeemed by the Company as described below. As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of Company Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights certificates alone will represent the Rights. In the event that (i) the Company is the surviving corporation in a merger with an Acquiring Person and shares of Company Common Stock shall remain outstanding, (ii) a Person other than an Exempt Person becomes the beneficial owner of 15% or more of the then outstanding shares of Company Common Stock, (iii) an Acquiring Person engages in one or more "self- dealing" transactions as set forth in the Rights Agreement, or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1% (e.g., by means of a reverse stock split or recapitalization), then, in each such case, each holder of a Right will thereafter have the right to receive, upon exercise, Units of Preferred Stock (or, in certain circumstances, Company Common Stock, cash, property or other securities of the Company) having a current market value equal to two times the exercise price of the Right. The exercise price is the Purchase Price multiplied by the number of Units of Preferred Stock issuable upon exercise of a Right prior to the events described in this paragraph. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that, at any time following the Stock Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction and the Company is not the surviving corporation (other than a merger described in the preceding paragraph), (ii) any Person consolidates or merges with the Company and all or part of the Company Common Stock is converted or exchanged for securities, cash or property of any other Person or (iii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as described above) shall thereafter have the right to receive, upon exercise, common stock of the Acquiring Person having a current market value equal to two times the exercise price of the Right. The Purchase Price payable, and the number of Units of Preferred Stock issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) if holders of the Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii) upon the distribution to the holders of the Preferred Stock of evidences of indebtedness, cash or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. The Company is not required to issue fractional Units. In lieu thereof, an adjustment in cash may be made based on the market price of the Preferred Stock prior to the date of exercise. At any time until ten business days following the Stock Acquisition Date, a majority of the Independent Directors may redeem the Rights in whole, but not in part, at a price of $.001 per Right (subject to adjustment in certain events) (the "Redemption Price"), payable, at the election of such majority of the Independent Directors, in cash or shares of Company Common Stock. Immediately upon the action of a majority of the Independent Directors ordering the redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. At any time prior to the Distribution Date, the Company (by action of a majority of the Independent Directors) may exchange all or part of the outstanding Rights for that number of Units of Preferred Stock at an exchange ratio determined pursuant to the Rights Agreement and reflective of the then current market price. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to shareholders or to the Company, shareholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Units of Preferred Stock (or other consideration). Notwithstanding any provision of the Rights Agreement to the contrary, the execution and delivery of the Agreement and Plan of Merger dated as of March ___, 1998 by and among Xerox Corporation, TDC subsidiary Corporation, TDC Two Subsidiary Corporation, the Company and XLConnect Solutions, Inc. (the "Merger Agreement") or the consummation of the Sub Merger or Parent Merger (as such terms are defined in the Merger Agreement) contemplated thereby will not (i) cause the Rights to become exercisable, (ii) cause any Person to become an Acquiring Person or (iii) give rise to a Distribution Date. Any of the provisions of the Rights Agreement may be amended without the approval of the holders of Company Common Stock at any time prior to the Distribution Date. After the Distribution Date, the provisions of the Rights Agreement may be amended in order to cure any ambiguity, defect or inconsistency, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person), or to shorten or lengthen any time period under the Rights Agreement; provided, however, that, except under certain circumstances, no amendment to adjust the time period governing redemption shall be made at such time as the Rights are not redeemable. Description of Preferred Stock - ------------------------------ The Units of Preferred Stock that may be acquired upon exercise of the Rights will be nonredeemable and subordinate to any other shares of preferred stock that may be issued by the Company. Each Unit of Preferred Stock will be entitled to dividends at the same rate per share as dividends declared on the Company Common Stock and shall be entitled to payment of dividends to the extent dividends are declared on the Company Common Stock. In the event of liquidation, the holder of a Unit of Preferred Stock will receive the per share amount paid in respect of a share of Company Common Stock. In the event of any merger, consolidation or other transaction in which shares of Company Common Stock are exchanged, each Unit of Preferred Stock will be entitled to receive the per share amount paid in respect of each share of Company Common Stock. Each Unit of Preferred Stock will have one vote, voting together with the Company Common Stock. The rights of holders of the Preferred Stock to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary antidilution provisions. Because of the nature of the Preferred Stock's dividend, liquidation and voting rights, the economic value of one Unit of Preferred Stock, that may be acquired upon the exercise of each Right should approximate the economic value of one share of the Company's Common Stock. EX-10 4 Exhibit 10.9 SEPARATION AGREEMENT -------------------- THIS SEPARATION AGREEMENT ("Agreement") is made this 11th day of September, 1997, by and between Michael A. Norris ("Norris"), an individual who resides at _______________________________________________, as well as each and every dependent, heir, executor, legal representative and assign of Norris, and INTELLIGENT ELECTRONICS, INC. ("IE"), a business corporation existing under the laws of the Commonwealth of Pennsylvania, having its corporate headquarters at Exton, Pennsylvania, together with each and every of its predecessors, successors (by merger or otherwise), parent, subsidiaries, affiliates, divisions, directors, officers, employees and agents, whether present or former, including XLConnect Solutions, Inc. This Agreement also constitutes an amendment to the employment letter dated August 8, 1996 between Norris and IE (the "Employment Letter"). WHEREAS, the parties reached an agreement in principle in July 1997 concerning the resignation of Norris as President of IE and CEO of the Reseller Network Division of IE and the termination of his employment with IE. WHEREAS, Norris and IE desire to part on an amicable basis. WHEREAS, the parties are entering into this Agreement in order to more fully set forth the parties' agreements and understandings regarding Norris' resignation as an officer and the termination of his employment. NOW THEREFORE, in consideration of the mutual promises hereinafter set forth, Norris and IE acting of their own free will and intending to be legally and irrevocably bound, hereby agree as follows: 1. Employment Termination. Norris agrees that his employment with IE will terminate on September 30, 1997 (the "Separation Date"). The parties acknowledge that effective August 27, 1997, Norris resigned from all positions as a director, officer, trustee or otherwise with IE and its subsidiaries and affiliates, except that Norris has not resigned as a member of the Board of Directors of IE. Upon termination of his employment with IE, Norris shall be entitled to receive the benefits set forth in this Agreement as and when required in accordance with the terms hereof. Until termination of Norris' employment, Norris will continue to perform services relating to transitional issues in connection with IE's former Reseller Network Division and XLSource Division, which were sold in July 1997. 2. Salary Continuation. Commencing on the Separation Date, IE agrees to pay Norris, as salary continuation, at the rate of his current base annual salary of Four Hundred Seventy Five Thousand, for fifteen (15) months following Norris' Separation Date ("Severance Period"). This salary continuation will be paid in equal bi-weekly installments in the same manner and subject to all required federal, state and local tax withholdings as is the case with Norris' current salary. 3. Medical and Dental Benefits Continuation. During the Severance Period, IE will provide Norris and his family full coverage under the IE group medical and dental programs subject to the terms of the medical and dental plans. Any required employee contribution to the medical plan premium will be deducted from Norris' monthly salary continuation payments during such period. Norris' statutory rights under COBRA to continue participation in IE's group medical coverage for a period of up to eighteen (18) months, at his own cost, shall begin immediately following the termination of medical and dental coverage paid for by IE. IE's obligation to continue to pay for medical coverage, and any corresponding deduction from Norris' salary continuation payments, will cease if Norris becomes eligible to participate in a comparable medical and dental plan with a new employer. In this case, Norris agrees to immediately notify IE by written notice to IE's Chief Financial Officer. 4. Stock Options. Norris' IE stock options will continue to vest in accordance with their original terms and conditions through August 27, 2006, notwithstanding the termination of Norris' employment with IE. If the Inherent Value (as defined in Section 5) as of September 30, 1997 is greater than zero, then all IE stock options then held by Norris which are not yet fully vested will become fully vested. If the Inherent Value as of January 30, 1999 is greater than zero, then all IE stock options and XLConnect stock options then held by Norris will become fully vested. 5. Stock Value Guarantee Payment. This Section 5 supersedes and replaces the fifth paragraph of the Employment Letter relating to the payment of up to $1.7 million in connection with Norris' options to purchase common stock of IE. The net amount of the payment required to be made by IE to Norris under this Section 5 is herein referred to as the "Stock Value Guarantee Payment." For purposes of this Section 5, the "fair market value" as of a specified date shall be deemed to be the average of the closing price per share of IE common stock on the five trading days ending on the last trading day prior to the specified date. As long as Norris is an employee of IE on September 30, 1997 or was previously terminated by the Company without cause (as defined in the Employment Letter), IE will pay Norris, on September 30, 1997, an amount (the "First Installment") equal to one-half of the excess of $1.7 million over the product of (a) 750,000 (corresponding to the number of IE stock options granted to Norris) and (b) the excess of the fair market value (as of September 30, 1997) over the exercise price of Norris' IE stock options (such excess being herein referred to as the "Inherent Value"). So long as Norris was entitled to receive the First Installment pursuant to the preceding sentence, then on January 30, 1999, IE will pay Norris an amount, equal to the excess of $1.7 million over the First Installment (such excess being herein referred to as the "Option Payment Balance"), which amount shall be further reduced (but not below zero) by the Realized Value (as defined below) (the "Second Installment"). For purposes hereof, the "Realized Value" shall mean the sum of the amounts described in paragraphs (a) through (e) below, as reduced by the net amount of any taxes which Norris was, is, or will be, obligated to pay as a result of the exercise of stock options or the sale or other disposition of shares described in said paragraphs (a) through (e): a. The excess of the product of the fair market value (as of January 30, 1999) of the IE common stock underlying Norris' IE options or acquired on exercise of stock options, and retained by Norris as of January 30, 1999, over the aggregate exercise price of such options. b. The excess of the product of the fair market value (as of January 30, 1999) of any XLConnect common stock acquired on exercise of stock options and retained by Norris as of January 30, 1999, over the aggregate exercise price of such options. c. The value of any proceeds received by Norris on or prior to January 30, 1999 from any sale or other disposition of IE options, together with the excess of the value of any proceeds received by Norris on or prior to January 30, 1999 from any sale or other disposition of any shares of IE common stock (acquired on exercise of stock options) over the exercise price paid by Norris for such shares; d. The excess of the value of any proceeds received by Norris on or prior to January 30, 1999 from any sale or other disposition of any shares of XLConnect common stock (acquired on exercise of stock options) over the exercise price paid by Norris for such shares; e. The value of any distributions or dividends received by Norris on or prior to January 30, 1999 on IE common stock (acquired on exercise of stock options) and XLConnect common stock (acquired on exercise of stock options); In the event that the Realized Value exceeds the Option Payment Balance, then Norris agrees to pay to IE on January 30, 1999 the amount of such excess (but in no event more than the amount of the First Installment). All references to options to purchase XLConnect common stock in this Agreement shall be deemed to refer only to options which are held by Norris as of the date hereof and not to any XLConnect options which may be granted to Norris after the date hereof. Repayment of Certain Amounts. In the event that after January 30, 1999 and on or prior to November 27, 2000, Norris receives (i) any distributions or dividends on IE common stock (acquired on exercise of stock options) or XLConnect common stock (acquired on exercise of options), or (ii) any proceeds from any sale or other disposition of Norris' IE or XLConnect options or shares of IE or XLConnect common stock (acquired on exercise of stock options) and the aggregate of such proceeds exceed the sum of (x) the Realized Value, and (y) in the case of the sale or other disposition of shares, the exercise price paid by Norris on exercise of the options underlying such shares, Norris agree to repay to IE, promptly upon receipt of such proceeds and promptly from time to time as future proceeds are received, all such proceeds up to an amount not exceeding the following amount: (a) the First Installment, plus (b) the Second Installment, minus (c) the net amount of any taxes which Norris was, is or will be obligated to pay as a result of Norris' receipt of the First Installment and the Second Installment, plus (d) the net amount of any tax benefit which Norris receives by reason of the repayment by Norris to IE pursuant to this paragraph. 6. Other Benefits. IE agrees to extend to Norris the following additional benefits: a. IE will provide Norris its executive relocation package as utilized in his move to Denver, CO, and IE will provide Norris with a tax gross-up related to this relocation package. IE will cover any loss in equity associated with the sale of Norris' current principal residence located in Denver. Said loss in equity will be calculated as the excess of the purchase price paid by Norris for the residence over the gross sales price of the residence as sold by Norris in a bona fide sale to an unrelated third party. b. Until the earlier of the expiration of the Severance Period or the occurrence of a Change of Control, IE will continue to pay the premiums on the $1 million life insurance policy currently in force insuring Norris' life. c. Until the earlier of the expiration of the Severance Period, the occurrence of a Change of Control or the expiration of the car lease currently in force, Norris will continue to have the right to retain use of his current executive automobile currently leased for his use by the Company, at Company expense. d. The obligation of IE to bonus Norris certain interest charges as set forth on page two of the Employment Letter is hereby terminated and is of no further force or effect. 7. Bonus Payment. On the Separation Date IE agrees to pay Norris the sum of $125,000 in cash, representing one-half of his maximum 1997 bonus entitlement. Norris will thereafter not be entitled to receive any further bonus payments. 8. Acceleration of Salary Continuation and Stock Value Guarantee Payment. In the event either: a. a Change of Control (as defined below) occurs after the date hereof, whether before or after the Separation Date; or b. IE at any time hereafter has either insignificant assets (defined as consolidated total assets of less than $100 million at the end of any quarterly reporting period commencing after the date hereof) or insignificant operations (defined as consolidated revenues during any quarterly reporting period commencing after the date hereof of less than $75 million) or insignificant tangible net worth (defined as consolidated shareholders' equity less goodwill of less than $20 million or at the end of any quarterly reporting period commencing after the date hereof); then (1) the salary continuation payments and the Stock Value Guarantee Payment not yet paid to Norris pursuant to this Agreement shall be accelerated so that Norris shall receive, within fifteen (15) business days of such event, a lump sum payment equal to the balance of salary continuation payments and the balance of the Stock Value Guarantee Payment which Norris would have received had such acceleration not taken place; and (2) all IE stock options and XLConnect stock options then held by Norris which are not yet fully vested will become fully vested. For purposes of calculating the Second Installment of the Stock Value Guarantee Payment under this Section, all references to January 30, 1999 in the definition of "Realized Value" will be replaced by the date of the Change of Control. For the purposes of this Agreement a "Change of Control" of IE shall be deemed to have occurred upon the earliest of the following events: (a) Any "person," as such term is defined under Section 3(a)(9) and 13(d) of the Exchange Act, who is not an affiliate of IE on the date hereof, becomes a "beneficial owner," as such term is used in Rule 13d-3 under the Exchange Act, of more than 50% of IE's common stock; (b) Upon the distribution by IE of all or substantially all of its assets to its shareholders pursuant to a plan of liquidation; or (c) IE consummates a merger, consolidation, other form of business combination or a sale of all or substantially all of its assets, unless the business of IE is continued following any such transaction by a resulting entity (which may be but need not be, IE) and the shareholders of IE immediately prior to such transaction (the "Prior Shareholders") hold, directly or indirectly, a majority of the voting power of the resulting entity. In the event Norris becomes entitled to receive any amounts under this Section 8, then Norris will become obligated to repay certain amounts in accordance with the provisions set forth under the caption "Repayment of Certain Amounts" in Section 5 hereof, provided that any reference to January 30, 1999 therein will be replaced by the date of the Change of Control. 9. Confidentiality: a. Norris agrees that he will not disclose or use for his direct or indirect benefit or the direct or indirect benefit of any third party, any Confidential Information (as hereinafter defined) of IE. In general, "Confidential Information" means any and all proprietary information of IE, whether any information relating to computer codes or instructions (including source and object code listings, logic algorithms, subroutines, modules or other subparts of computer programs and related documentation, including program notation); computer processing systems and techniques, concepts, layouts, flowcharts, specification, know-how, and associated programmer, user or other manuals or other like textual materials (including any other data and materials used in performing Norris' duties); all computer input and outputs (regardless of the media on which stored or located); hardware and software configurations; designs, interfaces, research, processes, inventions, products, methods; marketing, sales and distribution, data, methods , plans and efforts; IE's relationship with actual and prospective customers, contractors and suppliers; IE's relationship with actual financial and banking institutions, creditors, or vendors; any other materials prepared by Norris or other employees in the course of, relating to or arising out of their employment, or prepared by any other contractor for IE or its customers: and any other materials that have not been made available to the general public. b. Norris agrees that he will, effective on Separation Date: (I) discontinue all use of Confidential Information; (ii) return to IE all material furnished by IE that contains Confidential Information; (iii) erase or destroy and Confidential Information contained in computer memory or data storage apparatus under the ownership or control of Norris; and (iv) remove Confidential Information from any software under the ownership or control of Norris that incorporates or uses Confidential Information in whole or in part. c. Norris agrees to return to IE on the Separation Date, or earlier termination of employment, any documents, records, notebooks, files correspondence, reports, memorandum, personal property owned by IE, or any other documents and material whatsoever relating to the business of the Company. He also agrees that he will not make, retain, remove or distribute any copies of the foregoing. IE agrees that Norris can purchase at agreed upon prices IE's equipment being used by him including the laptop, desktop, Officefax, chair and work top at his residence. 10. Waiver and Release of Claims. a. Norris Release. Norris completely releases, relinquishes, waives and forever discharges IE, its officers, directors, employees, agents, subsidiaries and affiliates, and their respective successors and assigns, from all manner of actions, causes of action, suits, debts, dues, accounts, bonds, covenants, contracts, agreements, judgments, claims, and demands whatsoever, in law or equity, known or unknown, in tort, contract, by statute, negligence (whether by contribution or indemnification) or any other basis for relief, compensatory, punitive, or other damages, expenses (including attorney's fees), reimbursement or costs of any kind which Norris ever had, now has or may have, for or by reason of any cause, matter or thing whatsoever, arising out of or in any way related to Norris' employment with IE and its subsidiaries and affiliates, his membership of any of the Board of Directors of IE or any of its subsidiaries or affiliates, or the termination of any such employment and membership; provided however, that nothing contained herein shall release IE from its obligations under this Agreement. Norris agrees that he has executed this Release on his own behalf, and also on behalf of his heirs, agents, representatives, successors and assigns. This release includes, but is not limited to, a release of any rights or claims he may have under: (1) The Age Discrimination in Employment Act (ADEA), which prohibits age discrimination in employment; (2) Title VII of the Civil Rights Act of 1964; as amended by the Civil Rights Act of 1991, which prohibits discrimination in employment based on race, color, national origin, religion or sex; (3) The Americans with Disabilities Act (ADA), which prohibits discrimination on the basis of a covered disability; (4) The Employer Retirement and Income Security Act (ERISA), which prohibits discrimination on the basis of entitlement to certain benefits; (5) Any other federal, state or local laws or regulations prohibiting employment discrimination; (6) Breach of any express or implied contract claims; (7) Wrongful termination or any other tort claims, including claims for attorney's fees whether based on common law, or otherwise. Norris understands, however, that by signing this Release, he does not waive rights to (i) claims arising under any applicable worker's compensation laws; (ii) any claims which the law states may not be waived; and (iii) his vested rights under the regular employment benefit plans of IE, in effect as of the date of this Agreement. b. IE Release. IE hereby completely remises, releases, relinquishes, waives and forever discharges Norris and his dependents, heirs, executors, agents, legal representatives, successors and assigns, of and from all manner of actions, causes of action, suits, debts, dues, accounts, bonds, covenants, contracts, agreements, judgments, claims and demands whatsoever, in law or equity, known or unknown, in tort, contract, by statute, negligence (whether by contribution or indemnification) or any other basis for relief, compensatory, punitive or other damages, expenses (including attorney's fees), reimbursements or costs of any kind which IE ever had, now has or may have, for or by reason of any cause, matter or thing whatsoever, arising out of or in any way related to his employment with IE and its subsidiaries and affiliates, his membership of any of the Board of Directors of IE or any of its subsidiaries or affiliates, or the termination of any such employment and membership; provided however, that nothing contained herein shall release Norris from his obligations under this Agreement. IE agrees that it has executed this Release on its own behalf, and also on behalf of its subsidiaries, affiliates, divisions, successors (by merger or otherwise) and assigns, including XLC. 11. Indemnification. To the extent permitted by law, IE agrees to defend, indemnify and hold Norris harmless against any threatened or pending actions or proceedings, whether brought by a third party or as a derivative action, by reason of the fact that Norris was an officer or representative of IE acting within the scope of his employment. 12. Cooperation in Defending Legal Actions. Norris understands that he will not in the future voluntarily assist any individual or entity in preparing, commencing or prosecuting any action or proceeding against IE its directors, officers, employees, or affiliates, including but not limited to, any administrative agency claims, charges or complaints and/or lawsuits against IE, its directors, officers, employees or affiliates, or to voluntarily participate or cooperate in any such action or proceeding, except as such agreement is specifically prohibited by statute. Norris also agrees that he will cooperate with and assist IE in its defense or prosecution of any such action or proceeding. This Agreement shall not preclude Norris from testifying in such an action or proceeding if he is compelled to do so pursuant to a subpoena or other court order. However, Norris expressly agrees that he will provide written notice addressed to the attention of Barry M. Abelson, Esquire, Pepper Hamilton & Sheetz, LLP, 3000 Two Logan Square, Philadelphia, PA 19103 (fax no. 215-981-4750) if he should receive, by service or otherwise, a notice, subpoena or other court order or any other written request seeking or requiring him to testify or otherwise participate in or assist in any action or proceeding against IE, such notice to be so provided within 24 hours of each such receipt by Norris or anyone acting on his behalf. 13. Announcements and Non-Disparagement. The parties hereby agree that all public disclosure regarding the reasons for the termination of Norris' employment and other positions with the Company shall be agreed upon between the parties in advance, which agreement will not be unreasonably withheld. Each party agrees not to make any comments inconsistent with any agreed upon language. Each party further agrees not to disparage the other with respect to matters arising prior to the date of the execution of this Agreement or to disclose or otherwise identify any matters which may be detrimental to the other which occurred prior to the date of the execution of this Agreement. It is further agreed that inquiries for references by prospective employers shall be directed to Richard Sanford, whose comments shall be positive in nature and not inconsistent with the provisions of this paragraph. 14. Arbitration of Disputes Under this Agreement. The parties agree that any and all disputes arising out of the performance or breach of this Agreement or any promise or covenant herein shall be resolved by submission to arbitration in Philadelphia, PA under, and in accordance with, the rules and procedures of the American Arbitration Association. In any such proceeding, the prevailing party shall be entitled to an award of reasonable attorney's fees, costs and expenses. It is expressly agreed that no amounts will be withheld from any amounts due during the Severance Period unless an appropriate court order has been obtained. 15. Governing Law; Enforcement. This agreement shall be governed by and construed and enforced under the laws of the Commonwealth of Pennsylvania. All remedies at law and equity shall be available for the enforcement of this Agreement incorporated by reference herein. This Agreement may be pleaded as a full bar to the enforcement of nay claim in any way related to or arising out of Norris' employment with IE and/or the termination thereof. 16. Opportunity to Review and Right to Revoke. Norris hereby acknowledges that he is acting on his own free will, that he has been afforded ample opportunity to read and review the terms of this Agreement, that he has had an opportunity to seek the advise of counsel, and that he is voluntarily entering into this Agreement with full knowledge of its respective provisions and effects. Norris also acknowledges that he has seven (7) days following his signing of this Agreement to revoke this Agreement in which case IE will have no obligation to make any payment to him hereunder, and as a condition to any such revocation, any payment already made hereunder by IE to Norris will be returned by Norris to IE. 17. Contractual Effect. The parties understand and acknowledge that the terms of this Agreement are contractual and not a mere recital. Consequently, they expressly consent that this Agreement shall be given full force and effect according to each and all of its express terms and provision, and that it shall be binding upon the respective parties as well as their heirs, executors, successors, administrators and assigns including XLC. The parties further acknowledge that this Agreement, including the recitals, sets forth the entire agreement and understanding of the parties relating to its subject matter, and supersedes and merges all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written. No change or modification to the Agreement will be binding unless it is in writing and signed by both IE and Norris. IN WITNESS WHEREOF, Norris and IE each acknowledge that they are acting of their own free will, that they have had a sufficient opportunity to read and review the terms of this Agreement, they have each received the advice of their respective counsel with respect hereto, and that they have voluntarily caused the execution of this Agreement and by reference herein as of the day and year first set forth above. /s/ Michael A. Norris /s/ Nancy Norris - ----------------------------- --------------------------------- Michael A. Norris Witness On behalf of INTELLIGENT ELECTRONICS, INC.: By: /s/ Richard D. Sanford Attest: /s/ Virginia G. Rosen ----------------------------- ------------------------- Richard D. Sanford Name: Virginia G. Rosen Chairman of the Board, Title: Executive Assistant Chief Executive Officer and President EX-10 5 Exhibit 10.10 1/23/98 Mr. Richard D. Sanford Dear Mr. Sanford, The purpose of this letter agreement ("Letter Agreement") is to set forth certain understandings relating to your continued employment by INTELLIGENT ELECTRONICS, INC., a Pennsylvania corporation (the "Company") and certain continuing obligations of the Company following the termination of your employment. Our understandings are as follows: 1. You will continue to serve the Company as Chief Executive Officer and Chairman of the Board of Directors of the Company through the consummation of the proposed acquisition transaction involving the sale of the Company in its entirety (the "Transaction"). 2. The Company will pay you as compensation for all services rendered hereunder a base salary at the annual rate of $850,000 through the closing of the Transaction. In addition, upon the closing of the Transaction, the Company will (i) continue your health and major medical benefits for you and your family for one year from such closing, (ii) pay you a $40,000 lump sum at closing to cover administrative support for one year, (iii) pay you a $30,000 lump sum at closing to cover office rent for one year, and (iv) convey to you the two vehicles and miscellaneous equipment identified on Annex A. 3. The Company agrees that in the event any of the Split-Dollar Agreements between the Company and Barry Abelson (as trustee of the trust created under the Irrevocable Trust Agreement of Richard D. Sanford dated August 22, 1991) are terminated, notwithstanding anything in any other agreement to the contrary, the Company will not be entitled to reimbursement for any excess of premiums paid by the Company over the cash surrender values of the policies to which such Split-Dollar Agreements pertain and neither you nor such trustee or trust will have any liabilities or obligations to the Company with respect thereto other than for the cash surrender values. 4. The Company agrees to maintain for your benefit and as you may instruct from time to time, forwarding of calls for six (6) months after the Transaction. 5. You completely release, relinquish, waive and discharge the Company, its predecessors, successors (by merger or otherwise), parents, subsidiaries, affiliates, divisions, officers, directors, employees and agents, whether present or former, from all claims, liabilities, demands and causes of action, known or unknown, filed or contingent, which you may have or claim to have against the Company as of the date of the signing of this Agreement arising out of or in any way related to your employment with the Company or the contemplated termination of that employment. You agree that you have executed this Agreement on your own behalf, and also on behalf of your heirs, agents, representatives, successors and assigns. This release includes, but is not limited to, a release of any rights or claims you may have under: (i) the Age Discrimination in Employment Act (ADEA), which prohibits age discrimination in employment; (ii) Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, which prohibits discrimination in employment based on race, color, national origin, religion or sex; (iii) the Americans with Disabilities Act (ADA), which prohibits discrimination on the basis of a covered disability; (iv) the Employer Retirement and Income Security Act (ERISA), which prohibits discrimination on the basis of entitlement to certain benefits; (v) any other federal, state or local laws or regulations prohibiting employment discrimination; (vi) breach of any express or implied contract claims; or (vii) wrongful termination or any other tort claims, including claims for attorney's fees, whether based on common law, or otherwise. You understand, however, that by signing this Agreement, you do not waive rights to: (i) claims arising under any applicable worker's compensation laws; (ii) any claims which the law states may not be waived; and (iii) if applicable, your vested rights under the regular employment benefit plans of the Company, in effect as of the date of this Agreement. 6. You will not in the future voluntarily assist any individual or entity in preparing, commencing or prosecuting any action or proceeding against the Company, its directors, officers, employees, or affiliates, including but not limited to, any administrative agency claims, charges or complaints and/or lawsuits against the Company, its directors, officers, employees, or affiliates, nor will you voluntarily participate or cooperate in any such action or proceeding, except to the extent such an undertaking is specifically prohibited by statute. You also agree that you will cooperate with and assist the Company in its defense of any such action or proceeding, subject to reimbursement of reasonable out-of-pocket expenses. This Agreement shall not preclude you from testifying in such an action or proceeding if you are compelled to do so pursuant to a subpoena or other court order. However, you expressly agrees that you will provide written notice addressed to the attention of Barry M. Abelson, Esquire, Pepper, Hamilton, LLP, 3000 Two Logan Square, Philadelphia, PA 19103 (Fax No.: 215-981-4750) if you should receive, by service or otherwise, a notice, subpoena or other court order or any other written request seeking or requiring you to testify or otherwise participate in or assist in any action or proceeding against the Company, such notice to be so provided within 48 hours of each such receipt by you or anyone acting on your behalf. 7. Except to the extent inconsistent with any terms herein, all terms of your current employment will remain unchanged. INTELLIGENT ELECTRONICS, INC. By: /s/ Eugene Marinelli, CFO ------------------------------------ The foregoing is acceptable and approved as of the date first written above: /s/ Richard D. Sanford - ---------------------------------------- Richard D. Sanford Annex A See following pages. EX-10 6 Exhibit 10.11 2/27/98 Mr. Gene E. Marinelli Dear Mr. Marinelli, The purpose of this letter agreement ("Agreement") is to set forth certain understandings relating to your continued employment by INTELLIGENT ELECTRONICS, INC., a Pennsylvania corporation (the "Company") and certain continuing obligations of the Company following the termination of your employment, such understanding to be made effective November 1, 1997. Our understandings are as follows: WHEREAS, you have been employed by the Company pursuant to the terms of that Retention Agreement between you and the Company signed by the Company on March 6, 1997 (the "Retention Agreement") which contemplated your employment by the Company through October 31, 1997; WHEREAS, prior to October 31, 1997, you reached an informal understanding with the Company that you would continue to serve the Company beyond October 31, 1997; and WHEREAS, the parties hereto now wish to memorialize the terms of that understanding, effective October 31, 1997. NOW, THEREFORE, in consideration of the premises and the mutual agreements, covenants and promises hereafter set forth, the parties hereby agree as follows: 1. You will continue to serve the Company under the terms of the Retention Agreement and the Confidentiality and Non-Disclosure Agreement between you and the Company signed by you on February 21, 1997 (the "Confidentiality Agreement"), except that (i) Sections 1, 2, 3 and 5 and the last sentence of Section 8 of the Retention Agreement will be of no further force and effect, (ii) recognizing your fulfillment of the obligations under the Retention Agreement, upon termination of your employment by either you or the Company for any reason, you will be entitled to a total severance award of $97,000 to be paid in equal bi- weekly installments throughout the one year period following your termination (the "Severance Period") and also the continuation of medical benefits during the Severance Period the same as were in effect upon the commencement of the Retention Agreement, (iii) your base salary will be $97,000 on an annual basis, and (iv) you agree to the terms set forth below. 2. You completely release, relinquish, waive and discharge the Company, its predecessors, successors (by merger or otherwise), parents, subsidiaries, affiliates, divisions, officers, directors, employees and agents, whether present or former, from all claims, liabilities, demands and causes of action, known or unknown, filed or contingent, which you may have or claim to have against the Company as of the date of the signing of this Agreement arising out of or in any way related to your employment with the Company or the contemplated termination of that employment. You agree that you have executed this Agreement on your own behalf, and also on behalf of your heirs, agents, representatives, successors and assigns. This release includes, but is not limited to, a release of any rights or claims you may have under: (i) the Age Discrimination in Employment Act (ADEA), which prohibits age discrimination in employment; (ii) Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, which prohibits discrimination in employment based on race, color, national origin, religion or sex; (iii) the Americans with Disabilities Act (ADA), which prohibits discrimination on the basis of a covered disability; (iv) the Employer Retirement and Income Security Act (ERISA), which prohibits discrimination on the basis of entitlement to certain benefits; (v) any other federal, state or local laws or regulations prohibiting employment discrimination; (vi) breach of any express or implied contract claims; or (vii) wrongful termination or any other tort claims, including claims for attorney's fees, whether based on common law, or otherwise. You understand, however, that by signing this Agreement, you do not waive rights to: (i) claims arising under any applicable worker's compensation laws; (ii) any claims which the law states may not be waived; and (iii) if applicable, your vested rights under the regular employment benefit plans of the Company, in effect as of the date of this Agreement. 3. You will not in the future voluntarily assist any individual or entity in preparing, commencing or prosecuting any action or proceeding against the Company, its directors, officers, employees, or affiliates, including but not limited to, any administrative agency claims, charges or complaints and/or lawsuits against the Company, its directors, officers, employees, or affiliates, nor will you voluntarily participate or cooperate in any such action or proceeding, except as such agreement is specifically prohibited by statute. You also agrees that you will cooperate with and assist the Company in its defense of any such action or proceeding, subject to reimbursement of reasonable out-of-pocket expenses. This Agreement shall not preclude you from testifying in such an action or proceeding if you are compelled to do so pursuant to a subpoena or other court order. However, you expressly agree that you will provide written notice addressed to the attention of Barry M. Abelson, Esquire, Pepper, Hamilton, LLP, 3000 Two Logan Square, Philadelphia, PA 19103 (Fax No.: 215-981-4750) if you should receive, by service or otherwise, a notice, subpoena or other court order or any other written request seeking or requiring you to testify or otherwise participate in or assist in any action or proceeding against the Company, such notice to be so provided within 48 hours of each such receipt by you or anyone acting on your behalf. INTELLIGENT ELECTRONICS, INC. By: /s/ Richard D. Sanford --------------------------------- The foregoing is acceptable and approved effective as of October 31, 1997: /s/ Eugene E. Marinelli - ---------------------------------------- Gene Marinelli EX-21 7 Exhibit 21 ---------- SUBSIDIARIES OF INTELLIGENT ELECTRONICS, INC. The following is a list of the Company's subsidiaries: E-C Computer Technical Services, Inc., a Texas corporation Intellinet, Ltd., a Pennsylvania corporation R C K Computers, Inc., a Texas corporation RNTS, Inc., a Colorado corporation The Future Now, Inc., an Ohio corporation XLConnect Solutions, Inc., a Pennsylvania corporation XLConnect Systems, Inc., a Pennsylvania corporation XLSource, Inc., an Arkansas corporation EX-23 8 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Intelligent Electronics, Inc. We consent to incorporation by reference in the Registration Statements (No. 33-39398, 333-15971 and 333-19161) on Form S-3 and (No. 33-144436, 33-42119 and 33-60771) on Form S-8 of Intelligent Electronics, Inc. of our reports dated April 2, 1998, relating to the consolidated balance sheet of Intelligent Electronics, Inc. and subsidiaries as of January 31, 1998, the related consolidated statements of operations, shareholders' equity and cash flows and the related schedule for the year then ended, which reports are included in the January 31, 1998 annual report on Form 10-K of Intelligent Electronics, Inc. KPMG Peat Marwick LLP Philadelphia, PA April 2, 1998 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in both the Prospectus constituting part of the Registration Statement on Forms S-3 (No. 33-39398, 333-15971 and 333- 19161) and the Registration Statements on Forms S-8 (Nos. 33-144436, 33-42119 and 33-60771) of Intelligent Electronics, Inc. of our report dated April 30, 1997, appearing on page 16 of this Form 10-K. PRICE WATERHOUSE LLP Philadelphia, PA April 6, 1998 EX-27 9
5 1,000 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 46,586 0 67,317 3,994 2,628 137,623 30,274 20,389 207,489 94,014 0 0 0 471 91,383 207,489 557,912 557,912 477,412 477,412 79,806 5,694 3,327 (33,583) 4,443 (39,373) (5,220) 0 0 (44,593) (1.13) (1.13)
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