-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GbigRHzhp+EAvOfl0Xs+eEpPcLvlclQJ1lpi/HgLv/Mc7RfH/izExYTFssoB5tlF PRutxDYCZF2K4lsYRzU9Jw== 0000814430-95-000017.txt : 19950803 0000814430-95-000017.hdr.sgml : 19950803 ACCESSION NUMBER: 0000814430-95-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950421 DATE AS OF CHANGE: 19950523 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELLIGENT ELECTRONICS INC CENTRAL INDEX KEY: 0000814430 STANDARD INDUSTRIAL CLASSIFICATION: 5045 IRS NUMBER: 232208404 STATE OF INCORPORATION: PA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15991 FILM NUMBER: 95540987 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/A 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 (FEE REQUIRED) For the fiscal year ended January 28, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 0-15991 INTELLIGENT ELECTRONICS, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2208404 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 411 Eagleview Boulevard, Exton, PA 19341 (Address of principal executive offices, including zip code) (610)458-5500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value [Title of Class] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 1995: Common Stock, $.01 Par Value - $250,780,000 The number of shares outstanding of the issuer's common stock as of March 31, 1995: Common Stock, $.01 Par Value - 31,206,049 Documents Incorporated by Reference Portions of the Registrant's Proxy Statement for the Annual Shareholders' Meeting to be held on or about June 8, 1995, are incorporated by reference into Items 10, 11, 12 and 13 (Part III) of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this report on Form 10-K. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] PART I Item 1. BUSINESS Introduction Intelligent Electronics, Inc. (the "Company") provides information technology products, services and solutions to network integrators (the "Network"), and to large and small corporate customers, educational institutions and governmental agencies. The Company was founded in 1982 and is a Pennsylvania corporation. In March 1984, the Company commenced the wholesale distribution of microcomputers. As a leading supplier of premium brand technology products in the United States, the Company provides business solutions through innovative product management, sales demand generation programs and logistics services. As of January 28, 1995, the Network comprised more than 2,500 locations. 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 wholly-owned subsidiaries. General The Company's revenues are derived principally from the distribution of microcomputer systems, workstations, networking and telecommunications equipment and software. In addition, in December 1994, the Company acquired certain assets of branch locations in five major-metropolitan cities from The Future Now, Inc. ("FNOW") to solidify its position in strategic corporate markets. These locations include Boston, New York City, Los Angeles, San Francisco and Baltimore/Washington, D.C. The Company currently owns approximately 31.1% of the outstanding common stock of FNOW. On March 6, 1995, the Company signed a letter of intent to acquire all the remaining shares of FNOW, in a stock-for-stock merger transaction. Based on the exchange ratio set forth in the letter of intent, FNOW shareholders will receive .6588 shares of the Company's common stock in exchange for each share of FNOW. The transaction is subject to the completion of due diligence, the execution of a definitive agreement and other customary conditions and approvals, including approval by FNOW's shareholders. Assuming the completion of the FNOW merger, the FNOW acquisitions are intended to create a financially strong sales and service organization offering a range of sophisticated customer support and consulting services. The Company provides distribution of microcomputers and related equipment to its customers through a business-to-business approach. Additionally, the Company provides product selection, technical support, cost-efficient marketing programs and promotions, configuration and marketing opportunities. The Company believes that it purchases the majority of the products distributed at the lowest published prices available and believes that its financial strength and purchasing power give it better access to constrained product lines. The Company consequently passes on to its customers a portion of the discount which it receives from vendors. This pricing, together with the Company's service offerings and ready access to expansive product inventories, generally enables its customers to purchase products from the Company at better terms than they could obtain directly from vendors and to effectively compete in the marketplace. The Company sells products and provides certain services to its Network members, who are charged varying fees based on different levels of services which they select. The Company believes that its product pricing and its "services-for-fees" approach enhance the competitiveness of its Network and provide for an efficient allocation of support. In addition, the Company provides and is continuing to develop programs to enhance the competitiveness of its Network, such as marketing assistance, programs designed to enhance channel sales, product promotion, pre-shipment configuration, technical support and new product evaluation. Programs designed for specific members of the Network include a nationwide advanced systems program operated under the name "Intelligent Systems Group", which targets end-users with a regional or national presence and focuses primarily on high-end or technically advanced products, the ISG National Service Network, which assists members of the Network in servicing multi-location, regional or national accounts, the Minority Technical Alliance, which assists certain Network members in obtaining business from end-users seeking to purchase from minority-owned businesses and the Business Technology Centers program, which assists Network members in positioning themselves in the small business market. The Company also offers financing programs, under which, for a fee, it extends up to thirty days credit to qualified end-users and certain Network members who purchase selected products. Under one such program, the Company, in partnership with Network members, provides products and extends credit directly to end-users who have been approved both by the Company and the Network member. This program frees up the existing credit line of the Network member. Also, certain members of the Network are receiving credit in order to facilitate their ability to purchase certain products from the Company and to allow the Company to compete with competitors who offer such credit terms. As these programs become more established and marketed, it is anticipated that they will facilitate incremental sales and profits, contribute gross margin, increase selling, general and administrative expenses, and increase accounts receivable. The Company may outsource some of the above financing programs which could slow the growth or reduce the level of accounts receivable. The Company is currently upgrading its management information systems, as part of a project called IE 2000, including its financial accounting system, warehouse management systems, order-entry and purchasing systems and on-line customer access system. IE 2000 is designed to transform the Company to a process-driven model in order to facilitate continued growth and provide greater operating efficiencies. The Company's primary operations are Demand Generation (manages the Company's relationships with customers and vendors) and Demand Fulfillment (manages the delivery of products). The upgrading of the Company's processes and systems is expected to be completed by the end of fiscal 1996 and to cost approximately $40 million, including costs of approximately $8 million through January 28, 1995. Network Structure Franchise Agreements. Certain of the relationships between the Company and its Network are governed by franchise agreements. The first franchise agreement was signed in August 1984, and provided for the operation of a business center pursuant to a system developed by the Company under the tradename Todays Computers Business Centers ("TCBC"). At October 31, 1988, there were 175 centers in operation under the TCBC name. In December 1988, the Company acquired Entre Computer Centers, Inc. ("Entre"), which consisted of 180 franchised customers and company-owned centers. In August 1989, the Company acquired Connecting Point of America, Inc. ("CPA") which consisted of a network of 246 franchised customers. The franchise agreements provide for the operation of a business center and the sale of microcomputer systems and related products and services as well as other advanced technology products under the Company's proprietary trademarks "Todays Computers Business Centers" and "TCBC," or "Entre Computer Centers" or "Connecting Point of America". These agreements generally have an initial term of 10 years which may be renewed for an additional 10 years and provide that the franchisee will have the right to operate a franchise at a specific location. The franchisees generally sell products approved for sale which may be purchased from the Company. Some franchisees have agreed to purchase certain manufacturers' products only from the Company. The Company may terminate the franchise agreement, subject to termination requirements under state franchise laws, either upon the occurrence of certain specified events or upon 30 days' notice of certain defaults by the franchisee. Certain franchisees may terminate the agreement with or without cause, at any time upon 60 days' prior written notice to the Company. Franchisees operating under TCBC or Entre marks are subject to certain restrictions against competition following termination. The Company also sells products to various members of the Network who do not sign franchise agreements and, therefore, are not entitled to conduct business under any of the Company's trademarks but are permitted to purchase certain products from the Company at competitive prices and terms. In addition, members of the Network can participate in various supplemental programs offered by the Company and obtain the right to use other proprietary service marks of the Company including "Intelligent Systems Group" or "ISG," "Business Technology Centers" or "BTC," and "Minority Technical Alliance" or "MTA." During the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993, FNOW accounted for approximately 16%, 16% and 10%, respectively, of the Company's revenues from continuing operations. See Note 4 to the Company's Consolidated Financial Statements for the year ended January 28, 1995. The Company is not dependent for a material part of its business upon any other member of the Network, and the loss of any other Network member would not have a material adverse effect on the Company's financial condition. Products The Company currently markets technology products consisting of microcomputer systems, workstations, networking and telecommunications equipment and software. The Company's product acquisition staff selects products on the basis of overall quality, product image, technological capability, and business applications, as well as the pricing, discount, marketing and rebate programs offered by the manufacturer which enable the Company, and in turn the Network, to benefit from quantity purchasing economies. The Company currently distributes products of approximately 100 vendors, principally COMPAQ Computer Corporation ("COMPAQ"), Hewlett-Packard Company ("Hewlett-Packard"), Apple Computer, Inc. ("Apple"), International Business Machines Corporation ("IBM"), NEC Technologies, Inc., Toshiba America Information Systems, Inc., Microsoft Corporation, Epson America, Inc., Novell, Inc., Digital Equipment Corporation, American Telephone and Telegraph Company and Lotus Development Corporation. In the past, certain vendors of the Company required resellers to purchase products from only one source. These vendors have changed their policy, allowing "open sourcing," which permits resellers to purchase products from more than one source. As a result of open sourcing, competitive pricing pressures throughout the industry have intensified and customer loyalty has been reduced. In response to open sourcing and to enhance other services, the Company has broadened the selection of computer technology products stocked in its central warehouses. Products which the Company added to its existing assortment include advanced technology central processing units, an expanded offering of peripheral devices and certain software. Inventory levels increased in support of this enhanced product offering and higher sales volume. These lines typically require expanded inventory levels and a longer sell through cycle. The Company's agreements with its major vendors permit it to purchase products from them for sale to Network members which are directly authorized by such vendors to sell products. In some cases, specific products from the major vendors may be sold to Network members which do not have specific authorization from the vendors. The vendor agreements are subject to termination by the vendors without cause on varying notice periods, and are subject to periodic renewals or re-authorization by the vendors. The termination or non-renewal of an agreement with a major vendor could have a material adverse effect on the Company. Under the agreements with the vendors, products may be returned to vendors at restocking fees ranging up to 5%. The agreements generally provide for price adjustments for specified periods which protect the Company in the event of price reductions by the vendor. The Company administers certain vendors' price adjustment programs for the benefit of the Network. In 1994, the Company instituted a policy allowing members of the Network to return certain manufacturers' products, without a restocking fee, within fifteen days of purchase. After fifteen days, the Company charges restocking fees ranging up to 10%. In addition, the Company has favorable volume purchase agreements with major industry distributors, under which members of the Network may purchase items not supplied by the Company directly from the distributors at advantageous prices and terms. Products from certain of these manufacturers comprised the following percentages of the Company's revenues during the years ended January 28, 1995, January 29, 1994 and January 30, 1993:
Year ended ----------------------------------------------------- January 28, January 29, January 30, 1995 1994 1993 ------------- ------------- ------------ IBM 15% 15% 18% COMPAQ 25% 25% 18% Apple 12% 18% 22% Hewlett-Packard 24% 22% 20%
Competition Competition in the microcomputer products market is intense, principally in the areas of price, breadth of product line, product availability and technical support and service. The Company and its Network compete with computer aggregators, distributors and retailers in the sale of its products. Additionally, several manufacturers have expanded their channels of distribution, pricing and product positioning and compete with the Company and its Network. The Company believes that the pricing and product availability offered to it by its vendors are at least as favorable as are offered to its competitors, which enables the Company and the Network to compete favorably with their competitors in terms of pricing and product availability. In addition, the Company develops customized value-add programs for its Network, including programs to develop channel markets, such as the market for advanced technology products, or to target certain end- users seeking to purchase products from minority-owned businesses, which enhance the competitiveness of the Network. The Company also provides technical support and service programs which it believes contribute favorably to the competitiveness of the Network. The Company is also subject to competition from other aggregators in recruiting and retaining Network members, as well as competition from distributors in its efforts to sell products to the Network. The Company believes that its pricing and value-add programs and services allow it to compete effectively. Certain competitors may have greater financial resources than the Company. Trademarks and Service Marks The service marks "Todays Computers Business Centers," "TCBC," "Entre," "Entre Computer Center," "Connecting Point, "Intelligent Systems Group," "ISG," "BTC Business Technology Center," "Minority Business Alliance" and the design of the Entre Computer Center logo are in use and (except for the logo) are currently registered or are in the process of registration in the United States Patent and Trademark Office by the Company. Although the marks are not otherwise registered with any states, the Company claims common law rights to the marks based on adoption and use. To the Company's knowledge, there are no pending interference, opposition or cancellation proceedings, or litigation, threatened or claimed, with respect to the marks in any jurisdiction. The Company holds no patents. Management believes that the Company's marks are valuable; however, the loss of use of any of the marks would not have a material adverse effect on the Company's business. Government Regulation The Company is subject to Federal Trade Commission regulations governing disclosure requirements in the sale of franchises. The Company is also subject to a substantial number of United States and state laws regulating franchise operations. For the most part, such laws impose registration and disclosure requirements on the Company in the offer and sale of franchises and also regulate related advertisements. In certain states, there are substantive laws or regulations affecting the relationship between the Company and the franchisees, especially in the area of termination of the franchise agreement. The Company believes it is currently and has been in the past in substantial compliance with all such regulations. Executive Officers of the Company The executive officers of the Company are as follows:
Name Age Position Richard D. Sanford 51 Chairman of the Board and Chief Executive Officer Gregory A. Pratt 46 President and Chief Operating Officer Robert P. May 45 Senior Vice President Mark R. Briggs 38 Senior Vice President Timothy D. Cook 34 Senior Vice President Edward A. Meltzer 46 Vice President and Chief Financial Officer Stephanie D. Cohen 33 Vice President, Secretary and Treasurer
Richard D. Sanford has been the Company's Chairman and Chief Executive Officer since he founded the Company in May 1982. Gregory A. Pratt joined the Company in March 1992 as Executive Vice President and was appointed President and Chief Operating Officer of the Company shortly thereafter. Prior to joining the Company, Mr. Pratt served as President of Atari Computer Corporation and Vice President of Finance and Chief Financial Officer of Atari Corporation. He also served on the Board of Directors of Atari Corporation and was a member of the Board's Executive Committee. Robert P. May joined the Company in November 1993 as Senior Vice President. Prior to joining the Company, Mr. May was a Senior Vice President of Federal Express Corporation and was President of Federal Express' Business Logistics Services Division. In his 20-year career with Federal Express, Mr. May served in a number of executive operations and corporate management positions. Mark R. Briggs joined the Company as Vice President and Chief Financial Officer in March 1990 and became Vice President and Chief Operating Officer, Franchise Division (now Demand Generation) in December 1991. In February 1994, Mr. Briggs was elected Senior Vice President of the Company and Chief Executive Officer of Demand Generation. Prior to joining the Company, Mr. Briggs held various positions with Ingram-Micro D, Inc. (a distributor of microcomputer products), including Senior Vice President and Chief Financial Officer. Timothy D. Cook joined the Company as Senior Vice President - Fulfillment in October 1994. Prior to joining the Company, Mr. Cook held various positions at IBM since 1983, including Director of Brand Management and Site Services, and Director of North American Fulfillment for the IBM PC Company. Edward A. Meltzer became Chief Financial Officer in March 1992 and held the position of Treasurer of the Company from January 1989 to May 1993 and Vice President since August 1990. Mr. Meltzer served as Treasurer of Entre from January 1987 until its acquisition by the Company. Stephanie D. Cohen was elected Vice President, Secretary and Treasurer in May 1993 and held the position of Vice President, Investor Relations of the Company from March 1991 to May 1993. Ms. Cohen joined the Company in 1987 as Controller, and served as Director, Investor Relations from March 1989 until March 1991. Employees As of January 28, 1995, the Company had 1,162 full-time employees. No employee is represented by a labor union and the Company believes that its employee relations are good. Item 2. PROPERTY The Company currently distributes products from four leased facilities in the United States. One distribution center is located in approximately 488,000 square feet of leased warehouse space in Memphis, Tennessee, under a lease which expires in February 2005. The remaining distribution centers are located in the Denver, Colorado area which total approximately 456,000 square feet of space under leases expiring no later than December 1995. The Company leases approximately 31,000 square feet in Exton, Pennsylvania, primarily for its principal executive offices, the occupancy of which commenced in May 1989, for a term expiring in June 1997 and approximately 122,000 square feet in the Denver, Colorado area, primarily for its Demand Generation offices, under a lease expiring in December 2001. In addition, the Company leases facilities for its branch locations in five major metropolitan cities in the United States. The Company believes that its facilities are adequate for its present needs. Item 3. LEGAL PROCEEDINGS In December 1994, several purported class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania (Civil Action Nos. 94-3753, 94-CV-7410, 94-CV-7388, and 94-CV-7405) against the Company and certain directors and officers; these lawsuits have been consolidated with a class action lawsuit filed several years ago against the Company, certain directors and officers, and the Company's auditors (who are not named in the most recent complaint) in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 92-CV-1905). A purported derivative lawsuit was also filed in December 1994 in the Court of Common Pleas of Philadelphia County (No. 803) against the Company and certain of its directors and officers. These lawsuits allege violations of certain disclosure and related provisions of the federal securities laws and breach of fiduciary duties, including allegations relating to the Company's practices regarding vendor marketing funds, and seek damages in unspecified amounts as well as other monetary and equitable relief. In addition, the Company has been contacted by the Philadelphia office of the Securities and Exchange Commission regarding a preliminary, informal inquiry. The Company believes that all such allegations and lawsuits are without merit and intends to defend against them vigorously. While management of the Company, based on its investigation of these matters and consultations with counsel, believes resolution of these matters will not have a material adverse effect on the Company's financial position, the ultimate outcome of these matters cannot presently be determined. 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. During fiscal 1994, based in part on the advice of legal counsel, the Company established a reserve of $9 million in respect of all litigation and arbitration matters. Although the aggregate amount of the claims may exceed the amount of the reserve, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations in any subsequent period. 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 traded over-the-counter in the Nasdaq National Market (symbol INEL). As of March 31, 1995, there were 865 shareholders of record. Set forth below is the range of the high and low sale prices for the Company's common stock as reported by Nasdaq during each fiscal quarter within the two most recent fiscal years: Quarter ended High Low ---------------- -------- -------- January 28, 1995 $ 17 $ 7 1/2 October 29, 1994 $ 18 1/8 $ 13 7/8 July 30, 1994 $ 23 1/4 $ 13 5/8 April 30, 1994 $ 27 3/8 $ 18 1/2 January 29, 1994 $ 28 $ 21 1/8 October 30, 1993 $ 24 3/8 $ 15 July 31, 1993 $ 16 1/4 $ 12 1/4 May 1, 1993 $ 15 3/8 $ 12 The Company instituted a quarterly dividend of $0.08 per share in the second quarter of fiscal 1993. On June 1, 1993, the Company paid a one-time special cash dividend of $2.00 per share. In the second quarter of fiscal 1994, the quarterly dividend was increased to $0.10 per share.
Item 6. SELECTED FINANCIAL DATA STATEMENT OF OPERATIONS DATA (1) (in thousands, except per share data) Transition period Year ended ended Year ended January 28, January 29, January 30, February 1, October 31, 1995 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- ----------- Revenues $ 3,208,083 $ 2,646,102 $ 2,016,686 $ 515,974 $ 1,753,574 $ 1,458,541 Income from continuing operations 8,060 41,117 22,134 9,625 38,529 29,250 Earnings per common share from continuing operations $ 0.23 $ 1.13 $ 0.58 $ 0.25 $ 1.12 $ 1.04 Cash dividends declared per share of common stock $ 0.38 $ 2.24 -- -- -- -- BALANCE SHEET DATA January 28, January 29, January 30, February 1, October 31, 1995 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- --------- --------- Total assets $ 670,774 $ 577,011 $ 630,332 $ 670,415 $ 706,515 $ 442,043 Long-term debt -- -- 97 29,690 29,756 29,496 Total shareholders' equity 167,484 218,850 280,527 289,279 274,477 119,552 (1) See Note 3 to Consolidated Financial Statements for the fiscal year ended January 28, 1995 for information regarding the acquisition of BizMart, Inc. on June 19, 1991 and its sale on March 4, 1993, resulting in BizMart's results of operations being classified as a discontinued operation.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Continuing Operations Fiscal 1994 Compared to Fiscal 1993 - - - ----------------------------------- Revenues for the year ended January 28, 1995 ("fiscal 1994") were $3.2 billion compared to $2.6 billion for the year ended January 29, 1994 ("fiscal 1993"), representing an increase of 21%. The addition of new network integrators and continued demand from existing network integrators for premium brand name and advanced technology products were primarily responsible for the increase in revenues. However, the Company believes that operating inefficiencies caused by systems stresses and outages, discussed below, during the last half of fiscal 1994 caused a loss of potential sales. Gross profit as a percentage of revenues decreased to 4.1% for fiscal 1994 compared to 4.4% for fiscal 1993. The decrease in gross margin percent is primarily attributable to intensified competitive pricing pressures as certain manufacturers expanded their distribution channels and the impact of management information systems stresses and outages, offset in part by the higher volume of revenues generated from higher margin advanced technology products and taking advantage of purchasing and early payment discount opportunities. The systems-related stresses and outages were caused by the cumulative effect of operating out of multiple warehouses, the addition of new vendors and SKU's and the expansion of on-line services to the Company's network integrators. This resulted in reduced customer service levels and unfavorably impacted gross margins as the Company reduced prices to customers, incurred inventory losses and incurred additional freight costs to expedite shipments. Although the Company does not expect the inventory-related losses to recur, it believes that the other factors adversely impacting gross margins are likely to continue for the foreseeable future. Selling, general and administrative expenses increased to $96.2 million (3.0% of revenues) for fiscal 1994 from $52.5 million (2.0% of revenues) for fiscal 1993. The increase was primarily due to costs to service the higher volume of revenues and to support new programs, vendors and SKU's; systems stresses and outages and related inefficiencies; a $9 million reserve for litigation and arbitration matters; and approximately $9 million of costs incurred in connection with the elimination of certain peripheral ventures noted below and the implementation of IE 2000, including costs associated with personnel reductions, closing and consolidating facilities, relocating personnel and consultant fees. IE 2000 is a project designed to transform the Company to a process-driven model. The Company expects future annualized cost savings of approximately $10 million as a result of IE 2000 together with the elimination of certain peripheral ventures. The Company expects costs associated with the transformation project and operating inefficiencies to continue through the middle of fiscal 1995. During fiscal 1994, the Company closed its cable television programming operation, discontinued its direct fulfillment agreement with a third-party and sold substantially all of its wireless telecommunications operation. In fiscal 1994 and fiscal 1993, revenues from these eliminated peripheral ventures were less than 1% of consolidated revenues and operating losses were $4.3 million and $1.3 million, respectively. These eliminations were substantially completed in the fourth quarter of fiscal 1994. Investment and other income decreased from fiscal 1993 to fiscal 1994 primarily due to less investable cash as a result of the use of the Company's available cash for payment of common stock dividends and repurchases of its common stock. Interest expense increased as the Company used its available inventory financing arrangements to finance inventory purchases. During fiscal 1994, The Future Now, Inc. ("FNOW") announced the implementation of a company-wide restructuring, which included the closing and consolidation of duplicate facilities. For fiscal 1994, the Company recognized an after-tax loss of $13 million as its equity in FNOW's net loss compared to after-tax income of $1.7 million for fiscal 1993 (See Note 4 to the consolidated financial statements). The Company's effective tax rate increased to 39.7% for fiscal 1994 compared to 38.2% for fiscal 1993. The impact of non-deductible goodwill amortization on lower pre-tax earnings, partially offset by a reduction in the Company's effective state tax rate, was primarily responsible for this increase. The Company does not expect significant revenue growth in fiscal 1995 as it continues to concentrate on increasing product margins and upgrading systems. Gross profit and selling, general and administrative expenses are expected to increase both in amount and as a percentage of revenues if the Company's proposed acquisition of FNOW is completed (See Note 4). Fiscal 1993 Compared to Fiscal 1992 - - - ----------------------------------- Revenues increased 31% to $2.6 billion in fiscal 1993 from $2 billion for the year ended January 30, 1993 ("fiscal 1992"). The increase was due primarily to the addition of new network members and increased revenues from existing members led by continued strong demand for premium computers and peripherals, despite the inability of certain manufacturers to supply certain products, offset in part by the sale of the Company Center Division ("CCD") in May and July 1992 (See Note 4). Gross profit as a percentage of revenues for fiscal 1993 was 4.4% compared to 5.1% for fiscal 1992. This decline was primarily attributable to the sale of CCD which realized higher gross margins than the Company realizes on wholesale revenues and continued competitive pressures throughout the microcomputer industry. The Company reported fourth quarter gross margin percent of 4.6% as gross margin percent increased throughout fiscal 1993 as a result of taking advantage of purchasing opportunities and the introduction of new services and programs. Selling, general and administrative expenses decreased and as a percentage of revenues declined from 2.6% in fiscal 1992 to 2.0% in fiscal 1993. The elimination of costs related to CCD (which had proportionately higher operating costs than those associated with wholesale operations) in July 1992 accounted for most of the reduction, offset by cost increases to service the larger network, higher volume of revenues and new programs. These increases were at a lower rate than the growth in revenues causing the decline in selling, general and administrative expenses as a percentage of revenues. Amortization of intangibles decreased in fiscal 1993 compared to fiscal 1992 due to the elimination of goodwill included in CCD's net assets sold to FNOW. Investment and other income was $5.1 million in fiscal 1993 compared to $0.5 million in fiscal 1992. This increase was due primarily to income earned on investing the proceeds from the sale of BizMart. Interest expense decreased primarily as a result of the early repayment of the Subordinated Notes in January and February 1993 and the reduced use of inventory financing. The Company's equity interest in earnings of its affiliate increased to $1.7 million from $0.7 million. This increase was due to the inclusion of the Company's equity in FNOW's earnings for a full year and increased earnings by FNOW in fiscal 1993. The effective tax rate for fiscal 1993 was 38.2% compared to 44.1% in fiscal 1992. Higher pre-tax earnings and tax-exempt investment income in fiscal 1993 and the impact of the incremental tax charge related to the sale of CCD in fiscal 1992, offset by a rise in the Company's effective state tax rate, were primarily responsible for the decrease. Income from continuing operations for fiscal 1993 was $41.1 million compared to $22.1 million for fiscal 1992 due to the factors described above. Results of Discontinued Operation and Sale of BizMart As discussed more fully in Note 3 to the consolidated financial statements, on June 19, 1991, the Company acquired BizMart, a national chain of office products supercenters, which operated in a separate industry segment from the Company's other subsidiaries. On March 4, 1993, the Company completed the sale of BizMart to OfficeMax, Inc. Accordingly, results of BizMart's operations are classified as a discontinued operation. During fiscal 1993, BizMart operations resulted in pre-tax losses totaling $3.5 million compared to pre-tax losses of $27.1 million in fiscal 1992. Contributing to such losses were adjustments to the carrying value of certain assets, including inventory repurchased from franchisees. Liquidity and Capital Resources The Company has financed its growth to date from stock offerings, bank and subordinated borrowings, inventory financing and internally generated funds. The principal uses of its cash have been to fund its accounts receivable and inventory, make acquisitions, repurchase common stock and pay cash dividends. During fiscal 1994, cash generated from operating activities totaled $23.3 million compared to $8.2 million in fiscal 1993. At January 28, 1995, the Company had cash and cash equivalents of $69.0 million ($122.2 million at January 29, 1994) and marketable securities available for sale totaling $8.4 million ($61.1 million at January 29, 1994). Working capital totaled $31.9 million at January 28, 1995 compared to $105.3 million at January 29, 1994. This decrease is primarily a result of common stock repurchases and dividends during the year. New financing programs offered by the Company and its expanded selection and higher levels of inventory have increased working capital requirements. During fiscal 1994, days sales in accounts receivable averaged 4.5 days (1.9 days in fiscal 1993) and inventory turnover averaged 8.4 times (11.8 times in fiscal 1993). The increase in accounts receivable from January 29, 1994 to January 28, 1995 is due primarily to the acquisition of certain branch locations from FNOW and the extension of credit to the Company's network and end-users. The Company expects accounts receivable to increase as the Company continues to extend credit to its network and end- users. The Company may outsource some of its financing programs which could slow the growth or reduce the level of accounts receivable. The Company also has a $170 million financing agreement with a finance company. At January 28, 1995, the Company had $106.8 million available from this facility. On October 22, 1993, the Company executed a $20 million guarantee to an inventory finance company on behalf of FNOW. This guarantee remained in place at January 28, 1995. On January 27, 1995, the Board of Directors declared a cash dividend of $0.10 per share to shareholders of record on February 15, 1995, which was paid on March 1, 1995. During fiscal 1994, the Company declared cash dividends totaling $0.38 per share. The Board of Directors has authorized the repurchase, in open-market transactions, of up to 13.6 million shares of the Company's common stock. As of January 28, 1995, the Company had repurchased approximately 8.3 million shares at a cost of approximately $105.7 million, of which approximately 4.1 million shares were repurchased at a cost of approximately $48.5 million during fiscal 1994. The Company's transformation project, IE 2000, is expected to be completed by the end of fiscal 1996 and is estimated to cost approximately $40 million, primarily due to upgrades in its management information systems, including costs of approximately $8 million through January 28, 1995. Based on the Company's current level of operations and capital expenditure requirements, management believes that the Company's cash and marketable securities, internally generated funds and available financing arrangements and opportunities will be sufficient to meet the Company's cash requirements for the foreseeable future. Inflation and Seasonality The Company believes that inflation has not had a material impact on its operations or liquidity to date. The Company's financial performance does not exhibit significant seasonality, although certain computer product lines follow a seasonal pattern with peaks occurring near the end of the calendar year. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Intelligent Electronics, Inc. and its subsidiaries, listed in the index appearing under Item 14(a)(1) are filed as part of this annual report on Form 10-K. REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders Intelligent Electronics, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 28 present fairly, in all material respects, the financial position of Intelligent Electronics, Inc. and its subsidiaries at January 28, 1995 and January 29, 1994 and the results of their operations and their cash flows for each of the three years in the period ended January 28, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Philadelphia, Pennsylvania April 12, 1995
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Balance Sheet (in thousands, except share-related data) January 28, January 29, 1995 1994 ------------- ------------- Assets ------ Current assets: Cash and cash equivalents (including repurchase agreements of $14,381 in 1994) $ 69,027 $ 122,249 Marketable securities available for sale 8,398 61,130 Accounts receivable (net of allowance for doubtful accounts of $298 in 1995 and $398 in 1994) 77,890 9,524 Inventory 364,606 251,044 Prepaid expenses and other current assets 3,973 8,872 Deferred income taxes 11,256 7,840 ------------ ----------- Total current assets 535,150 460,659 Property and equipment, net 36,463 11,371 Intangible assets, primarily goodwill (net of accumulated amortization of $25,882 in 1995 and $21,124 in 1994) 71,693 71,585 Investments in affiliates 18,692 30,096 Other assets 8,776 3,300 ------------ ----------- Total assets $ 670,774 $ 577,011 ============ =========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 467,109 $ 334,341 Accrued liabilities 36,181 21,025 ------------ ----------- Total current liabilities 503,290 355,366 ------------ ----------- Other liabilities -- 2,795 Commitments and contingencies (Notes 5, 6, 12 and 13) -- -- Shareholders' equity: Preferred stock $1.00 par value per share: Authorized 15,000,000 shares, none issued and outstanding -- -- Common stock $.01 par value per share: Authorized 100,000,000 shares; issued: 39,519,949 in 1995 and 39,310,439 in 1994 395 393 Additional paid-in capital 221,312 219,107 Treasury stock (8,326,200 shares in 1995 and 4,196,200 shares in 1994) (105,677) (57,181) Unrealized loss on marketable securities and investments (304) -- Retained earnings 51,758 56,531 ------------ ----------- Total shareholders' equity 167,484 218,850 ------------ ----------- Total liabilities and shareholders' equity $ 670,774 $ 577,011 ============ ===========
See accompanying notes to consolidated financial statements.
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Statement of Operations (in thousands, except per share data) Year ended ------------------------------------------------ January 28, January 29, January 30, 1995 1994 1993 ------------ ------------ ------------ Revenues $ 3,208,083 $ 2,646,102 $ 2,016,686 Cost of goods sold 3,075,342 2,529,242 1,913,393 ------------ ------------ ------------ Gross profit 132,741 116,860 103,293 ------------ ------------ ------------ Operating expenses: Selling, general and administrative expenses 96,193 52,477 53,047 Amortization of intangibles, primarily goodwill 4,758 4,721 4,921 ------------ ------------ ------------ Total operating expenses 100,951 57,198 57,968 ------------ ------------ ------------ Income from operations 31,790 59,662 45,325 Other income (expense): Investment and other income, net 4,374 5,144 475 Interest expense (1,238) (901) (7,420) ------------ ------------ ------------ Income from continuing operations before provision for income taxes and equity in earnings (loss) of affiliate 34,926 63,905 38,380 Provision for income taxes 13,853 24,443 16,909 ------------ ------------ ------------ Income from continuing operations before equity in earnings (loss) of affiliate 21,073 39,462 21,471 Equity in earnings (loss) of affiliate (net of tax expense/(benefit) of $(2,497), $981 and $365) (13,013) 1,655 663 ------------ ------------ ------------ Income from continuing operations 8,060 41,117 22,134 Discontinued operation: Income (loss) from discontinued operation (net of tax benefit of $1,076 and $6,964) -- (2,468) (20,160) Gain on sale of BizMart (net of tax expense of $1,306) -- 4,276 -- ------------ ------------ ------------ Income before extraordinary item 8,060 42,925 1,974 Extraordinary item: Loss on early repayment of subordinated debt (net of tax benefit of $1,799) -- -- (3,269) ------------ ------------ ------------ Net income (loss) $ 8,060 $ 42,925 $ (1,295) ============ ============ ============ Earnings (loss) per common share and share equivalents: Continuing operations $ 0.23 $ 1.13 $ 0.58 Discontinued operation -- (0.07) (0.52) Sale of BizMart -- 0.12 -- Extraordinary item -- -- (0.09) ------------ ------------ ------------ Net income (loss) per share $ 0.23 $ 1.18 $(0.03) ============ ============ ============ Weighted average number of common shares and share equivalents outstanding: 34,848 36,521 38,204
See accompanying notes to consolidated financial statements.
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Statement of Shareholders' Equity (in thousands, except share-related data) Unrealized loss Total Additional on marketable share- Common paid-in Treasury securities and Retained holders' stock capital stock investments earnings equity ------ ----------- ----------- -------------- -------- ---------- Balance at February 1, 1992 $ 366 $ 193,307 $ 95,606 $ 289,279 Issuance of 40,000 shares on exercise of warrants 1 189 -- 190 Issuance of 328,860 shares on exercise of options and related tax benefit 3 3,246 -- 3,249 Repurchase of 754,400 shares -- -- $ (10,896) -- (10,896) Net loss -- -- -- (1,295) (1,295) ------ ----------- ----------- -------------- -------- ---------- Balance at January 30, 1993 370 196,742 (10,896) 94,311 280,527 Issuance of 120,000 shares on exercise of warrants 1 569 -- -- 570 Issuance of 2,229,285 shares on exercise of options and related tax benefit 22 21,796 -- -- 21,818 Repurchase of 3,441,800 shares -- -- (46,285) -- (46,285) Cash dividends ($2.24 per share) -- -- -- (80,705) (80,705) Net income -- -- -- 42,925 42,925 ------ ----------- ----------- -------------- -------- ---------- Balance at January 29, 1994 393 219,107 (57,181) 56,531 218,850 Issuance of 209,510 shares on exercise of options and related tax benefit 2 2,205 -- -- 2,207 Repurchase of 4,130,000 shares -- -- (48,496) -- (48,496) Cash dividends ($0.38 per share) -- -- -- (12,833) (12,833) Unrealized loss on marketable securities and investments -- -- -- $ (304) -- (304) Net income -- -- -- -- 8,060 8,060 ------ ----------- ----------- -------------- -------- ---------- Balance at January 28, 1995 $ 395 $ 221,312 $(105,677) $ (304) $ 51,758 $ 167,484 ====== =========== =========== ============== ======== ==========
See accompanying notes to consolidated financial statements.
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Consolidated Statement of Cash Flows (in thousands) Year ended -------------------------------------------- January 28, January 29, January 30, 1995 1994 1993 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 8,060 $ 42,925 $ (1,295) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 10,108 9,279 9,196 (Provision) benefit for deferred taxes (6,206) (3,071) 1,146 Provision for losses on trade receivables 336 375 381 Provision for write-down of inventory 1,796 1,541 1,563 Provision for litigation and arbitration matters 9,000 -- -- Loss from discontinued operation -- 2,468 20,160 Gain on sale of CCD -- -- (43) Gain on sale of BizMart -- (4,276) -- Equity in (earnings) loss of affiliate 15,510 (2,636) (1,028) Extraordinary item, loss on early repayment of subordinated debt -- -- 3,462 Changes in assets and liabilities excluding effects of business acquisitions and sales: Accounts receivable (46,027) (1,489) (4,057) Inventory (110,620) (57,047) (32,223) Other current assets 2,159 (10,895) (1,454) Accounts payable 132,964 30,204 42,020 Accrued liabilities 6,224 784 (6,758) ----------- ----------- ----------- Net cash provided by operating activities 23,304 8,162 31,070 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (31,709) (154,400) -- Sales and maturities of marketable securities 84,164 93,270 -- Acquisition of property and equipment, net (28,001) (7,402) (4,571) Purchase of net assets of franchised centers (39,101) -- -- Proceeds from sale of BizMart -- 275,236 -- Proceeds from sale of CCD -- -- 2,340 Repayment of note receivable from affiliate -- -- 27,850 Investments in and loans to affiliates (2,162) (10,247) -- Other (762) (804) (804) ----------- ----------- ----------- Net cash provided by (used for) investing activities (17,571) 195,653 24,815 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of subordinated debt -- (17,500) (12,500) Common stock repurchased (48,496) (55,375) (1,806) Cash dividends paid (12,523) (77,896) -- Proceeds from exercise of stock options 2,207 21,818 3,249 Proceeds from exercise of warrants -- 570 190 Reduction in capital lease obligations (143) (119) (317) ----------- ----------- ----------- Net cash used for financing activities (58,955) (128,502) (11,184) ----------- ----------- ----------- Net cash provided by (used for) continuing operations (53,222) 75,313 44,701 Cash used for discontinued operation -- (5,562) (56,693) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53,222) 69,751 (11,992) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 122,249 52,498 64,490 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,027 $ 122,249 $ 52,498 =========== =========== ===========
See accompanying notes to consolidated financial statements. INTELLIGENT ELECTRONICS, INC. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands except share-related data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - - - -------- Intelligent Electronics, Inc. (the "Company") provides information technology products, services and solutions to its network of more than 2,500 integrators ("Network"), and to large and small corporate customers, educational institutions and governmental agencies. As a leading supplier of premium brand technology products in the United States, the Company provides business solutions to its customers through innovative product management, sales demand generation programs and logistics services. The principal products sold by the Company include microcomputer systems, workstations, networking and telecommunications equipment and software. On March 4, 1993, the Company sold BizMart, Inc. ("BizMart") and accordingly, BizMart is treated as a discontinued operation in the accompanying financial statements (See Note 3). Unless otherwise indicated, amounts and disclosures referred to herein relate to continuing operations. Principles of Consolidation - - - --------------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Definition of Fiscal Year - - - ------------------------- The fifty-two week periods ended January 28, 1995, January 29, 1994 and January 30, 1993 are referred to herein as "fiscal 1994," "fiscal 1993" and "fiscal 1992," respectively. Cash, Cash Equivalents and Marketable Securities - - - ------------------------------------------------ Cash and cash equivalents comprise the Company's cash balances and short-term investments with an initial maturity of less than ninety days and include money-market funds, commercial paper and repurchase agreements. Short-term investments totaled $69,548 and $121,956 at January 28, 1995, and January 29, 1994, respectively. With respect to repurchase agreements, the Company requires specific assignment of securities as collateral for such investments, but does not take possession of the collateral. The carrying amount of cash, short-term investments and marketable securities approximates fair market value due to the short-term maturity of these instruments. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 ("FAS 115"), Accounting for Certain Investments in Debt and Equity Securities, effective for fiscal years beginning after December 15, 1993. FAS 115 requires certain investments in debt and equity securities be classified into one of three categories: held- to-maturity, available-for-sale, or trading. The Company adopted FAS 115 on January 30, 1994. Adoption of this statement did not have a material effect on the financial position or results of operations of the Company; however, certain amounts in the January 29, 1994 Consolidated Balance Sheet have been reclassified for comparative purposes. Inventory - - - --------- Inventory consists of microcomputers, related peripheral products and software, and is valued at the lower of cost (first-in, first-out) or market. Property and Equipment - - - ---------------------- Property and equipment are carried at cost. The cost of additions and improvements is capitalized, while maintenance and repairs are charged to operations when incurred. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (three to ten years). Leasehold improvements are amortized over the shorter of their useful lives or the remaining lease term. Leases meeting the capitalization requirements of FAS 13 are capitalized and depreciated over the lease term. Depreciation expense totaled $5,351 ($1,154 included in cost of goods sold), $4,558 ($783 included in cost of goods sold) and $3,680 for fiscal 1994, 1993 and 1992, respectively. Accumulated depreciation totaled $14,791 at January 28, 1995 and $14,872 at January 29, 1994. IE 2000 is a project designed to transform the Company to a process-driven model. Certain costs associated with IE 2000, including purchased software, outside consulting fees for custom software development and related incremental internal costs are being capitalized and will be amortized over the estimated useful life of the software. Approximately $8 million was capitalized pursuant to IE 2000 at January 28, 1995. The project is expected to be completed by the end of fiscal 1996. Goodwill - - - -------- Goodwill, resulting from acquisitions accounted for under the purchase method, is amortized using the straight-line method generally over a 20-year period. Revenue Recognition - - - ------------------- Revenue is recognized upon shipment of products or performance of services. Revenue from the granting of individual franchises is recognized when all significant obligations have been performed. Revenues and total operating costs related to company-owned centers were $9,897 and $10,197, respectively for fiscal 1994 (See Note 2), and $86,223 and $85,212, respectively, for fiscal 1992 (See Note 4). Funds received from vendors for marketing programs and product rebates are accounted for as revenue, a reduction of selling, general and administrative expenses or product cost according to the nature of the program. Investment and Other Income - - - --------------------------- Investment income includes interest and dividend income and realized gains and losses on marketable securities. Total interest and dividend income was $4,062, $5,241 and $1,086 for fiscal 1994, fiscal 1993 and fiscal 1992, respectively. Income Taxes - - - ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("FAS 109"). Pursuant to FAS 109, deferred tax assets and liabilities are recorded for temporary differences which enter into the determination of taxable income in different periods for financial reporting and income tax purposes. Earnings Per Share - - - ------------------ Primary earnings per share is computed using the weighted average number of common shares and dilutive common share equivalents outstanding based on the average market price during the period. The amount of dilution is computed by application of the treasury stock method. Fully diluted earnings per share is computed in substantially the same manner, but includes the dilutive effect of all issuable shares, based on the market price at the end of the period, whether or not they are common share equivalents. Treasury stock transactions are recorded on their trade date and reduce weighted average shares outstanding from that date. (2) ACQUISITIONS On December 30, 1994, the Company purchased certain assets of branch locations in five major-metropolitan cities from The Future Now, Inc. ("FNOW"), an equity affiliate, member of the Network and publicly traded company (See Note 4). The aggregate purchase price was approximately $39,101 and was accounted for by the purchase method. The aggregate purchase price was allocated to the assets and liabilities assumed based on their estimated fair market values as follows: Accounts receivable $ 23,000 Inventory 4,936 Property and equipment 2,714 Goodwill 8,838 Other assets 13 Other current liabilities (400) --------- Total purchase price $ 39,101 ========= These locations are operated by FNOW under a management agreement. The acquisition of these locations had no material effect on the consolidated results of operations in fiscal 1994. (3) DISCONTINUED OPERATION AND SALE OF BIZMART On June 19, 1991, the Company acquired BizMart, a national chain of office products supercenters, for an aggregate purchase price of $195,796 including transaction costs. BizMart operations included the sale of traditional office products, microcomputers and related equipment. The Company accounted for the acquisition using the purchase method. On March 4, 1993, the Company sold BizMart to OfficeMax, Inc. ("OfficeMax") and received a cash payment totaling $275,236, including the purchase price, as defined, of $269,770 and repayment of other amounts, consisting principally of intercompany advances after November 28, 1992. The aggregate sale proceeds less the carrying value of net assets sold and costs related to the sale resulted in a gain before tax of $5,582. The effective tax rate for the sale of BizMart varies from the effective tax rate for the discontinued operation due to differences between the tax bases of assets sold and their amounts for financial reporting purposes. Results of BizMart's operations have been reported separately as a discontinued operation in the accompanying Consolidated Statement of Operations. BizMart's operating results excluded from continuing operations are summarized as follows: Fiscal Fiscal 1993 1992 ---------- ----------- Net sales $ 60,193 $ 634,962 Costs and expenses 63,737 662,086 ---------- ----------- Loss before taxes (3,544) (27,124) Income tax benefit (1,076) (6,964) ---------- ----------- Loss from discontinued operation $ (2,468) $ (20,160) ========== =========== BizMart was included in the consolidated federal and certain state income tax returns of the Company. For financial reporting purposes, income tax expense (benefit) was provided on a separate return basis except that the benefit of net operating losses was measured on a consolidated basis. (4) SALE OF COMPANY CENTER DIVISION AND INVESTMENTS IN AFFILIATES On May 15, 1992, the Company sold certain assets of its Bellevue, WA center to Random Access, Inc. ("RA"), a member of the Network and publicly traded company. The consideration received consisted of $400 cash and 92,500 (as adjusted for a reverse two-for-one stock split on June 28,1993) newly issued unregistered shares representing approximately 1% of RA common stock. The Company accounts for its investment in RA common stock as available-for-sale in accordance with FAS 115, and accordingly, the carrying value is recorded at fair market value with changes in fair value recorded in shareholders' equity. At January 28, 1995, the aggregate market value, based on RA's quoted market price, of the Company's investment in RA was approximately $278. On July 2, 1992, the Company sold substantially all of the remaining operations of its Company Center Division ("CCD") to FNOW. The consideration received by the Company consisted of 1,638,377 newly issued unregistered shares of FNOW valued at $16,589, or $10.12 per share, repayment of intercompany obligations ($27,850), warrants valued at $263 to purchase 184,498 shares of FNOW common stock at an average exercise price of $10.06 per share, and a cash payment of $1,940. The aggregate sale proceeds from the above transactions less the carrying value of net assets sold and costs related to the sales resulted in a gain before tax of $43. An incremental tax charge of approximately $1,700, arising from differences between the tax bases of assets sold and their amounts for financial reporting purposes, is included in the Company's provision for income taxes for fiscal 1992. In March 1993, FNOW completed a public offering which reduced the Company's equity interest in FNOW to 24.3%. In October 1993, the Company purchased an additional 681,447 newly issued unregistered shares of FNOW raising the Company's equity interest to 31.1%. The Company accounts for its investment in FNOW using the equity method. At January 28, 1995, the carrying value of the Company's investment in FNOW was approximately $17,852 and the aggregate market value, based on FNOW's quoted market price, was approximately $10,841, which management views as a temporary decline in value. Summarized financial information for FNOW is as follows: Fiscal Fiscal 1994 1993 ---------- ---------- Current assets $ 181,377 $ 223,850 Non-current assets 48,000 66,709 Current liabilities 193,263 132,150 Non-current liabilities 2,825 80,649 Revenues 795,736 701,834 Gross profit 116,946 113,489 Net income (loss) (44,988) 9,303 The Company sells products to FNOW pursuant to a franchise agreement which expires in the year 2000. This agreement may be terminated by FNOW upon 90 days notice and payment of certain amounts. During fiscal 1994, 1993 and 1992, sales to FNOW approximated $506,000, $427,000 and $212,000, respectively, representing approximately 16%, 16% and 10%, respectively, of the Company's consolidated revenues from continuing operations. On March 6, 1995, the Company signed a letter of intent to acquire all the remaining shares of FNOW, in a stock-for-stock merger transaction. Based on the exchange ratio set forth in the letter of intent, FNOW shareholders will receive .6588 shares of the Company's common stock in exchange for each share of FNOW. The transaction is subject to the completion of due diligence, the execution of a definitive agreement and other customary conditions and approvals, including approval by FNOW's shareholders. (5) CREDIT FACILITIES On April 18, 1989, the Company issued to certain institutional investors Subordinated Notes in the aggregate principal amount of $30,000 and used net proceeds therefrom to reduce existing borrowings and for working capital purposes. Interest on the Subordinated Notes was payable quarterly at 13.25% per annum. On January 11, 1993 and February 24, 1993, the Company prepaid principal of $12,500 and $17,500, respectively, to retire the Subordinated Notes in full. Pursuant to terms outlined in the Subordinated Notes Agreement, the Company paid accrued interest and a prepayment premium totaling $4,454 in connection with the early repayment of the Subordinated Notes. The prepayment premium, together with unamortized deferred financing costs and loan discount are reflected as an extraordinary item, net of the related tax benefit, in the Consolidated Statement of Operations in fiscal 1992. The Company and its subsidiaries have agreements with various lenders and other creditors to finance product purchases from vendors and for working capital requirements. Amounts outstanding for inventory financing are included in accounts payable on the Consolidated Balance Sheet. One such agreement with a finance company provides a total credit line of $170,000 for both inventory financing and general working capital requirements. Approximately, $106,800 and $23,200 were available under this credit line at January 28, 1995 and January 29, 1994, respectively. In connection with these arrangements, such creditors have a lien on all of the Company's assets at January 28, 1995. In addition, certain of these arrangements impose financial covenants relating to working capital, net worth, current ratio, liabilities to net worth and earnings. (6) LEASE OBLIGATIONS The Company has noncancelable operating leases for offices, warehouse facilities, and equipment that expire over the next ten years. Most of the facilities' leases include renewal options and certain of the equipment leases have purchase options. Rent expense recorded for fiscal 1994, fiscal 1993 and fiscal 1992 amounted to $6,020, $3,836, and $3,947, respectively. Future minimum lease payments under noncancelable operating leases are as follows: Fiscal Year Amount ----------- -------- 1995 $ 6,258 1996 5,056 1997 4,450 1998 4,122 1999 4,122 Thereafter 12,979 The Company is guarantor of certain real estate leases of BizMart. OfficeMax has indemnified the Company against potential losses which may result pursuant to such guarantees. (7) CAPITAL STOCK On April 18, 1989, in connection with the issuance of the Subordinated Notes (See Note 5), the Company granted warrants for the purchase of 1,200,000 shares of common stock at an exercise price of $4.75 per share, exercisable until April 30, 1995, subject to adjustment under certain circumstances. The value of these warrants ($1,090) was credited to paid-in capital and was charged to interest expense over the term of the loan. Shares of the Company's common stock have been issued pursuant to the exercise of 120,000 warrants during fiscal 1993, 40,000 warrants during fiscal 1992 and the remaining 1,040,000 warrants prior to fiscal 1992. The Board of Directors of the Company has authorized the repurchase of up to 13.6 million shares, in open-market transactions, of its common stock. As of January 28, 1995, the Company has repurchased approximately 8.3 million shares at a cost of approximately $105,677. Stock Options - - - ------------- The Company has a non-qualified stock option plan for employees and directors which permits the granting of options to purchase an aggregate of eight million shares of common stock to employees and directors of the Company. This plan is 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 generally exercisable commencing one year after the date of grant in five equal annual installments (unless otherwise provided in the grant) and expire six to ten years after the date of grant, subject to earlier termination and other rules relating to the cessation of employment. Changes in stock options are summarized as follows: Number of Option price shares Range per share ---------- --------------- Balance outstanding February 1, 1992 4,956,400 $ 1.25-$15.50 Granted 450,000 $10.25-$24.25 Exercised (278,860) $ 1.25-$11.50 Canceled (891,240) $ 2.85-$24.25 ---------- Balance outstanding January 30, 1993 4,236,300 $ 1.56-$15.50 Granted 1,014,100 $15.00-$24.88 Exercised (1,977,160) $ 1.56-$15.50 Canceled (666,300) $ 5.81-$17.00 ---------- Balance outstanding January 29, 1994 2,606,940 $ 2.85-$24.88 Granted 945,300 $13.25-$24.00 Exercised (208,070) $ 2.85-$15.50 Canceled (233,780) $ 7.63-$24.00 --------- Balance outstanding January 28, 1995 3,110,390 $ 5.75-$24.88 ========= As of January 28, 1995, there were 972,858 options exercisable under the employee and director stock option plan at exercise prices ranging from $5.75 to $24.88 per share. On February 25, 1995, the Board of Directors of 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, of which 345,158 were exercisable at January 28, 1995. The Company also has a non-qualified stock option plan which permits the granting of options to purchase an aggregate of two million shares of common stock to franchisees of the Company. This plan is intended to reward franchisees' performance and commitment to the Company. Options are generally granted at option prices equivalent to fair market value on the date of grant. The options are generally exercisable commencing one year after the date of the grant in five equal annual installments. The options expire six years after the date of grant, subject to earlier termination and other rules relating to default under the terms of the franchise agreement. As of January 28, 1995, there were 141,635 options outstanding under this plan. Of this amount, 81,915 were exercisable at prices ranging from $5.81 to $14.75 per share. The Company granted 200,000 options (100,000 each in May 1990 and May 1989) to an outside advisor to the Board of Directors of the Company with the same general terms and conditions as those in the non-qualified stock option plan for employees and directors. At January 28, 1995, 100,000 of these options were outstanding. In addition, 200,000 options were granted to an officer of BizMart in connection with the June 1991 acquisition, of which 50,000 were exercised on March 17, 1992 and 150,000 were exercised during fiscal 1993. As of January 28, 1995, shares of common stock are reserved for issuance for the following purposes: Shares Exercise of employee and director stock options 4,088,650 Exercise of franchisee stock options 1,933,435 Exercise of other stock options 100,000 --------- Total 6,122,085 ========= In April 1995, the Company's Board of Directors adopted the 1995 Long-Term Incentive Plan, subject to shareholder approval at the Annual Shareholders' Meeting to be held on or about June 8, 1995, permitting the grant of stock, stock-related and performance-based awards to employees and directors of the Company. A total of 5 million shares of the Company's common stock have been reserved for grant under the 1995 Long-Term Incentive Plan. 8) INCOME TAXES The provision for income taxes consists of the following: Current Deferred Total --------- -------- --------- Fiscal 1994 Federal $ 19,011 $ (5,923) $ 13,088 State 1,109 (344) 765 --------- -------- --------- Total $ 20,120 $ (6,267) $ 13,853 ========= ======== ========= Fiscal 1993 Federal $ 24,900 $ (2,916) $ 21,984 State 2,803 (344) 2,459 --------- -------- --------- Total $ 27,703 $ (3,260) $ 24,443 ========= ======== ========= Fiscal 1992 Federal $ 12,891 $ 3,191 $ 16,082 State 813 14 827 --------- -------- --------- Total $ 13,704 $ 3,205 $ 16,909 ========= ======== ========= Deferred income tax balances, and the deferred component of the provision for income taxes, relate to the following cumulative temporary differences: January 28, January 29, 1995 1994 ------------ ------------ Inventory $ 2,107 $ 1,879 Accounts receivable reserves 363 490 Acquisition and sale accruals 2,457 3,378 Employee benefits 851 834 Depreciation 592 537 Litigation and related contingencies 3,266 -- Other accruals 1,620 722 ------------ ------------ Deferred tax asset $ 11,256 $ 7,840 ============ ============ Deferred gain on sale of CCD $ -- $ 989 Equity in earnings of affiliate -- 1,372 Other -- 429 ------------ ------------ Non-current deferred tax liability $ -- $ 2,790 ============ ============ A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Fiscal Fiscal Fiscal 1994 1993 1992 ----- ----- ----- Federal statutory rate 35.0% 35.0% 34.0% State income taxes, net of federal benefit 1.4 2.5 1.4 Amortization of intangibles 4.9 2.7 4.6 Basis difference from sale of CCD -- -- 4.6 Tax-exempt investment income (2.0) (2.1) -- Other 0.4 0.1 (0.5) ----- ----- ----- 39.7% 38.2% 44.1% ===== ===== ===== (9) SUPPLEMENTAL CASH FLOW INFORMATION The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows: Fiscal Fiscal Fiscal 1994 1993 1992 -------- -------- -------- Details of acquisitions: Fair value of assets acquired $ 39,501 -- -- Liabilities assumed 400 -- -- Details of other investing activities: Common stock and warrants received from sale of CCD -- -- $ 17,146 Details of other financing activities: Accrual for repurchase of common stock -- -- 9,090 Accrual of dividends declared 3,119 $ 2,809 -- Cash paid during the year for: Interest 1,518 767 10,099 Income taxes 19,865 22,833 11,559 (10) MAJOR SUPPLIERS The Company has authorized dealership or distributorship agreements with various manufacturers. Products from certain of these manufacturers comprised the following percentages of the Company's revenues during fiscal 1994, fiscal 1993 and fiscal 1992: Fiscal Fiscal Fiscal 1994 1993 1992 ------- ------- ------- IBM Corp. 15% 15% 18% Compaq Computer Corp. 25% 25% 18% Apple Computer, Inc. 12% 18% 22% Hewlett-Packard Company 24% 22% 20% (11) EMPLOYEE BENEFIT PLAN 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. Until February 1992, the Company matched $0.50 for each dollar contributed by participants subject to certain limitations. Employer matching contributions were temporarily suspended during fiscal 1992 and were reinstated on February 1, 1993. The Company's contributions under the Plan for fiscal 1994, fiscal 1993 and fiscal 1992 were $426, $313 and $162, respectively. (12) COMMITMENTS The Company and its subsidiaries have arrangements with five finance companies which provide inventory financing facilities for its Network. The Company monitors the financial stability of the finance companies and requires payment within two days of product shipment. If these arrangements are terminated, the Company would have to develop alternative financing arrangements. In conjunction with these arrangements, the Company has inventory repurchase agreements with the finance companies that would require it to repurchase certain inventory which might be repossessed from the Network by the finance companies. To date, such repurchases have been insignificant. On October 22, 1993, the Company executed a $20 million guarantee to an inventory finance company on behalf of FNOW, which remained outstanding at January 28, 1995. (13) CONTINGENCIES In December 1994, several purported class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania (Civil Action Nos. 94-3753, 94-CV-7410, 94-CV-7388, and 94-CV-7405) against the Company and certain directors and officers; these lawsuits have been consolidated with a class action lawsuit filed several years ago against the Company, certain directors and officers, and the Company's auditors (who are not named in the most recent complaint) in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 92-CV-1905). A purported derivative lawsuit was also filed in December 1994 in the Court of Common Pleas of Philadelphia County (No. 803) against the Company and certain of its directors and officers. These lawsuits allege violations of certain disclosure and related provisions of the federal securities laws and breach of fiduciary duties, including allegations relating to the Company's practices regarding vendor marketing funds, and seek damages in unspecified amounts as well as other monetary and equitable relief. In addition, the Company has been contacted by the Philadelphia office of the Securities and Exchange Commission regarding a preliminary, informal inquiry. The Company believes that all such allegations and lawsuits are without merit and intends to defend against them vigorously. While management of the Company, based on its investigation of these matters and consultations with counsel, believes resolution of these matters will not have a material adverse effect on the Company's financial position, the ultimate outcome of these matters cannot presently be determined. 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. During fiscal 1994, based in part on the advice of legal counsel, the Company established a reserve of $9 million in respect of all litigation and arbitration matters. Although the aggregate amount of the claims may exceed the amount of the reserve, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations in any subsequent period. (14) QUARTERLY FINANCIAL DATA (unaudited) Selected quarterly financial data for fiscal 1994 and fiscal 1993, is as follows:
First Second Third Fourth Fiscal Fiscal 1994 Quarter Quarter Quarter Quarter Year - - - -------------------------- --------- --------- --------- --------- ---------- Revenues $ 762,314 $ 793,274 $ 831,122 $ 821,373 $3,208,083 Gross profit 35,467 37,974 25,314 33,986 132,741 Net income (loss) 12,793 2,695 (3,020) (4,408) 8,060 Earnings (loss) per share $ 0.36 $ 0.08 $(0.09) $(0.14) $ 0.23 Fiscal 1993 - - - ------------------------ Revenues $ 616,948 $ 613,245 $ 675,902 $ 740,007 $2,646,102 Gross profit 25,785 26,809 30,156 34,110 116,860 Loss from discontinued operation (2,468) -- -- -- (2,468) Sale of BizMart 6,298 -- -- (2,022) 4,276 Net income 12,151 9,194 10,851 10,729 42,925 Earnings (loss) per share: Continuing operations $ 0.23 $ 0.26 $ 0.30 $ 0.35 $ 1.13 Discontinued operation (0.07) -- -- -- (0.07) Sale of BizMart 0.17 -- -- (0.05) 0.12 --------- --------- --------- --------- ---------- Net income $ 0.33 $ 0.26 $ 0.30 $ 0.30 $ 1.18 ========= ========= ========= ========= ==========
The sum of the quarterly net earnings per share amounts does not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year based on respective weighted average common shares and share equivalents outstanding. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information contained in the sections titled "Election of Directors" in the Proxy Statement for the Annual Shareholders' Meeting to be held on or about June 8, 1995 (the "Proxy Statement"), with respect to directors of the Company, and the information contained in the section titled "Item 1. Business -Executive Officers of the Company" in Part I of this Form 10-K, with respect to executive officers of the Company, are incorporated herein by reference in response to this item. Item 11. EXECUTIVE COMPENSATION The information contained in the section titled "Executive Compensation" in the Proxy Statement (other than the portion thereof contained under the headings "Stock Performance Chart" and "Compensation and Stock Option Committee Report on Executive Compensation"), with respect to executive compensation and the information contained in the section titled "Director Compensation" in the Proxy Statement with respect to Director compensation are incorporated herein by reference in response to this item. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the section titled "Principal Shareholders and Holdings of Officers and Directors" in the Proxy Statement, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the section titled "Certain Relationships and Related Transactions" in the Proxy Statement, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report : (1) Financial statements: Report of Independent Accountants Consolidated Balance Sheet, January 28, 1995 and January 29, 1994 Consolidated Statement of Operations, Years ended January 28, 1995, January 29, 1994 and January 30, 1993 Consolidated Statement of Shareholders' Equity, Years ended January 28, 1995, January 29, 1994 and January 30, 1993 Consolidated Statement of Cash Flows, Years ended January 28, 1995, January 29, 1994 and January 30, 1993 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule VIII - 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: * 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.) *10.1 Amended and Restated Non-Qualified Stock Option Plan for Employees and Directors. (Exhibit 10.1 to the 1990 Form 10-K.) ** *10.2 Amended and Restated Non-Qualified Stock Option Plan for Franchisees. (Exhibit 10.2 to the 1990 Form 10-K.) *10.3 IBM Personal Computer Agreement between the Company and IBM, as amended. (Exhibit 10.5 to the 1987 Registration Statement.) *10.4 COMPAQ Computer Corporation United States Central Purchase Agreement among the Company, TCBC and COMPAQ. (Exhibit 10.5 to the Company's Registration Statement No. 33-27573 filed on March 16, 1989 [the "1989 Registration Statement"].) *10.5 Lease Agreement dated January 20, 1989 between the Company and Hankin/Crow Associates. (Exhibit 10.13 to the 1989 Registration Statement.) *10.6 IBM Personal Computer Agreement between Entre and IBM. (Exhibit 10.14 to the 1989 Registration Statement.) *10.7 COMPAQ Computer Corporation Central Purchase Agreement between Entre and COMPAQ. (Exhibit 10.15 to the 1989 Registration Statement.) *10.8 IBM Personal Computer Agreement between CPA and IBM. (Exhibit 10.24 to the 1989 Registration Statement.) *10.9 Dealer Sales Agreement between CPA and Apple. (Exhibit 10.25 to the 1989 Registration Statement.) *10.10 Addendum to Dealer Sales Agreement between CPA and IBM (and related documents). (Exhibit 10.29 to the 1989 Registration Statement.) *10.11 Agreement dated July 20, 1990 between the Company and Sun Microsystems, Inc. (Exhibit 10.33 to the 1990 Form 10-K.) *10.12 Agreement and Plan of Merger dated as of May 10, 1991 among the Company, IEI Acquisition Corp. ("IEI") and BizMart. (Exhibit (c)(1) to the Company's Schedule 14D-1 filed with the SEC on May 17, 1991 [the "1991 Schedule 14D-1"].) *10.13 Stock Purchase Agreement between Intelligent Electronics, Inc. and OfficeMax, Inc. dated December 3, 1992. (Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended October 31, 1992.) *10.14 Amendment to Addendum to Agreement for Wholesale Financing (Security Agreement) and Addendum to Addendum to Agreement for Wholesale Financing - Flexible Payment Plan dated January 25, 1994. (Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended January 29, 1994.) *10.15 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.) ** 10.16 Lease Agreement between Harbin Group, L.P. and the Company dated May 17, 1994. 10.17 Lease Agreement between Quebec Court Joint Venture No. 2 and the Company dated June 3, 1995. 10.18 Addendum to Addendum to Agreement for Wholesale Financing (Security Agreement) and Addendum to Addendum to Agreement for Wholesale Financing - Flexible Payment Plan dated January 26, 1995. 10.19 Financial Statements for The Future Now, Inc. for the year ended December 31, 1994. 11 Statement re: computation of per share earnings. 21 Subsidiaries of the Company. 23 Consent of Price Waterhouse LLP. 23.1 Consent of KPMG Peat Marwick LLP. (b) Reports filed on Form 8-K during last fiscal quarter of 1994. The Company filed a Current Report on Form 8-K dated January 5, 1995, relating to the acquisition of certain assets of branch locations in five major-metropolitan cities from The Future Now, Inc. __________________________________________ * Incorporated by reference ** Management contract or compensatory plan or arrangement
INTELLIGENT ELECTRONICS, INC. and Subsidiaries Valuation and Qualifying Accounts and Reserves Schedule VIII Years ended January 30, 1993, January 29, 1994 and January 28, 1995 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 January 30, 1993 $602,000 $381,000 -- ($750,000) $233,000 ========== ========== ========== ============ ========== Year ended January 29, 1994 $233,000 $375,000 -- ($210,000) $398,000 ========== ========== ========== ============ ========== Year ended January 28, 1995 $398,000 $336,000 -- ($436,000) $298,000 ========== ========== ========== ============ ==========
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 20, 1995 /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 20, 1995 /s/ Richard D. Sanford ----------------------------------- Richard D. Sanford, Chief Executive Officer and Chairman of the Board Date: April 20, 1995 /s/ Gregory A. Pratt ----------------------------------- Gregory A. Pratt, President Chief Operating Officer Date: April 20, 1995 /s/ Edward A. Meltzer ----------------------------------- Edward A. Meltzer, Chief Financial Officer, Vice President, Principal Accounting Officer Date: April 20, 1995 /s/ Arnold S. Hoffman ----------------------------------- Arnold S. Hoffman, Director Date: April 20, 1995 /s/ William L. Rulon-Miller ----------------------------------- William L. Rulon-Miller, Director Date: April 20, 1995 /s/ Barry M. Abelson ----------------------------------- Barry M. Abelson, Director Date: April 20, 1995 /s/ Roger J. Fritz ----------------------------------- Roger J. Fritz, Director Date: April 20, 1995 /s/ Robert P. May ----------------------------------- Robert P. May, Director Date: April 20, 1995 /s/ James M. Ciccarelli ----------------------------------- James M. Ciccarelli, Director Date: April 20, 1995 /s/ Alex A.C. Wilson ----------------------------------- Alex A.C. Wilson, Director EX-10 2 Exhibit 10.16 LEASE AGREEMENT THIS AGREEMENT entered into as of the 17th day of May, 1994, by and between HARBIN GROUP, L.P., a Tennessee limited partnership, which will hereinafter be designated as Lessor, and RND, INC., a Colorado corporation, which will hereinafter be designated as Lessee, WITNESSETH: 1. Lease of Premises. For and in consideration of the rent reserved and the covenants herein, and subject to the conditions, Lessor leases to Lessee, and Lessee leases from Lessor premises located at U.S. Highway 78 and Tuggle Road, Memphis, Shelby County, Tennessee, legally described as follows: See legal description attached hereto as Exhibit "A" and incorporated herein by reference, and consisting of approximately a 16.74 acre site with approximately 365,910 square feet of building space to be used for the purposes hereinafter set forth. 2. Term. The term of this Lease shall commence on a date (the "Commencement Date"), which shall be the earlier of (i) the first day of the month following the date Lessor delivers a certificate of occupancy for the premises to Lessee and notifies Lessee in writing that Lessor has completed the premises pursuant to the plans and specifications attached hereto as Exhibit "B" and incorporated herein by reference, and generally in conformance with the letter of intent ("Letter of Intent"), as revised, dated February 3, 1994, attached hereto as Exhibit "E," subject to subsequent revisions or modifications due to additional improvements, actual project cost or otherwise; or (ii) December 1, 1994, and ending 120 months thereafter ("Termination Date"). Lessor and Lessee hereby agree that the Commencement Date shall be evidenced by a Commencement Date Agreement in the form attached as Exhibit "C." Taking of possession by Lessee shall be deemed conclusively to establish that said buildings and other improvements as occupied by Lessee are in good and satisfactory condition as of and when possession was taken, except for any "punch list" items specified by Lessee and agreed to by Lessor which Lessor will use its best efforts to complete within thirty (30) days of Lessee's occupancy. Lessee may occupy the premises in whole or in part prior to the Commencement Date at no charge, provided such occupation does not interfere with Lessor's completion of the remainder of the improvements. Subject to force majeure provisions as hereinafter provided, in the event Lessor fails to fulfill said covenants through no fault of Lessee, Lessor shall be allowed such additional time as may be necessary to complete said improvements so long as Lessor is diligently working to complete the same; provided, however, should Lessor fail to deliver the premises to Lessee prior to February 1, 1995, Lessor shall pay to Lessee the actual charges incurred by Lessee under that certain Temporary Lease Agreement by and between Belz Enterprises, Inc., as lessor, and RND, Inc., as lessee, for approximately 223,000 square feet of warehouse space located on Steele Road, Shelby County, Tennessee, for the period of occupancy, if any, after March 1, 1995. Such charges shall not exceed $46,460.00 per month. Lessee shall obtain Lessor's written consent to extend the above-referenced Temporary Lease Agreement beyond March 1, 1995, such consent not being unreasonably withheld by Lessor. 3. Rent. A. For the term of the Lease, Lessee shall pay, in equal monthly installments, to Lessor rent for the premises, in advance without demand, deduction or set off for the entire term hereof as follows: Year Per Year Per Month 1 $1,079,435.00 $ 89,953.00 2 $1,079,435.00 $ 89,953.00 3 $1,079,435.00 $ 89,953.00 4 $1,079,435.00 $ 89,953.00 5 $1,079,435.00 $ 89,953.00 6 $1,187,378.00 $ 98,948.00 7 $1,187,378.00 $ 98,948.00 8 $1,187,378.00 $ 98,948.00 9 $1,187,378.00 $ 98,948.00 10 $1,187,378.00 $ 98,948.00 The first such monthly installment shall be due and payable on or before the first day of each calendar month succeeding the Commencement Date recited above during the hereby demised term, except that the rental payment for any fractional calendar month at the commencement or end of the lease period shall be prorated. B. Provided there is no default then existing under the Lease, Lessee shall have the right to renew for one additional five (5) year period by providing written notice of its intention to renew at least six (6) months prior to the end of the initial term of this Lease. In the event of renewal, all terms of this Lease shall remain the same except for the rent which shall be $113,790.00 per month for the extended term. C. It is the purpose and intent of Lessor and Lessee that the rent payable by Lessee hereunder shall be absolutely net to Lessor so that this Lease shall yield net, to Lessor, the rent specified herein, and that, subject to any warranties of construction from the general contractor, Rentenbach Constructors, Inc. ("Rentenbach") all costs, expenses, or obligations relating to the Premises and its maintenance and repair shall be paid by Lessee. Lessor shall take all actions on Lessee's behalf which are reasonably necessary to enforce all such warranties of construction from Rentenbach Constructors, Inc., in the event Rentenbach fails or refuses to comply with Lessee's reasonable request to perform under said warranties. Such costs, expenses and obligations shall include, without limitation, costs and expenses associated with the maintenance and operation of any buildings located on the premises, repair costs, electricity, fuel, water, sewer, gas, security, window washing, janitorial services, trash and snow removal, landscaping, pest control, management fees, supplies, replacements or other expenses for maintaining, operating and repairing the building, real and personal property taxes, and insurance premiums. In the event Lessor receives any tax bills or other statement for charges, assessments or other expenses related to the premises, Lessor shall send these bills or statements to Lessee which shall promptly discharge, pay and satisfy the same before they become delinquent; provided, however, Lessee may contest in good faith any such bill or statement provided such contest and failure to pay any such bill or statement will not cause a lien to be placed on the premises unless such lien is immediately discharged or bonded in accordance with applicable law, or as reasonably required by Lessor's lender holding a deed of trust on the premises. In the event Lessee fails to pay any such bill, statement or charges, or take proper measures to contest the same as aforesaid, subject to said bonding obligations to prevent any lien from being placed on the premises, within thirty (30) days after receipt of same, either from Lessor or the party seeking to collect same, the same shall constitute an event of default hereunder. D. Lessee shall be entitled to a moving allowance of $100,000.00 due and payable by Lessor to Lessee in good funds upon the Commencement Date. 4. Use of Premises. A. It is agreed that during the term of this Lease and its extensions, said premises shall be used for the operation of Lessee's business as a wholesale establishment and all uses incident thereto as a business engaged in the sale of commodities in quantity, usually for resale or business use, chiefly to retailers, other businesses, industries, and institutions, and any other use allowable by applicable law including without limitation applicable zoning laws. B. Lessee will not do, or permit anything to be done, in, upon, or about the leased premises that increases the fire hazard beyond that which will exist by reason of the ordinary use or occupancy of the premises set out above. Lessee will not do or permit to be done anything which will make uninsurable the leased premises or any part thereof. C. Lessee will not do or permit to be done anything in, about, or upon the leased premises; that conflicts with the federal, state and municipal laws, or the regulations of the local fire department or board of health; that creates a nuisance; or that is dangerous to persons or property. D. In addition to Lessee's covenants, undertakings, and agreements set forth in this Lease, Lessee further agrees and covenants that it will, in connection with Lessee's use, operation, and occupancy of the Premises, fully and promptly comply with all applicable local, state, and federal environmental laws, regulations, rules, guidelines, ordinances, and administrative or judicial orders and rulings, relating to the generation, recycling, use, reuse, sale, storage, handling, transport, treatment, and disposal of any Hazardous Materials ("Applicable Laws"). Lessee further undertakes and agrees to indemnify and hold Lessor and its partners, agents, employees, and affiliates harmless from and against any and all claims, demands, losses, liens, liabilities, penalties, fines, suits, investigations, regulatory proceedings and other proceedings, and all costs and expenses (including but not limited to attorneys' fees), incurred in connection therewith arising directly or indirectly from or out of, or in any way connected with (1) the use or possession of any Hazardous Materials on or about the premises at any time by Lessee, its officers, agents, servants, employees, or contractors; or (2) any violation or alleged violation of Applicable Laws by Lessee, its officers, agents, servants, employees or contractors. Lessee further agrees that the indemnity provided herein shall survive the expiration or other termination of this Lease and any retaking of possession of the premises by Lessor resulting from any default by Lessee, or otherwise. As used herein, the term "Hazardous Materials" means any chemical, material, or substance to which exposure is prohibited, limited or regulated by any federal, state, or local authority or which, even if not so regulated, is known or believed by competent medical authority, to pose a hazard to health and safety, and includes (but is not limited to) any substance and materials defined or designated as "hazardous substances," "hazardous materials," or "toxic substances" under Applicable Laws. Lessor represents and warrants that to the best of its knowledge, information and belief including, without limitation, knowledge based upon the environmental audit dated September 30, 1991, prepared by Certified Engineering and Testing Co., Inc., the premises is in full compliance with Applicable Laws free and clear of any Hazardous Materials as of the Commencement Date. Lessor agrees to indemnify and hold Lessee harmless from and against all claims, liabilities, losses, damages, and costs which Lessee may sustain by reason of Lessor's violation of the foregoing representation and warranty. 5. Assignment and Subletting. This Lease shall not be assigned or any part of the leased premises sublet without the written consent of Lessor, which consent shall not be unreasonably withheld. The intended use of the sublessee or assignee shall not be, as long as such use is reasonable, ground for Lessor to withhold consent. If Lessor consents to an assignment or subletting, Lessee shall remain liable for payment of the specified rental and the due performance of all agreements and conditions herein. 6. Transfer. Lessor's interest in this Lease shall pass to vest in Lessor's heirs, devisees, successors, and assignees. 7. Construction, Alterations, and Improvements. Lessee will not make any alterations, changes or improvements that will affect the integrity of the property without the prior written consent of Lessor, which consent shall not be unreasonably withheld. The cost of any alterations or improvements hereto shall be paid by Lessee. The right is specifically reserved to Lessee to remove all equipment or fixtures owned by Lessee and placed on the premises at the termination of this Lease or any extension thereof, provided, however, that at such time all rental payments due Lessee are paid in full and further provided, however, that Lessee shall repair all damage caused by such removal and restore the premises to the same condition existing on the Commencement Date, ordinary wear and tear accepted. 8. Repair and Maintenance. A. Because it is the intent of the parties that the rent payable by Lessee shall be absolutely net to Lessor as aforesaid, Lessor shall not be required to make any improvements or repairs to the premises, provided, however, Rentenbach will provide a standard one (1) year warranty for all construction performed on the premises, and an additional warranty limited to the structure, foundation, concrete slab, structural frame, roof deck (metal), and all exterior walls for a period of twenty-four (24) months from the date of occupancy. Lessor shall take all action on Lessee's behalf which are reasonably necessary to enforce all such warranties of construction from Rentenbach in the event Rentenbach fails or refuses to comply with Lessee's reasonable request to perform under said warranties. B. Other than as set forth above, Lessee shall be responsible for all repairs and maintenance to all items related to the premises, including without limitation, those that would normally be associated with the day- to-day occupancy of the property, including non-structural items such as windows, doors and floor coverings. Lessee shall return the premises to Lessor at the termination of this Lease in good condition, ordinary wear and tear excepted. 9. Utilities. Lessee shall pay all utility bills and all garbage and waste removal and all janitorial service. 10. Signs. It is understood and agreed by Lessor that Lessee shall install, or have installed, on the demised premises a sign advertising the business of Lessee, such sign to be of such size, type and in such location as shall be reasonably acceptable to Lessor and its lender, which consent shall not be unreasonably withheld. Lessor does hereby acknowledge that Lessor acquires no rights or interest by reason of this agreement in any trademarks, patent rights or service mark rights existing or applied for or which may be applied for in the future in connection with said sign. The sign shall at all times be deemed personal property and shall not be by any reason of attachment or connection with a realty become or be deemed a fixture or appurtenance to such realty and shall at all times be severable therefrom, free from any claim or any right of Lessor. Upon termination of this leasehold, or any extension thereof, for any cause, Lessee shall remove the sign from the premises where installed and Lessor agrees to surrender and deliver possession thereof. Lessee agrees not to erect or to maintain any such sign in violation of any law, ordinance, rule, or regulation of any government, nor to create a nuisance thereby. Upon termination of this Lease, Lessee will remove any sign, advertisement, or notice painted on or affixed to the leased premises, and restore the place it occupied to the condition which existed as of the date this Lease takes effect, ordinary wear and tear excepted. 11. Insurance. A. Lessee, at its own cost and expense shall keep all buildings, improvements on, in, or appurtenant to the demised premises at the commencement of the term, and thereafter erected thereon, or therein, including alterations, replacements, and improvements, insured for the benefit of Lessor and Lessee against loss or damage by fire, casualty, and all available extended coverage or other hazards, including earthquake insurance, and similar insurance as may, from time to time, be reasonably required (but in any event only such insurance as is normally required for other similar properties in this area of similar type and use), in a sum not less than the full insurable value thereof based on a value of $29.45 per rentable square foot. Lessee covenants to pay all insurance premiums when and as the same become due. B. Lessee covenants to provide on or before the commencement of the term of this Lease at its sole cost and expense, and to keep in force during the term, comprehensive public liability policy of insurance protecting Lessor and Lessee against any liability for injury to persons and/or property occurring in, or on or about the demised premises, or any appurtenances thereto. Lessee covenants to carry such insurance in a solvent company or companies of recognized standing, reasonably acceptable to Lessor and licensed to do business in the state of Tennessee, in an amount no less than $1,000,000 in respect to any one person; in an amount no less than $5,000,000 in respect to any one accident; and in an amount no less than $150,000 in respect to property damage; which policy will be written for the use and benefit of Lessor and Lessee, with Lessor and Lessee being insured. Lessee shall provide Lessor with a copy of certificate of all insurance policies above referred to, and evidence of payment therefor. C. All said policies shall provide for advance notice to Lessor at least thirty (30) days prior to any proposed cancellation or alteration of any policy. To the extent each may do so without invalidating any insurance policy of either Lessor or Lessee each party waives any and all rights of recovery against the other or any officer, employee, agent or representative thereof, for any loss or damage where, and to the extent that, such party is insured against under any insurance policy in force at the time of the loss or damage. Lessor and Lessee shall notify their respective insurance carriers of the foregoing mutual waiver of subrogation. D. It is understood and agreed that the premises will be encumbered by a deed of trust from Lessor for the benefit of a lender of Lessor's choosing (the "Bank"), and that the deed of trust will require Lessor to provide and maintain certain policies of insurance as set forth therein. Because this Lease is subject to said deed of trust and is net to Lessor as aforesaid, Lessee agrees to comply with all reasonable applicable provisions of said deed of trust concerning insurance, including, without limitation, inclusion of a standard non-contributory mortgagee clause (but in any event only such insurance as is normally required for other similar properties in this area of similar type and use), with a lender's loss payable endorsement for the benefit of the Bank acceptable in the state of Tennessee and reasonably acceptable to the Bank. 12. Fire and Other Damage. A. If the buildings situated upon the premises should be damaged or destroyed by fire, tornado or other casualty, Lessee shall give immediate written notice thereof to Lessor. If during the term of this Lease the said premises is so damaged by fire or other casualty as to be rendered untenantable for the use described herein, rent shall abate for the period during which the premises is untenantable and, if the repair of such damage shall not be commenced by Lessor within sixty (60) days from the date of such casualty and completed within one hundred twenty (120) days after commencement of construction, subject to force majeure as hereinafter provided, it shall be optional with either party hereto by written notice to the other given not later than one hundred fifty (150) days, but in any event prior to the commencement of restoration, after said fire or other casualty to terminate this Lease as of the date of such damage, and in case of such termination, the rent shall be paid only to the date of such fire or other casualty and this Lease shall be cancelled as of that date. In the event the premises is so damaged by fire or other casualty as to be rendered untenantable for the use described herein and Lessee makes available to Lessor such funds as are necessary to repair the premises, notwithstanding the preceding paragraph, Lessor shall commence such repairs within ten (10) days after such funds are made available by Lessee, provided the Bank has not elected to apply the insurance proceeds to any indebtedness secured by a mortgage or deed of trust covering the premises. The Bank's mortgage shall contain a provision whereby the Bank will make its election to either apply the insurance proceeds to said indebtedness, or allow the insurance proceeds to be used for repair of the premises, within ten (10) days of being notified of said casualty. The Bank's mortgage shall also contain provisions providing for the reimbursement of Lessee from such insurance proceeds should Lessee elect to fund initial repairs prior to receipt of insurance proceeds, with the Bank's obligation to reimburse being subject to the Bank's standard construction loan funding procedures and policies, and allowing for any excess insurance proceeds over what is used to reimburse Lessee being applied as such mortgage provides. B. Upon partial destruction of said premises, Lessor shall make and complete repairs in full within ninety (90) days from the date of such casualty, during which time the rental shall be abated to the extent of the loss of the use of the premises (based on useable square footage) and in the event that such repair is not made within such time, subject to force majeure as hereinafter provided, and as a result of such partial destruction Lessee in its reasonable judgment is unable to conduct its business in substantially the same manner existing prior to such partial destruction, Lessee may, upon thirty (30) days prior written notice, terminate this Lease and shall only be obligated to pay to Lessor any unpaid prorated portion of rent through the time Lessee actually vacates the premises. C. Notwithstanding anything herein to the contrary, in the event the Bank requires that the insurance proceeds be applied to any indebtedness secured by a mortgage or deed of trust covering the premises, then either party shall have the right to terminate this Lease by delivering written notice of termination to the other within thirty (30) days after such requirement is made by the Bank, whereupon all rights and obligations hereunder shall cease and terminate. 13. Holding Over. Should Lessee be allowed to remain in possession after termination of this Lease or its options or extensions, either in course or by reason of the breach of any of its provisions by Lessee, or should Lessor accept any rent after such termination, then neither the remaining in possession nor the acceptance of the rent shall be deemed a renewal of this Lease or a tenancy from year to year, but, on the contrary, the status of the Lease shall be deemed that of a month-to-month lease at a monthly rental equal to the monthly rental existing immediately prior to any holdover period occurring prior to the expiration of the initial ten (10) year term and, subsequent to such time, shall be at a monthly rental equal to the monthly rental for the renewal period set forth in Section 3(B) hereof, and Lessee will vacate the premises within 30 days after being notified to do so by Lessor. 14. Subordination. Lessee hereby subordinates this Lease to any mortgage, deed of trust or encumbrance which Lessor may have placed, or may hereafter place, on the premises; provided, however, A. that so long as Lessee is not in default in the payment of rent, or in the performance or observance of any of the terms of this Lease, Lessee's possession of the premises and Lessee's rights and privileges under the Lease or any renewal thereof shall not be diminished or interfered with by any mortgagee, trustee or holder; B. that an agreement of estoppel, subordination, non-disturbance and attornment embodying such provision shall be entered into by the mortgagee or mortgagees and Lessee simultaneously with the execution of such mortgage; and, C. that Lessee agrees to execute on demand any instrument which may be deemed necessary or desirable to render such mortgage, deed of trust, or encumbrance, whenever made, superior and prior to this Lease. The right is specifically reserved to Lessee to apply rent payments due under the terms of this Lease directly to any mortgage, deed of trust, or encumbrance created by Lessor in order to prevent foreclosure thereof and maintain Lessee's peaceful use and enjoyment of the property under the terms of this Lease. 15. Events of Default. The following events shall be deemed to be events of default by Lessee under this Lease: A. Lessee shall fail to pay any installment of the rent or other charges herein reserved and shall not cure such failure within five (5) business days after written notice thereof from Lessor to Lessee; B. Lessee shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors; C. Lessee shall file a petition under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any state thereof; or Lessee shall be adjudged bankrupt or insolvent in proceedings filed against Lessee thereunder; D. A receiver or trustee shall be appointed for all or substantially all of the assets of Lessee; or E. Lessee shall fail to comply with any other term, provision or covenant of this Lease and shall not cure such failure within twenty (20) days after written notice thereof to Lessee (unless such event of default cannot reasonably be remedied despite Lessee's best efforts within such twenty (20) day period, in which event Lessee shall not be in default if Lessee commences to cure such event of default promptly within the twenty (20) days period and thereafter diligently pursues such cure to completion.) If Lessee fails to cure such failure within the time allowed hereunder, Lessor shall have the right to cure any breach by Lessee, at Lessee's expense, and Lessee shall reimburse Lessor for such expense immediately upon demand from Lessor accompanied by reasonable evidence of such expenses. 16. Remedies. Upon the occurrence of any such events of default herein described, Lessor shall have the option to pursue any one or more of the following remedies without any further notice or demand whatsoever: A. Terminate this Lease, in which event Lessee shall immediately surrender the premises to Lessor, and if Lessee fails to do so, Lessor may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the premises and expel or remove Lessee and any other person who may be occupying such premises or any part thereof, by force if necessary, without being liable for prosecution or any claim of damages therefor; and Lessee agrees to pay to Lessor on demand the amount of all loss and damage which Lessor may suffer by reason of such termination, whether through inability to relet the premises on satisfactory terms or otherwise. B. Enter upon and take possession of the premises and expel or remove Lessee and any other person who may be occupying such premises or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages therefor, and relet the premises and receive the rent thereof; and Lessee agrees to pay to the Lessor on demand any deficiency that may arise by reason of such reletting. C. Enter upon the premises, by force if necessary, without being liable for prosecution or any claim for damages therefor, and do whatever Lessee is obligated to do under the terms of this Lease; and Lessee agrees to reimburse Lessor on demand for any reasonable expenses, accompanied by reasonable evidence of such expenses, which Lessor may incur in thus effecting compliance with Lessee's obligations under this Lease, and Lessee further agrees that Lessor shall not be liable for any damages resulting to the Lessee from such action. In the event Lessee fails to pay any installment of rent hereunder within five (5) business days of notice that such installment was not paid when due, to help defray the additional cost to Lessor for processing such late payments Lessee shall pay to Lessor a late charge in an amount equal to two percent (2%) of such installment. The provision for such late charge shall be in addition to all of Lessor's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Lessor's remedies in any manner. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Lessor hereunder or of any damages accruing to Lessor by reason of the violation of any of the terms, provisions and covenants herein contained. No act or thing done by Lessor or its agents during the term hereby granted shall be deemed a termination of this Lease or an acceptance of the surrender of the premises, and no agreement to terminate this Lease or accept a surrender of said premises shall be valid unless in writing signed by Lessor. No waiver by Lessor of any violation or breach of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants herein contained. Lessor's acceptance of the payment of rental or other payments hereunder after the occurrence of an event of default shall not be construed as a waiver of such default, unless Lessor so notifies Lessee in writing. Forbearance by Lessor to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default or of Lessor's right to enforce any such remedies with respect to such default or any subsequent default. If, on account of any breach or default by either party of its obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for the non-breaching party to employ or consult with an attorney concerning or to enforce or defend any of its rights or remedies hereunder, the breaching party agrees to pay any reasonable attorneys' fees and costs incurred as a result of such breach. 17. Surrender of Premises. On termination of this Lease in course or by action of either party, Lessee shall surrender the premises in as good condition as they were in at the beginning of the term hereof, reasonable wear and tear excepted. Lessee shall have thirty days in which to remove fixtures and equipment and Lessee shall repair any damage to the premises caused by the removal of any of its property and shall replace any portion of the premises altered by the removal. Upon Lessee's failure to surrender the premises, Lessee, in addition to the damages that Lessor sustains, shall also indemnify, defend and hold Lessor harmless from all claims made by any succeeding tenant against Lessor which are founded upon delay or failure in delivering possession of the premises to the succeeding tenant, which delay or failure resulted from Lessee's failure to surrender the premises within the time period set forth above. 18. Performance by Lessee. Time is of the essence of each of the agreements and conditions herein to be performed by Lessee. The failure of Lessor to insist upon performance of any of the agreements and conditions herein in any one or more instances shall not be a waiver of the performance of such agreements and conditions. Receipt by Lessor of rent with knowledge of the breach of any of the agreements and conditions hereof shall not be deemed a waiver of such breach. 19. Notices. If at any time after the execution of this lease, it shall become necessary or convenient for one of the parties hereto to serve any notice, demand or communication on any other party, such notice, demand or communication shall be in writing signed by the party serving the same, deposited in the registered or certified United States mail, return receipt requested, postage prepaid, and (a) if intended for Lessor shall be addressed to: Harbin Group, L.P. P.O. Box 752298 Memphis, Tennessee 38175-2298 and (b) if intended for Lessee shall be addressed to: RND, Inc. 5025 Tuggle Road Memphis, Tennessee 38118 with copy to: Intelligent Electronics, Inc. ATTN: Corporate Counsel 411 Eagleview Boulevard Exton, Pennsylvania 19341 or to such other address as either party may have furnished to the other in writing as place for the service of notice. Any notice so mailed shall be deemed to have been given as of the time the same is actually received or delivery is refused as reflected on the return receipt. 20. Right of Entry. Lessor shall have the right to enter the premises for any reasonable purpose, including inspection of the property during normal business hours (Monday through Friday, 8:00 a.m. through 5:00 p.m., Central Time) unless in the case of emergency; provided, however, except in the case of an emergency, Lessor shall give Lessee notice at least 24 hours in advance of its intent to enter the property. Lessor may place a "For Rent" sign or signs on the leased premises during the last one hundred eighty (180) days this Lease is in force. 21. Changes Required by Law or Regulations. In the event any changes, alterations, or additions to the premises after the Commencement Date are required by the enactment or amendment after the Commencement Date of any law, ordinance, or regulation of the Fire Department, Board of Health, or other similar entity, then the cost of such change, alterations or additions, not to exceed the sum of $100,000 for any such change, alteration or addition, shall be paid by Lessee. 22. Condemnation. A. If the whole or any substantial part of the premises should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof and the taking would prevent or materially interfere with the use and occupancy of the premises such that Lessee is unable to conduct its business in substantially the same manner prior to such condemnation and the remainder cannot be restored such that Lessee can conduct its business in substantially the same manner prior to such condemnation, this Lease shall terminate at the option of either party and the rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said premises shall occur. B. If part of the premises shall be taken for any public or quasi- public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this Lease is not terminated as provided in the subparagraph above, this Lease shall not terminate but the rent payable hereunder during the unexpired portion of this Lease shall by reduced by a fraction, the numerator of which is the number of untenantable square feet and the denominator of which is equal to the total amount of square footage of the building constituting a portion of the premises, and Lessor, at its expense, shall commence restoration of the premises as necessary to restore the premises, so that Lessee is able to conduct its business in substantially the same manner prior to such condemnation, within thirty (30) days from the date of such actual taking and complete such restoration within one hundred twenty (120) days after commencement of construction, subject to force majeure as hereinafter provided. If Lessor fails to complete restoration within such one hundred twenty (120) days from the commencement of construction, subject to force majeure as aforesaid, and Lessee cannot conduct its business in substantially the same manner prior to such condemnation, it shall be optional with either party hereto by written notice to the other given not later than one hundred fifty (150) days, but in any event prior to commencement of restoration, after said actual taking to terminate this Lease upon thirty (30) days prior written notice, and Lessee shall only be obligated to pay to Lessor any unpaid prorated portion of rent as calculated above through the time Lessee actually vacates the premises. C. All condemnation awards shall be the exclusive property of Lessor, but Lessee may bring an action in its own name for its loss of business and leasehold interest as well as any other damages which Lessee may recover as a result of such condemnation action. 23. Commissions. Except as otherwise provided herein, it is hereby agreed that any commission owed to a real estate broker or agent in connection with the Lease shall be Lessor's responsibility. Each party agrees to indemnify and hold the other party harmless from any liability for any commission for which the indemnifying party is responsible. 24. Refusal on Sale. If during the term of this Lease or any extension hereof Lessor, its successors or assigns, shall desire to accept a bona fide offer to purchase the demised premises, Lessor, or such successors or assigns, shall notify Lessee of such desire to sell in the manner provided in this Lease for the giving of notice, and Lessee shall have the right of first refusal in the event of such offer to purchase said premises upon the same terms and conditions of such offer by giving Lessor, or such successors or assigns, written notice of its election so to do within fifteen (15) days after such notice from Lessor, or such successors or assigns. In the event Lessee fails to notice Lessor, or such successors or assigns, of its election within the fifteen (15) day period, Lessor, or such successors or assigns, shall have the right to sell the premises to any person upon the terms and conditions contained in said notice to Lessee. 25. Options to Purchase. A. Provided there is no default then existing under the Lease, Lessee shall have the right upon written notice given by July 15, 1994, to purchase Phase I of the premises (365,910 square feet as set forth in the plans and specifications) for the purchase price of $10,175,957.00 ($27.81 per square foot; provided, however, the purchase price shall be increased accordingly due to any net increase in costs due to any change orders or expansion), with the closing to take place within five (5) days of receipt of a certificate of occupancy and all closing costs associated with such sale to be paid by Lessee and Lessor according to custom in the locality where the premises is located. If Lessee does not exercise the aforesaid option to purchase prior to July 15, 1994, Lessee shall still have the right of first refusal set forth in Section 24 hereof. If Lessor has notified Lessee of a bona fide offer to purchase the premises as set forth in Section 24 hereof prior to Lessee's exercise of its option to purchase set forth in this Paragraph 25A, and if Lessee exercises such option to purchase and thereafter sells the premises within two (2) years of closing to the same person or entity making such bona fide offer, or any related person or entity, Lessee shall pay to Lessor at the closing thereof fifty percent (50%) of the spread or amount, if any, by which the sales price exceeds the previous purchase price applicable to the sale of the premises from Lessor to Lessee. B. In addition to the foregoing option to purchase which expires on July 15, 1994, if not exercised by that date, if there is no default existing under the Lease at the end of the initial 10 year term of this Lease, and provided Lessor has not notified Lessee of a bona fide offer to purchase the premises as set forth in Section 24 hereof, Lessor shall also have the right upon written notice given at least six (6) months prior to the end of the initial term of this lease to purchase the entire premises for a purchase price equal to $35.40 multiplied times the rentable square footage for the premises existing at that time, plus 50% of any increase in the fair market value ("FMV") of the premises over such price, such FMV to be determined either by the mutual agreement of the parties or by a registered MAI Appraiser mutually acceptable to Lessor and Lessee, but paid for by Lessor, with at least 10 years experience in the area where the premises is located, with the closing to take place within thirty (30) days after Lessor's notice of the exercise of its option to purchase, and closing costs to be paid as aforesaid. 26. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. 27. Execution. This instrument has been executed in duplicate. 28. Law. This Agreement shall be governed by the laws of the State of Tennessee. 29. Mechanic's Liens. Lessee shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Lessor in the premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Lessee, including those who may furnish materials or perform labor for any construction or repairs, and each such claim shall affect and each such lien shall attach to, if at all, only the leasehold interest granted to Lessee by this instrument, or materials furnished in connection with any work performed on the premises on which any lien is or can be validly and legally asserted. Lessee agrees to promptly discharge or bond over in accordance with applicable law, and/or as may be reasonably required by any mortgagee of Lessor, any lien which is filed against the premises as a result of Lessee's use or occupation thereof, and to indemnify, defend and hold harmless Lessor from and against any loss, liability, damage, cost or expense, including reasonable attorneys' fees, incurred by Lessor arising out of claims or liens asserted or filed against the leasehold estate or against the right, title and interest of Lessor in the premises as a result of Lessee's use or occupation thereof. 30. Miscellaneous. A. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the content otherwise requires. B. The terms, provisions and covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. Lessor shall have the right to assign any of its rights and obligations under this Lease. Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this Lease. C. The captions inserted in this lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provisions hereof, or in any way affect the interpretation of this Lease. D. Lessee agrees from time to time within twenty (20) days after request of Lessor, to deliver to Lessor, or Lessor's designee, an estoppel certificate, in the form attached as Exhibit "D" or other form reasonably acceptable to the Bank, stating that this Lease is in full force and effect, the date to which rent has been paid, the unexpired term of this Lease and such other matters pertaining to this Lease as may be reasonably requested by Lessor. E. This Lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. F. All obligations of Lessee hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including without limitation all payment obligations with respect to taxes, operating costs, insurance and all obligations concerning the condition of the premises incurred prior to expiration or early termination. Upon the expiration or earlier termination of the term hereof, and prior to Lessee vacating the Premises, Lessee shall either perform such repairs as necessary to put the premises, including without limitation all heating and air conditioning systems and equipment therein, in good condition and repair, reasonable wear and tear excepted, or pay to Lessor such amount as is reasonably estimated by Lessor and Lessee to be necessary to pay for such repairs. Lessee shall also, prior to vacating the premises, pay to Lessor the amount, as reasonably estimated by Lessor and Lessee, of Lessee's obligation hereunder for real estate taxes, operating costs and insurance premiums which shall be prorated for the year in which the Lease expires or terminates. All such amounts shall be used and held by Lessor for payment of such obligations of Lessee hereunder, with Lessee being liable for any additional costs therefor upon demand by Lessor, or with any excess to be returned to Lessee after all such obligations have been determined and satisfied, as the case may be. G. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there may be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. H. In the event Lessor is delayed, hindered or prevented from performing any acts or thing required hereunder by reason of force majeure, including without limitation, strikes, lock-outs, casualties, Acts of God, labor troubles, inability to procure labor materials, failure of power, governmental laws or regulations, riots, insurrection, war or other causes beyond the reasonable control of Lessor, Lessor shall not be liable and the period for the performance by Lessor of any such act shall be extended for a period equivalent to the period of such delay. I. This Lease and Lessee's obligations hereunder shall be fully and unconditionally guaranteed by Lessee's parent company, Intelligent Electronics, Inc., in form and content mutually acceptable to Lessor, Lessee and the Bank. J. Lessee understands Lessor shall execute and deliver an assignment of leases and rents to the Bank. Upon the Bank's request, Lessee shall send all rent payments hereunder directly to the Bank and Lessor hereby authorizes Lessee to accept the Bank's request without question or any need to first obtain Lessor's permission. K. Notwithstanding anything herein to the contrary, wherever in this Lease Lessee is given the right to terminate the Lease upon Lessor's failure to perform, including, without limitation, Lessor's failure to restore the premises within the time deadlines herein provided in the event of a total or partial casualty or condemnation, Lessee shall notify the Bank in writing within ten (10) days of the commencement of any time period during which Lessor is to perform any repairs or other obligation hereunder so that the Bank may be afforded the opportunity to insure Lessor's compliance with its obligations hereunder and, if Lessor fails to perform and such failure does not prevent Lessee from operating its business on the premises in substantially the same manner existing prior to the occurrence of the event giving rise to Lessor's obligation hereunder, Lessor shall notify the Bank in writing of Lessor's failure to perform hereunder and the Bank shall be afforded a reasonable length of time thereafter to perform Lessor's obligations hereunder as shall be mutually acceptable to Lessee and the Bank. Any notices hereunder Lessee elects or is required to give to Lessor shall also be given to the Bank at the following address or such other address as the Bank or any subsequent lender holding a mortgage on the premises may request by written notice to Lessee: Boatmen's Bank of Tennessee 6060 Poplar Avenue Memphis, Tennessee 38119 ATTN: Metropolitan Division 31. Letter of Intent; Expansion Options. A. The Letter of Intent is attached hereto as Exhibit "E" for illustration purposes only evidencing the general intent of the parties and not as part of this lease contract or part of the plans and specifications attached as Exhibit "B." The actual construction and costs set forth in the Letter of Intent are subject to change pursuant to the actual plans and specifications and/or due to additional improvements Lessee may request, or other criteria which could require a modification subject to final approval by Lessee and Lessor. B. The Letter of Intent addresses two possible expansion options for the premises. The first expansion option concerns expansion onto property owned by Lessor contiguous to the building being built on the premises and sets forth the general intent of the parties in this regard. Provided there is no default then existing under the Lease, and provided Lessor has not received a bona fide offer to purchase the premises as set forth in Section 24 hereof, if Lessee gives written notice to Lessor by the Commencement Date that it desires to exercise its option to expand onto such property as set forth in the Letter of Intent, the rental rate for such expansion space shall be $2.95 per square foot (based on Rentenbach's commitment to fix its construction cost), otherwise if notice is given after the Commencement Date, the rental rate shall be based on the availability and terms of any construction financing and as the parties shall mutually agree. In the event of such expansion, this Lease shall be modified to reflect the increased space and rent. All other terms of the Lease would remain the same. Lessee's right to exercise its option to expand set forth above shall survive Lessor's conveyance of the premises if Lessor receives a bona fide offer to purchase the premises prior to Lessee's exercise of said expansion option, but Lessee shall not be allowed to exercise said option prior to the closing of the sale of the property by Lessor after Lessor's receipt of such bona fide offer. C. The second expansion option concerns expansion onto a portion of adjoining property owned by Lessor but presently under lease to J.B. Hunt Transport, Inc. ("J.B. Hunt"), and is subject to various contingencies including, without limitation, the availability of the land, the availability and terms of any construction financing (provided, however, to the extent Rentenbach is the contractor and commits there will be no increase in construction cost due to any increase in the cost of labor or materials, the same shall not be a basis for increasing the rent), and a mutually acceptable modification of this Lease to incorporate the expansion space. Provided there is no default then existing under the Lease, provided Lessor still owns both the premises and the adjoining J.B. Hunt property, and provided Lessor has not received a bona fide offer to purchase the premises as set forth in Section 24 hereof, if Lessee gives written notice to Lessor that it desires to expand onto the adjoining property, Lessor shall use its best efforts to obtain a termination of said J.B. Hunt lease on terms mutually acceptable to Lessor and J.B. Hunt, and to obtain construction financing acceptable to Lessor and to construct the expansion space reasonably in accordance with the Letter of Intent and on such additional terms including, without limitation, Lease terms, as the parties shall mutually agree. IN WITNESS WHEREOF, Lessor and Lessee acting herein by duly authorized representatives have caused this Lease to be executed as of the date first above written. Lessor: HARBIN GROUP, L.P. By: Eagle Development Corp., General Partner By: /s/ Leon C. Harbin, III Title: President Lessee: RND, INC. By: /s/ Gregory A. Pratt Title: President Exhibit "A" (Legal Description) PROPERTY DESCRIPTION BEING A PART OF THE LEON C. HARBIN, III, TRUSTEE PROPERTY LOCATED IN SHELBY COUNTY, TENNESSEE, AS RECORDED IN REGISTER'S NO. BD-6141, IN THE SHELBY COUNTY REGISTER'S OFFICE IN SHELBY COUNTY, TENNESSEE, SAID PROPERTY BEING LOCATED ALONG THE WEST SIDE OF TUGGLE ROAD EAST OF U.S. HIGHWAY 78 AND SOUTH OF SHELBY DRIVE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE POINT OF TANGENCY OF THE WEST RIGHT-OF-WAY LINE OF TUGGLE ROAD AND THE EAST RIGHT-OF-WAY LINE OF U.S. HIGHWAY 78 (LAMAR AVENUE); THENCE ALONG THE EAST RIGHT-OF-WAY OF U.S. HIGHWAY 78 N28 53'14"W FOR A DISTANCE OF 684.55 FEET TO A POINT; THENCE CONTINUING ALONG SAID EAST RIGHT-OF-WAY LINE N61 06'46"E FOR A DISTANCE OF 7.00 FEET TO A POINT; THENCE CONTINUING ALONG SAID EAST RIGHT-OF-WAY LINE N28 53'14"W FOR A DISTANCE OF 100.00 FEET TO A POINT; THENCE CONTINUING ALONG SAID EAST RIGHT-OF-WAY LINE S6 06'46"W FOR A DISTANCE OF 7:00 FEET TO A POINT; THENCE CONTINUING ALONG SAID EAST RIGHT-OF-WAY LINE N28 53'14"W FOR A DISTANCE OF 448.18 FEET TO A POINT, SAID POINT BEING THE SOUTHWEST CORNER OF THE VOLUNTEER 91 LIMITED PARTNERSHIP PROPERTY AS RECORDED IN REGISTER'S NO. CF- 3090; THENCE LEAVING SAID EAST RIGHT-OF-WAY LINE ALONG A SOUTH LINE OF SAID VOLUNTEER 91 LIMITED PARTNERSHIP PROPERTY N61 06'12"E FOR A DISTANCE OF 643.28 FEET TO A POINT; THENCE LEAVING SAID SOUTH LINE S28 53'48"E FOR A DISTANCE OF 921.62 FEET TO A POINT ON THE WEST RIGHT-OF-WAY LINE OF TUGGLE ROAD; THENCE ALONG THE WEST RIGHT-OF-WAY LINE OF TUGGLE ROAD WITH THE FOLLOWING CALLS: S27 16'15"W - 654.48 FEET WITH A CIRCULAR CURVE TO THE RIGHT HAVING A RADIUS OF 170.00 FEET AND AN ARC LENGTH OF 59.54 FEET (CHORD LENGTH OF 59.24 FEET AND CHORD BEARING OF S37 18'17"W) WITH A CIRCULAR CURVE TO THE RIGHT HAVING A RADIUS OF 30.00 FEET AND AN ARCH LENGTH OF 43.83 FEET (CHORD LENGTH OF 40.03 FEET AND CHORD BEARING OF S89 11'31"W) WITH A CIRCULAR CURVE TO THE RIGHT HAVING A RADIUS OF 170.00 FEET AND AN ARC LENGTH OF 59.54 FEET (CHORD LENGTH OF 59.24 FEET AND CHORD BEARING OF N38 55'16"W) TO THE POINT OF BEGINNING AND CONTAINING 728,978 SQUARE FEET OR 16.735 ACRES, MORE OR LESS. Exhibit "B" (Plans and Specifications) (Architectural plans and drawings prepared by Denton & Associates.) Exhibit "B" (cont) - Configuration Center Requirements Structure General - 35,000 square foot structure shall be constructed of concrete block, sheet rock, or pre cast concrete with a standard Class A acoustic grid ceiling dropped to a clear height of sixteen (16) feet from the floor. Walls will be painted on both sides and exterior walls shall be protected with "high/low" guard rails. Provision shall be made for three (3) conveyor openings with anti-static vinyl strip closures as well as one (1) double door entry. Walls and ceiling shall be fully insulated. The room shall be constructed in such a way as to make it fully compliant with new Americans with Disabilities Act regulations. Lighting - recessed 2' x 4' fluorescent fixtures with standard lenses providing 75 foot candle illumination at the floor. Lighted exit signs shall be provided as required by OSHA/NFPA/Building Code regulations. Floors - as described for the warehouse except that the coating shall be of a pigmented electro-static discharge nature which meets MIL specification #______________. All floor joints shall be filled and smoothed prior to application of the finish coating. Electrical - Electrical load for this room is estimated at 1040 kVA or 1251 amps including conveyor system, lighting, air conditioning, 458 duplex outlets, and air compressor(s). The duplex outlets need to be installed with isolated grounds. In addition, line conditioning equipment should be included. Attached is a report previously prepared for a different facility which details the calculated load figures mentioned above. Offices - Four (4) each 10' x 12' offices shall be included as part of the buildout for this structure. Finish will be normal office finish to equal the rest of the offices in the building. Mechanical - As described in the "Distribution Center Requirements". Air conditioning (Heating) shall maintain 68 degrees Fahrenheit at all times in the warm months and 72 degrees Fahrenheit in the cooler months. All air conditioning units shall be equipped with ambient air kits to prevent freeze up while operating during cool months. In addition, air ionization and electronic air filters shall be used in this structure. Design shall include "positive room pressure" to prevent dust from being pulled into the room from warehouse areas. Fire Protection - Structure will be fully sprinklered in accordance with NFPA standards for a computer manufacturing/assembly environment. All fire extinguishers, exit signs, and heat/smoke detectors shall be included as required by OHSA/NFPA/Building Codes. Accepted: Leon C. Harbin III - Harbin Development Corp. Larry S. Patterson - Rentenbach Constructors, Inc. Kevin R. Johns - InteLogistics Exhibit "B" - Distribution Center Requirements Revised: 2/03/94 SITE General - Site work to include site clearing and excavation, site utilities, landscaping, site irrigation, curb and gutter, asphalt paving, concrete dolly pads at docks, concrete pad and fenced enclosure at exterior recycling and dumpster area, and a concrete retaining wall for the drive in ramp (if required). Paving - Heavy duty paving section(s) shall be provided at the entrance drive(s) and loading area(s) and concrete aprons for the docks. A paved, secured trailer storage lot capable of holding 38 trailers shall be included adjacent to the loading area. All other areas may receive standard paving section(s). Landscaping/Irrigation - Building site will be landscaped consistent with the typical landscaping of other quality industrial distribution buildings located in the area. Where appropriate, mature transplanted trees will be placed on the property. An employee/break area shall be incorporated into the exterior landscape plan. Shell Building Structure - Minimum 360,000 square foot, 28 foot clear, concrete tilt wall building with structural steel column and bar joist framing system of approximately 50 x 50 foot column spacing with factory painted metal decking. Structure shall be built with expansion capability to 445,625 square feet. Such expansion capability shall allow for the future expansion to take place at the lowest possible cost. Floors - Shall be designed to support a high volume of fork lift truck traffic. Concrete expansion joints shall not be metal. A 7" 4000 PSI nonreinforced concrete floor slab, sealed, and coated. Building Finish - The building exterior finish will be smooth faced pre-cast concrete, epoxy painted with two (2) reveal stripes. Roof System - Single ply.45 mil. membrane system, mechanically fastened Carlisle or equal. Insulation will be polyisocyanurate or EPS obtaining a thermal value of at least R-12. A roof ventilation system will be provided to minimize heat build up in the facility and to properly cycle fresh outside air into the facility. Circulation rate shall meet or exceed OSHA standards. A minimum of six (6) air changes will be accomplished on an hourly basis. An evaporative roof cooling system will be installed over the warehouse and configuration areas. Skylights - One 4' x 8' melt away type skylight per 5000 square feet of space shall be provided in accordance and subject to local fire codes. Overhead Doors - Forty-Two (42) 8' x 10' high lift dock doors and one (1) 12' x 14' drive-in door will be provided. Two interior side loading docks shall also be provided. Doors to be Thermacore by Overhead Door Company or equal. Punchouts shall be provided to provide maximum possible number of doors along the wall area on the loading side of the building. Storefront and Windows - Office space - commercial grade thermal window/storefront system with 1" tinted insulated glass. Four foot high windows for 300 linear feet along the front wall of the building. Plumbing - As required to service the building, including a limited number of hose bibs, lawn sprinklering system, internal roof drains, and gas piping. A dumping/filling station for tenant supplied floor scrubber shall be provided in a location to be determined by tenant. Flush valve style toilet fixtures will be provided in quantities as required per code for on site employee count of 200 in two areas. Formica tops or equal shall be used in restroom areas for sink mounting. Showers shall be provided in the warehouse restroom areas. One office and one warehouse break room will be provided each of which includes a sink, disposer, dishwasher, two microwave ovens, two refrigerators, twenty feet of cabinetry, and one ice maker. Insulation - The warehouse walls will be internally insulated to a value of R8 the full height of the wall. Building Electrical Service - 480 volt service sized to meet the expected building requirements. Sub panels will need to be run to the configuration center area with isolated grounds (See configuration center requirements schedule). One central location located near the main warehouse entrance will be provided for activating the warehouse lighting in increments/groups to be determined by tenant. A back up 100KVA diesel or natural gas generator shall be included in the electrical, plumbing, and other building designs. Exterior Lighting - A combination of high intensity building and pole mounted metal halide fixtures providing adequate lighting in all employee and loading areas shall be provided. Interior Lighting - Office lighting shall be standard 2' x 4' foot recessed interior office fixtures designed at least to the minimum levels required by OSHA for office lighting. All emergency lighting, and lighted exit signs shall be provided. Lighting level will be 70-75 FC in the office areas. Office Space - Approximately 20,000 square feet of Class "A" office space is provided. Please provide an improvement allowance of $360,000 for the construction of the finished space. Included is the main office area (20,000 sq.ft.) and the main warehouse office (5,000 sq.ft.) including break, drivers waiting, security, lobby and restrooms. Tenant shall be permitted to use any remaining allowance for data/telephone cabling or to offset other moving expenses. 10,000 square feet of Class "A" office will be finished 10,000 square feet of shell, and 5,000 square feet of finished warehouse offices will be provided with Phase I. All finished spaces shall be surrounded by heavy metal "high and low" guard railings and floor mounted bolsters with openings as required for entrance and egress points. Warehouse Area - Include "pit type" hydraulic dock levelers, dock locks, dock seals, dock lights, and security gates (8' high) for each dock door. Provide security gate for the drive-in door. "AisleLyter" bilevel metal halide style fixtures manufactured by Wide Lite or equivalent shall be provided to illuminate bulk storage areas to 30 foot candles and dock areas to 50 foot candles. All warehouse lighting shall be mounted above the bar joists. The location of racks provided by tenant to confirm the count of lighting fixtures will be provided by (2/25/94). Heating (via gas-fired unit heaters) shall be provided to meet code or provide a minimum temperature of 68 degrees in the warehouse area with an exterior temperature of zero degrees Fahrenheit. Control shall be handled in the most efficient number of zones with the thermostats located centrally. Each unit will have its own temperature sensor. Air conditioning will be included in the office and configuration areas (see configuration specification attached). All units will be equipped with ambient air kits to prevent freeze up while operating on cool days. The configuration area will require upgraded units due to conveyor motor and computer heat accumulation. In addition, the configuration area should be designed to create an over pressure situation and should include air ionization equipment. Ventilation shall be provided at the roof level in the warehouse storage and work areas to exhaust heat and reduce air stratification during warm weather. These units should seal during cold weather and not be subject to inadvertent opening in the event of fire. Warehouse floor to be sealed with STS420 clear floor sealer by Tenant products or equal obtaining a clear high gloss sheen. Electrical distribution and receptacles to meet standard distribution requirements. 480 volt pre wire should be included to service 30 each electric fork-lift batteries in a central charging area and three (3) each tenant provided trash compactor units at dock area locations to be determined by tenant. Wet Sprinkler System Fire Protection - Designed to meet NFPA requirements for storage of Class IV encapsulated commodities to a racked height of twenty-two (22) feet. Preference is an early suppression fast response system design. The sprinkler system shall be in conformance with all federal, local, and state regulations. Draft curtains, heat/smoke detectors, fire hose stations, fire extinguishers, emergency lighting, and signage shall be installed to meet factory mutual standards and meet or exceed local building code requirements. Fire separation walls shall also be built including three 12' x 12' fire shuttered openings per wall. Accepted: Leon C. Harbin III - Harbin Development Corp. Larry S. Patterson - Rentenbach Constructors, Inc. Kevin R. Johns - InteLogistics Exhibit "C" Commencement Date Agreement THIS COMMENCEMENT DATE AGREEMENT, made this ____ day of ___________, 1994, by and between THE HARBIN GROUP, L.P., hereinafter called "Lessor," and RND, INC., hereinafter called "Lessee." W I T N E S S E T H: WHEREAS, the parties hereto entered into a Lease Agreement ("Lease"), dated May ____, 1994, wherein Lessee leased from Lessor and Lessor leased to Lessee the premises described as: 5025 Tuggle Road Memphis, Tennessee 38118 WHEREAS, the parties now desire to enter into an Agreement setting forth the actual Commencement Date of the Lease, as defined therein. NOW, THEREFORE, in consideration of the mutual promises contained herein, Lessor and Lessee agree as follows: 1. The Commencement Date of the Lease, dated May ____, 1994, shall be ____________ ____, 199___, and the expiration date of said Lease shall be ____________ ____, ________. 2. The rental for the term of the Lease shall be as provided therein. All other terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, Lessor and Lessee have set their hands as of the date first above written. Lessor: HARBIN GROUP, L.P. By: Eagle Development Corp., General Partner By: ______________________________ Title: ___________________________ Date: ____________________________ Lessee: RND, INC. By: _______________________________ Title: ____________________________ Date: _____________________________ Exhibit "D" STATEMENT OF LESSEE: ESTOPPEL LETTER ____________ ____, ________ Subject: Lease, Dated May ____, 1994, For Premises at Memphis, Tennessee It is our understanding that you intend to consummate certain transactions concerning the subject premises, and as a condition precedent thereof each of you have required and are relying upon this certification by the undersigned. The undersigned as Lessee under that certain Lease made and entered into between Harbin Group, L.P., as Lessor and the undersigned, as Lessee, hereby ratifies the said Lease and acknowledges and certifies that the undersigned has entered into occupancy of the premises described in said Lease on ____________ ____, 19____; and it terminates as of ____________ ____, ________. It is further acknowledges and certified that said Lease is in full force and effect, and, has not since the date thereof been assigned, modified, supplemented or amended in any way, and that the same represents the entire agreement between the parties; that all conditions under said Lease to be performed by Lessor have been satisfied and on this date there are no existing defenses or offsets which the undersigned has against the enforcement of said Lease by Lessor; that no rental or payment has been paid in advance in said Lease. Very truly yours, RND, Inc. By: _______________________________ Title: ____________________________ Date: _____________________________ Exhibit "E" (Letter of Intent) Intelligent Electronics/Harbin Development Corp. Office/Distribution Project Memphis (Shelby County), Tennessee LETTER OF INTENT FOR BUILD-TO-SUIT LEASE - Revised LESSOR: The Harbin Group, Ltd./Harbin Development Corp. LESSEE: Intelligent Electronics Corporation BUILDING STRUCTURE: Pre-Cast Concrete/Structural Steel Frame, One-Story, 28' Clear-Height OFFICE EXTERIOR: Brick/Glass Curtain Wall, One-Story OFFICE INTERIOR: Class "A" Building Standard, per spec FLOOR SLAB: 7" 4,000 psi unreinforced concrete floor slab throughout the distribution facility Phase I & Phase II ROOF: Mechanically-fastened, R-12 insulation, fifteen (15) year warranty, EPDM System HVAC SYSTEM: Office: A/C & Gas Heat Systems Distribution: Ventilated Fans & Gas Heat, Smoke Evacuation Systems CLEAR HEIGHT: 28' AUTO PARKING: 206 spaces TRAILER PARKING: 38 spaces TRUCK DOCKS: 42 Total 8' x 10' / 1 Total 14" x 12' LEASE TERM: Ten (10) years (triple net) GROSS BUILDING Initial Quotation Revised Phase I AREA: ----------------- --------------- 320,000 square feet-Phase I Distribution: 300,000 s.f. 123,125 square feet-Phase II Configuration: 35,000 s.f. ------------------- 443,125 square feet Total Distr/Office: 5,000 s.f. Main Office: 20,000 s.f. ----------- 360,000 s.f. Revised Phase II ---------------- Distribution: 85,625 s.f. TOTAL: 445,625 s.f. SITE AREA: 16.74 Acres (+/-) LEASE RATE: U.S. 78/Tuggle Road Site Initial Quotation Revised Quotation ----------------- ----------------- 10 Year 10 Year Term Rate/SF Term Rate/SF ---- ------- ---- ------- Yrs. 1-5 $2.85 Yrs. 1-5 $2.78 Yrs. 6-10 $3.06 Yrs. 6-10 $3.05 Optional Renewal Yrs. 11-15 $3.49 Yrs. 11-15 $3.48 Average Lease Average Lease Rate Years 1-10 = $2.95 Rate Years 1-5 = $2.69 Note: Includes front-end free rent prior to August 1, 1994. EXPANSION SCENARIOS / COSTS / RATES I. EXPANSION OPTION ONE - PROJECT PHASE II (To expand adjacent to Phase I facility) TOTAL SQUARE FOOTAGE: 85,625 S.F. PROJECT COST OF CONSTRUCTION: A) Concurrent $2.78 PSF B) 3-9 Months $2.82 PSF C) 9-24 Months $2.86 PSF II. EXPANSION OPTION TWO - PROJECT PHASE III (J.B. Hunt tract adjacent to Phase I) TOTAL SQUARE FOOTAGE: 210,000 S.F. PROBABLE TIMING: 12 - 24 Months COST OF LAND ACQUISITION: $720,000 PROBABLE COST OF DEMOLITION OF EXISTING CONSTRUCTION: $90,000 210,000 SF OF FREE-STANDING DISTRIBUTION/OFFICE FACILITY TILT-UP STRUCTURAL STEEL: $3,885,000 / $18.50 PSF PHASE II EXPANSION LEASE RATE PER S.F.: Yrs. 1-5 Yrs. 6-10 Yrs. 11-15 -------- --------- ---------- 12-24 Months $3.36 $3.57 $4.07 24-36 Months $3.40 36-48 Months $3.44 III. EXPANSION OPTION THREE - PROJECT PHASE IV (Nike tract) TOTAL SQUARE FOOTAGE: 290,000 S.F. PROBABLE TIMING: 24 - 54 Months PROBABLE COST OF LAND ACQUISITION: $780,000 PROBABLE COST OF CONSTRUCTION: $5,437,500 / $18.75 PSF LEASE RATE: Yrs. 1-5 Yrs. 6-10 Yrs. 11-15 -------- --------- ---------- 24 - 48 Months $3.12 $3.33 $3.73 LEASE TYPE: Triple net where Rentenbach Constructors will provide a standard one (1) year warranty for all construction performed on the project. Further, Rentenbach Constructors will issue an additional warranty limited to the structure, foundation, concrete slab, structural frame, roof deck (metal), and all exterior walls for a period of twenty-four (24) months from the date of occupancy. No warranty, real or implied, by Contractor or Owner will be in force past the twenty-fourth (24th) month of occupancy. The warranty shall survive any sale of the facility to the third party. The User shall be responsible for all Taxes, Insurance, Building Maintenance, and Common Area Maintenance/Landscaping on the property for the entire term of the Lease. PURCHASE OPTION: Lessor grants to Lessee a Right to Purchase for the fixed price of $10,050,000 upon completion of Phase I of the Project. Lessor grants an additional Right to Purchase Phase I of the Project at the end of year five (5) for $10,900,000. In the event, Lessee does not exercise its Right to Purchase Phase I of the Project at the end of the first five (5) year term of the Lease, Lessee agrees to extend the primary term of the Lease to include years 11-15 renewal option period. ALTERNATIVE OPTION TO PURCHASE: Lessor agrees to grant to Lessee an ongoing Right of First Refusal to Purchase the Premises based on the same terms and conditions of a bonafide offer, as may be presented to Lessor by Lessee. LEASE COMMENCEMENT: Assuming Landlords receipt of Binding Letter of Intent by February 2, 1994, and very timely approval of the plans and specifications by your firm, with Design and Construction to begin February 4, 1994. Beneficial incremental occupancy shall take place May 31, 1994 (Phase I). Actual Lease Commencement to take place the latter of August 1, 1994, or the first day of the month following Lessor's receipt of permanent building certificate of occupancy. Lessee may occupy the Lease premises in whole or in part prior to actual Lease Commencement at no charge. All other terms and conditions of the to be executed Lease Agreement shall remain in full force and effect. COST BARTERING OF MATERIALS FOR CONSTRUCTION: The Lessee desires to investigate and utilize as feasible the barter of materials and/or services provided by the Lessee, to defer actual costs of materials incorporated by the Lessor into the building's construction. The Lessor or designated agent will provide a schedule of items applicable to this procurement method. No construction time delay, real or implied, will occur as a result of any bartering by or on behalf of the Lessee. Lessor reserves the right to approve the incorporation of any materials into the Project. ASSUMPTIONS: We have made numerous assumptions based on the original requests of the Intelligent Electronics Corporation. Should there be any additional improvements or other criteria which significantly increase or decrease the total project cost, we respectfully request the opportunity to modify the aforementioned Lease Schedule accordingly, subject to final approval by the Intelligent Electronics Corporation and The Harbin Group, Ltd./Harbin Development Corp. The aforementioned Lease Schedule is contingent upon first approve by the Harbin Group, Ltd./Harbin Development Corp.'s Lender(s) of choice and assumes the Lease Agreement to be Corporately Guaranteed by the Intelligent Electronics Corporation. AGREED: AGREED: THE HARBIN GROUP, LTD./HARBIN INTELLIGENT ELECTRONICS CORPORATION DEVELOPMENT CORP. AND/OR ASSIGNS /s/ Leon C. Harbin, III /s/ Gregory A. Pratt Title: Managing General Partner Title: President 2-3-94 2/3/94 GUARANTY TO INDUCE THE HARBIN GROUP, INC. ("Harbin"), to enter into a Lease (the "Lease") dated May 17, 994, by and between Harbin and RND, INC. ("Lessee"), and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, INTELLIGENT ELECTRONICS, INC., the undersigned guarantor ("Guarantor") hereby unconditionally and irrevocably guarantees the prompt and full payment, performance and observance, when due of all rental, additional rental and other sums, covenants, liabilities, obligations, duties, conditions and agreements therein provided to be paid, performed and observed by Lessee, and Guarantor hereby makes itself fully liable for such payment and performance. This is an absolute guarantee of payment and performance, and not of collection, of all Lessee's obligations under the Lease. Guarantor hereby expressly waives (i) any right to require that any action be brought against Lessee, (ii) demand, notice of dishonor, protest or notice of protest of every kinds; (iv) notice of any and all proceedings in connection with the Lease (including notice of Lessee's default under the Lease); (v) diligence in collecting any sums due under the Lease or enforcing any of the obligations under the Lease; and (vi) bringing of suit and diligence in taking any action with reference thereto or in handling or pursuing any of Lessor's rights under this Lease. All notices to Lessee must also be provided to Guarantor in accordance with the same terms and provisions as set forth in the Lease. Notwithstanding any payment or payments made by Guarantor by reason of this Guaranty, Guarantor shall not be subrogated to any rights of Harbin until all of the obligations of Lessee under the Lease shall have been performed. Any claims of Guarantor against Lessee arising from any payment or payments made by Guarantor by reason of this Guaranty shall be in all respects subordinated to the full and complete payment or discharge of the obligations of the Lessee under the Lease. All notices to Lessee must also be provided to Guarantor in accordance with the same terms and provisions as set forth in the Lease. Guarantor further agrees that its liability under this Guaranty shall be primary and that in any right of action which shall accrue to Harbin against Lessee under the Lease, Harbin may, at its option, proceed against Guarantor without having commenced any action against or having obtained any judgment against Lessee. The taking of such actions against Guarantor shall be without prejudice to Harbin to proceed against Lessee, whether by separate action or joinder. Guarantor agrees to pay reasonable attorney's fees and all other costs and expenses which may be reasonably incurred by Harbin in the enforcement of this Guaranty, which are incurred subsequent to Harbin's providing notice to Guarantor that Lessee is in default, with such notice requesting Guarantor's performance under this Guaranty. Guarantor acknowledges and agrees that the execution and delivery of this Guaranty by Guarantor to Harbin has served as a material inducement to Harbin to itself execute and deliver the Lease and that it is a condition precedent to the effectiveness of the Lease that Guarantor execute and deliver this Guaranty to Harbin; and Guarantor further acknowledges and agrees that but for the execution and delivery of this Guaranty by Guarantor, Harbin would not have executed and delivered the Lease. Guarantor also acknowledges that the execution and delivery of this Guaranty has also served as a material inducement to Harbin's lender, Boatmen's Bank of Tennessee (the "Bank"), to make a construction loan to Harbin for purposes of constructing the improvements on the premises described in the Lease, and that the Lease as well as this Guaranty, and all rights thereunder will be absolutely assigned to the Bank which may in place of Harbin enforce all rights of Harbin hereunder in the place and stead of Harbin. Guarantor agrees that in the event that Lessee shall become insolvent or shall be adjudicated a bankrupt, or shall file a petition for reorganization, arrangement or other relief under any present or further provision of the Bankruptcy Reform Act of 1978, or if such a petition be filed by creditors of said Lessee, or if Lessee shall seek a judicial readjustment of the rights of its creditors under any present or future Federal or State law or if a receiver of all or part of its property and assets is appointed by any State or Federal court, no such proceeding or action taken therein shall modify, diminish or in any way affect the liability of Guarantor under this Guaranty and the liability of Guarantor with respect to the Lease shall be of the same scope as if Guarantor itself executed the Lease as the named Lessee thereunder and no "rejection" and/or "termination" of the Lease in any of the proceedings referred to in this paragraph shall be effective to release and/or terminate the continuing liability of Guarantor to Harbin under this Guaranty with respect to the Lease for the remainder of the Lease term stated therein unaffected by any such "rejection" and/or "termination" in said proceedings; and if, in connection with any of the circumstances referred to in this paragraph, Harbin should request that Guarantor execute a new Lease for the balance of the term of the Lease (unaffected by any such "rejection" and/or "termination" in any of said proceedings), but in all other respects identical with the Lease, Guarantor shall do so as the named "Lessee" under such new Lease (irrespective of the fact that the existing Lease may have been "rejected" or "terminated" in connection with any proceedings referred to in this paragraph). In the event of failure or refusal of Guarantor to execute such new Lease as therein provided, without limiting any of the legal or equitable remedies of Harbin on account of such failure or refusal, Guarantor agrees that Harbin shall have the right to obtain a decree of specific performance against Guarantor. Guarantor's guaranty pursuant to this Guaranty reasonably may be expected to benefit, directly or indirectly, Guarantor. Guarantor is a corp- oration duly organized, legally existing and in good standing under the laws of Pennsylvania, and is duly qualified as a foreign corporation in all jurisdictions wherein the property owned or the business transacted by it makes such qualification necessary. Guarantor is duly authorized and empowered to execute, deliver and perform this Guaranty and all corporate action on Guarantor's part requisite for the due execution, delivery and performance of this Guaranty has been duly and effectively taken. The Guaranty constitutes the valid and binding obligation of Guarantor, enforceable in accordance with its terms (except that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights). This Guaranty will not violate any provisions of Guarantor's articles or certificate of incorporation, bylaws, or any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Guarantor is subject, or result in the creation or imposition of or obligation to grant any lien upon any properties of Guarantor. Guarantor's execution, delivery and performance of this Guaranty does not require the consent or approval of any other person, including without limitation any regulatory authority or governmental body of the United States or any state-thereof or any political subdivision of the United States or any state thereof. The undersigned, signing for and on behalf of Guarantor is duly authorized and empowered to execute this Guaranty for and on behalf of Guarantor. Any notice or demand to Guarantor hereunder or in connection herewith may be given in writing and shall be properly addressed to the other party at the following address or to such other address as may be provided in writing by either party from time to time, shall be sent by any recognized commercial overnight courier or United States registered or certified mail, postage prepaid, return receipt requested, and may be concurrently sent by facsimile: To Guarantor: Intelligent Electronics, Inc. 411 Eagleview Boulevard Exton, PA 19341 Attention: President Fax Number: (610) 458-0599 with a copy to: Intelligent Electronics, Inc. 411 Eagleview Boulevard Exton, PA 19341 Attention: Legal Department Fax Number: (610) 458-8453 To Harbin: Harbin Group, L.P. P.O. Box 752298 Memphis, TN 38175-2298 Fax Number: (901) 682-4408 with a copy to: Boatmen's Bank of Tennessee 6060 Poplar Avenue Memphis, TN 38119 Attention: Metropolitan Department Fax Number: (901) 762-6299 Notice shall for all purposes of this Guaranty be treated as effective or having been given upon actual receipt of delivery or refusal of delivery by the intended recipient, such receipt to be evidenced by either a facsimile confirmation slip, confirmation of deposit of such notice with overnight delivery service, or a return receipt signed on behalf of the recipient. After at least ten (10) days prior written notice to Guarantor, Lessor and Lessee may at any time modify, extend, amend or make any other covenants respecting the Lease as may be appropriate, including subleasing and assigning the Lease by Lessee to third parties. Should Guarantor object within such ten (10) day period and fail to thereafter consent, which consent shall not be unreasonably withheld, to any such modification, extension, amendment, or any other change respecting the Lease, Guarantor shall not be released but shall continue to be fully liable for payment and performance of all liabilities, obligations and duties of Lessee under the Lease as if such modification, extension, amendment or other change had not been made. Should Guarantor fail to object within such ten (10) day period, Guarantor shall not be released, but shall continue to be fully liable for payment and performance of all liabilities, obligations and duties of Lessee under the Lease as modified, extended or amended. Guarantor recognizes that the obligations under this Guaranty are absolute and unconditional, and that Lessor and its successors and assigns shall have the right to demand performance from and proceed against Guarantor for the enforcement of the obligations under this Guaranty without the necessity of first proceeding against or demanding performance by Lessee of or with respect to any obligations under the Lease. Guarantor's liability shall not be affected by any indulgence, compromise or settlement agreed upon by Lessee and Lessor, bankruptcy or similar proceeding instituted by or against Lessee, or any Lease termination to the extent Lessee continues to be liable; provided, however, Guarantor shall not be bound by any compromise or settlement not entered into a court of competent jurisdiction without at least ten (10) days prior written notice thereof. Guarantor acknowledges and agrees that this Guaranty accurately represents and contains the entire agreement between Guarantor and Harbin with respect to the subject matter hereof, that Guarantor is not relying, in the execution of this Guaranty, on any representations (whether written or oral) made by or on behalf of Harbin except as expressly set forth in this Guaranty, and that any and all prior statements and/or representations made by or on behalf of Harbin to Guarantor (whether written or oral) in connection with the subject matter hereof are merged herein. This Guaranty shall not be waived, altered, modified or amended as to any of its terms or provisions except in writing duly signed by Harbin and Guarantor. All terms and provisions hereto shall inure to the benefit of the assigns and successors of Harbin and shall be binding upon the successors and assigns of Guarantor; provided, however, the obligations of Guarantor hereunder may not be assigned without the express written permission of Harbin and the Bank which consent may be withheld in their sole discretion, unless such assignment results from the sale of Guarantor to a person or company of relatively equal financial ability to comply with the terms of this Guaranty and such person or company assumes all obligations of Guarantor hereunder. The Guaranty shall be governed by and construed in accordance with the laws of the State of Tennessee. Dated: May 17, 1994 INTELLIGENT ELECTRONICS, INC. BY: /s/ Gregory A. Pratt NAME: Gregory A. Pratt TITLE: President and Chief Operating Officer ADDRESS: 411 Eagleview Boulevard Exton, PA 19341 FIRST AMENDMENT TO LEASE AGREEMENT This Agreement entered into as of 10th day of October, 1994, by and between HARBIN GROUP, L.P., a Tennessee limited partnership ("Lessor") and RND, Inc., a Colorado corporation ("Lessee"). WITNESSETH: WHEREAS, Lessor is the owner of certain real property located in Shelby County, Tennessee, at the northwest intersection of U.S. Highway 78 and Tuggle Road, consisting of approximately 16.74 acres (the "Premises"); and WHEREAS, Lessor has leased the Premises to Lessee pursuant to that certain Lease Agreement dated as of the 17th day of May, 1994 (the "Lease"); and WHEREAS, Lessee has exercised its expansion option set forth in paragraph 33.B. of the Lease to expand the total building space presently under construction, and has asked for certain non-standard improvements to be added to the building being constructed on the Premises; and WHEREAS, Lessor and Lessee have agreed to make certain modifications or amendments to the Lease as hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES and of the undertakings and agreements hereinafter set forth, the parties hereto agree as follows: 1. The total square feet of building space appearing in Section 1 of the Lease is hereby increased by 121,760 square feet (the "Expansion Space") from 365,910 square feet to 487,670 square feet. 2. In Section 2 of the Lease, the Commencement Date as to any portion of the premises shall be the earlier of (i) the date the Lessee occupies such portion of the premises; or (ii) the first day of the month following the date Lessor delivers a certificate of occupancy for the premises to Lessee and notifies Lessee in writing that Lessor has completed the premises pursuant to the plans and specifications attached to the Lease as Exhibit "B" and generally in conformance with the letter of intent ("Letter of Intent"), as revised, dated February 3, 1994, attached to the Lease as Exhibit "E", subject to subsequent revisions or modifications due to additional improvements, actual project cost or otherwise. 3. In Section 2 of the Lease where it is provided that Lessor shall pay to Lessee the actual charges incurred by Lessee under that certain Temporary Lease Agreement by and between Belz Enterprises, Inc. and Lessee for the period of occupancy, if any, after March 1, 1995, should Lessor fail to deliver the Premises to Lessee prior to such date, subject to force majeure and tenant delays as provided in the Lease, it is understood and agreed that this provision shall not apply to the expansion, configuration or office space, and shall only apply to the previously requested 300,000 S.F. of wholesale distribution space. 4. Section 3.A. of the Lease is hereby amended to substitute in place of the rentals listed therein the following yearly and monthly rental amounts: Year Per Year Per Month ---- -------- --------- 1 $1,536,156.00 $128,013.00 2 $1,536,156.00 $128,013.00 3 $1,536,156.00 $128,013.00 4 $1,536,156.00 $128,013.00 5 $1,536,156.00 $128,013.00 6 $1,689.768.00 $140,814.00 7 $1,689.768.00 $140,814.00 8 $1,689.768.00 $140,814.00 9 $1,689.768.00 $140,814.00 10 $1,689.768.00 $140,814.00 5. Section 3.B. of the Lease is hereby amended to substitute in place of the monthly rent figure of $113,790.00 the monthly rent figure of $161,936.00, such increase representing the increased monthly rental for an additional five (5) year renewal following the initial term of the Lease. 6. Section 11.A. of the Lease is hereby amended to substitute in place of the sum of $29.45 per rentable square foot the sum of $31.09 per rentable square foot. 7. Section 25. of the Lease is hereby deleted in its entirety. 8. In regard to the completion of the final 84,090 square feet of the Expansion Space, rent shall become payable and begin to accrue upon the earlier to occur of (i) the date Lessee occupies this portion of the Expansion Space, or (ii) May 1, 1995. 9. The rent payable under the Lease shall be increased by $.04 per square foot for every $100,000.00 on a pro rata basis, of additional improvements requested by Lessee between the date of this Agreement and the issuance of a certificate of occupancy for the Premises. 10. Except as modified herein, the Lessee shall remain in full force and effect, without default thereunder on the part of either party hereto. 11. As part of the consideration for Lessee entering into this Agreement, Lessor has agreed to take such steps, and execute such documents as are necessary to qualify for and implement favorable property tax treatment for the Premises (the "Pilot Program") from the Industrial Development Board of Shelby County, Tennessee. In the event Lessor fails to comply with its covenant set forth herein, Lessor shall be responsible for paying any excess taxes on the Premises which arise as a result of Lessor's failure to comply with said covenant, provided such failure or loss of tax savings does not result from Lessee's own actions or negligence, or the actions of any other party besides Lessor or beyond Lessor's control. IN WITNESS WHEREOF, Lessor and Lessee acting hereby by duly authorized representatives have caused this Agreement to be executed as of the date first above written. LESSOR: HARBIN GROUP, L.P. BY: Eagle Development Corporation, General Partner BY: /s/ Leon C. Harbin, III ---------------------------------------- TITLE: President LESSEE: RND, INC. BY: /s/ Gregory A. Pratt ---------------------------------------- TITLE: President EX-10 3 Exhibit 10.17 LEASE BETWEEN QUEBEC COURT JOINT VENTURE NO. 2 6312 S. Fiddler's Green Circle, Suite 350N Englewood, Colorado 80111 LANDLORD AND TENANT Intelligent Advanced Systems, Inc., a Delaware corporation 5700 S. Quebec Street, Suites 100, 200 & 300 Englewood, Colorado 80111 Dated June 3, 1994 LEASE This Lease ("Lease") is made between Intelligent Advanced Systems, Inc., a Delaware corporation, whose address is 5700 S. Quebec Street, Suite 100, 200 & 300, Englewood, Colorado 80111, ("Tenant"), and QUEBEC COURT JOINT VENTURE NO. 2, 6312 S. Fiddler's Green Circle, Suite 350N, Englewood, Colorado 80111 ("Landlord"), on the day set forth on the cover page of this Lease. 1. TERMS AND CONDITIONS: A. "Leased Premises" shall mean the entire building (consisting of 3 floors)shown as such on EXHIBIT A attached hereto and made a part hereof, except for 7942 SF currently leased to Human Resource Company of Colorado ("HRCC") on the 3rd floor of the Building (see Exhibit A) which Landlord shall make available to Tenant, at Landlord's expense, on 4/1/95, and rent shall not commence until delivery of such space. B. "Building" shall mean the office building commonly known as Quebec Court I located at 5700 S. Quebec Street, Englewood, Colorado and the real property including the Building parking area (see Exhibit B1) on which it is located as described in EXHIBIT B attached hereto and made a part hereof. C. "Lease Commencement Date" shall mean August 1, 1994 or as may be adjusted pursuant to the terms of this Lease. D. "Lease Term" shall mean the period beginning on the Lease Commencement Date and ending on December 31, 2001, or as may be adjusted pursuant to the terms of this Lease. Any reference in this Lease to Lease Term or the words "during the term" or "the term" shall all be deemed to include any renewal period authorized under this Lease. E. "Rent" shall mean the following for the periods indicated: The monthly "Rent" shall include Rent, Building Operating Costs, together with other amounts payable by Tenant to Landlord under this Lease and shall be: ANNUAL RENT PERIOD MONTHLY RENT PER SQUARE FOOT SQUARE FEET *8/1/94-12/31/94 $ 61,029.00 $ 6.00 122,058 *1/1/95-3/31/95 $106,800.75 $10.50 122,058 4/1/95-12/31/95 $113,750.00 $10.50 130,000** 1/1/96-12/31/96 $124,583.33 $11.50 130,000 1/1/97-12/31/97 $135,416.67 $12.50 130,000 1/1/98-12/31/98 $146,250.00 $13.50 130,000 1/1/99-12/31/99 $157,083.33 $14.50 130,000 1/1/00-12/31/00 $167,916.67 $15.50 130,000 1/1/01-12/31/01 $167,916.67 $15.50 130,000 *See Addendum #2 **Increased from 122,058 RSF to 130,000 RSF subject to delivery of HRCC space. F. "Tenant's Total Square Footage" shall mean approximately 122,058 Rentable Square Feet ("RSF") which is calculated by adding together the crosshatched areas shown on Exhibit A and Tenant's share of common areas of the Building prior to delivery of the HRCC space to Tenant, and thereafter 130,000 Rentable Square Feet which area shall exclude the entire fourth level currently occupied as a personal residence, "Total Building Square Footage" shall mean 130,000 rentable square feet ("RSF") which is calculated by adding together rentable square footage of the premises leased by all tenants in the building and the common areas of the Building and the "Tenant's Pro Rata Share" shall mean ninety three and nine tenths percent (93.9%) prior to delivery of the HRCC space to Tenant and thereafter one hundred percent (100.0%) (Tenant's Total Square Footage divided by Total Building Square Footage). All measurements subject to verification by either party's architect of rentable areas in the Building shall be computed by measuring from the inside of "Permanent Outer Building Walls", hereinafter deemed to exclude from such measurement the thickness of any special surfacing materials such as paneling, furring strips, and carpet, or from the inside surface of the glass line where present to the inside of Permanent Outer Building Walls or the inside surface of the glass line where present less all vertical penetrations; the parties agree to use BOMA's ANSI Z65.1 1989 method of measurement. If such measurements are later discovered to be in conflict with the square footages stated above, this Lease shall be amended to provide for the actual square footages, and any covenants herein based upon ratios relating to such square footages shall likewise be modified. G. "Permitted Purpose" shall mean use of the Leased Premises for the following general office purposes: general office use. H. "The Broker of Record" shall mean CB Commercial Real Estate Group, Inc., as a dual agent. I. "Authorized Number of Parking Spaces" During the term of the Lease, including any renewal or extension, Tenant shall have the right, at no cost to Tenant, except as noted below to use 476 undesignated parking spaces in the building parking area, and at the time Tenant requires an additional 50 spaces, Tenant shall be permitted to use 50 in the adjacent Quebec Court II lot to the extent there is a cost to build the additional spaces at Quebec Court II, said cost shall be included in the Building Operating Costs. However, said cost shall be excluded from $.50/RSF/YR cap described in paragraph 3.B. 2. USES A. Except as provided in Paragraph 21 below in case of Tenant's default, Tenant agrees to use the Leased Premises for the Permitted Purpose only, and for no other purpose. Tenant covenants to comply with all building, zoning, fire and other governmental laws, ordinances, regulations or rules applicable to the Leased Premises. Tenant shall not do or permit anything to be done in or about the Leased Premises, or bring or keep anything in the Leased Premises that may (i) increase the fire and extended coverage insurance premium upon the Building; (ii) injure the Building; or (iii) constitute waste or be a nuisance, public or private, or menace to tenants of adjoining premises or anyone else. B. Landlord represents that subject to the provisions of a work letter to be executed between the parties, a sample is attached hereto and made a part hereof as EXHIBIT H (the "Work Letter"), a Certificate of Occupancy for the Leased Premises shall be issued as of the Lease Commencement Date; provided, however, that in the event such Certificate of Occupancy is not issued as of the Lease Commencement Date, Tenant's sole remedy for the breach of such representation shall be the right to an abatement of the Rent, due hereunder, on a pro rated per diem basis equal to one day of Rent for each day following the scheduled Lease Commencement Date, for so long as such Certificate of Occupancy shall remain unissued, and in such event the actual Lease Commencement Date shall be deemed to be the date on which such Certificate of Occupancy is issued. No abatement of Rent shall be due, however, if the cause of the delay in issuance of the Certificate of Occupancy is due to the fault of the Tenant. C. Tenant agrees that it has determined to Tenant's satisfaction that the Leased Premises can be used for the Permitted Purpose. In the event the Leased Premises cannot be used for the Permitted Purpose at any time during the Lease Term, Landlord shall have the option to terminate this Lease or modify the Permitted Purpose. If Landlord fails to exercise such option, Tenant shall have the right to use the Leased Premises for any other remaining lawful purpose, for so long as the Leased Premises are then capable of accommodating such use. D. Tenant shall have a nonexclusive right with HRCC and the exclusive right after HRCC vacates the 3rd floor to use the exterior common areas, inclusive of parking areas, outside of the Building, and located on the real estate legally described on EXHIBIT B, in accordance with Landlord's reasonable rules and regulations, as described in Paragraph 17 below. 3. RENT: A. Tenant covenants and agrees to pay to Landlord during the term of this Lease, at the place specified by Landlord, the Rent, without deduction or setoff, due and payable in advance on the first day of each month; provided, however, Tenant shall be entitled to offset against the Rent any damages finally determined by an arbitration panel as hereinafter provided to have resulted from Landlord's breach of its obligations hereunder. Rent not paid by the fifth (5th) of the month shall be subject to a late charge of three percent (3%) of the amount due provided that the Landlord gives Tenant written notice that the rent is past due and payable and Tenant fails to make such payment to Landlord within five (5) days after receipt of Landlord's notice, however, Landlord shall not be required to give such notice more than once in any calendar year. Notwithstanding anything to the contrary contained in this Section, if, during the term of the Lease (i) Tenant has expended money to cure an alleged default by Landlord, and (ii) filed an arbitration proceeding for compensatory damages (excluding punitive damages) resulting from Tenant's cure of Landlord's alleged breach, Tenant shall be entitled to setoff against rent the amount for which such arbitration panel enters a final judgement in favor of Tenant, and only with respect to any compensatory damages (excluding punitive damages) awarded to Tenant. Solely for the purposes of determining whether Tenant is entitled to reimbursement of monies expended to cure an alleged default by Landlord, Landlord and Tenant acknowledge and agree that Tenant shall be entitled to seek binding arbitration of its alleged damages resulting from its expenditure of money to cure the alleged default. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The arbitration shall be held in the State of Colorado. The Federal Arbitration Act shall apply to the construction and interpretation of this paragraph. Judgement upon any award rendered by the majority vote of an arbitration panel of three may be entered into any court having jurisdiction. If Tenant is ever required to pay taxes, utilities and/or janitorial expenses due to the failure of Landlord to pay such items as Landlord is obligated to do herein, Landlord and Tenant acknowledge and agree that Tenant shall have the right to offset against future rent such amount paid for taxes, utilities and/or janitorial expenses only if and when Tenant: (i) gives Landlord 30 days notice to cure the nonpayment or notify Tenant why Landlord has not made such payment (or such shorter period of the amounts are due in less than 30 days), (ii) gives Landlord 30 days to reimburse Tenant for the later's payment thereof, (iii) files an action with an arbitration panel as provided in the preceding paragraph, and (iv) allows a maximum of six months to transpire from its original notice to Landlord to await a final judgement from the arbitration panel. If the arbitration panel does not render a final judgement within such six-month period, Tenant shall then be able to offset against future rent any amounts that it has properly paid for taxes, utilities or janitorial expenses. The foregoing does not affect nor otherwise impair Landlord's right to refuse to pay such expenses if Landlord is properly protesting the amount of such charges, including without limitation, contesting the taxes assessed by the applicable taxing authority. In such an event, Landlord shall indemnify, defend and hold Tenant harmless from and against all loss, cost, damage and expense as a result of its dispute. If Tenant proceeds to pay such costs despite the pendency of such dispute, Tenant shall not have the right to bring an action with the arbitration panel as provided herein until such time as the dispute is resolved between the Landlord and the other party, and Tenant's ability to offset such payment (or the actual amount owed to the third party by Landlord if less than the amount of such payment) against future rent shall not ripen until such arbitration panel enters a final judgement in favor of Tenant. B. In addition to Rent, Tenant shall pay Tenant's Pro Rata Share of "Building Operating Costs" in excess of $6.00 per rentable square foot. Building Operating Costs shall mean all reasonable expenses, costs and disbursements competitively priced, which Landlord shall pay or become obligated to pay because of or in connection with the maintenance, repair and operation of the Building, including, but not limited to, real estate taxes and assessments, use, sales, or any other taxes (except income taxes) based on rents, personal property taxes on personal property used in the operation of the Building; Landlord's insurance, as described in Paragraph 6 below; utilities not separately metered to individual tenants; costs of leasing or amortization of energy reduction devices and systems, except those included in the initial building specifications; maintenance; repairs, redecorating of common areas; costs of roof renovation (which shall be amortized over its expected life); janitorial service; operating supplies; property management; Building Services; snow removal; landscaping; costs of leasing or amortizing plants, shrubs, trees, or flowers, and normal maintenance thereof; costs of leasing or amortizing *wall hangings, *fixtures, *paintings and *statues, rubbish removal; tools and equipment used for the daily operation of the Building; air conditioning and heating, elevator repair and maintenance, resurfacing and restriping of parking areas; repair and replacement of car stops and signage; security; and wages, payroll taxes, welfare and disability benefits reasonably incurred in the operation of the Building. Building Operating Costs shall not include monies spent for income tax, accounting, interest, depreciation, or expenditures of a capital nature (except to the extent that such expenditures not to exceed $.50/RSF/YR ($65,000.00), based upon current RSF) on a **cumulative basis during the lease term, are required due to a change in law. If the expenditure results from a change in law, the Building Operating Costs shall include only that part of the expense attributable to each lease year based upon the following amortization schedule, which shall not be less than $.50/RSF/YR in those years in which there are enough expenses chargeable in such year: Amount of Expenditure*** Number of Years to Amortize - - - ------------------------ --------------------------- $65,000.00 or Less One (1) $65,000.01 to $130,000.00 Two (2) $130,000.01 to $195,000.00 Three (3) $195,000.01 to $260,000.00 Four (4) $260,000.01 to $325,000.00 Five (5) $325,000.01 TO $390,000.00 Six (6) $390,000.01 to $455,000.00 Seven (7) *** Assuming 130,000 RSF, subject to change over the lease term. For example, if in year two of the lease term, an expenditure due to a change in law is made in the amount of $150,000.00, Landlord shall include $65,000.00 in the Building Operating Costs in such second year, and $65,000.00 and $20,000.00 in each of the next two lease years, respectively. As an additional example, if in year five of the lease term such an expenditure is made in the amount of $500,000.00, Landlord shall include $100,000.00 in the lease year in which such expenditure is made, and $100,000.00 in each of the next four lease years (assuming Tenant exercises its renewal option). Landlord and Tenant acknowledge and agree that notwithstanding anything to the contrary contained in this Section B., Tenant's maximum aggregate liability for such expenditures during the initial 7 years of the Lease Term shall be $455,000.00 ("Tenant's Contribution"). Any unused or unamortized portion of Tenant's Contribution shall carry forward into any renewal term of the Lease, if applicable, and the maximum liability for such during the renewal term of the Lease shall be $455,000.00 plus the unused or unamortized portion of the Tenant's Contribution from the initial term of the Lease. *In no event shall the cost applicable to such wall hangings, fixtures, paintings and statues increase during the initial term or any renewal thereof. ** For instance, if in the first year of the lease term, Landlord is not required to make any expenditures for a change in law, all .50/RSF/YR ($65,000.00) chargeable in such lease year shall be added to the $.50/RSF/YR chargeable in the second year of the lease term. Thus, making such chargeable expenditures equal to $1.00/RSF/YR ($130,000.00 assuming no change in RSF) in such second year. If Landlord or Tenant desire to make any expenditures that are reasonably anticipated to reduce Building Operating Costs, the parties may enter into any cost-sharing agreement with respect to such expenditure as they see fit at or prior to either party's incurrence of such expenditures. Real estate taxes also shall be deemed to include all of Landlord's expenses, including, but not limited to, attorney's fees incurred by Landlord in any effort to minimize such taxes, whether by contesting proposed increases in assessments or by any other means or procedures appropriate in the circumstances. C. Within one-hundred-twenty (120) days after the beginning of each calendar year, commencing on January 1 of the year following the year of the Lease Commencement Date, Landlord shall give Tenant a statement of Landlord's estimate of Building Operating Costs. Annually, after assessing past and estimated future operating costs data, Landlord may adjust the monthly operating cost payment provided for herein upward or downward to reflect more accurately the anticipated monthly costs. All payments due at least thirty (30) days after the revision notice shall be payable at the new rate and in twelve (12) equal monthly installments. As of the end of each calendar year, Landlord shall compute the actual costs of operating the Building for the previous twelve (12) month period (if the Building has been operating for less that 12 months, the cost of operating the Building for a year shall be determined by dividing the actual operating costs by the number of days of actual operation and multiplying by 365). Landlord shall deliver to Tenant notice of such cost and the amount due, if any, from Tenant as soon as reasonably practical. Tenant shall reimburse Landlord within thirty (30) days after notice of any deficiency between estimated operating costs and actual costs. In the event of overpayment by Tenant, Landlord shall apply the excess to the next successive installments of Rent due hereunder, including Rent due under any extensions of the Lease, unless there are no further Rent payments due from Tenant, in which case Landlord shall pay such excess to Tenant within ten (10) days of such notice from Landlord. Landlord shall, upon Tenant's written request, make available to Tenant or Tenant's Representative(s) a written accounting complete with receipts, invoices, service contracts, cancelled checks and other backup information reasonably requested by Tenant showing how Building Operating Costs were calculated for the Building for any year. In the event Tenant objects to the statement of Building Operating Costs for any year, Tenant and Landlord agree to cooperate in good faith to resolve any such objection. The foregoing notwithstanding, Tenant shall in no way be relieved of its obligation to pay Tenant's Pro Rata Share of Building Operating Costs as calculated by Landlord during the period in which it is cooperating with Landlord to resolve any objections as provided herein. 4. UTILITIES: Landlord, in its name, shall, provide to the Leased Premises the following utility services: water, sewer, electricity, electrical metering and gas. Utility charges whether separately metered or not shall be treated as Building Operating Costs. Landlord does not warrant that any of the utility services will be free from interruption caused by Unavoidable Delay, as defined in Paragraph 23 below. 5. BUILDING SERVICES: Landlord shall provide services to Tenant which are comparable to services provided at other first class suburban office buildings in southeast Denver. Landlord agrees to maintain all parking and exterior common areas, which maintenance shall include lighting, gardening, cleaning, sweeping, painting and window cleaning; and to provide for the Leased Premises and the Building such other services, as reasonably requested by Tenant from time to time on a reasonable billable basis including, but not limited to, air-cooling, heating and interior janitorial services, which interior janitorial services are listed on EXHIBIT C attached hereto and made a part hereof. Landlord shall maintain and repair the exterior of the Building, its structural portions and the roof. The services to be provided by Landlord according to this Paragraph 5 shall be deemed to be "Building Services". The cost of Building Services shall be considered a Building Operating Cost. Landlord shall not be liable in any event, nor shall Rent be abated, because of interruption of Building Services. The foregoing notwithstanding, if any interruption of Building Services causes the Leased Premises to be untenantable for a period of at least five (5) consecutive business days, Rent shall be abated proportionately. 6. INSURANCE, INDEMNITY: A. Landlord shall secure and maintain throughout the term of this Lease the following insurance coverage which Landlord deems reasonable (the cost of which shall be a Building Operating Cost) in amounts and form within Landlord's reasonable discretion: (1) Fire insurance with extended coverage endorsements attached in the amount of the full insurable value of the Building; (2) Comprehensive public liability insurance (including bodily injury and property damage insurance) for the Building; and (3) Rental abatement insurance against abatement or loss of rent in case of fire or other casualty. Landlord may, but is not obligated to, purchase such other insurance customarily purchased, from time to time, by first-class office building owners and managers in the Denver, Colorado area and treat the cost thereof as a Building Operating Cost. B. Tenant shall, at its own expense, procure and maintain throughout the term of this Lease: (1) Comprehensive public liability insurance, without deductible, insuring Tenant's activities with respect to the Leased Premises against loss, damage or liability for personal injury or death, Landlord's damage to property or commercial loss occurring on or about the Leased Premises, in amounts no less than $1,000,000 combined single limit; and (2) Workmen's compensation insurance in at least the statutory amounts with respect to any work or other operation in or about the Leased Premises. Landlord and Landlord's mortgagee, if any, shall be named as additional insureds under such insurance and such insurance shall be primary and noncontributing with any insurance carried by Landlord. The liability insurance policy shall contain endorsements requiring thirty (30) days notice to Landlord prior to any cancellation or any reduction in amount of coverage. Tenant shall deliver to Landlord, as a condition precedent to taking occupancy of the Leased Premises, a Certificate or Certificates evidencing such insurance and including an appropriate waiver of subrogation clause, as described in Paragraph 7 below. Tenant, as a material part of the consideration be rendered to Landlord, hereby waive all claims against Landlord for injury to persons or property sustained by Tenant, its agents, employees, invitees, so long as such injuries are covered by Tenant's liability insurance. C. Except to the extent proceeds are paid from Landlord's insurance, Tenant shall indemnify and hold Landlord harmless from and against all demands, suits, fines, liabilities, losses, damages, costs and expenses (including legal expenses) which Landlord may incur or become liable for as a result of any breach by Tenant, its agents, employees, officers, contractors, invitees or licensees of the terms or covenants of this Lease. 7. WAIVER OF SUBROGATION: Anything in this Lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all rights of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any casualty loss or damage that may occur to the Premises, improvements to the building of which the Premises are a part, or personal property (building contents) within the building and/or Premises, for any reason regardless of cause or origin. Each party to this Lease agrees immediately after execution of this Lease to give each insurance company, which has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this paragraph, and if necessary, to have the insurance policies properly endorsed. 8. REPAIRS: Except for Building Services provided by Landlord, Tenant agrees to maintain in a clean, orderly and sanitary condition, and keep in good repair, the interior of the Leased Premises, ordinary wear and tear and damage caused by Landlord excepted. Such maintenance and repair shall be at the sole cost of Tenant and shall include but not be limited to the maintenance and repair of floor covering, ceilings and walls, front and rear doors, and all interior glass on the Leased Premises. If Tenant fails to maintain or keep the Leased Premises in good repair and such failure continues for five (5) days after written notice from Landlord, Landlord may perform any such required maintenance and repairs and the cost thereof shall be additional Rent payable by Tenant within ten (10) days of receipt of any invoice from Landlord. 9. TENANT'S PROPERTY: Furnishings, trade fixtures and moveable equipment, if any, paid for and installed by Tenant, shall be the property of Tenant, including but not limited to Tenant's phone system, computer systems and equipment. Any furnishings, trade fixtures and moveable equipment paid for by Landlord, shall be considered the property of Tenant, if Tenant has reimbursed Landlord for the cost of such property. On expiration of this Lease, if there is then no Event of Default, Tenant may remove any such property and shall remove any such property if directed by Landlord. Tenant shall repair and/or reimburse Landlord for the cost of repairing any damage resulting from removal of Tenant's property. If Tenant fails to remove such property as required under this Lease, Landlord may do so and Landlord shall not be liable for any loss or damage to the property of Tenant which may occur during Landlord's removal thereof. 10. IMPROVEMENTS AND ALTERATIONS BY TENANT: Tenant may make such additional improvements or alterations to the Leased Premises which it may deem necessary or desirable, but only with Landlord's prior written approval (which approval shall not be unreasonably withheld). Any such improvements or alterations by Tenant shall be done, at Tenant's expense, by a licensed contractor approved by Landlord in conformity with plans and specifications reasonably approved by Landlord. All work performed shall be done in a good and workmanlike manner and with materials (which are specifically described in the specifications) of the quality and appearance comparable to those in the Building, and shall become the property of Landlord. Prior to the commencement of any work or delivery of any materials to the Leased Premises, Tenant shall furnish Landlord, for its approval, copies of the following: (a) plans and specifications; (b) names and addresses of contractors; (c) copies of contracts; (d) necessary permits; and (e) such other items as may be reasonably requested by Landlord to protect itself in connection with the work. 11. CASUALTY: If the Leased Premises or the Building are destroyed or damaged by fire, earthquake or other casualty to the extent that they are untenantable in whole or in part, then Landlord shall, except as provided below, proceed with reasonable diligence to rebuild and restore the Leased Premises, or such part thereof as may be destroyed or damaged, and during the period of such rebuilding and restoration, this Lease shall remain in full force and effect, and Rent shall be abated in the same ratio as the square footage in the portion of the Leased Premises rendered untenantable, if any, shall bear to the Total Square Footage of the Leased Premises. If Landlord shall reasonably determine that such destruction or damage cannot be rebuilt and restored within one hundred twenty (120) days, it shall so notify Tenant within thirty (30) days after the occurrence of such damage or destruction. In such event, either Landlord or Tenant may, within twenty (20) days after such notice, terminate this Lease. If neither party terminates this Lease during such twenty (20) day period, this Lease shall remain in effect and Landlord shall diligently proceed to rebuild and restore the Leased Premises, and Rent shall abate as set forth above. Anything to the contrary notwithstanding, in the event the Leased Premises are rendered untenantable due to the fault or neglect of Tenant, its agents, employees, visitors or licensees, there shall be no abatement of Rent as provided above, except to the extent such loss of Rent shall be payable from the proceeds of the rental abatement insurance maintained by Landlord in accordance with Paragraph 6 above. 12. ASSIGNMENT, LETTING AND SUBLETTING: A. Tenant, its legal representatives and successors in interest, shall not assign, let or sublet, or permit assigning, letting or subletting of this Lease, the Leased Premises or any part thereof, respectively, without first obtaining the written consent of Landlord, which consent shall not be unreasonably withheld. Any approval of Landlord, unless specifically stated therein, shall not relieve Tenant from its obligations under this Lease. B. In addition to any other reasonable basis, Landlord shall be deemed to be reasonably withholding its consent to any such assignment, letting or subletting, if such assignment, letting or subletting would result in the assignment, leasing or subleasing of the Leased Premises to: (2) a party whose business is of a character which does not, in Landlord's opinion, comport with the character of the Building. C. If Tenant sublets the Leased Premises, one-half of any rent or other payment received by Tenant from a sublessee in excess of the Rent Tenant is obligated to pay to Landlord hereunder shall be paid to the Landlord as additional Rent. D. If Tenant wants to assign, let or sublet greater than 50% of the Leased Premises, Landlord has the right to cancel the Lease and take back the Premises. Landlord is not required to cancel the Lease and any obligations under the Lease prior to cancellation are still required to be performed or paid. Tenant shall have the right, without Landlord's prior written consent to assign or sublease all or any portion of the Premises to a subsidiary or affiliate of Tenant, including but not limited to a parent of Tenant or affiliates or subsidiaries of Tenant or parent. However, Tenant or its successors shall remain liable for the lease obligations. E. Tenant may mortgage or otherwise may encumber its leasehold interest, provided that such encumbrance shall not be deemed to be a consent by Landlord to the assignment of Tenant's rights or obligations hereunder. Tenant shall only be required to seek Landlord's prior written consent, which consent shall not be unreasonably withheld, if Tenant is securing its financing solely with its leasehold interest. 13. LIENS: Tenant shall keep the Leased Premises and the Building free from any liens arising out of any work performed, materials furnished, or obligation incurred by Tenant. In the event a lien is filed against Tenant, the Leased Premises or the Building on account of any work performed, materials furnished or obligations incurred by Tenant, at the written request of Landlord, Tenant shall post a bond, or other security reasonably satisfactory to Landlord, as protection against any expenses, cost or liability incurred by Landlord as a result of such lien. The bond shall be posted (or other security acceptable to Landlord shall be provided) within ten (10) business days of receipt of such written request by Landlord, or Landlord shall have the option to terminate this Lease in accordance with Paragraph 21 below. 14. CONDEMNATION: If the whole or any part of the Leased Premises, excluding parking areas, shall be taken under power of eminent domain or like power, or sold under imminent threat thereof to any public authority or private entity having such power, this Lease shall terminate as to the part of the Leased Premises so taken or sold, effective as of the date possession is required to be delivered to such authority or entity. Rent for the remaining term shall be reduced in the proportion that the Total Square Footage of the Leased Premises is reduced by the taking. If a partial taking or sale of the Building or of the parking spaces on the Leased Premises (i) substantially reduces the area of the Building or reduces the parking spaces by more than five percent (5%) resulting in a substantial inability of Tenant to use the Leased Premises for the Permitted Purpose as determined by Tenant in its reasonable discretion, Tenant may terminate this Lease by notice to the Landlord within thirty (30) days after the Tenant receives a written notice of the portion to be taken or sold, to be effective one-hundred-eighty (180) days thereafter, or when the portion is taken or sold, whichever is sooner. All condemnation awards and similar payments shall be paid and belong to Landlord, except any amounts awarded or paid specifically for Tenants trade fixtures and relocation costs, provided such awards do not reduce Landlord's award. Nothing contained herein shall diminish Tenant's right to deal on its own behalf with the condemning authority. Notwithstanding the foregoing, if there is alternate space on the Leased Premises to construct additional parking spaces or if there is parking available within a one thousand (1,000) feet distance from the Leased Premises, which Landlord is able to secure on behalf of Tenant, Tenant shall not be allowed to terminate this lease if Landlord provides such alternative parking arrangements. 15. CONSTRUCTION CONDITIONS/CONDITION OF LEASED PREMISES: A. Tenant, with Landlord's reasonable approval of the general contractor's and/or subcontractor's qualifications shall have the right to select the space planner, architect, engineers and general contractor and/or subcontractors whom Landlord utilizes to construct the improvements (the "Tenant Improvements") to the Leased Premises, pursuant to the Work Letter Agreement (hereinafter "Work Letter Agreement") executed by Landlord and Tenant [or subsequent work letters if Tenant exercises the option(s) to expand provided herein]. Tenant shall bear the expense of constructing the improvements, except for Article 6 of Addendum No. I which costs shall be at Landlord's sole cost and expense, as provided in the Work Letter Agreement and Tenant may use or may direct the Landlord to use the construction company of Tenant's choice for initial and future improvements. Landlord shall have the right to use its own construction company for Article 6 of Addendum No. I, which costs shall be at Landlord's sole cost and expense. B. Landlord shall bear the risk of loss to the Tenant Improvements for any space of the Leased Premises until the Lease Commencement Date for that space occurs. Tenant or Tenant's Representative(s) may inspect the Tenant Improvements at reasonable times so long as such inspections do not interfere with construction activities. Tenant, by working through Landlord regarding issues of quality, shall have the right to exercise control over space planner, architect, engineers and the construction and persons performing construction activities on the Leased Premises. Acceptance by Tenant of the Certificate of Occupancy for the Leased Premises shall indicate that Tenant accepts the Leased Premises with the Tenant Improvements as being in the condition called for by this Lease, except for those items set forth in the punch-list provided by Tenant following delivery of space to Tenant by Landlord and except defects of Tenant Improvement's which Tenant shall give notice to Landlord which Landlord will remedy in a timely fashion. C. The parties have executed the Work Letter Agreement (attached as Exhibit H). 16. OCCUPANCY, LEASE COMMENCEMENT DATE: The Leased Premises shall be ready for occupancy on such dates that the Tenant Improvements are substantially completed in accordance with Paragraph 15 above, subject only to items which will not materially affect the use of Leased Premises for the Permitted Purpose. In the event of a delay in occupancy, this Lease shall not become void or voidable (unless such delay continues for more than one-hundred-eighty (180) days, and is not due to the fault of Tenant, in which case either party may terminate this Lease). Prior to occupying the Leased Premises, Tenant shall execute and deliver to Landlord a letter in the form attached hereto and made a part hereof as EXHIBIT D, acknowledging the Lease Commencement Date of the Leased Premises. 17. RULES AND REGULATIONS: Tenant covenants that Tenant and its agents, employees, invitees, or those claiming under Tenant will at all times observe, perform and abide by all reasonable rules and regulations promulgated by Landlord, from time to time, as long as such rules and regulations do not conflict with, or unreasonably modify, any provision of this Lease. Landlord's rules and regulations in effect on the date hereof are attached hereto and made a part hereof as EXHIBIT E. 18. PARKING: After HRCC vacates the Building, Tenant and its employees and invitees shall have the exclusive privilege to use the surface parking indicated on Exhibit B-1, pursuant to the rules and regulations relating to parking adopted by Landlord from time to time. Tenant and its employees and invitees shall have the exclusive privilege to use the Authorized Number of Parking Spaces as set forth in Paragraph 1.I. hereof, pursuant to the reasonable rules and regulations relating to parking adopted by Landlord from time to time. Tenant agrees not to overburden the surface parking facilities and agrees to cooperate with Landlord and other tenants in the use of such facilities. Landlord reserves the right in its reasonable discretion to determine whether parking facilities are becoming overcrowded and, in such event, to take such steps necessary to correct such condition including, but not limited to policing and towing. 19. ACCESS: Tenant shall permit Landlord to enter the Leased Premises at reasonable times for the purpose of inspecting, altering and repairing the Leased Premises and ascertaining compliance by Tenant with the provisions of this Lease. During the last twelve (12) months of the Lease term, Landlord may also show the Leased Premises to prospective purchasers or renters during regular business hours and upon reasonable notice, provided that Landlord shall not unreasonably interfere with Tenant's business operations. 20. SIGNS: All signs and symbols placed in the doors or windows or elsewhere about the Leased Premises, or upon any other part of the Building, including building directories, shall be subject to the reasonable approval of Landlord. Tenant, at Tenant's sole cost shall have the right to place a sign(s) on the Building and the grounds subject to Landlord's (so long as such complies with municipal codes and regulations) reasonable approval and upon termination of the Lease, Tenant shall restore the Building and the ground, to its prior condition. Tenant shall be entitled to place signs within the interior of the Leased Premises without having first obtained Landlord's approval. Upon expiration of this Lease, all signs installed by Tenant shall be removed and any damage resulting therefrom shall be promptly repaired, or such removal and repair may be done by Landlord and the cost thereof charged to Tenant as Rent hereunder. 21. TENANT'S DEFAULT: It shall be an "Event of Default" if (i) Tenant shall fail to pay any monthly installment of Rent or any other charge or payment required of Tenant hereunder within ten (10) business days of written notice; (ii) Tenant shall violate or fail to perform any of the other material conditions, covenants or agreements herein made by Tenant, and such violation or failure shall continue for a period of twenty (20) business days after written notice thereof to Tenant by Landlord, provided, however, that if Tenant commences to cure such default within said 20 day period and cures within 90 days after written notice thereof, then such default shall not be deemed an Event of Default; (iii) Tenant shall make a general assignment for the benefit of its creditors or shall file a petition for bankruptcy or other reorganization, liquidation, dissolution or similar relief; (iv) a proceeding is filed against Tenant seeking any relief mentioned in (iii) above which is not dismissed within sixty (60) days after filing; (v) a trustee, receiver or liquidator shall be appointed for Tenant or a substantial part of its property. If an Event of Default occurs, then Landlord may either: (i) give Tenant written notice of Landlord's intention to terminate this Lease on the date of such given notice or any later date specified therein, and on such specified date all of Tenant's and Landlord's rights and obligations under this Lease, except as expressly reserved, shall cease, Landlord's written notice shall operate as a notice to quit, and Landlord may proceed to recover possession of the Leased Premises by any lawful means, including by reentry and repossession; the obligation of Tenant to pay and the right of Landlord to recover all Rent and other charges accrued up to the time of termination or recovery of possession by Landlord, whichever is later, together with the costs of collection, including reasonable attorneys' fees, subject to Paragraph 25, shall survive termination of the Lease; or (ii) without further notice, except as is required by law, reenter and take possession of the Leased Premises, or any part thereof, and repossess the same as Landlord's former estate, and expel Tenant and those claiming through or under Tenant, and remove the effects of either or both without being deemed guilty of any manner of trespass, without being deemed to have elected to terminate this Lease, and without prejudice to any remedies for arrears of rent, preceding breaches of covenants, or loss of profits; after reentering and repossessing the Leased Premises without terminating this Lease, Landlord may, from time to time, without terminating this Lease, relet the Leased Premises or any part thereof, on behalf of Tenant for such term or terms and at such rent or rents, and upon such other terms and conditions, as Landlord may deem advisable in its sole reasonable discretion (including concessions, free rent and payment of commissions) with the right to make alterations and repairs to the Leased Premises. In the event Landlord does not elect to terminate this Lease, but on the contrary elects to take possession, then such repossession shall not relieve Tenant of its obligations and liability under this Lease, all of which shall survive such repossession. In the event of such repossession, Tenant shall pay to Landlord as Rent all Rent which would be payable hereunder if such repossession had not occurred, less the net proceeds, if any, of any reletting or the value of Landlord's use, if any, of the Leased Premises after deducting all of Landlord's reasonable expenses in connection with such reletting, including, but not limited to, all repossession costs, brokerage commissions, legal expenses, expenses of employees, costs of alterations, expenses of preparation for reletting, rental concessions and free rent. Tenant shall pay such Rent to Landlord on the days on which the Rent would have been payable hereunder if possession had not been retaken. Any damage or loss sustained by Landlord following Landlord's election to reenter and repossess the Leased Premises without terminating this Lease may be recovered by Landlord, at Landlord's option, (i) at the time of the reletting, (ii) in separate actions, from time to time, as said damage shall have been made more easily ascertainable by successive relettings, or (iii) be deferred until the expiration of the term of this Lease, in which event the cause of action shall not be deemed to have accrued until the date of expiration of said term. Although Landlord has no obligation to relet the Leased Premises for Tenant's Account subject to Landlord's duty to mitigate its damages following Landlord's election to reenter and repossess the Leased Premises without terminating this Lease, if after so repossessing the Leased Premises Landlord undertakes reasonable efforts for a period of ninety days to relet the Leased Premises for Tenant's account and Landlord is unable to find a new tenant for the Leased Premises and relet the Leased Premises on behalf of the Tenant upon such terms and conditions as Landlord may deem advisable, in its sole discretion, then Landlord may, at its option exercisable by written notice and demand to Tenant, elect to accelerate all Rent due for the remainder of the Term (determined as if there had been no Event of Default) and Tenant shall immediately pay Landlord the present value (discounted at 10%) of the Rent due for the remainder of the Term, together with all expenses and costs, including reasonable attorneys' fees, incurred by Landlord, reduced by the reasonable rental value of the leased premises for the remainder of the term. In the event this Lease is terminated pursuant to the provisions of this Section, or terminated pursuant to a proceeding for possession under the Colorado Forcible Entry and Unlawful Detainer Statutes, Tenant shall remain liable to Landlord for damages in an amount equal to the Rent and other sums which would have been owing by Tenant hereunder for the balance of the Term had this Lease not been terminated plus all amounts incurred by Landlord in order to obtain possession of the Premises and relet the same, including attorneys' fees, reletting expenses, alterations and repair costs, brokerage commissions and all other like amounts. Landlord shall be entitled to collect such damages from Tenant monthly on the days on which the Rent and other amounts would have been payable hereunder if this Lease had not been terminated, and Landlord shall be entitled to receive the same from Tenant on each such day. Alternatively, at the option of Landlord, in the event this Lease is terminated, Landlord shall be entitled to recover forthwith against Tenant as damages for loss of the bargain and not as a penalty, an amount equal to the amount of Rent reserved in this Lease for the balance of the Term reduced to present value by a discount factor of 10% and further reduced by the reasonable rental value of the leased premises for the remainder of the term, plus all amounts incurred by Landlord in order to obtain possession of the Premises and relet the same, including attorneys' fees, reletting expenses, alterations and repair costs, brokerage commissions and all other like amounts. The provisions contained in this paragraph shall be in addition to and shall not prevent the enforcement of any claim Landlord may have against Tenant for anticipatory breach of the unexpired term of this Lease; provided, however, that Landlord's right to accelerate rent shall not apply to an anticipatory breach of the terms of this Lease. All rights and remedies of Landlord under this Lease shall be cumulative and shall not be exclusive of any other rights and remedies provided to Landlord under applicable law. Notwithstanding anything to the contrary contained herein, an Event of Default shall not occur if: (i) Tenant makes a general assignment for the benefit of its creditors or files a petition in bankruptcy or other reorganization, liquidation, dissolution or similar relief; (ii) a proceeding is filed against Tenant seeking any relief mentioned in (i) above which is not dismissed within sixty (60) days after filing; or (iii) a trustee, receiver or liquidator is appointed for Tenant or a substantial part of its property, so long as Intelligent Electronics, Inc., performs all of Tenant's obligations under this Lease. 22. REMOVAL OF PROPERTY: In an Event of Default, Landlord shall have the right, but not the obligation, to remove from the Leased Premises all personal property, fixtures, furnishings and other property located therein, and to store such property in any place selected by Landlord, including, but not limited to, a public warehouse, at the expense and risk of the owners thereof, with the right to sell such stored property seven (7) days after notice to Tenant, after it has been stored for a period of thirty (30) days or more. The proceeds of such sale shall be applied first to the cost of such sale, second to the payment of the charges for storage, if any, and third to the payment of other sums of money which may then be due from Tenant to Landlord under any of the terms hereof, the balance, if any, to be paid to Tenant. 23. QUIET ENJOYMENT, INABILITY TO PERFORM: A. If, and so long as, Tenant pays Rent and keeps and performs each and every term, covenant and condition herein contained on the part and on behalf of Tenant to be kept and performed, Tenant shall quietly enjoy the Leased Premises without hindrance or molestation by Landlord, subject to the terms, covenants and conditions of this Lease and the Superior Instruments, as defined and provided in Paragraph 35 below. B. Landlord shall pay all taxes and assessments so as not to jeopardize Tenant's use of the Leased Premises. The foregoing notwithstanding, Landlord shall be entitled to contest any tax or assessment which it deems to be improperly levied against the Building so long as Tenant's use of the Leased Premises is not interfered with. C. Except as provided in this Lease, this Lease and the obligations of Tenant to pay Rent and perform all of the terms, covenants and conditions on the part of Tenant to be performed shall be in no way affected, impaired or excused because Landlord, due to Unavoidable Delay, is (a) unable to fulfill any of its obligations under this Lease, or (b) unable to make or is delayed in making any repairs, replacements, additions, alterations or decorations, or (c) unable to supply or is delayed in supplying any equipment or fixtures. Landlord shall in each instance exercise reasonable diligence to effect performance when and as soon as possible. "Unavoidable Delay" shall mean any and all delays beyond Landlord's reasonable control, including without limitation, delay caused by Tenant, governmental restrictions, governmental regulations or controls other than Landlord's failure to comply with such requirements, undue delays by governmental authorities, order of civil, military, or naval authority, governmental preemption, strikes, labor disputes, lockouts, shortages of labor or materials, inability to obtain materials or reasonable substitutes therefore, acts of God, fire, earthquake, floods, explosions, actions of the elements, extreme weather conditions, enemy action, civil commotion, riot or insurrection, delays in obtaining governmental permits or approvals or any other cause beyond Landlord's reasonable control. 24. HOLD OVER TENANCY: If (without execution of a new lease or written extension) Tenant shall hold over after the expiration of the term of this Lease, Tenant may, at Landlord's election, be deemed to be occupying the Leased Premises as a tenant from month to month, which tenancy may be terminated as provided by law. During such tenancy, Tenant agrees to pay to Landlord 100% of Tenant's then current Rent as adjusted in paragraph 3 of the lease, as set forth herein, unless notified by Landlord to vacate the Premises upon termination, then the rate shall be 150% of Tenant's then current rent as adjusted in paragraph 3 of the lease, and to be bound by all of the terms, covenants and conditions as herein specified, so far as applicable. The foregoing notwithstanding, in the event Landlord and Tenant are negotiating in good faith over the extension of the Lease Term for a period exceeding the renewal period, if any, contemplated in Paragraph 39 below, Tenant shall pay Rent at the same rate as was due during the then current renewal period, for a period not to exceed sixty (60) days following the termination date of such renewal period. At the end of such sixty (60) day period, Tenant agrees to pay to Landlord Tenant's Share of Building Operating Costs and 150% of the then current Rent until Tenant's occupancy is terminated. 25. ATTORNEYS' FEES: In the event suit is brought for the recovery of any Rent due under this Lease, or for the breach of any covenant or condition of this Lease, or for the restitution of the Leased Premises to Landlord and/or eviction of Tenant during said term, or after the expiration thereof, the party prevailing in any such legal action shall be entitled to an award for all legal costs and expenses, including, but not limited to, a reasonable sum for attorneys' fees. 26. AMENDMENT, WAIVER: This Lease constitutes the entire agreement between the parties. This Lease shall not be amended or modified except in writing by both parties, certified and sealed by Tenant's acting corporate secretary. No covenant or term of this Lease shall be waived except with the express written consent of the waiving party whose forbearance or indulgence in any regard shall not constitute a waiver of such covenant or term. Failure to exercise any right in one or more instances shall not be construed as a waiver of the right to strict performance or as an amendment to this Lease. 27. NOTICES: All notices required by this Lease shall be in writing, sealed in an envelope and delivered in person, or mailed by U.S. Registered or Certified mail, return receipt requested, postage prepaid, to the address specified below: A. If intended for Landlord: Quebec Court Joint Venture No. 2 6312 S. Fiddler's Green Circle, #350N Englewood, Colorado 80111 Attn: Property Manager B. If intended for Tenant: Intelligent Advanced Systems, Inc. 5700 S. Quebec Street Englewood, Colorado 80111 Attn: Vice President of Finance C. With copy to: Intelligent Electronics 411 Englewood Boulevard Exton, PA 19341 Attn: Corporate Counsel or to such other addresses as either party designates by notice, as provided in this paragraph, to the other party, from time to time. Notice shall be effective as of the date actually received or the date the acceptance is refused by the recipient. 28. BINDING EFFECT, GENDER: Subject to the provisions in Paragraph 12, this Lease shall be binding upon and inure to the benefit of the parties and their successors and assigns. It is understood and agreed that the terms "Landlord" and "Tenant" and verbs and pronouns in the singular number are uniformly used throughout this Lease regardless of gender, number or fact of incorporation of the parties hereto. 29. ADDENDA AND ATTACHMENTS: The typewritten addenda, exhibits or supplemental provisions, if any, attached or added hereto, are made a part of this Lease by reference and the terms thereof shall control over any inconsistent provisions in the paragraphs of this Lease. 30. LIMITATION OF LANDLORD'S LIABILITY/INDEMNIFICATION: The obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, directors, officers, or shareholders of Landlord, and Tenant shall look solely to the real estate that is the subject of this Lease and to no other assets of the Landlord for satisfaction of any liability in respect to this Lease and will not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for such satisfaction or for any deficiency judgement should Tenant be unable to satisfy any liability owed to it. Landlord shall not be liable to Tenant or to Tenant's employees, agents or visitors, or to any other person or entity, whomsoever, for any injury to person or damage to or loss of property on or about the Leased Premises or the Building caused by the negligence or misconduct of Tenant, its employees, subtenants, licensees or concessionaires, or of any other person entering the Building under the express or implied invitation of Tenant, or arising out of the use of the Premises by Tenant and the conduct of its business therein, or arising out of any breach or default by Tenant in the performance of its obligations hereunder or resulting from any other cause except Landlord's negligence, and Tenant hereby agrees to indemnify Landlord and hold it harmless from any loss, expenses or claims arising out of such damage or injury. 31. LANDLORD'S RESERVED RIGHTS: Without notice and without liability to Tenant, Landlord shall have the right to: (1) Change (i) the name of the Building, and (ii) the street address of the Building if required to do so by an appropriate authority; (2) Install and maintain reasonable signs on the exterior of the Building; (3) Make reasonable rules and regulations as, in the judgment of Landlord, may from time to time, be needed for the safety of the tenants, the care and cleanliness of the Building, and the preservation of good order therein. Tenant shall be notified in writing when each such rule and regulation is promulgated; (4) Grant utility easements or other easements to such parties, or replat, subdivide or make such other changes in the legal status of the land underlying the Building, as Landlord shall deem necessary, provided such grant or changes do not substantially or materially interfere with Tenant's use of the Leased Premises as intended under this Lease; and (5) Sell the Building and assign this Lease to the purchaser (and upon such assignment be released from all of its obligations under this Lease which accrue after such assignment). Tenant agrees to attorn to such purchaser, or any other successor or assign of Landlord through foreclosure or deed in lieu of foreclosure or otherwise and to recognize such person as Landlord under this Lease, as provided more fully in Paragraph 35 below. 32. OFFSET STATEMENT: Within twenty (20) days after request therefore by either party or its agents, successors or assigns, the other party shall deliver, in recordable form, a certificate to any proposed mortgagee or purchaser, or to the requesting party or parties identified by the requesting party, together with a true and correct copy of this Lease, certifying, if applicable (i) that this Lease is in full force and effect, without modification, (ii) the amount, if any, of prepaid rent and security deposit paid by Tenant to Landlord, (iii) that the other party as of the date of the certificate, has performed all of its obligations due to be performed under this Lease and that there are no defenses, counterclaims, deductions or offsets outstanding, or other excuses for the other's performance under this Lease, or stating those claimed by Tenant, and (iv) any other fact reasonably requested by either parties' or such proposed mortgagee or purchaser, which does not modify or conflict with either parties' rights under this Lease. The other party's failure to deliver said statement in time shall be conclusive upon the requesting party: (a) to the best knowledge of the other party, that this Lease is in full force and effect, without modification except as may be represented by Landlord, (b) that there are no uncured defaults in Landlord's performance and Tenant has no right of offset, except as set forth in Section 3.A hereof, counterclaim defenses or deduction against Rent or Landlord hereunder; and (c) that no more than one period's rent has been paid in advance. 33. ACCORD AND SATISFACTION: No receipt and retention by Landlord of any payment tendered by Tenant in connection with this Lease will give rise to, or support, or constitute an accord and satisfaction, notwithstanding any accompanying statement, instruction or other assertion to the contrary (whether by notation on a check or in a transmittal letter or otherwise), unless Landlord expressly agrees to an accord and satisfaction in a separate writing duly executed by the appropriate persons. Landlord may receive and retain, absolutely and for itself, any and all payments so tendered, notwithstanding any accompanying instructions by Tenant to the contrary. 34. SEVERABILITY: The parties intend this Lease to be legally valid and enforceable in accordance with all of its terms to the fullest extent permitted by law. If any term hereof shall be finally held to be invalid or unenforceable, the parties agree that such term shall be stricken from this Lease, the same as if it never had been contained herein. Such invalidity or unenforceability shall not extend to or otherwise affect any other term of this Lease, and the unaffected terms hereof shall remain in full force and effect to the fullest extent permitted by law, the same as if such stricken term never had been contained herein. The above notwithstanding, if any provision of this Lease shall be finally held to be invalid or unenforceable, and such term substantially and adversely affects the amount of Rent to be received by Landlord, or the nature of its obligations to Tenant, or otherwise affects the economic bargain agreed to by Landlord in this Lease, Landlord shall have the additional option of terminating this Lease. Such right shall be exercised, if at all, by delivering notice to Tenant within thirty (30) days after any final judgment declaring a provision of this Lease invalid or unenforceable, stating a date of termination no sooner than ninety (90) days from such notice. 35. SUBORDINATION: The rights of Tenant hereunder are, and shall be, at the election of any mortgagee, subject and subordinate to the lien of any deeds of trust, mortgages, the encumbrance of any leasehold financing, or the lien resulting from any other method of financing or refinancing, now or hereafter in force against the Building of which the Leased Premises are a part, and to all advances made, or hereafter to be made upon the security thereof (hereafter referred to as the "Superior Instruments"). The foregoing notwithstanding, for any liens or Superior Instruments filed of record after the execution of this Lease, the rights of Tenant under this Lease shall not be subject or subordinated to such liens or Superior Instruments unless the holders thereof execute an agreement in form and substance similar to the agreement attached hereto as EXHIBIT F (the "Subordination, Nondisturbance and Attornment Agreement"). If requested, Tenant agrees to execute whatever reasonable documentation may be required to further effectuate the provisions of this paragraph. There are no superior instruments in existence as of Lease execution. Tenant agrees to attorn to any purchaser of the Building, or any other successor or assign of Landlord through foreclosure or deed in lieu of foreclosure, in return for and upon delivery to Tenant by such purchaser or mortgagee, as the case may be, of an agreement substantially in the form of the Subordination, Nondisturbance and Attornment Agreement. 36. TIME: Time is of the essence hereof. 37. APPLICABLE LAW: This Lease shall be construed according to the laws of the State of Colorado and venue shall be in Arapahoe County, Colorado. 38. BROKER'S INDEMNIFICATION: As part of the consideration for the entering into this Lease, Tenant and Landlord represent and warrant to each other that no broker or agent negotiated or was instrumental in the negotiation or consummation of this Lease except the Broker of Record, and Tenant and Landlord agrees to indemnify each other against any loss, expenses, cost or liability incurred by the other as a result of a claim by any broker or finder claiming through either party. 39. RENEWAL OPTIONS: Landlord hereby grants Tenant one (1) option to extend the term of the Lease for a seven (7) year period. Except as provided herein, each option is granted on the same terms and conditions provided for in the Lease, except for the Rent, and Lease Term. Tenant shall accept the Leased Premises in its then "as-is" condition except for improvements mentioned below and accept further that no concessions or other privileges granted to Tenant as provided in the Lease or any addendum thereto, shall be granted to Tenant during the extension period. The Rent for the extension period shall be as follows: MONTHLY ANNUAL RENT PERIOD RENT PER SQUARE FOOT ------ ----------- --------------- Option 1/1/02-12/31/08 95% of FMRV 95% of FMRV Such option to extend may be exercised only (i) upon written notice by Tenant, certified and sealed by Tenant's acting corporate secretary on or before six (6) months prior to the end of the Lease Term; and (ii) if Tenant is not in default under the Lease, both at the time the option is exercised and at the time the extension period begins. The extension shall be at the Fair Market Rental Value (FMRV), and upon all other terms and provisions of this Lease, except no concessions or other privileges as provided in the Lease or any addendum thereto, shall apply to the extension period. FMRV shall be the Rent calculated at the then prevailing rate for similar space in comparable buildings located in the market area in which the Building is located, taking into account that the then prevailing rate shall be the prevailing rate charged by Landlord for renewal terms and not the prevailing rate charged by Landlord for the initial term of a lease, with Landlord to provide a fair market improvement allowance for a renewal. Said FMRV shall be declared by the Landlord in writing to the Tenant seven (7) months prior to the termination of the Lease. Tenant shall have thirty (30) days after Tenant notifies Landlord in writing of its intent to exercise its option to renew the Lease Term in which to dispute, in writing, Landlord's finding of FMRV, and failing such timely notice of dispute, Landlord's declared FMRV shall be deemed to be accepted by both parties. If within ten (10) working days of Tenant's registering its dispute of Landlord's declaration the parties have not agreed upon FMRV, it shall be established by arbitration under the rules of the American Arbitration Association then in effect. The parties hereto agree to prevail upon the American Arbitration Association to select qualified real estate brokers, appraisers or building managers to comprise the arbitration panel, and agree further that the FMRV established by the arbitration panel shall be binding. In the event the results of the arbitration are not known by the commencement of the option period, Tenant shall pay a rental equal to the Rent, as adjusted in accordance with Paragraph 3 of the Lease, payable in the month immediately preceding the termination of the Lease until such time as the FMRV has been established by the arbitration panel. Any adjustments necessitated by the determination of the arbitration panel shall be made forthwith, and the appropriate difference in payment, or refund, shall be paid within ten (10) days of the determination by the arbitration panel. 40. SECURITY DEPOSIT: "Intentionally Deleted" 41. MOVING CARRIERS: Tenant agrees that prior to selecting a carrier to move Tenant's property on or off the Leased Premises, Tenant shall (i) ascertain that such carrier is registered with the Interstate Commerce Commission and (ii) obtain the consent of Landlord to use such carrier, which consent shall not be unreasonably withheld. A valid reason for withholding consent shall include, but not be limited to, Landlord's previous experience with the carrier. 42. GUARANTEE: Tenant agrees that at the time of execution of the Lease, Intelligent Electronics, Inc., shall provide a Guarantee of Lease which is acceptable to Landlord in the form provided in EXHIBIT G attached hereto and made a part hereof. 43. SUBSTITUTE PREMISES: "Intentionally Deleted" 44. OTHER: This Lease is executed as of the date first above written. TENANT: Intelligent Advanced Systems, Inc., a Delaware corporation BY: /s/ Gregory A. Pratt President (Printed Name & Title) ACKNOWLEDGMENT STATE OF PENNSYLVANIA ) )ss. COUNTY OF CHESTER ) The foregoing instrument was acknowledged before me on this 14th day of June, 1994, by Gregory A. Pratt of Intelligent Electronics, Inc. Witness my hand and official seal. NOTARY PUBLIC (S E A L) s/s Paula C. Worn (Printed Name of Notary) LANDLORD: QUEBEC COURT JOINT VENTURE NO. 2, a Colorado joint venture BY: COLTEL I, INC., a Delaware corporation Joint Venturer BY: /s/ Jerry Davidson, Senior V.P., Eastdil Advisors, Inc., Managing Agent ACKNOWLEDGMENT STATE OF COLORADO ) ) ss. COUNTY OF ARAPA ) The foregoing instrument was acknowledged before me on this 22nd day of June, 1994, by Jerry Davidson as Senior Vice President, Eastdil Advisors, Inc., Managing Agent. Witness my hand and official seal. /s/ Pauline A. Wooster (S E A L) NOTARY PUBLIC (Printed Name of Notary) ADDENDUM NO. I To Lease dated May 12, 1994 between Intelligent Advanced Systems, Inc., a Delaware corporation as Tenant, and QUEBEC COURT JOINT VENTURE, NO. 2 as Landlord. 1. Relocation and Improvement Allowance: Landlord agrees to provide Tenant with a relocation and improvement allowance ("Allowance") of $1,298,000 of which Tenant shall have the right to expend as it sees fit for any and all costs associated with moving, analysis, design, purchase, construction and installation of materials, furniture, fixtures and equipment that Tenant desires to make in the Building including any relocation and ancillary costs associated with the occupancy. Beginning June 1, 1994, on the first business day of June, 1994 and on the first business day of each succeeding month thereafter, out of the funds and allowances to be provided by Landlord under the terms of this Lease, upon presentation of any invoice approved by Tenant or its authorized representative and upon receipt by Landlord of appropriate invoice related lien waivers from the general contractor and/or subcontractors, Landlord shall pay such invoices. If Tenant elects to have the Landlord build out the space according to the final space plan approved by the parties, Tenant shall notify Landlord of any funds expended out of the Allowance with the remainder of such funds available for construction. In addition, in the event any excess tenant improvements are requested by Tenant, John Madden Company, per a separate Letter Agreement, agrees to provide up to $500,000 in excess Tenant Improvement Allowance. Landlord shall have no liability for any amount of excess Tenant Improvement Allowance to be provided by John Madden Company per the separate Letter Agreement. This Lease shall not be contingent upon such excess Tenant Improvement Allowance, and the failure of the John Madden Company to provide such excess Tenant Improvement Allowance shall not be deemed to be a default of the Lease. 2. Rent: Except as otherwise provided for in Paragraph 2B of the Lease, Tenant's Rent beginning 8/1/94 shall be based upon the square footage occupied by Tenant and shall exclude Suite 320 occupied by Human Resource Company of Colorado of approximately 7,942 rentable square feet. 3. Early Possession: Tenant may have the right to early possession with the ability to occupy the space any time after lease execution for purposes of evaluation, design construction and operation of business. Early occupancy shall be under the terms of the lease except rent, which shall be at $6.00 per RSF per year which shall not commence prior to August 1, 1994. 4. Greenwood Athletic Club: Landlord shall provide Intelligent Advanced Systems, Inc. with a $10,000.00 credit for membership at the Club. 5. Existing Lease: Tenant and Landlord agree that the Lease between Quebec Joint Venture No. 2 and Intelligent Advanced Systems, Inc., dated August 10, 1993 and amended by the First Amendment to Office Lease dated November 19, 1993 shall become null and void upon full execution of this Lease and said space shall become a part of this Lease. 6. Improvements to Building: Notwithstanding anything to the contrary contained in Exhibit H, Landlord agrees to make initial upgrades and improvements to the Building, at Landlord's sole cost and expense up to $135,000.00 (which costs shall not be added into Building Operating Costs), which upgrades and improvements shall be substantially in compliance with recommended upgrades and modifications in Paragraphs 4 through 6 of the attached Exhibit J with reasonable approval of design, materials and workmanship to be by Mark Clark of Michael J. Hutchinson & Associates, 1737 Central Street, Denver, CO 80211. Landlord shall bear all responsibility and all costs as part of the $135,000.00 referenced above for ensuring that all Building Systems, materials and components referenced in Exhibit H, Paragraph 2.03 shall comply with code and regulations of the governing public authority. In addition, Landlord shall contribute up to a $30,000.00 allowance for the upgrade of the entrance, lobby and common areas of the building, which costs shall not be added to Building Operating Expenses and Landlord shall at Landlord's sole cost and expense, upgrade/retrofit the existing lighting system with new electronic ballasts and T8 lamps, which costs shall not be added to Building Operating Expenses such that the level of quality and energy savings shall comply with building code. Such retrofit/upgrade shall be subject to reasonable review and approval of Tenant's electrical engineer, Mark Clark of Michael J. Hutchinson & Associates, and all costs associated with such upgrade work shall be at no cost to Tenant and shall not be included as a part of the $135,000 expenditure limitation referenced above not added to Building Operating Expense. 7. Electrical Engineering: Mark Clark of Michael J. Hutchinson & Associates shall perform all electrical engineering and design associated with all work outlined in Exhibit J, plus all Tenant Improvement Work, at Tenant's discretion. In addition, Michael J. Hutchinson & Associates shall have the right to review, refer and approve the electrical subcontractor performing the scope of work outlined in Exhibit J, and other improvements for Tenant, regarding such subcontractor's qualifications, pricing (including overtime wages) materials to be installed and work procedures and equipment used as well as having the right to approve the Contractor's supervision and control of the electrical subcontractor regarding the work to be performed. 8. Space Planning Allowance: Landlord shall provide to Tenant a space planning allowance of $.10/RSF payable as specified upon written request by Tenant. 9. Compliance with Laws: See Exhibit K attached hereto and made a part hereof. 10. Joint Venture: The ownership of the building is a joint venture between the John Madden Company and a TREET (Telephone Real Estate Equity Trust) for the AT&T Pension Fund. 11. Landlord's Consent: Whenever Landlord's consent is required during the lease term, it should not be unreasonable withheld, delayed or conditioned by Landlord. 12. Satellite Device: Tenant shall have the right to place a satellite dish upon the roof subject to reasonable approval of Landlord and approval by municipal authority, pursuant to Satellite Letter Agreement #1 to be executed by both parties. EXHIBIT A PLAN OF LEASED PREMISES GRAPHIC DRAWING EXHIBIT B LEGAL DESCRIPTION Condominium Unit B, Quebec Court Condominiums, according to the Condominium Map recorded February 25, 1981 in Book 49 at Page 28 and the Condominium Declaration (copy of such to be provided by Landlord) for Quebec Court Condominiums recorded February 25, 1981 in Book 3371 at Page 297, County of Arapahoe, State of Colorado. EXHIBIT B1 Parking Lot Exhibit - Quebec Court I GRAPHIC DRAWING. EXHIBIT B2 Parking Lot Exhibit - Quebec Court II GRAPHIC DRAWING. EXHIBIT C JANITORIAL SERVICES OFFICES: Empty all waste receptacles. Empty and damp-wipe ashtrays. Dust all horizontal surfaces with a chemically treated cloth Dust high and low areas (pictures, clocks, partition tops, etc.) Vacuum all obvious dirt and dust. Remove all visible soil. Using tank vacuum or back-pack vacuum, vacuum corners, edges, and chairs and spot-vacuum all carpet areas. Collect, remove and recycle whenever possible all trash from Building. Using approved spotter, spot-clean carpeted area. LOBBY: Dust mop all hard surface floors with treated dust mop. Mop all stains and spills, especially coffee and drip spills. Spot-clean all walls, light switches, and doors. Empty and damp-wipe ashtrays. Using a high-speed machine, spray buff all tile areas. CORRIDORS: Spot-clean all walls, light switches, and doors. Clean and polish all drinking fountains. Empty and damp-wipe ashtrays. Fully vacuum all carpets from wall to wall. Using approved spotter, spot-clean carpeted areas. RESTROOMS: Clean and sanitize all restroom units including toilets, urinals, and sinks; damp-wipe mirrors, polish chrome, wipe counters and dispensers, and empty trash. Machine-scrub all hard-surface floors using mild detergent. Dust and clean all return air vents. Wash all restroom partitions on both sides. GLASS: Clean both sides of all interior glass. ELEVATOR CARPET: Completely clean and vacuum carpeted elevators. STAIRS, CARPET: Police stairs for litter. Vacuum and clean stairs. EXHIBIT D LEASE COMMENCEMENT DATE STATEMENT Date: _______________________ Quebec Court Joint Venture, No. 2 Re: _________________________ 6312 S. Fiddler's Green Circle, #350N 5700 S. Quebec Street Englewood, Colorado 80111 Englewood, Colorado 80111 Dear Quebec Court Joint Venture, No. 2: This letter is being delivered to you in accordance with Paragraph 16 of the Lease dated ____________________, 19___, between you and the undersigned, pertaining to the space referred to above (the "Lease"). We hereby acknowledge that the Lease Commencement Date (as defined in the Lease) for the Leased Premises is ______________, 19___, and the date of expiration of the Term is ____________, 19___ . TENANT: Intelligent Advanced Systems Inc., a Delaware corporation WITNESS: ______________________ __________________________________________ (Printed Name) (Printed Name & Title) EXHIBIT E RULES AND REGULATIONS 1. The sidewalks, entrances, halls, corridors, elevators, and stairways of the Building shall not be obstructed or used as a waiting or lounging place by Tenant, or its agents, servants, employees, invitees, licensees, and visitors. 2. Landlord reserves the right to refuse admittance to the Building at any time other than between the hours of 7:00 a.m. and 6:00 p.m. weekdays, or 7:00 a.m. to 1:00 p.m. on Saturdays, to any person not producing either a key to the Leased Premises or a pass issued by Landlord or such other means of identification as established by Tenant and approved by Landlord from time to time. In case of invasion, riot, public excitement or other commotion, Landlord also reserves the right to prevent access to the Building during the continuance of same. Landlord shall in no case be liable for damages for the admission or exclusion of any person to or from the Building. 3. Landlord will furnish to Tenant the number of keys to each door lock in the Leased Premises as requested by Tenant, at a reasonable charge per key. No Tenant shall have any keys made for the Leased Premises; nor shall any Tenant alter any lock, or install new or additional locks or bolts on any door without the prior written approval of Landlord. If a lock alteration or installation is made, the new lock must accept the master key for the Building. Each tenant, upon the expiration or termination of its tenancy, shall deliver to Landlord all keys in such Tenant's possession for all locks and bolts in the Building. In the event Tenant's security system conflicts with the system stated above, the parties shall work cooperatively to modify such to the mutual satisfaction of each other, at Tenant's sole cost. 4. In order that the Building may be kept in a state of cleanliness, each Tenant shall, during the term of each respective Lease, permit Landlord's employees (or Landlord's agent's employees) to take care of and clean the Leased Premises and Tenant shall not employ any person(s) other than Landlord's employees (or Landlord's agent's employees) for such purpose. No Tenant shall cause any unnecessary labor by reason of such Tenant's carelessness or indifference in the preservation of good order and cleanliness of the Leased Premises. Tenant will see that: (a) the windows are closed; (b) the doors securely locked; and (c) all water faucets and other utilities are shut off (so as to prevent waste or damage), each day before leaving the Leased Premises. In the event Tenant must dispose of wooden crates, which will not fit into office waste paper baskets, it will be the responsibility of Tenant to dispose of same. In no event shall Tenant set such items in the public hallways or other areas of the Building or garage facility, excepting Tenant's own Leased Premises, for disposal. Other boxes and/or trash bags shall be disposed of by Landlord. 5. No iron safe or other heavy or bulky object shall be delivered to or removed from the Building, except by experienced safe men, movers or riggers approved in writing by Landlord. All damage done to the Building by the delivery or removal of such items, or by reason of their presence in the Building, shall be paid to Landlord, immediately upon demand, by the Tenant, by, through or under whom such damage was done. There shall not be used, in any space, or in the public halls of the Building, either by Tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand-trucks except those equipped with rubber tires. Landlord is required to be reasonable regarding this provision. 6. The walls, partitions, skylights, windows, doors, and transoms that reflect or admit light into passageways or into any other part of the Building shall not be covered or obstructed by any Tenant. 7. The toilet-rooms, toilets, urinals, wash bowls and water apparatus shall not be used for any purpose other than for those for which they were constructed or installed, and no sweeping, rubbish, chemicals, or other unsuitable substances shall be thrown or placed therein. The expense of any breakage, stoppage or damage resulting from violations of this rule by Tenant or by Tenant's agents, servants, employees, invitees, licensees, or visitors, shall be borne by Tenant. 8. No sign, name, placard, advertisement, or notice visible from the exterior of any Leased Premises, shall be inscribed, painted or affixed by any Tenant on any part of the Building or Project without the prior written approval of Landlord. A directory containing the names of all Tenants of the Building shall be provided by Landlord at an appropriate place on the first floor of the Building. 9. No signaling, telegraphic, or telephonic instruments or devices, or other wires, instruments or devices, shall be installed in connection with any Leased Premises without the prior written approval of Landlord. Such installations, and the boring or cutting for wires, shall be made at the sole cost and expense of Tenant and under the control and direction of Landlord. Landlord retains, in all cases, the right to require: (a) the installation and use of such electrical protecting devices that prevent the transmission of excessive currents of electricity into or through the Building; (b) the changing of wires and of their installation and arrangement underground or otherwise as Landlord may direct; and (c) compliance on the part of all using or seeking access to such wires with such rules as Landlord may establish relating thereto. All such wires used by Tenant must be clearly tagged at the distribution boards and junction boxes and elsewhere in the Building, with (x) the number of the Leased Premises to which said wires lead, (y) the purpose for which said wires are used, and (z) the name of the company operating same. Landlord must be reasonable regarding this provision. 10. Tenant, its agents, servants, or employees shall not: (a) go upon the roof of the Building; (b) use any additional method of heating or air conditioning the Leased Premises; (c) sweep or throw any dirt or other substance from the Leased Premises into any of the halls, corridors, elevators, or stairways of the Building; (d) bring in or keep in or about the Leased Premises any vehicles or animals of any kind; (e) install any radio or television antenna or any other device or item on the roof, exterior walls, windows, or window sills of the Building; (f) place objects against glass partitions, doors, or windows which would be unsightly from the interior or exterior of the Building; or (g) use any portion of the Leased Premises: (i) for the storage of merchandise for sale to the general public, (ii) for lodging or sleeping, (iii) for cooking (except that the use by any Tenant of Underwriter's Laboratory equipment for brewing coffee, tea and similar beverages or the use of by Tenant of a similarly approved microwave oven shall be permitted, provided that such use is incompliance with law), or (iv) for the selling or display of any goods, items or merchandise, either at wholesale or retail. Tenant, its agents, servants and employees, invitees, licensees, or visitors shall not permit the operation of any musical or sound producing instruments or device which may be heard outside the Leased Premises, Building or garage facility, or which may emit electrical waves which will impair radio or television broadcast or reception from or into the Building. 11. Tenant shall not store or use in any Leased Premises: (a) any ether, naphtha, phosphorous, benzol, gasoline, benzine, petroleum, crude or refined earth or coal oils, kerosene or camphene; (b) any other flammable, combustible, explosive or illuminating fluid, gas or material of any kind; or (c) any other fluid, gas or material of any kind having an offensive odor. 12. No canvassing, soliciting, distribution of hand bills or other written material, or peddling shall be permitted in the Building, and Tenant shall cooperate with Landlord in prevention and elimination of same. 13. Tenant shall give Landlord prompt notice of all accidents to, or defects in, air conditioning equipment, plumbing, electrical facilities, or any part or appurtenances of the Leased Premises. 14. The landscaped grounds adjacent to the Building shall be used for the enjoyment of Tenant, its agents, servants, and employees so long as such parties conduct themselves in a manner so as not to disturb, destroy, or litter said grounds. All parties using the grounds shall comply with all laws, ordinances, and rules and regulations of the city and/or county in which the Building lies. EXHIBIT F Subordination, Nondisturbance and Attornment Agreement THIS AGREEMENT made this _______ day of ___________________, 19___ by and among _____________________________________, with an office at _______________ _______________________ (the "Mortgagee"), and _________________________, with an address at ____________________ (the "Tenant"), and __________________, a Colorado limited partnership, with its principal place of business at _______________________________________ (the "Borrower"). WITNESSETH: WHEREAS, the Mortgagee is the holder of a First Deed of Trust and Security Agreement from the Borrower dated ______________, 19___, recorded with the ____________________________ on _______________, 19___ at Book ____ Page _____ (the "Mortgage"), which Mortgage covers certain property in Arapahoe County, Colorado, as more fully described in Exhibit "B" of the Lease; and; WHEREAS, by virtue of that certain lease ("Lease") dated _________, 19___ between the Borrower, as Landlord therein, and the Tenant, as Tenant therein, the Tenant has leased from the Borrower approximately ______ rentable square feet of space located in an office building at ___________________________ ____________________ (the "Premises"), which Premises are a portion of the property encumbered by the Mortgage ("Mortgaged Property"); WHEREAS, the Tenant desires to be assured of continued occupancy of the Premises under the terms of the Lease and subject to the terms of the Mortgage; NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) by each party in hand paid to the other, receipt of which is hereby acknowledged, and in consideration of the Premises and the mutual covenants and agreements hereinafter contained, the parties hereto, intending to be legally bound hereby, hereby agree as follows: 1. The Tenant hereby agrees: (a) subject to this Agreement, the Lease and the Tenant's leasehold estate and any and all estates, options, liens and charges therein contained or created thereby are, and shall be remain, subject and subordinate in all respects to the lien and effects of the Mortgage and to all of the terms, conditions and provisions thereof, to all advances made or to be made thereunder, and to any renewals, extensions, modifications, consolidations or replacements thereof, with the same force and effect as if the Mortgage had been executed, delivered and duly recorded at the above-mentioned Recorder of Deeds, prior to the execution and delivery of the Lease; (b) from time to time, upon request by the Mortgagee, it shall forthwith provide the Mortgagee within ten days of such request with an estoppel certificate certifying that no defaults, claims, offsets or events, or situations which, with the passage of time, could become a default or the basis for a claim or offset against the Borrower by the Tenant, exist under the Lease or, if the same exist, certifying and describing such items as are in existence; (c) it will forward to the Mortgagee copies of any notice, claim or demand given or made by the Tenant to or on the Borrower, in all cases concurrently with forwarding same to the Borrower, such copies to be provided to the Mortgagee by the same method of mailing as the statement, notice, claim or demand was made or given to or on the Borrower; (d) without the prior written consent of the Mortgagee (i) no rent or other sums due under the Lease shall be paid more than thirty (30) days in advance of the due date therefore established by the Lease, except the security deposit, if any, (ii) no modifications shall be made in the provisions of the Lease nor shall the term be extended or renewed, except as provided therein, (iii) the Lease shall not be terminated by the Tenant except as provided therein nor shall the Tenant tender or accept a surrender of the Lease except incident to a termination provided for in said Lease, and (iv) it shall only sublet the Premises demised by the Lease or assign the Tenant's interest in the lease in accordance with the provisions of said Lease; (e) in the event of any act or omission by the Borrower which would give the Tenant the right to terminate the Lease or to claim a partial or total eviction, reduce rents or to credit or offset any amounts against future rents, the Tenant will not exercise such right (i) until it shall have given written notice of such act or omission to the Mortgagee, and (ii) until a reasonable time for remedying such act or omission shall have elapsed following such giving of notice; and if it so elects, the Mortgagee shall have the right to cure any default by the Borrower under the Lease, including, if necessary to cure such defaults, access to the Premises in accordance with the terms of the Lease. (f) notices required to be given to the Mortgagee under this Agreement will be given to any successor-in-interest of the Mortgagee under the Mortgage provided that, prior to the event for which notice is required to be given to the Mortgagee, such successor-in-interest of the Mortgagee shall have given written notice to the Tenant of its acquisition of the Mortgagee's interest therein, and designated the address to which such notice is to be directed; (g) in the event that the holder of the Mortgage (as now or hereafter constituted), or anyone claiming from or through any such holder, shall enter into and lawfully become possessed of the Mortgaged Property or the Premises, or shall succeed to the rights of the Borrower under the Lease, either through foreclosure of said Mortgage or otherwise howsoever, (i) the Tenant shall attorn to, and recognize, such holder or anyone claiming from or through such holder as its landlord under the Lease for the unexpired balance of the term of the Lease and any extension or renewal thereof, subject to all of the terms and conditions of the Lease, and (ii) the Tenant shall make all payments payable by the Tenant under the Lease directly to the holder of the Mortgage upon such holder's written instructions to the Tenant; and if, by operation of law, or otherwise, the institution of any action or other proceedings by the Mortgagee under the Mortgage or the entry into and taking possession of the Premises shall result in the cancellation or termination of the Lease or the Tenant's obligations thereunder, either party shall, so long as no Event of Default is then occurring under the Lease, upon request, execute and deliver a new lease of the Premises pursuant to the lease, containing the same terms and conditions as the Lease, except that the term and any extension thereof shall be the unexpired term and unexpired extended term or terms of the Lease as of the date of execution and delivery of said new lease; (h) it has no right or option, whether under the Lease or otherwise, to purchase any portion of the Mortgaged Property or any interest therein, and to the extent that Tenant has or hereafter acquires any such right or option, the same is hereby subordinated to the Mortgage; (i) the Mortgagee shall have no responsibility, liability or obligation to cure any defaults by the Borrower under the Lease, nor be subject to claims, defenses or offsets under the Lease (except those offsets permitted by (1) paragraph 3.A of the Lease or (2) the following paragraph), or against the Borrower possessed by the Tenant and which arose or existed prior to actual foreclosure of the Mortgage or entry under and taking possession of the Mortgaged Property by the Mortgagee. If the Mortgagee forecloses the Mortgage and enters upon and takes actual possession of the Mortgaged Property, the Mortgagee shall do so free and clear of all such prior defaults, claims, or offsets (except those offsets permitted by (1) paragraph 3.A of the Lease or (2) the following paragraph) and shall not be liable or responsible to the Tenant for any act or omission of any prior landlord (including the Borrower), or subject to any claims, defenses or offsets (except those offsets permitted by (1) paragraph 3.A of the Lease or (2) the following paragraph) which the Tenant might have against any prior landlord (including the Borrower); and Notwithstanding anything to the contrary contained in this paragraph, if, during the term of the lease prior to actual foreclosure or entry under and taking possession of the Mortgaged Property by the Mortgagee of the Property, (i) Tenant has expended money to cure an alleged default by Landlord, and (ii) brought a timely arbitration proceeding for compensatory damages (excluding punitive damages) resulting from Tenant's cure of Landlord's alleged breach, and such action has not been resolved prior to actual foreclosure on entry under and taking possession of the Mortgaged Property by the Mortgagee, the Mortgagee shall be subject to such claims and potential offset only to the extent that such arbitration panel enters a judgment in favor of Tenant, and only with respect to any compensatory damages (excluding punitive damages) awarded to Tenant. Solely for purposes of this paragraph (i), Landlord and Tenant hereby agree that Tenant shall be entitled to seek binding arbitration of its alleged damages resulting from its expenditure of money to cure alleged default of Landlord pursuant to the applicable rules of the American Arbitration Association. The arbitration shall occur in the State of Colorado. The Federal Arbitration Act shall apply to the construction and interpretation of this paragraph. Judgement upon any award rendered by the majority vote of an arbitration panel of three may be entered in any court having jurisdiction. (j) the institution of any action or other proceedings by the Mortgagee under the Mortgage in order to realize upon the Borrower's interest in the Mortgaged Property shall not by operation of law, or otherwise, result in the cancellation or termination of the Lease or the Tenant's obligations thereunder. 2. The Mortgagee hereby agrees: (a) so long as the Tenant is not in default (beyond all applicable periods given the Tenant under the Lease to cure such default) and shall pay the rents and additional rents thereunder, and shall fully comply with and perform all the terms, covenants, conditions and provisions of the Lease on the part of the Tenant thereunder to be complied with and performed, (i) the Tenant's possession and occupancy of the Premises and the Tenant's rights and privileges under the Lease, or any extension or renewal thereof which may be effected in accordance with the terms of the Lease, shall not be disturbed by the Mortgagee or any successor-in-interest to the Mortgagee; (ii) the Mortgagee shall not join the Tenant as party to any action or proceeding brought as a result of a default under the Mortgage for the purposes of terminating the Tenant's interest and estate under the Lease, subject to paragraph 1(g) above and subject further to the condition that the Mortgagee shall not be bound by any rent or other payment which the Tenant might have paid more than thirty (30) days in advance of the time stipulated for payment under the Lease or by any amendment or modification of the Lease made without its written consent. (b) in the event that the interest of the Borrower shall vest in the Mortgagee by reason of foreclosure or any other procedures brought by it, or in any other manner, the Mortgagee and its successors-in- interest agree to be bound by all of the undischarged obligations of Landlord under the Lease occurring after such foreclosure or other action. 3. The Tenant hereby represents and warrants that: (a) the Lease is in full force and effect; (b) neither the Landlord nor the Tenant is in default in the performance of or compliance with any provision of the Lease; (c) the Tenant has not received any notice of default or termination of the Lease; (d) the lease is a complete statement of the agreement of the parties thereto with respect to the leasing of the Premises; and (e) the Tenant has accepted possession of the Premises and is the sole owner of the leasehold estate created thereby. 4. The Borrower hereby irrevocably authorizes and directs the Tenant, upon receipt from the Mortgagee of written notice to do so, to pay all rents and other monies payable by the Tenant under the Lease to or at the direction of the Mortgagee. The Borrower irrevocably releases the Tenant of any liability to the Borrower for all payments so made, and the Borrower agrees to defend, indemnify and hold the Tenant harmless from and against any and all claims, demands, losses, or liabilities asserted by, through, or under the Borrower for any and all payments so made. The Tenant agrees that upon receipt of such notice it will pay all monies then due and becoming due from the Tenant under the Lease to or at the direction of the Mortgagee, notwithstanding any provision of the Lease to the contrary. Such payments shall continue until the Mortgagee directs the Tenant otherwise in writing. The Tenant agrees that neither the Mortgagee's demanding or receiving any such payments, nor the Mortgagee's exercising any other right, remedy, privilege, power or immunity granted by the Lease or this Agreement will operate to impose any liability upon the Mortgagee for performance of any obligation of the Mortgagee under the Lease unless and until the Mortgagee elects otherwise in writing or unless the Mortgagee takes possession of the Premises and assumes the function of a landlord. 5. Any notice, demand or consent hereunder shall be in writing and may be given or mailed by mailing the same by registered or certified mail, return receipt requested, addressed, or intended for the Mortgagee, to the Mortgagee at the address set forth on the first part of this Agreement, and if intended for the Tenant, addressed to the Tenant with a copy to Intelligent Electronics, Inc. at the addresses also set forth on the first page of this Agreement with a copy to the Premises, and if intended for the Borrower, addressed to the Borrower at the address also set forth on the first page of this Agreement. Either party may designate a new address by notice in writing to the other party. Any notice given in accordance wherewith shall be effective upon receipt or refusal of delivery in the United States mails in accordance herewith. 6. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of each of the parties hereto. The term "Mortgagee" shall include the respective holders from time to time of the Mortgage (as now or hereafter constituted), the term "Borrower" shall be synonymous with the term "Landlord" during the term of the Mortgage and the terms "Landlord" and "Tenant" shall include the holder from time to time of the lessor's interest, and the holder from time to time of the lessee's interest, respectively, in the Lease. 7. Any claim by the Tenant against the Mortgagee under the Lease or this Agreement shall be satisfied solely out of the interest of the Mortgagee in the Mortgaged Property and the Tenant shall not seek recovery against or out of any other assets of the Mortgagee. This Agreement shall be governed by, and construed under the laws of the State of Colorado. IN WITNESS WHEREOF, the parties hereto have caused the execution hereof as a sealed instrument as of the day and year first above written. TENANT: Intelligent Advanced Systems, Inc., a Delaware corporation x_______________________________________ (Printed Name & Title) STATE OF ________________) ) ss. COUNTY OF _______________) The foregoing instrument was acknowledged before me on this ______ day of ______________, 19___, by _________________________ as _________________ of _________________. Witness my hand and official seal. x_______________________________________ NOTARY PUBLIC (Printed Name of Notary) (S E A L) _______________________________________ (Notary's Address) MY COMMISSION EXPIRES:________________ MORTGAGEE: ___________________________ x_____________________________________ (Printed Name & Title) STATE OF ________________) ) ss. COUNTY OF _______________) The foregoing instrument was acknowledged before me on this ______ day of ______________, 19___, by _________________________ as _________________ of _________________. Witness my hand and official seal. x_____________________________________ NOTARY PUBLIC (Printed Name of Notary) (S E A L) _____________________________________ (Notary's Address) MY COMMISSION EXPIRES:_______________ LANDLORD/BORROWER: __________________ x_____________________________________ (Printed Name & Title) STATE OF ________________) ) ss. COUNTY OF _______________) The foregoing instrument was acknowledged before me on this ______ day of ______________, 19___, by _________________________ as _________________ of _________________. Witness my hand and official seal. x____________________________________ NOTARY PUBLIC (Printed Name of Notary) (S E A L) ____________________________________ (Notary's Address) MY COMMISSION EXPIRES:______________ EXHIBIT G GUARANTEE OF LEASE THIS GUARANTEE OF LEASE is made this ______ day of __________. 19__, by Intelligent Electronics, Inc., a Pennsylvania corporation("Guarantor"). WITNESSETH: In consideration of Landlord executing the Lease (which Lease is advantageous to Guarantor) and, as part of as well as separately from the Lease, Guarantor does hereby unconditionally and irrevocably covenant and agree with Landlord as follows: 1. In this Guarantee of Lease, the term "Lease" means that certain Lease dated this 12th day of May, 1994, between Intelligent Advanced Systems, Inc., a Delaware corporation ("Tenant") and QUEBEC COURT JOINT VENTURE, NO. 2 ("Landlord"), and any amendment, variation, extension or renewal thereof which may be agreed to by Tenant and Landlord, as provided in paragraphs 26 and 39 of the Lease, the terms of which are hereby incorporated herein and made a part hereof. Additionally, the term "Premises" means the premises demised by the Lease, and the term "Term" means the term of the Lease. 2. If at any time during the Term, Tenant for any reason fails to make any payment, whether to Landlord or otherwise, or to perform, observe or keep each and every of Tenant's covenants and conditions, when and as required by the Lease, then in such event, and so often as the same shall occur, Guarantor shall promptly make such payment or perform, observe or keep each and every such covenant and condition wherein Tenant has failed, and shall indemnify and hold harmless Landlord on demand from time to time to the extent that Landlord shall receive an amount equal to the rents and monies to be paid to Landlord pursuant to the Lease had the Lease continued without default by the Tenant. 3. Landlord is not bound to commence, proceed with or exhaust its recourse against Tenant before requiring Guarantor to perform any obligation of Guarantor hereunder. 4. If Tenant or Guarantor defaults, Landlord may, but shall not be obligated to, take such action as Landlord may elect to relet all or part of the Premises in order to reduce Landlord's loss or any liability to Landlord arising hereunder consistent with the terms of the Lease. 5. Without limiting any other provision hereof, Guarantor shall pay to Landlord all reasonable expenses incurred (after Guarantor is requested to perform) by the Landlord in connection with any action taken pursuant to the provisions of this Guarantee of lease, and all reasonable expenses incurred by Landlord, including legal fees, in connection with any legal action taken by Landlord to enforce this Guarantee of Lease. 6. Guarantor shall be released from this Guarantee of Lease only upon termination of the Lease according to the terms of the Lease, and all obligations of Tenant thereunder. 7. Except as provided in Paragraph 6 above, Guarantor shall not be released from this Guarantee by reason of any extension of time granted or permitted to Tenant by Landlord; Landlord's delay, waiver, forbearance, or neglect in requiring or enforcing the covenant or condition imposed on Tenant by the Lease; Landlord's failure to notify Guarantor of any default by the Tenant; any amendment, variation, extension or renewal of the Lease agreed to by the Landlord and Tenant, as provided in paragraphs 26 and 39 of the Lease, whether with or without the knowledge of Guarantor; any assignment or termination of the Lease or any subletting or abandonment by Tenant of all or any part of the Premises; any bankruptcy, receivership, liquidation or insolvency of the Tenant or any act by any trustee in bankruptcy, receiver or liquidator; or any distress, reentry or dispossession by Landlord or any action taken by Landlord under the provisions of Paragraph 4 above. 8. If this Guarantee of Lease is executed by more than one person, firm or corporation, their liability shall be joint and several. If the Guarantor is a corporation, Guarantor represents and warrants that it has business relations with the Tenant and that its execution of this agreement has been duly authorized and is binding upon the Guarantor. 9. All terms, conditions, and covenants to be performed by Guarantor hereunder shall be applicable to and binding upon the Guarantor, its successors and assigns. 10. This Guarantee of Lease shall be governed by the laws of the State of Colorado, and Guarantor hereby submits to the jurisdiction of the courts of the State of Colorado in any action or proceeding whatever by the Landlord to enforce its rights hereunder. IN WITNESS WHEREOF, Guarantor has executed this Guarantee of Lease at Englewood, Colorado on the day and year first above written. Intelligent Electronics, Inc., a Pennsylvania corporation /s/ Gregory A. Pratt GUARANTOR (Printed Name of Guarantor) ACKNOWLEDGMENT STATE OF PENNSYLVANIA ) )ss. COUNTY OF CHESTER ) The foregoing instrument was acknowledged before me on this 14th day of June, 1994, by Gregory A. Pratt of Intelligent Electronics, Inc. Witness my hand and official seal. NOTARY PUBLIC (S E A L) /s/ Paula C. Worn (Printed Name of Notary) EXHIBIT H WORK LETTER AGREEMENT Englewood, Colorado Dated: June 3, 1994 Tenant and Landlord have simultaneously executed this Work Letter Agreement and the Lease. To induce Tenant to enter into the Lease to which this Work Letter Agreement is attached, and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant mutually agree as follows: 1. Definitions: The terms defined in the paragraph, for purposes of this Work Letter Agreement, shall have the meanings herein specified, and in addition to the terms defined herein, terms defined in the Lease shall, for purposes of this Work Letter Agreement, have the meanings therein specified. 1.01 "Building Standard" means the minimum quality of materials, finishing and workmanship specified by Landlord for the Building and shall include those materials, finishings and workmanship as set forth in Schedule 2 attached hereto and made a part hereof. 1.02 "Landlord's Contractor" means Greenwood Service Company, or such other person or firm as is reasonably designated by Landlord. 1.03 "Tenant Improvements" means those items which are supplied, installed, and finished by Landlord on behalf of Tenant, under the terms of this Work Letter Agreement and the Contract (as defined below), which shall be paid for by Tenant as provided for in Schedule 1 attached hereto and made a part hereof. In no event shall Tenant Improvements be deemed to mean Tenant's furniture, special computer requirements or telephone equipment. 1.04 "Tenant's Total Square Footage" shall have the meaning specified in the Lease. 1.05 "Tenant's Rentable Square Footage" shall have the same meaning as specified in the Lease. 1.06 "Total Building Square Footage" shall have the same meaning as specified in the Lease. 1.07 "Landlord's Architect" means Greenwood Service Company, or such other person or firm as is reasonably designated by Landlord. 1.08 "Shell Condition" shall mean the condition of the Building completed by Landlord in accordance with the plans and specifications for the Building shell (the "Building Shell Plans") except that the following items shown on the Building Shell Plans shall be deemed to be Tenant Improvements as defined in Paragraph 1.03 above) and not Shell Condition: (a) emergency lights (fluorescent with battery pack) (b) window coverings; (c) finish of the Leased Premises as specified in the finish schedule to the Building Shell Plans; and (d) any paint and/or vinyl wall coverings whatsoever in the Leased Premises. 2. Completion of Leased Premises: 2.01 (a) Unless otherwise agreed to in writing by Landlord and Tenant, all work involved in the completion of Tenant Improvements shall be carried out by Landlord's Contractor under the direction of Landlord. Tenant and Landlord shall cooperate with each other and with Contractor to promote the efficient and expeditious completion of such work. (b) Landlord and Tenant shall cooperate to prepare a mutually agreeable space plan for the Leased Premises and submit to Architect such other additional information necessary to prepare the working drawings and specifications (the "Plans") for the Leased Premises which Plans shall be mutually agreeable to Landlord and Tenant. The charges to Tenant for preparing the Plans (and the scope of work related thereto) set forth in SCHEDULE 1 attached hereto and made a part hereof. Landlord shall cause to be prepared and deliver the Plans to Tenant within fourteen (14) days after the space plan has been approved and Tenant shall approve the Plans one (1) day after receipt thereof. Landlord shall cause to be prepared and deliver a detailed written estimate of the cost of Standard and Non-Standard Tenant Improvements (the "Estimate") within seven (7) days after the Plans have been approved, and Tenant shall approve the Estimate one (1) day after receipt thereof. If Tenant shall fail to disapprove the Plans or the Estimate in a timely manner, then such failure shall be deemed to be an approval. Landlord shall cause to be prepared, and shall deliver the construction agreement (the "Contract") to Tenant within one (1) day after the Estimate has been approved, and Tenant shall have one (1) day after receipt to approve or disapprove the Contract. Failure to disapprove the Contract in a timely manner shall be deemed an approval and Landlord shall be authorized to proceed with construction. The schedule for the above is as follows: (c) In the event Tenant's failure to approve the Plans is caused by Tenant's desire to modify the Plans for its own purposes, Landlord shall have new plans prepared, and the same procedure prescribed in this Work Letter Agreement for the initiation, approval and commencement of Tenant Improvements shall be followed, but in such event, the Lease Commencement Date shall remain unchanged, unless Landlord causes other delays to the Lease Commencement Date. In the event Tenant fails to approve the Plans because the Plans have been improperly prepared, Landlord shall have new Plans prepared, as expeditiously as possible, and the Lease Commencement Date shall be extended by the number of days elapsed on account of such improperly prepared Plans. (d) Anything to the contrary notwithstanding, Tenant's right to approve the Estimate is limited to approval of the cost of non-standard improvements, as described in SCHEDULE 2. In the event Tenant fails to approve the estimate, as provided in this Work Letter Agreement, Landlord shall take competitive bids for the cost of such work and submit a revised Estimate to Tenant for approval. In no event shall Tenant's failure to approve the Estimate or any revised Estimate affect the Lease Commencement Date. 2.02 If there are any changes in Tenant Improvements, by or on behalf of Tenant, from the work as reflected in the Plans, each such change must receive prior written approval of Landlord. 2.03 Only with Landlord's express written permission shall Tenant alter or modify, or in any manner disturb: (a) Any system or installation of the Building, including, but not limited to, Central plumbing system, Central electrical systems, Central heating, ventilating and air conditioning systems, Central fire protection and fire alert systems, Central building maintenance systems, Central structural systems, elevators, and anything located within the Central core of the Building; or (b) Any Branch (as defined below), of any system or installation of the Building which is located within the Leased premises, including, but not limited to, Branch electrical system, Branch heating, ventilating and air conditioning system, and Branch fire protection and alert system. For the purpose of this Paragraph 2.03, "Central" shall be defined as that portion of any Building system or component which is within the core and/or common to and/or serves or exists for the benefit of other tenants in the Building, and "Branch" shall be defined as that portion of any Building system or component which serves to connect or extend Central systems into the Leased Premises. 2.04 Landlord shall have no obligation to commence any work involved in the completion of Tenant's Improvements until Tenant shall have approved the Plans and the Estimate as required by the provisions contained herein. 3. Commencement of Rent: Tenant's obligation for the payment of Rent due under the Lease shall commence on the date specified in the Lease, Landlord has failed to substantially complete all Tenant Improvements, as set forth in this Work Letter Agreement, subject only to the completion or correction of the items on Tenant's punch list; provided however, that if Landlord is delayed in substantially completing such work as a result of: (a) Tenant's failure to furnish promptly, information concerning Tenant's requirements for constructing Tenant Improvements; (b) Tenant's failure to approve all of the plans, drawings, specifications, and instructions as required by Paragraph 2.01 of this Work Agreement; (c) Tenant's changes in any plans and/or specifications as finally approved; (d) Tenant's request for materials, finishes, or installations other than building Standards; or (e) Any other unauthorized act or omission by Tenant or its agents, then Tenant's obligation for the payment of rent due under the Lease shall not be affected, abated, or deferred on account of such delay. 4. Miscellaneous Provisions: Landlord and Tenant agree as follows: 4.01 For purposes of this Work Letter Agreement, whenever Landlord's consent or approval is required to be given, such consent or approval shall be deemed to be given or withheld on a reasonable basis. 4.02 Notices and other items to be delivered pursuant to this Work Letter shall be to the addresses set forth in Paragraph 27 of the Lease and shall be deemed effective upon receipt of same by the party to whom such notice or item is directed. If the foregoing correctly sets forth our understanding, kindly acknowledge your approval in the space provided below for that purpose. Very truly yours, LANDLORD: QUEBEC COURT JOINT VENTURE, NO. 2, a Colorado joint venture BY: COLTEL I, INC., a Delaware corporation Joint Venturer WITNESS: Pauline A. Wooster BY: /s/ Jerry L. Davidson (Printed Name) (Printed Name and Title) AGREED TO AND ACCEPTED this 20th day of June, 1994. TENANT: Intelligent Advanced Systems, Inc.. a Delaware corporation WITNESS: Paula C. Worn BY: /s/ Gregory A. Pratt (Printed Name) President (Printed Name and Title) SCHEDULE 1 TO WORK LETTER AGREEMENT Tenant shall pay for all Tenant Improvements to the Leased Premises other than those improvements to be made by Landlord pursuant to Paragraph 6 of the Addendum No. I from the Allowance provided to Tenant by Landlord in the amount of $1,298,000 ("Allowance" as set forth in Addendum No. I of this Lease) as set forth in Paragraph 1 of Addendum No. I of the Lease. All materials and workmanship of Tenant Improvements shall be of quality similar to that which currently exists in the Building. Any unused Allowance shall be paid to Tenant as follows: one-half (1/2) of the excess amount shall be paid no later than thirty (30) days after Tenant takes occupancy and the balance shall be paid no later than sixty (60) days after Tenant takes occupancy. In the event costs for constructing Tenant Improvements exceed the Allowance set forth in Paragraph 1 of the Addendum No. 1 to the Lease, Tenant shall have the right to pay for such improvements from the "Excess Allowance" set forth in Paragraph 1 of the Addendum No. 1 to the Lease. Following Tenant's approval of the expenditure and satisfactory completion of the work, upon presentation of Contractor and subcontractor invoices, appropriate lien waivers, appropriate evidence of payment by Contractor to such subcontractors and other appropriate documentation, Landlord shall disburse funds from the Allowance (to be held in third party escrow by Landlord) to Contractor once a month not to exceed the credit of $1,298,000 referenced above, and Landlord shall receive no supervision or administrative fee for such work or any other work related to construction of Tenant Improvements. The allowance of up to $135,000 and of $30,000 as set forth in Addendum No. I of the Lease are in addition to the $1,298,000 Allowance set forth in Addendum No. I of this lease. EXHIBIT I ERISA RIDER QUEBEC COURT JOINT VENTURE NO. 2 as Landlord (the "Landlord") and Intelligent Advance Systems, Inc., a Delaware corporation, as Tenant (the "Tenant") are executing simultaneously herewith a written lease (the "Lease") leasing certain space (the "Premises") in a building commonly known as Quebec Court, and more particularly described in the Lease. In consideration of the respective covenants of the parties described in the Lease, Landlord and Tenant further mutually agree as follows: 1. Default. A default under the lease shall be deemed to have occurred if Tenant or Tenant's assignee, lessee, or sublessee (and such party being hereinafter referred to as a "Transferee") if, and only to the extent that, any such transfer shall be permitted under and shall be effected in accordance with the terms and provisions of the Lease, becomes a "party in interest" ("Party In Interest") as such term is defined in Section 3 (14) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") with respect to any employee benefit plan (collectively, as amended from time to time, the "Plans", which term shall include any successor or successors to the Plans) which has assets held in the Telephone Real Estate Equity Trust ("TREET"), which term shall include any successor to TREET, or with respect to TREET. 2. Assignment and Subletting: Tenant covenants that it shall not at any time assign the Lease or any interest of Tenant thereunder, or let or sublet all or any portion of the Lease, to any party which is a Party In Interest. 3. Tenant Estoppel Certificate. Tenant shall from time to time, upon not less than ten (10) days prior written request by Landlord, execute, acknowledge and deliver to Landlord a written statement certifying whether Tenant or Tenant's Transferee is a Party In Interest with respect to any of the Plans individually or with respect to TREET. 4. ERISA Representations. Tenant hereby represents and warrants to Landlord that on the date of entry into the Lease and on the Commencement Date of the Lease, Tenant is not and shall not become at any time during the term of the Lease, a Party In Interest with respect to any of the Plans individually or with respect to TREET. In addition, Tenant acknowledges that if Tenant or Tenant's Transferee becomes a Party In Interest, the Lease may violate Section 406 of ERISA, which might result in the imposition of certain penalties and liabilities upon Tenant and Landlord. In such an event, Tenant agrees to indemnify Landlord against any and all cost, charges and expenses incurred by Landlord, including the fees of counsel, agents and others retained by the Landlord, arising out of any such violation of ERISA. 5. Lease Provisions Subject. To the extent that any of the provisions of this Rider shall be deemed to be inconsistent with the provisions of the Lease, the provisions of the Rider shall be controlling. 6. Investment Management Agreement. Tenant acknowledges that Landlord has entered into this Agreement at the direction of Eastdil Advisors, Inc. (the "Manager"), acting under and pursuant to an Investment Management Agreement with American Telephone and Telegraph Company, dated as of January 1, 1984, appointing the Manager to act as investment Manager with respect to certain assets, including the Leased Premises, constituting part of TREET. IN WITNESS WHEREOF, the parties hereto have executed this Exhibit as of the date of the said Lease. TENANT: Intelligent Advanced Systems, Inc., a Delaware corporation WITNESS: /s/ Paula C. Worn /s/ Gregory A. Pratt, President (Printed Name) (Printed Name and Title) LANDLORD: QUEBEC COURT JOINT VENTURE NO. 2 a Colorado joint venture BY: COLTEL I, INC. a Delaware corporation Joint Venturer WITNESS: /s/ Pauline A. Wooster BY: /s/ Jerry L. Davidson (Printed Name) Jerry Davidson, Senior V.P., Eastdil Advisors, Inc., Managing Agent EXHIBIT J Handrawn diagram by Michael J. Hutchison Associates, Inc., Consulting Electrical Engineers EXHIBIT K COMPLIANCE WITH LAWS 1. Landlord Compliances. At its sole cost and expense, Landlord will provide access to the building in compliance with The Americans With Disabilities Act of 1990. With the exception of the Americans With Disabilities Act of 1990, to the actual knowledge of Ownership and Management, the Building is in compliance with all applicable laws, regulations, ordinances and codes. Tenant shall have no obligation to pay for any expenditures required to remedy any violations of law that exist at the time the Lease was executed. 2. Environmental Matters. (a) Landlord's Obligations. (1) Landlord hereby represents and warrants to Tenant that to the best of its knowledge (A) there is not release of any Hazardous Materials on the property which has not been remediated; (B) no portion of the Property is being used for the treatment, storage, or disposal of any Hazardous Waste; (C) no Hazardous Materials are being used, generated, or disposed of on the Property except in compliance with all applicable Environmental laws. (D) the Property is not on any governmental list of contaminated properties, nor is any investigation, administrative order or notice, consent order, or agreement for litigation in existence or anticipated with respect to the Property. (2) Landlord covenants that, during the term of this Lease, it will not cause the treatment, storage, or disposal of any Hazardous Waste in, or on any part of the Property, and it will permit the introduction of other Hazardous Materials to the Property only in compliance with all Environmental Laws. (3) Landlord will be solely responsible for and will defend, indemnify, and hold Tenant, its agents, and employees harmless from and against all direct claims, costs, liabilities and penalties, including reasonable attorney fees and costs rising out of or in connection with Landlord's breach of its obligation under this section. Landlord's obligations under this section will survive the expiration or other termination of this Lease. (b) Tenant's Obligations. (1) Tenant will not cause or permit the storage, treatment or disposal of any Hazardous Materials in, on, or about the Premises or any part of the Property by Tenant, its agents, employees or contractors. Tenant will not permit the Property to be used or operated in a manner that may cause the Property or any part of the Property to be contaminated by any Hazardous Materials in violation of any Environmental Laws. (2) Tenant will be solely responsible for and will defend, indemnify, and hold Landlord, its agents and employees harmless from and against all direct claims, costs, and liabilities, including reasonable attorney fees and costs, arising out of or in connection with Tenant's breach of its obligations in this section. (3) Tenant will be solely responsible for and will defend, indemnify and hold Landlord, its agents, and employees harmless from and against any and all direct claims, costs, and liabilities, including reasonable attorney fees and costs, arising out of or in connection with Tenant's introduction of Hazardous Materials to the Property. Tenant's obligations under this section shall survive the expiration or other termination of this Lease. (c) Mutual Obligations. Each party will promptly notify the other party of (a) any and all enforcement, cleanup, remedial, removal, or other governmental or enforcement cleanup or other governmental or regulatory actions instituted, completed or threatened pursuant to any Environmental Laws relating to any Hazardous Materials effecting any part of the Property; and (b) all claims made or threatened by any third party against Tenant, Landlord or any part of the Property relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials on or about the Property or any part of the Property. (d) Definitions. "Hazardous Materials" means asbestos, explosives, radioactive materials, hazardous waste, hazardous substances, or hazardous materials including, without limitation, substances defined as "hazardous substances" in the Comprehensive Environmental Response Compensation Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601-9657 ("CERCLA"); the Hazardous Material Transportation Act of 1975, 49 U.S.C. Sec. 1801-1812; the Resource Conversation Recovery Acts of 1976, 42 U.S.C. Sec. 6901-6987; the Occupational Safety and health Act of 1970, 29 U.S.C. 651 et seq., or any other federal, state or local statute, law ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning hazardous materials, wastes or substances now or at any time hereinafter in effect (collectively, "Environmental Laws"). "Hazardous Waste" means hazardous waste as defined under the Resource Conservation Recovery Act of 1976, 42 U.S.C. Sec. 6901-6987. (e) The obligations of this Article shall survive the expiration or termination of this Agreement. SCHEDULE 2 TO WORK LETTER AGREEMENT QUEBEC COURT I AT GREENWOOD PLAZA TENANT IMPROVEMENT UNIT PRICES I. PARTITIONS: A. Wall System I - Demising Walls 2 1/2", 25-ga. metal studs, 24" O.C.; one layer 5/8" Type "X" drywall both sides; taped, sanded and ready for paint. Wall height from floor to slab above. Wall to be fully sound batt insulated. $28.00/l.f. B. Wall System II - Interior Partitions 2 1/2", 25-ga. metal studs, 24" O.C.; one layer 5/8" Type "X" drywall both sides; taped, sanded and ready for paint. Wall height from floor to acoustical ceiling (8' - 6"). $18.00/l.f. C. Sound Insulation Friction sound batt insulation for walls or above ceiling; furnished and installed. 2 1/2". $0.40/s.f. D. Base 4" x 1/8" Roppe Toeless rubber base in choice of colors, or equal; furnished and installed. $0.95/l.f. II. DOORS: A. Interior Doors: 3'0" x 7'-0" x 1-3/4" solid core, plain sliced, red oak in Timely frame. Hardware to be Schlage cylindrical latch set, one and on-half (1-1/2) pair regular butts and one wall stop. $300.00/each B. Suite Entry Door 3'0" x 7'-0" x 1-3/4" solid core, plain sliced, red oak in hollow metal frame. Hardware to be Schlage cylindrical lock set, one and on-half pair ball bearing butts, closer, smoke seal and wall stop. $470.00/each III. CEILING: A. 2' x 2' standard lay-in acoustical ceiling, including ceiling cuts and additional wall angle at demising walls. $1.40/s.f. B. Grid Penetrations $2.00/l.f. IV. PAINT: A. Paint hollow metal door frame with two (2) coats semi-gloss Aklyd enamel. $25.00/each B. Stain and finish red oak entry door. $35.00/each C. Paint walls with two (2) coats flat Latex pastel colors. $0.28/s.f. V. FLOOR COVERING: A. Stratton Ansley Park 30 oz. cut pile in Tenant's choice of standard colors. $8.50/s.y. B. Install carpet; glue direct method. $2.20/s.y. VI. ELECTRICAL, TELEPHONE & LIGHTING: A. 120V duplex wall receptacle $46.20/each B. 120V duplex Tombstone floor receptacle including core drilling. $121.20/each C. 120V fourplex wall receptacle. $57.20/each D. 120V fourplex Tombstone floor receptacle including core drilling. $138.90/each E. CRT wall receptacle with 3/4" conduit to top of partition. $30.00/each F. CRT floor receptacle. $99.00/each G. Telephone wall outlet with conduit to one (1) foot above ceiling line. $30.00/each H. Telephone floor outlet including core drilling. $99.00/each I. 2' x 4' flourescent light fixture with acrylic lens. $94.00/each J. 277V single pole light switch. $46.20/each K. 277V 3-way light switch. $70.10/each L. Exit light. $268.00/each M. 2' x 4' flourescent light fixture with battery pack. $233.00/each VII. CONSTRUCTION MANAGEMENT FEE: 10% of total cost. EX-10 4 Exhibit 10.18 IBM Credit Corporation 2707 Butterfield Road Oak Brook, IL 60521 January 26, 1995 Intelligent Electronics, Inc. ("IE") RND, Inc. ("RND") Intelligent Advanced Systems, Inc. ("IE Advanced Systems") Intelligent SP, Inc. ("IESP") Missing Link Communications, Inc. ("Missing Link") Intelevest Holdings, Inc. ("Intelevest Holdings") Intelevest Business Trust ("Intelevest Trust") Intellinet, Ltd. ("Intellinet") Re: Addendum to Addendum to Agreement for Wholesale Financing (Security Agreement) and Addendum to Addendum to Agreement for Wholesale Financing - Flexible Payment Plan c/o Mr. Edward A. Meltzer Vice President and CFO Intelligent Electronics, Inc. 411 Eagleview Boulevard Exton, PA 19341 Ladies and Gentlemen: Reference is made to the Addendum to Agreement for Wholesale Financing (Security Agreement) dated January 29, 1992 (as amended, supplemented or otherwise modified prior to January 25, 1994, the ("AWF") among Intelligent Electronics, Inc. ("IE"), Todays Computers Business Centers, Inc. ("TCBC"), Entre Computer Centers, Inc. ("Entre"), Entre Computer Centers of Virginia, Inc. ("Entre VA"), Entre Computer Centers of New York, Inc. ("Entre NY"), Entre Computer Centers International, Inc. ("Entre Int.") Connecting Point of America, Inc. ("Connecting Point"), Intelligent Electronics of Texas, Inc. ("IE TX"), Monterey-Waldec, Inc. ("Monterey"), EROP, Inc. ("EROP"), BizMart, Inc. ("BizMart"), BizMart of Texas, Inc. ("BizMart TX") and IBM Credit Corporation ("IBM Credit"), as amended and supplemented by the Addendum to Addendum to Agreement for Wholesale Financing - Flexible Payment Plan dated January 29, 1992 (as such Addendum has been amended, supplemented or otherwise modified prior to January 25, 1994, the "FPP"), as such AWF and FPP were amended, supplemented and modified by the letter agreement dated January 25, 1994 among IE, TCBC, Entre, Entre Int., Connecting Point, and IBM Credit, which letter Agreement amended the AWF and the FPP ("AWF 1" and "FPP 1" respectively), as such AWF 1 and FPP 1 were amended, supplemented or modified by the letter agreement dated as of January 29, 1994 among IE, TCBC, Entre, Entre Int., Connecting Point, RND, Inc. ("RND"), Intelligent Advanced Systems, Inc. ("IE Advanced Systems"), Intelligent Distribution Services, Inc. ("IE Distribution Services"), Intelligent SP, Inc. ("IESP"), Missing Link Communications, Inc. ("Missing Link"), Intelevest Holdings, Inc. ("Intelevest Holdings"), Intelevest Business Trust ("Intelevest Trust"), Wireless Telecom, Inc. ("Wireless Telecom"), Intellinet, Ltd. ("Intellinet") and IBM Credit, which letter agreement recognized the reorganization of the IE corporate group ("AWF 2" and "FPP 2" respectively) (as amended, supplemented or otherwise modified prior to the date hereof, the "Existing AWF" and "Existing FPP" respectively) (the Existing AWF and the Existing FPP, collectively, the "Existing Agreement"). In connection to the foregoing, the parties hereto agree that: A. Extension. The date through which the terms and conditions of the Existing AWF, the Existing FPP and the Existing Agreement shall remain in force is hereby extended until February 28, 1995. On or before such date, the Existing AWF, the Existing FPP and the Existing Agreement will be (1) further extended for a period of at least ninety days but not to exceed one year, with expectation that Customers and IBM Credit will execute a continuing agreement amending and restating the Existing Agreement within such period or (2) IBM Credit will provide Customers at least ninety days notice of IBM Credit's intent to terminate the Existing Agreement. If the Existing Agreement is extended according to (1) above, IBM Credit will provide Customers at least ninety days notice of any change to the terms and conditions of the Existing Agreement. B. Ratification and Effectiveness. This letter agreement shall be governed by and construed in accordance with the internal laws of the State of Illinois. This letter agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. If this letter satisfactorily outlines our agreement, please have an authorized representative of each of Ie, RND, Intelligent Advanced Systems, IE Distribution Services, IESP, Missing Link, Intelevest Holdings, Intelevest Trust, and Intellinet execute this letter agreement and return it to IBM Credit at the address noted above. Very truly yours, /s/ D.E. Diedo - - - ----------------------------------- D.E. Diedo Remarketer Financing Center Manager Read and agreed as of the date set forth above Intelligent Electronics, Inc. By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. Read and agreed as of the date set forth above RND, Inc. By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. Read and agreed as of the date set forth above Intelligent Advanced Systems, Inc. By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. Read and agreed as of the date set forth above Intelligent Distribution Services, Inc. By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. Read and agreed as of the date set forth above Missing Link Communications, Inc. By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. Read and agreed as of the date set forth above Intelevest Holdings, Inc. By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. Read and agreed as of the date set forth above Intelevest Business Trust By: /s/ Edward A. Meltzer -------------------------------- Print Name: Edward A. Meltzer Title: V.P. EX-10 5 Exhibit 10.19 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period: ____________ to _______________ Commission file number: 0-19296 The Future Now, Inc. ---------------------------------------- (Exact name of registrant as specified in Articles of Incorporation) Ohio 31-1252959 (State of Incorporation) (I.R.S. Employer Identification No.) 8044 Montgomery Rd. Suite 601 Cincinnati, Ohio 45236 (Address) (Zip Code) Telephone Number: (513) 792-4500 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value. Indicate by check mark whether the registrant (l) 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. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the Common Stock of The Future Now, Inc. held by non-affiliates as of January 31, 1995: $23,338,613. There were 7,578,566 shares of the registrant's common stock outstanding as of January 31, 1995. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for the 1995 Annual Meeting of Shareholders to be held on or about May 25, 1995, are incorporated by reference into Part III of this Form 10-K. In the event such Proxy Statement is not filed with the Commission by April 30, 1995, the Registrant will amend this annual report on Form 10-K to include the required items in Part III of this Report. PART I Item 1. BUSINESS The Company is one of the ten largest computer resellers in the United States as measured by sales. The Company, a computer sales and services company, sells and installs microcomputers, UNIX workstations, turnkey local and wide area network systems, computer software and peripheral products for business, professional, educational and governmental customers. The Company also offers a wide range of sophisticated customer support and consulting services which carry higher gross margins than product sales and are the principal focus of the Company's marketing strategy. The Company currently operates 19 sales offices in 13 states and manages seven additional sales offices in six other states for Intelligent Electronics, Inc. ("IE"). The Company does not maintain any retail facilities. The Company is the successor of a business originally formed in 1975 for the purpose of distributing word processing equipment in Ohio and Kentucky. In the 1980s, this predecessor business changed its focus to the microcomputer industry. The Company was incorporated in Ohio in August, 1988 by members of the predecessor's management and other investors for the specific purpose of acquiring the predecessor's business and assets. This acquisition was completed in December, 1988, and the Company began doing business as "The Future Now, Inc." The Company has subsequently acquired 15 existing businesses, including the Company Center Division ("CCD") of IE in 1992 and Direct Computer Corporation, Premium Computer Corporate Center and Basicomputer Corporation in 1993. During 1994 the Company decided to forgo further acquisitions and concentrated on consolidating and integrating its operations. Effective second quarter 1994, the Company adopted a definitive plan for a company-wide restructuring, including the closing of substantially all warehouses and the closing and consolidation of duplicate facilities in areas where the Company had made acquisitions. Additionally, effective December 30, 1994, the Company sold the assets of five of its branch offices and two satellite sales offices to IE and entered into a management agreement with IE under which the Company continues to manage these facilities. On March 6, 1995, the Company and IE signed a letter of intent for IE to acquire the outstanding stock of the Company. The acquisition will be a stock-for-stock, tax-free transaction. Based on the exchange ratio set forth in the letter of intent, Company shareholders will receive .6588 shares of IE stock in exchange for each share of Company stock. The transaction is subject to the completion of due diligence, the execution of a definitive agreement and other customary conditions and approvals, including approval by the Company's shareholders. Microcomputer Marketplace During the past ten years, rapid advances in computer technology have led to the development of significantly more powerful microcomputers at substantially lower prices. Additionally, the use of microcomputers has become widespread throughout all employee levels and functional areas within the workplace. Because of cost savings and enhanced flexibility, many businesses have installed networks as a preferred alternative to more expensive minicomputer or mainframe systems. Businesses are also using networks to displace existing minicomputer and mainframe systems. Networks, which are developed through the connection of a customer's multiple microcomputers and peripheral products into integrated systems, allow end users to share peripheral hardware and database resources, communicate directly via electronic mail and access the business' central computers. Originally, manufacturers sold their microcomputer products directly to end users or through retail computer dealers. During the 1980s, sales through retail dealers experienced rapid growth because retail outlets allowed the consumer to examine and test a wide variety of products from a number of hardware manufacturers. More recently, direct telemarketing and mail order developed as alternative distribution channels. These distribution channels benefited from heightened awareness on the part of the consumer, the emergence of industry standards and increased commonality of components. As microcomputer users became more computer literate, their dependence on local dealers for basic information and demonstrations diminished. In response to general competitive pressures, as well as specific price pressure from the direct telemarketing and mail order channels and direct sales by manufacturers, the microcomputer dealer distribution channel is currently undergoing additional market differentiation into dealers, such as the Company, which emphasize advanced systems and support for business networks as compared to computer "superstores" which offer retail purchasers a relatively low cost, low service alternative. The Company made a strategic decision in 1988 to narrow its market focus. The Company closed its retail outlets, relocated its sales offices to corporate office parks and developed a marketing strategy focused on business and institutional customers. In 1993, the Company organized its professional and technical services into its Professional Services Organization. This marketing strategy is designed to make the Company a partner to its customers by providing a full spectrum of professional services. The Company believes that the market for professional services as well as for microcomputer products will continue to grow. This anticipated growth should come from the demand for current technology expertise in business, professional firms and government. The Company's belief in this trend is based upon its experience with its own customers as well as general industry studies. The Company itself has not conducted any marketing studies. In addition, the Company believes the computer reseller business is in a continuing period of consolidation and realignment. Increased competition has made it more difficult for smaller resellers who do not benefit from discounts from volume purchases and are not capable of offering the range of sophisticated support services which customers are increasingly demanding. This industry consolidation provided the Company with opportunities through 1993 to make a series of acquisitions of other resellers, primarily in the geographic areas in which it was doing business. In 1994, the Company focused on integrating its prior acquisitions and emphasizing sales of professional services rather than hardware. The Company intends to continue its focus on professional services as it believes this strategic emphasis on sophisticated professional services will allow it to succeed in this changing industry. Business Strategy The Company's business strategy is to focus on the business, professional, and governmental markets. The Company believes that the increasing complexity of microcomputer systems, the widening usage of microcomputers in the workplace and the trend toward use of networks will continue to cause business and institutional customers to require significant levels of sophisticated professional services such as those provided by the Company. The Company believes that its ability to combine competitive pricing with sophisticated support services will allow it to compete effectively against a wide variety of alternative microcomputer distribution channels, including independent dealers, direct mail order and telemarketing, superstores and direct sales by manufacturers as well as firms offering information technology implementation consulting services. During 1994, the Company decided to concentrate on consolidating and integrating its operations. Effective second quarter 1994, the Company adopted a definitive plan for a company-wide restructuring, including the closing of substantially all warehouses and the closing and consolidation of duplicate facilities in areas where the Company had made acquisitions. The Company's primary strategy during 1994 was to focus on internal growth and to increase its presence in its existing markets through the expansion and upgrading of its Professional Services Organization. Continued innovation in the development of professional services and implementation of new marketing programs are also part of the Company's strategy to generate internal growth. Additionally, effective December 30, 1994, the Company sold the assets of five of its branch sales offices to IE for approximately $39 million and entered into a management agreement with IE under which the Company continues to manage these facilities. The Company entered into this transaction to reduce its outstanding debt and divest itself of the financial burdens of carrying these assets, including inventory. Under the terms of this transaction, the Company continues to manage these locations for IE in return for certain fixed management fees as well as a share in the profits these locations generate. The Company retained its employees at these locations. Under the management agreement with IE, the Company's focus is to provide services and products to the customers of those branches. In 1994, the Company also decided to centralize its purchasing, billing and credit and collection functions to provide more efficient overall operations in its business. By year end 1994, the majority of the credit and collection functions was centralized in the Company's Cincinnati headquarters. During the first quarter of 1995, all purchasing functions were centralized in the Company's Denver facility. Billing functions are centralized at the Company's Denver facility in tandem with each branch's conversion to CustomerCare Direct. By year end 1994, most branches were converted to CustomerCare Direct and the remaining branches are scheduled for conversion by the end of the second quarter 1995. During 1994, the Company also entered into an arrangement for a consulting firm to develop and manage the software used by the Company in its internal management information systems. The Company believes that its principal competitive strengths include: * A well-defined marketing strategy, supported by its Professional Services Organization, which focuses on providing sophisticated information technology services to its business, professional, governmental and educational customers enabling them to obtain full value from their information systems; * A commitment to providing sophisticated professional services nationwide through the employees in the Professional Services Organization; * The Company's alliances with industry leaders such as IE which allow the Company to offer a full range of services to its customers; * Volume purchasing power; and * Authorizations to sell leading name-brand microcomputer and workstation products and software from leading manufacturers including Apple, COMPAQ, Dell, Hewlett-Packard, IBM, Digital, AT&T, Sun, Microsoft, Lotus, Novell and Banyan. Marketing and Customers The Company directs its marketing efforts towards medium-sized businesses, Fortune 1000 corporations, professional firms and governmental and educational institutions. Some of the Company's customers do not have internal computer support personnel. The Company believes that these customers increasingly rely on business partners and suppliers to provide a complete solution to their information technology needs, in addition to competitive pricing. In addition, many of the Company's larger customers are outsourcing their information technology needs. The Company believes this trend will continue as more companies decide that it is more efficient and cost-effective to work with experts, such as the Company, in information technology rather than developing and maintaining their own expertise. The Company's marketing does not target retail or individual customers and sales to this market are not a significant part of its business. The Company currently does not intend to establish any retail outlets. No one customer accounted for more than 10% of the Company's total sales in 1994. Accordingly, the Company does not believe that the loss of any single customer would have a material adverse effect on its business. Sales to targeted customers are generated primarily by the Company's marketing representatives. As of February 28, 1995, the Company employed approximately 425 marketing representatives. These marketing representatives generally have college degrees and three or more years of successful microcomputer sales experience involving multi-product authorizations and are assigned to accounts on the basis of skill, experience and prior results. Continued growth and future success will depend in part on the Company's ability to attract, hire and retain highly skilled and motivated marketing personnel, particularly in the Professional Services Organization. The Company believes that it will be able to do so in part because of its compensation philosophy. Compensation programs for marketing representatives include both salary and commission. Commissions are based on a percentage of the gross profit generated by the sale, thereby allowing the marketing representatives to participate in the Company's gross profits. Under these compensation programs, the commission rate is greater for the sale of professional services than hardware which parallels the Company's marketing and business strategies. The Company utilizes various forms of advertising and promotional activities, including seminars, business forums and presentations, descriptive brochures, direct mail pieces and newspaper advertisements. Advertising emphasizes customer support services rather than product pricing. Marketing efforts are also enhanced by the Company's association with major manufacturers and by customer and manufacturer referrals. Products The Company markets microcomputer and workstation systems and related products and services. The components of the microcomputer systems generally supplied include a microprocessor-based central processing unit, peripheral devices such as video displays, keyboards, additional storage units, printers and software packages. The Company is an authorized dealer or a reseller at some or all of its locations for the products of over 100 manufacturers, including:
AST Computer, Inc. Hewlett-Packard Company American Telephone & Telegraph Company International Business Machines Corporation Apple Computer, Inc. Lotus Development Corporation Banyan Systems, Inc. Microsoft Corporation Bay Networks, Inc. NEC Information Systems, Inc. 3 Com Corporation Novell, Inc. Compaq Computer Corporation Oracle Corporation Dell Computer Corporation Sun Microsystems Corporation Digital Equipment Corporation Tektronix, Inc. Epson America, Inc. Toshiba American Information Systems, Inc. Hayes Microcomputer Products, Inc.
The Company continually evaluates new product lines and technological developments in the microcomputer industry and will seek additional manufacturer and product authorizations where appropriate. For each of the years ended December 31, 1994, 1993 and 1992, sales of microcomputers, peripheral products, supplies and software accounted for approximately 92% of total revenues. During these periods, the leading product lines, expressed as a percentage of hardware sales, were as follows: Percentage of Hardware Sales ----------------------------------- Manufacturer 1994 1993 1992 - - - ------------ ---- ---- ---- COMPAQ 25% 25% 16% IBM 20 19 22 Hewlett-Packard 12 12 13 Apple 3 5 8 All Other Manufacturers 40 39 41 ---- --- --- 100% 100% 100% === === === The increases and decreases in percentages of total sales among these major product lines resulted primarily from changes in product mix as a result of acquisitions and changes in customer preferences. The Company selects the products it sells on the basis of overall quality, product image, technological capability, business applications and availability of volume discounts. The Company continually monitors new products to keep current with technological advances. The microcomputer market is characterized by various hardware systems that utilize different and often incompatible standards for hardware and software. As new or improved features are introduced by manufacturers, the utility of particular products may change substantially. Concern over these changes results in confusion by customers as to which product is best suited to the customer's needs and a related volatility in demand for products. The Company attempts to address this confusion and volatility by presenting itself as "platform neutral" in its marketing and offering hardware systems, software and support services that address virtually all applicable industry standards. The majority of sales of hardware, software and peripheral products is on a trade account basis. The customer is invoiced at the time of delivery or shipment. In 1993 and 1994, the Company offered FutureFile which is a catalogue or CD-ROM based listing of manufacturers and products offered and supported by the Company. FutureFile contains product information, including descriptions of equipment compatibility and services descriptions. The manufacturers, products and services listed in FutureFile represent those recommended by the Company. FutureFile is updated frequently and provides a single resource a customer can use to evaluate available products and services. In late 1994, the Company modified this offering and renamed it Demand 95. Demand 95 includes only those leading manufacturers of hardware and software upon which the Company intends to focus during 1995. The Professional Services Organization The Professional Services Organization offers a wide range of professional services including project and network management, consulting services, enterprise design, training and technology deployment. For each of 1994, 1993 and 1992, revenue from professional services amounted to approximately 7.5%, 5% and 4%, respectively, of total revenue. Professional services, which carry higher gross margins than product sales, are a principal focus of the Company's marketing strategy and are considered critical to its success. The Professional Services Organization currently includes the following four groups. Internetworking The Internetworking group provides local, metropolitan, wide and global area network services including needs analysis and design services, systems integration and installation services, UNIX services, enterprise consulting services and network management and support services. This group is designed to meet the needs of organizations with multiple network technologies which are looking to centralize and outsource their overall network service needs and information technology management. Each part of the Internetworking group designs custom solutions to meet customers' unique project requirements from the design stage to final installation and debugging. This group also designs and implements disaster recovery systems for customers. Application Services Group The Application Services Group offers consulting and development services to assist customers in the use of current technologies and application of those technologies to gain business process efficiencies. These include groupware consulting services, application design and development and advanced education services. This part of the Professional Services Organization is designed to assist clients in the design, customization and development of effective applications. The Application Services Group also offers current high level training and certification programs to support a wide range of network and desktop operating systems. Distributed Computing Group The Distributed Computing Group assists the client in overall resource management through planning and management services, software resource management and centralized system administration and management. This group offers the Power By the Hour asset management program which provides the end user appropriate computing technology to align with its changing needs. Under this program, the Company provides a complete package to the end user, thus relieving the client of the need to purchase and manage computing assets. Under the Power By the Hour program, the Distributed Computing Group will maintain, relocate and track the equipment, as well as provide management reports to the client. Technology Deployment and Service Group The Technology Deployment and Service Group provides maintenance, technical service and support. This group offers various levels of maintenance service including warranty work, on site maintenance arrangements, dedicated on site technical personnel and time and materials maintenance contracts. This group also offers The FutureCare Help Desk which provides technical assistance to clients including FutureCare 800 Support, a fee-based toll free telephone hotline. This group also provides on site support through which it will establish, operate and maintain help desks at a client's site. This group also will customize help desk management software for clients. This group also includes the warranty and repair services which the Company had outsourced to Hewlett-Packard Corporation in 1993. Effective January 1, 1995, Hewlett-Packard and the Company agreed to terminate that arrangement. As a result, the Company again is a primary provider of warranty and repair services to its clients through its own employees as well as through arrangements with certain national temporary employee agencies. Approximately 630 of the Company's employees are part of the Professional Services Organization and customer service and support functions, reflecting the Company's marketing strategy. The key Professional Services Organization personnel as well as the other approximately 425 marketing representatives generally have prior experience and specialized training. Manufacturers and Suppliers The Company purchases microcomputers and related products directly from certain manufacturers and indirectly through IE, a distributor of such products and the beneficial owner of 31.1% of the Company's Common Stock. In general, the Company must be authorized by a manufacturer to sell that manufacturer's products, whether the products are purchased from IE or directly from the manufacturer. The Company has entered into separate authorization agreements with its major manufacturers. Typically, these agreements provide that the Company has been appointed, on a non-exclusive basis, as an authorized dealer of specified products of the manufacturer at specified locations. Most of the authorization agreements, including those with Apple, COMPAQ, Hewlett-Packard and IBM provide that the manufacturer may terminate the agreement with or without cause upon 30 to 90 days notice or immediately upon the occurrence of certain events. The Company is the largest franchisee of IE, a leading national distributor of microcomputers and related products and services. IE maintains a network of approximately 2,200 franchised and affiliated systems resellers which provide products and services to businesses in the United States. The franchise agreements have 10 year terms expiring in December 2000 or September 2003, and are renewable by the Company for one additional 10 year term under certain conditions. IE may terminate the franchise agreements upon the occurrence of certain events and the Company may terminate the agreements without cause upon prior written notice to IE. In the event of such a termination, the Company is obligated to make a buy-out payment to IE equal to IE's gross profits realized from its sales of products to the Company during the 12-month period immediately preceding termination. Under this formula, if the Company had exercised its right to terminate the agreements effective December 31, 1994, the Company believes the total buy-out payment to IE would have been approximately $17 million. In the event of such a termination, the Company also has the right to pay IE an additional sum of $500,000 to be released from all non-competition covenants contained in the franchise agreements. The Company purchases products from IE at a mark-up of IE's cost from manufacturers. The amount of the mark-up depends upon the Company's volume of product purchases from IE. The Company believes that it receives the lowest mark-up offered by IE for the range of products and services purchased. During 1994, product purchases from IE amounted to approximately 85% of the Company's total product purchases. To assure itself that its franchise relationship with IE is beneficial, the Company periodically reviews the relative economic benefits and costs of this relationship. The Company has periodically explored the advisability of purchasing the products it procures through IE (primarily Apple, COMPAQ, Hewlett-Packard and IBM) directly from these hardware manufacturers. To date, the Company's management has determined that IE's terms on these products are favorable enough to warrant continued purchases through IE. The Company also benefits from IE's national presence in marketing. In addition to IE, other national companies perform the services the Company obtains from IE. In the event the Company was unable to continue its relationship with IE, it believes it could establish a similar relationship with another company in a reasonable period of time. Because of the competitive nature of the microcomputer distribution industry, the Company believes it could ultimately obtain terms as beneficial as those currently offered by IE. In late 1992, the Company initiated a pilot program with IE designed to reduce the Company's need to carry inventory of product available through IE. Under this program, IE configures product sold by the Company and ships it directly to the Company's customer, diminishing the Company's need to carry that inventory. This program also decreases the time between order and delivery to the customer. The Company expanded this program, called CustomerCare Direct, so that most of its sales offices were on this system by year end 1994 and intends that all sales offices will be using this system by June, 1995. The Company utilized this program for approximately 50% of its total sales in 1994. Although there have been difficulties in IE's implementation of this program which continued throughout 1994 and delayed this program's expansion to the entire Company, the Company and IE believe these difficulties can be resolved during 1995. As a result of these implementation difficulties, the Company continued to incur certain additional inventory carrying, configuration and shipping costs during 1994. The Company's cost for products purchased from IE depends upon the success of IE's negotiations with the product manufacturers. Certain of the Company's competitors, depending upon size and volume of purchases, may be able to purchase products directly from manufacturers at prices lower than those paid by the Company to IE and may be able to reflect such lower costs in lower prices to their customers. However, as described above, the Company's marketing strategy and its ability to generate sales revenue, is not primarily price-oriented. The Company's ability to obtain these products on a timely basis could also be affected by adverse developments relating to IE. The Company's current arrangements with Apple, COMPAQ, Hewlett-Packard, IBM and other major manufacturers generally provide protection to the Company against declines in the dealer list price of microcomputers and related products in the Company's inventory. These arrangements typically take the form of a cash payment or a credit against purchases in an amount equal to the difference between the price actually paid by the Company for its inventory of that manufacturer's products and the new dealer list price. In addition, such arrangements generally permit the return of inventory upon payment of a restocking fee. Each of the foregoing arrangements may be discontinued or varied, at the manufacturer's option, at any time. The Company's manufacturers permit the Company to pass through to its customers all warranties and return policies applicable to the manufacturer's products. The Company is reimbursed by the manufacturers for warranty work done for its customers. All service work after the expiration of the warranty period is at the customer's expense. In late 1993 and early 1994, the Company entered an alliance with the Hewlett-Packard Company called FutureConnection. Through this program, Hewlett-Packard provided certain warranty and most out of warranty service directly to the Company's customers. This program was discontinued in early 1995 as the Company concluded it would be more advantageous for it and its customers for the Company to again directly provide maintenance and repair services. The Company has established its Technology Deployment and Service Group which provides maintenance and repair services to customers. Software and other related products are purchased from numerous industry suppliers. As is customary in the industry, the Company does not have any long-term agreements or commitments with these suppliers, because competitive sources of supply are generally available for such products. Competition The microcomputer market is highly competitive. The Company is in direct competition with local, regional and national resellers of microcomputer products and services as well as firms offering information technology implementation consulting services. In addition, the Company faces competition from microcomputer manufacturers that sell their products through direct sales forces and from distributors that emphasize mail order and telemarketing. New developments in distribution, such as the introduction of computer superstores and increased direct sales by manufacturers to end users, have also increased competition. Depending on the customer, the principal areas of competition may include price, post-sales technical support and service, availability of inventory, delivery of product and breadth of product line. Some of the Company's competitors on the regional and national level have greater financial and marketing resources than the Company. Although the Company believes its prices and delivery terms are competitive, certain competitors offer more aggressive hardware pricing to their customers. Heightened price competition among hardware manufacturers has resulted in declining gross margins for many microcomputer resellers including the Company. The Company will continue to rely on its purchasing power and the sale of higher margin services through its Professional Services Organization to combat these competitive pressures. Seasonality Due primarily to the buying patterns of its commercial customers, the Company's sales tend to be highest in the fourth quarter of the calendar year. Employees On February 28, 1995, the Company had 1,465 employees. Among them are 426 marketing representatives, 629 in the Professional Services Group, 71 in distribution and 339 in management and administration. None of the employees is represented by a union, and the Company considers employee relations to be excellent. Trademarks and Service Marks The Company has the following trademarks or service marks registered in either the United States Patent and Trademark Office or in a state: "The Future Now, Inc."; "Future Connection" (application pending); "FutureFile" (application pending); "FutureCare" (application pending); and "Power By the Hour" (application pending). The Company holds no patents. ________________________ The following trademarks or trade names are used in this Report to identify the entities claiming the marks and names of their products: "Apple" for Apple Computer, Inc.; "AT&T" for AT&T Corp.; "Banyan" for Banyan Systems Incorporated; "COMPAQ" for Compaq Computer Corporation; " Dell" for Dell Computer Corporation, "Hewlett-Packard" for Hewlett-Packard Company; "IBM" for International Business Machines Corporation; "Microsoft" for Microsoft Corporation; "Novell" for Novell Inc.; "Sun" for Sun Microsystems, Inc. and "Digital" for Digital Equipment Corporation. Item 2. PROPERTIES It is the Company's policy to lease rather than own its sales and corporate offices and to locate its sales offices in office park and corporate center facilities. These leases provide for annual base rentals ranging from $59,105 to $418,400 during 1995 and their initial terms expire from May, 1995 through December 31, 2003. In general, the Company's leases require it to pay annual base rent in monthly installments and to pay its proportionate share of taxes, common area expenses, insurance and related costs. See Note 10 of Notes to Consolidated Financial Statements. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or of which any of its property is the subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter of its 1994 fiscal year. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded in the over-the-counter market on the National Association of Securities Dealers, Inc. Automated Quotation National Market System ("NASDAQ/NMS") under the symbol "FNOW". The approximate number of record-holders of the Company's common stock at January 31, 1995 was 180. The following table sets forth, for the quarters of 1994 and 1993 indicated, the high and low sales prices for the Company's common stock; as reported on the NASDAQ/NMS: 1994 1993 ---------------- -------------------- High Low High Low ----- --- ---- --- First quarter $16.875 $13.00 $15.25 $11.25 Second quarter 16.00 9.75 14.25 9.25 Third quarter 10.25 6.00 13.25 9.00 Fourth quarter 9.50 4.50 14.50 10.75 On February 28, 1995, the closing price per share of the Company's common stock as reported on the NASDAQ/NMS was $6.00. The Company intends to retain any earnings for future use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Item 6. SELECTED FINANCIAL DATA The following data have been derived from the Company's Consolidated Financial Statements and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included elsewhere in this Report.
At or For Year Ended December 31, ---------------------------------------------------------------------- 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- (in thousands, except share and per share data) Statement of Operations Data: Revenue: Sales-Equipment and Supplies ........ $ 682,638 $ 599,151 $ 283,202 $ 113,174 $ 69,994 Sales-Software ...................... 53,683 45,654 33,201 14,926 7,126 Services Income ..................... 59,415 34,470 14,900 6,037 3,474 Repair Services ..................... -- 22,559 11,697 4,589 2,597 ----------- ----------- ----------- ----------- ----------- 795,736 701,834 343,000 138,726 83,191 Cost of Sales ......................... 678,790 588,345 283,066 113,594 68,094 ----------- ----------- ----------- ----------- ----------- Gross Profit ........................ 116,946 113,489 59,934 25,132 15,097 ----------- ----------- ----------- ----------- ----------- Operating Expenses: Selling ............................. 34,117 32,050 19,366 7,548 4,568 Service ............................. 39,454 30,919 13,371 4,865 2,417 Warehouse ........................... 2,482 2,064 1,545 612 401 General and Administrative .......... 42,316 29,053 14,837 6,396 3,995 Restructuring ....................... 33,000 -- -- -- -- Goodwill Impairment ................. 6,985 -- -- -- -- ----------- ----------- ----------- ----------- ----------- 158,354 94,086 49,119 19,421 11,381 ----------- ----------- ----------- ----------- ----------- Income (Loss) From Operations ....... (41,408) 19,403 10,815 5,711 3,716 Other Income (Expense): Interest ............................ (8,319) (3,554) (1,505) (614) (1,063) Gain on Sale of Branches to Intelligent Electronics, Inc. ...... 2,472 -- -- -- -- ----------- ----------- ----------- ----------- ----------- (5,847) (3,554) (1,505) (614) (1,063) ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Taxes (Benefit) ..................... (47,255) 15,849 9,310 5,097 2,653 Income Taxes (Benefit) (1) ............ (2,267) 6,546 3,601 2,092 1,027 ----------- ----------- ----------- ----------- ----------- Net Income (Loss) ................... $ (44,988) $ 9,303 $ 5,709 $ 3,005 $ 1,626 =========== =========== =========== =========== =========== Earnings (Loss) Per Share ............. $ (5.96) $ 1.40 $ 1.27 $ 1.01 $ .70 Weighted Average Number of Common Shares Outstanding ........... 7,548,721 6,649,391 4,497,205 2,969,622 2,313,611 Balance Sheet Data: Working Capital ....................... $ (11,886) $ 91,699 $ 51,433 $ 13,231 $ 7,318 Total Assets .......................... $ 229,377 $ 290,559 $ 145,650 $ 52,954 $ 29,511 Total Debt (2) ........................ $ 41,175 $ 75,987 $ 34,119 $ 9,812 $ 8,733 Total Shareholders' Equity ............ $ 33,289 $ 77,759 $ 42,838 $ 20,592 $ 5,598 Cash Dividends Declared Per Share ..... $ -- $ -- $ -- $ .40 $ .61
(1) The Company, with the consent of its shareholders, elected to be taxed as an S Corporation under the provisions of Section 1362 of the Internal Revenue Code until the date of the initial public offering (June 28, 1991). An S Corporation's shareholders are personally liable to pay taxes on their proportionate share of the corporation's Federal and state taxable income. For purposes of this presentation, Federal and state income taxes have been calculated at an effective rate of approximately 39% as if the Company were a C Corporation under provisions of the Internal Revenue Code for all periods prior to June 28, 1991. (2) Total Long-Term Debt, including Current Portion, plus Short-Term Debt. The Company's financial position and results of operations have been significantly affected by the initial acquisition of the business and assets of its predecessor in December 1988, subsequent acquisitions in May 1989 (Indianapolis); January 1990 (Louisville); September 1990 (Ft. Wayne); November 1990 (a second Cincinnati operation); May 1991 (Dayton); July 1991 (a second Louisville operation); November 1991 (Cleveland, Lexington, Moline/Davenport); December 1991 (Little Rock, Memphis); January 1992 (Milwaukee); July 1992 (Boston, Dallas, Los Angeles, Nashville, New York City, Pittsburgh, San Francisco, St. Louis, Washington, D.C.); January 1993 (a second Dallas operation, Houston); August 1993 (two additional operations in the Los Angeles area); September 1993 (complementary operations in Cleveland, Dayton, Columbus, New York, Dallas and Pittsburgh; Atlanta, Raleigh, Kansas City, Detroit); and the Company's initial public offering of common shares in June 1991 and secondary offering in March 1993 (see Notes 4 and 5 of Notes to Consolidated Financial Statements) and by the restructuring in 1994 discussed in Note 2 of Notes to Consolidated Financial Statements and the goodwill impairment in 1994 discussed in Note 9 of Notes to Consolidated Financial Statements. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restructuring Charge and Goodwill Impairment Charges for restructuring of $33.0 million and goodwill impairment of $7.0 million significantly impacted results of operations for the year ended December 31, 1994. See Notes 2 and 9 of Notes to Consolidated Financial Statements. Results of Operations Results of operations for the year ended December 31, 1994 were significantly impacted by the acquisition in September 1993 of Basicomputer Corporation and by the restructuring charge and goodwill impairment discussed above. Results of operations for periods beginning January 1, 1995 will be significantly impacted by the sale of branches to Intelligent Electronics, Inc. ("IE"). Further, the Company signed a letter of intent on March 6, 1995 to merge with IE. See Notes 3 and 13 of Notes to Consolidated Financial Statements. Year Ended December 31, 1994 Compared with Year Ended December 31, 1993 Revenue increased $93.9 million, or 13.4%, in 1994 as compared with 1993, which principally resulted from acquisitions during 1993 that were included for a full year in 1994. In general, growth was generated by an increase in volume, which more than offset a general decline in the prices of the Company's products, and its growth in the professional services business. Equipment and supplies revenue as a percentage of total revenue increased to 85.8% in 1994 as compared with 85.4% in 1993. Software revenue as a percentage of total revenue increased to 6.7% in 1994 as compared with 6.5% in 1993. Because the gross margins generally are smaller on sales of equipment, supplies and software than are margins on sales of professional services, management generally views increases in the percentage of total revenue generated by these products to be unfavorable. Services income increased to 7.5% of total revenue during 1994 as compared with 4.9% (excluding repair services) during 1993. "Services income" is defined by the Company as revenue derived from: (i) commissions earned on the sale of maintenance contracts; (ii) product installation; (iii) systems networking; (iv) training; and (v) product rental. The Company emphasized the marketing of professional services beginning in early 1993 and believes that its marketing efforts are resulting in the growth in professional services revenue. Due to margin pressures associated with repair services in late 1993, the Company formed an alliance with the Hewlett-Packard Company wherein the Hewlett-Packard Company provided hardware repair service for the Company's clients in 1994. Accordingly, the Company had no repair services revenue in 1994. Effective January 1, 1995, the Company terminated its arrangement with the Hewlett-Packard Company and began providing hardware repair services for its clients. The Company formed the Service Group section of the Technology Deployment and Service Group to provide such services. The Service Group is operating under a newly formed management team and has purchased software to assist in the management of the repair services business. Arrangements have been made with a parts supplier to provide the repair parts used in the repair service work, thereby eliminating the need for the Company to carry parts inventory. Gross profit as a percentage of total revenue decreased to 14.7% for 1994 as compared with 16.2% for 1993. The Company's gross margin decline resulted primarily from a decline in margin on equipment and supplies in 1994 compared with 1993 in response to competitive pressures as well as specific price pressures as a result of various sales channels available today. In addition, charges of $3.0 million were recorded by the Company in the second quarter of 1994 to increase the inventory obsolescence allowance and record the sale of obsolete inventory from certain branches that were closed in the second quarter. Selling expenses as a percentage of total revenue decreased to 4.3% for 1994 as compared with 4.6% for 1993. This decrease in percentage of total revenue is due to the realization of planned volume increases without a corresponding increase in staffing. Service expenses as a percentage of total revenue increased to 5.0% in 1994 as compared with 4.4% in 1993. The increase resulted from the continued implementation of planned staff increases in order to focus on the increased demand for professional services in the business, professional, governmental, and educational markets. General and administrative expenses increased as a percentage of total revenue to 5.3% during 1994 as compared with 4.1% during 1993. Marketing rebates, which are reported as reductions in general and administrative expenses, totalled 1.1% of revenue in 1994 as compared with 1.3% for 1993. In general, levels of marketing rebates are declining and will continue to be affected by the nature and timing of vendor programs and by the Company's effective utilization of such programs. General and administrative expenses before reduction for marketing rebates were 6.4% of revenue in 1994 and 5.4% in 1993. General and administrative expenses in 1994 include $1.0 million for certain promotional activities designed to enhance the Company's relations with its various constituencies. As a result of the acquisitions in late 1993 and overall growth of the business, the Company incurred certain additional general and administrative expenses in the following categories: administrative salaries, $3.2 million; employee benefits, $2.1 million; property taxes, $1.6 million; travel, $1.0 million; and professional fees, $0.7 million. The costs associated with administrative salaries and employee benefits are expected to be reduced as the Company centralizes its billing, purchasing and credit and collections functions. Additionally, charges totalling $1.0 million were recorded by the Company to increase the allowance for receivables for locations closed during the second quarter of 1994. Interest expense more than doubled in 1994 to $8.3 million from $3.6 million in 1993. The increase resulted from increased debt required by the Company to finance growth from its acquisitions and increased level of operations. The Company incurred interest of $1.1 million on floorplanned inventory purchases in 1994 compared with such interest of $0.1 million incurred in 1993. Further, rising interest rates throughout 1994 caused interest expense to increase over 1993. Year Ended December 31, 1993 Compared with Year Ended December 31, 1992 Revenue increased $358.8 million, or 104.6%, in 1993 as compared with 1992. Sales growth in locations owned by the Company for all of 1993 and 1992 was 18% with remaining growth due to acquisitions in 1993 and 1992. The internal growth was generated by an increase in volume, which more than offset a general decline in the prices of the Company's products. Equipment and supplies revenue as a percentage of total revenue increased to 85.4% in 1993 as compared with 82.6% in 1992. This increase was principally due to the addition of the companies acquired in 1992 and in 1993, which proportionately sold more equipment than software and services, as compared with locations operated by the Company during both years. For locations operated by the Company in both years, sales of equipment and supplies decreased slightly to 81.1% of total revenue in 1993 from 81.3% of total revenue in 1992. Because the gross margins generally are smaller on sales of equipment and supplies than are margins on sales of services, management generally views increases in the percentage of total revenue generated by these products to be unfavorable. Software revenue as a percentage of total revenue decreased to 6.5% in 1993 as compared with 9.7% in 1992. The decrease was due principally to the percentage decline in software sales in locations operated by the Company during both years. Software sales as a percentage of total revenue in locations acquired in 1992 and 1993 increased to 3.3% in 1993 from 2.3% in 1992. Services income and repair services revenue together increased to 8.1% of total revenue during 1993 as compared with 7.8% during 1992. "Services" were defined by the Company as revenue derived from: (i) maintenance contracts; (ii) product installation; (iii) systems networking; (iv) training; (v) product rental; and (vi) commissions from manufacturers for sales to certain schools, hospitals and governmental agencies. The increase in the percent of services revenue to total revenue in 1993 compared with 1992 was due to an increase in such percentage in branches owned by the Company in both 1993 and 1992. The acquisitions in late 1992 and in 1993 derive a proportionately smaller percentage of their total revenue from services and the percentage of services revenue to their total revenue remained constant in 1993 and 1992. In late 1993, the Company formed an alliance with the Hewlett-Packard Company wherein the Hewlett-Packard Company provided certain hardware repair service for the Company's clients in 1994. Gross profit as a percentage of total revenue decreased to 16.2% for 1993 as compared with 17.5% for 1992. The Company's gross margin decline resulted primarily from a decline in margin on equipment and supplies in 1993 compared with 1992. Selling expenses as a percentage of total revenue decreased to 4.6% for 1993 as compared with 5.6% for 1992. This decrease in percentage of total revenue is due to the realization of planned volume increases without a corresponding increase in staffing. Service expenses as a percentage of total revenue increased to 4.4% in 1993 as compared with 3.9% in 1992. The increase resulted principally from a significant investment made by the Company to build its Professional Services Organization. General and administrative expenses decreased slightly as a percentage of total revenue to 4.1% during 1993 as compared with 4.3% during 1992. Efficiencies achieved by the Company in its administrative functions were principally responsible for the overall decrease. This decrease was partially offset by the decline in marketing rebates. Marketing rebates, which are reported as reductions in general and administrative expenses, totaled 1.3% of revenue in 1993 as compared with 1.6% for 1992. Levels of marketing rebates will continue to be affected by the nature and timing of vendor programs and by the Company's effective utilization of such programs. Interest expense more than doubled in 1993 to $3.6 million from $1.5 million in 1992. The increase resulted principally from increased debt required by the Company to finance its acquisitions in 1992 and 1993. Liquidity and Capital Resources The Company's liquidity and capital resources have been significantly impacted by acquisitions for the periods presented, particularly the acquisitions in August 1993 of Premium Computer Corporate Center and in September 1993 of Basicomputer Corporation. The Company's financing is provided through a Secured Credit Agreement ("Agreement") with certain banks and other financing agreements with third parties to finance the Company's inventories. As of December 31, 1994, the Agreement permits borrowing of up to $85.0 million payable in full in September 1996 with interest rates varying based on the prime rate offered by the agent bank plus 1 1/4%. The provisions of the Agreement contain various restrictive covenants with respect to the attainment of various financial objectives. As a result of the restructuring charge, the Company failed to comply with certain of these covenants as of June 30, 1994, September 30, 1994 and December 31, 1994. Effective July 8, 1994, an initial amendment to the Agreement waived the Company's requirement to achieve these covenants through September 30, 1994. Subsequent amendments extended the waiver until July 31, 1995. The Company must complete its merger with IE, secure new financing, or obtain a further waiver of these covenants prior to July 31, 1995. The Company expects that there will no longer be a need for this financing when the merger with IE is consummated. If the merger is not consummated, the Company must renegotiate its current financing or obtain new financing. The maximum level of borrowing under this Agreement was reduced from $85.0 million ($95.0 million from January 19, 1994 through March 31, 1994) to $70.0 million effective January 1, 1995 as specified under a waiver of financial covenants and as a result of the sale of certain branch assets to IE. See Note 3 of Notes to Consolidated Financial Statements. During the year ended December 31, 1994, the borrowings under the Agreement ranged from $39.9 million to $93.7 million and averaged $78.9 million outstanding. Borrowings vary based on seasonal needs and typically are higher during the Company's first quarter due to increased levels of accounts receivable resulting from the seasonally higher sales activity of the previous fourth quarter. Advances against this Agreement are based on the Company's trade receivables and are subject to eligibility requirements contained within the Agreement. In order to reduce its outstanding debt and increase liquidity, the Company sold certain assets to IE which provided $34.2 million in proceeds in December 1994 and an additional $5.0 million in proceeds in January 1995. The proceeds were used primarily to reduce borrowings under the Company's Agreement. See Note 3 of Notes to Consolidated Financial Statements. The Company has taken additional steps to increase liquidity by use of IE's CustomerCare Direct program. Under this program, the Company's need to carry inventory is significantly reduced as product is shipped directly from IE's warehouse to the customer's location, thereby eliminating the Company's need to warehouse such product. The Company's inventories are financed, in part, by secured credit agreements with third parties. Such agreements entitle the Company to finance up to $105.0 million of inventories as of December 31, 1994 on an interest free basis, for periods ranging from 30 to 45 days. Further, to maintain this level of third party inventory financing, IE guarantees up to $20.0 million on one of these agreements. The amounts outstanding under these agreements totalled $88.9 million and $69.6 million as of December 31, 1994 and 1993, respectively. One of these agreements contains restrictive covenants with respect to the attainment of various financial objectives. The Company failed to comply with certain of these covenants as of June 30, 1994, September 30, 1994, and December 31, 1994. The Company has obtained amendments to the agreement waiving the attainment of the financial objectives until July 31, 1995. The Company must renegotiate and reset these covenants or obtain a further waiver of these covenants prior to July 31, 1995. Management believes it can successfully renegotiate these covenants or obtain further waivers by July 31, 1995, if necessary. During the year ended December 31, 1993, the Company was party to two separate Secured Credit Agreements with certain banks. The first Secured Credit Agreement allowed for borrowings up to $50.0 million through September 8, 1993 and the second Secured Credit Agreement allowed for borrowings up to $85.0 million from September 9, 1993 forward. During 1993, outstanding borrowings under these Secured Credit Agreements ranged from $23.3 million to $83.9 million and averaged $48.9 million. The average balance outstanding under the second Secured Credit Agreement increased substantially after September 9, 1993 due to the acquisition of Basicomputer Corporation. In March 1993, the Company received net proceeds of $16.7 million from its public offering of 1,467,500 common shares. The proceeds were applied to indebtedness under the Company's Secured Credit Agreement. In October 1993, the Company sold 681,447 of its common shares to IE at $12.8375 per share. Proceeds to the Company were $8.7 million and were applied to indebtedness under the Company's Secured Credit Agreement. Capital expenditures totalled $3.3 million and $4.0 million, respectively, for the years 1994 and 1993. Capital expenditures are limited by the Secured Credit Agreement to $4.0 million per year for the years 1994, 1995 and 1996. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page Number Description In This Report - - - ----------- -------------- Financial Statements -------------------- Independent Auditors' Report - KPMG Peat Marwick LLP 19 Consolidated Balance Sheets at December 31, 1994 and 1993 20 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993, and 1992 21 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1993 and 1992 22 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 23 Notes to Consolidated Financial Statements 24 Schedule -------- Schedule II - Valuation and Qualifying Accounts 37
QUARTERLY RESULTS The following table sets forth certain unaudited results of each of the eight quarters in the two years ended December 31, 1994. The results for any quarter are not necessarily indicative of the results for any future period. This information is unaudited, but in the opinion of management includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. This information should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto included elsewhere in this Report.
Three Months Ended -------------------------------------------------------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1994 1994 1994 1994 1993 1993 1993 1993 ---------- ---------- ---------- --------- --------- --------- --------- --------- (in thousands except share and per share data) Revenue ........................ $ 193,688 $ 204,583 $ 189,758 $ 207,707 $ 136,573 $ 159,906 $ 176,035 $ 229,320 Cost of Sales .................. 164,686 181,167 158,410 174,527 114,406 134,913 148,474 190,552 ---------- ---------- --------- ---------- --------- --------- --------- --------- Gross Profit .................. 29,002 23,416 31,348 33,180 22,167 24,993 27,561 38,768 ---------- ---------- --------- ---------- --------- --------- --------- --------- Operating Expenses: Selling ....................... 8,343 9,208 8,260 8,306 6,937 7,608 8,033 9,472 Service ....................... 7,087 8,986 10,474 12,907 5,283 6,281 8,498 10,857 Warehouse ..................... 874 721 644 242 480 419 508 657 General and Administration .... 9,430 11,757 9,024 12,106 5,997 6,629 6,267 10,160 Restructuring ................. -- 33,000 -- -- -- -- -- -- Goodwill Impairment............ -- 6,985 -- -- -- -- -- -- ---------- ---------- --------- ---------- --------- --------- --------- --------- 25,734 70,657 28,402 33,561 18,697 20,937 23,306 31,146 ---------- ---------- --------- ---------- --------- --------- --------- --------- Income (Loss) From Operation .. 3,268 (47,241) 2,946 (381) 3,470 4,056 4,255 7,622 Other Income (Expense): Interest ....................... (1,501) (2,227) (2,008) (2,583) (614) (529) (843) (1,568) Gain on Sale of Branches to Intelligent Electronics, Inc.. -- -- -- 2,472 -- -- -- -- ---------- ---------- --------- ---------- --------- --------- --------- --------- (1,501) (2,227) (2,008) (111) (614) (529) (843) (1,568) ---------- ---------- --------- ---------- --------- --------- --------- --------- Income (Loss) Before Income Taxes (Benefit) .............. 1,767 (49,468) 938 (492) 2,856 3,527 3,412 6,054 Income Taxes (Benefit).......... 744 (3,111) 100 -- 1,171 1,454 1,310 2,611 ---------- ---------- --------- ---------- --------- --------- --------- --------- Net Income (Loss).............. $ 1,023 $ (46,357) $ 838 $ (492) $ 1,685 $ 2,073 $ 2,102 $ 3,443 ========== ========== ========= ========== ========= ========= ========= ========= Earnings (Loss) Per Share ...... $ .14 $ (6.14) $ .11 $ (.06) $ .30 $ .30 $ .31 $ .47 Weighted Average Number of Common Shares Outstanding...... 7,554,367 7,555,100 7,564,916 7,581,586 5,555,061 6,802,605 6,820,652 7,379,876
INDEPENDENT AUDITORS' REPORT The Board of Directors THE FUTURE NOW, INC.: We have audited the accompanying consolidated balance sheets of The Future Now, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as of and for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Future Now, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Cincinnati, Ohio March 23, 1995 THE FUTURE NOW, INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------------------------------- 1994 1993 --------------- -------------- ASSETS Current Assets Receivables: Trade ........................................... $ 98,451,119 $ 157,690,943 Due from Intelligent Electronics, Inc ........... 19,579,190 1,708,122 Other ........................................... 19,143,376 8,476,452 -------------- -------------- 137,173,685 167,875,517 Allowance ....................................... (1,437,412) (1,117,941) -------------- -------------- 135,736,273 166,757,576 Inventories ......................................... 44,075,416 54,649,992 Prepayments and Other ............................... 1,565,688 2,442,331 -------------- -------------- Total Current Assets ............................ 181,377,377 223,849,899 -------------- -------------- Property and Equipment ............................... 14,884,796 11,282,958 Accumulated Depreciation ............................ (3,849,482) (3,130,581) -------------- -------------- Property and Equipment, Net ............ 11,035,314 8,152,377 -------------- -------------- Intangible Assets, Net ............................... 32,681,359 48,950,786 Long-Term Receivable, Net of Current Portion ......... -- 8,169,314 Other Assets ......................................... 4,283,055 1,436,351 -------------- -------------- Total Assets ......................................... $ 229,377,105 $ 290,558,727 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-Term Debt ..................................... $ 39,927,060 -- Current Portion of Long-Term Debt ................... 687,964 588,897 Accounts Payable (net of receivable from Intelligent Electronics, Inc. for returned product of $6.3 million and $3.6 as of December 31, 1994 and 1993, respectively) .......... 129,893,674 113,143,956 Accrued Expenses .................................... 20,964,525 17,756,615 Deferred Income and Other ........................... 1,789,909 660,968 -------------- -------------- Total Current Liabilities ............... 193,263,132 132,150,436 -------------- -------------- Long-Term Liabilities Long-Term Debt ....................................... 560,275 75,397,856 Deferred Income Taxes ................................ -- 5,251,187 Other ................................................ 2,264,284 -- -------------- -------------- Total Long-Term Liabilities ............. 2,824,559 80,649,043 -------------- -------------- Shareholders' Equity Common Stock-no par value-20,000,000 shares authorized; 7,578,566 shares issued and outstanding in 1994 and 7,473,666 shares in 1993 .... 58,215,267 57,697,549 Retained Earnings (Accumulated Deficit) .............. (24,925,853) 20,061,699 -------------- -------------- Total Shareholders' Equity .............. 33,289,414 77,759,248 -------------- -------------- Total Liabilities and Shareholders' Equity ............... $ 229,377,105 $ 290,558,727 ============== ==============
See accompanying notes to consolidated financial statements. THE FUTURE NOW, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- Revenue Sales-Equipment and Supplies ............................. $ 682,637,970 $ 599,151,597 $ 283,201,725 Sales-Software ........................................... 53,683,668 45,653,742 33,201,185 Services Income .......................................... 59,414,683 34,470,370 14,899,885 Repair Services .......................................... -- 22,558,519 11,696,835 -------------- -------------- -------------- 795,736,321 701,834,228 342,999,630 -------------- -------------- -------------- Cost of Sales Equipment and Supplies (including approximately $548.1 million, $388.1 million and $172.9 million purchased from Intelligent Electronics, Inc. in 1994, 1993 and 1992, respectively) ...................... 626,447,257 541,253,012 249,260,398 Other (including approximately $28.9 million, $20.4 million and $9.1 million purchased from Intelligent Electronics, Inc. in 1994, 1993 and 1992, respectively) . 52,343,241 47,092,571 33,805,654 -------------- -------------- -------------- 678,790,498 588,345,583 283,066,052 -------------- -------------- -------------- Gross Profit ................................................. 116,945,823 113,488,645 59,933,578 -------------- -------------- -------------- Operating Expenses Selling .................................................. 34,117,129 32,050,079 19,365,927 Service .................................................. 39,454,411 30,919,338 13,371,262 Warehouse ................................................ 2,481,685 2,063,706 1,545,001 General and Administrative ............................... 42,316,030 29,052,686 14,836,472 Restructuring ............................................ 33,000,000 -- -- Goodwill Impairment ...................................... 6,984,642 -- -- -------------- -------------- -------------- 158,353,897 94,085,809 49,118,662 -------------- -------------- -------------- Income (Loss) From Operations ............................ (41,408,074) 19,402,836 10,814,916 Other Income (Expense): Interest ................................................. (8,319,160) (3,554,255 (1,505,330) Gain on Sale of Branches to Intelligent Electronics, Inc. ....................................... 2,472,271 -- -- -------------- -------------- -------------- (5,846,889) (3,554,255) (1,505,330) -------------- -------------- -------------- Income (Loss) Before Income Taxes (Benefit) .............. (47,254,963) 15,848,581 9,309,586 Income Taxes (Benefit) ....................................... (2,267,411) 6,546,000 3,601,000 -------------- -------------- -------------- Net Income (Loss) ........................................ $ (44,987,552) $ 9,302,581 $ 5,708,586 ============== ============== ============== Weighted Average Shares Outstanding .......................... 7,548,721 6,649,391 4,497,205 ============== ============== ============== Earnings (Loss) Per Share .................................... $ (5.96) $ 1.40 $ 1.27 ============== ============== ==============
See accompanying notes to consolidated financial statements. THE FUTURE NOW, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Common Stock Earnings ------------------------------ (Accumulated Shares Amount Deficit) ----------- --------------- ------------- Balance-December 31, 1991 .............................. 3,614,717 $ 15,541,857 $ 5,050,532 Acquisition of Businesses: Company Center Division of Intelligent Electronics, Inc .............................................. 1,638,377 16,383,770 -- Evergreen Systems, Inc. ........................... 15,000 153,750 -- Net Income .......................................... -- -- 5,708,586 ------------ ------------ ------------ Balance-December 31, 1992 .............................. 5,268,094 32,079,377 10,759,118 Public Offering ..................................... 1,467,500 16,698,649 -- Private Offering to Intelligent Electronics, Inc. ... 681,447 8,748,076 -- Restricted Stock, Net of Unearned Compensation ...... 35,000 56,875 -- Exercise of Warrants ................................ 21,625 114,572 -- Net Income .......................................... -- -- 9,302,581 ------------ ------------ ------------ Balance-December 31, 1993 .............................. 7,473,666 57,697,549 20,061,699 Restricted Stock, Net of Unearned Compensation ...... 40,000 222,639 -- Exercise of Warrants: Intelligent Electronics, Inc. ..................... 24,200 99,468 -- Other ............................................. 41,200 203,041 -- Treasury Stock ...................................... (500) (7,430) -- Net Loss ............................................ -- -- (44,987,552) ------------ ------------ ------------ Balance-December 31, 1994 .............................. 7,578,566 $ 58,215,267 $(24,925,853) ============ ============ ============
See accompanying notes to consolidated financial statements. THE FUTURE NOW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- Cash Flows from Operating Activities Receipts from Customers ....................................... $ 853,034,759 $ 626,911,397 $ 294,722,915 Payments to Suppliers and Employees ........................... (843,516,984) (635,614,811) (293,179,366) Income Taxes Refunded (Paid) .................................. 1,577,271 (1,413,885) (2,819,608) Interest Paid ................................................. (7,255,553) (3,439,030) (1,166,950) -------------- -------------- -------------- Net Cash Provided (Used) by Operating Activities ........ 3,839,493 (13,556,329) (2,443,009) -------------- -------------- -------------- Cash Flows from Investing Activities Acquisitions of Businesses, Net of Cash Acquired .............. (636,999) (31,574,500) (21,576,078) Purchases of Property and Equipment ........................... (3,253,618) (3,978,426) (968,610) Sales of Property and Equipment ............................... 405,800 120,393 44,016 Proceeds from Sale of Branches to Intelligent Electronics, Inc. 34,161,696 -- -- -------------- -------------- -------------- Net Cash Provided (Used) by Investing Activities ........ 30,676,879 (35,432,533) (22,500,672) -------------- -------------- -------------- Cash Flows from Financing Activities Stock Offerings, Net of Expenses .............................. -- 25,446,725 -- Borrowings (Repayments), Net .................................. (34,811,451) 23,427,565 24,046,467 Proceeds from Exercise of Stock Options and Warrants .......... 295,079 114,572 -- -------------- -------------- -------------- Net Cash Provided (Used) by Financing Activities ........ (34,516,372) 48,988,862 24,046,467 -------------- -------------- -------------- Net Decrease in Cash ............................................... -- -- (897,214) Cash-beginning of year ........................................ -- -- 897,214 -------------- -------------- -------------- Cash-end of year .............................................. -- -- -- ============== ============== ============== Reconciliation of Net Income (Loss) to Net Cash Provided (Used) by Operating Activities Net Income (Loss) ............................................. $ (44,987,552) $ 9,302,581 $ 5,708,586 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Restructuring ........................................... 33,000,000 -- -- Goodwill Impairment ..................................... 6,984,642 -- -- Depreciation and Amortization ........................... 4,529,767 4,361,708 2,235,219 Deferred Income Taxes ................................... (3,651,411) 6,946,000 2,089,000 Provision for Loss on Inventories ....................... 2,500,000 -- -- Provision for Loss on Receivables ....................... 2,219,184 801,516 270,831 Gain on Sale of Branches to Intelligent Electronics, Inc. ...................................... (2,472,271) -- -- Changes in Assets and Liabilities (Net of Effects of Acquisitions, Restructuring and Sale of Branches to Intelligent Electronics, Inc.): Decrease (Increase) in: Receivables ...................................... 18,836,598 (41,379,969) (17,266,792) Inventories ...................................... (21,644,690) (19,142,716) (10,815,846) Prepayments and Other ............................ (579,207) 377,782 (762,576) Other Assets ..................................... 197,890 (803,917) (1,169,212) Increase (Decrease) in: Accounts Payable and Accrued Expenses ............ 7,561,822 26,143,806 17,756,432 Deferred Income and Other ........................ 1,344,721 (163,120) (488,651) -------------- -------------- -------------- Net Cash Provided (Used) by Operating Activities ................... $ 3,839,493 $ (13,556,329) $ (2,443,009) ============== ============== ==============
See accompanying notes to consolidated financial statements. THE FUTURE NOW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1-Significant Transactions and Summary of Significant Accounting Policies Significant transactions affecting THE FUTURE NOW, INC. (the "Company") and its consolidated financial statements include the following: * Execution in March 1995 of a letter of intent for the Company to merge with Intelligent Electronics, Inc. ("IE") (a related party, see Note 13). * Sale in 1994 of certain branch assets to IE and recognition of gain on sale (see Note 3). * Restructuring (see Note 2) and write-off of impaired goodwill in 1994 (see Note 9). * Acquisitions in 1993 and 1992 (see Note 5). The significant accounting policies and practices followed by the Company are as follows: Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All material intercompany transactions and balances have been eliminated from the consolidated financial statements. Description of Business - The Company sells, installs and services microcomputers, UNIX workstations, turnkey local and wide area network systems, computer software and peripheral products for business, professional, educational and governmental customers. The Company also offers a wide range of sophisticated customer support and consulting services. The Company currently operates 19 branch sales offices in 13 states with corporate headquarters in Cincinnati, Ohio. The Company also manages five branch offices and two satellite offices in six other states under a management agreement with IE. The Company does not maintain any retail facilities. Inventories - Inventories are stated at the lower of cost or market value. Cost is determined on a first-in, first-out (FIFO) basis. Property and Equipment - Property and equipment are stated at cost, net of accumulated depreciation. Charges for repairs and maintenance are expensed as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is provided on a straight-line basis over the estimated useful lives of the depreciable assets, principally three to seven years. Intangible Assets - Intangible assets, composed principally of goodwill, are stated at amortized cost. Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. Noncompete Agreements - Material noncompete agreements entered into by the Company in connection with business acquisitions are included in Other Assets, are stated at amortized cost and are amortized on a straight-line basis over the terms of the noncompete agreements (3 to 5 years). For the years ended December 31, 1993 and 1992, amortization of such noncompete agreements amounted to $462,000 and $580,000, respectively. As of December 31, 1993, all noncompete agreements had been fully amortized. Revenue Recognition - Revenue from product sales is recognized at the time of shipment to the customer. Revenue associated with maintenance service contracts is recorded ratably over the service period of the contract. Costs of maintenance service contracts are recorded when incurred. Rental income is recognized as it is earned. Revenue from professional service contracts is recognized as services are provided to the customer on a percentage-of- completion basis. Return Policy - Company policy specifies that returns from customers are authorized for items that have been misshipped or are defective upon arrival at customer site. Return authorizations must be requested by the client within 30 days of the invoice date. Defective products are repaired or replaced at the Company's option. Credit is issued after the Company has received and reviewed the returned product. Manufacturers' Incentive Programs - The Company receives manufacturer incentive funds to perform certain training, advertising and other market development activities. Revenue associated with these funds is recorded as a reduction of general and administrative expenses. Income Taxes - Prior to 1992, income taxes were recognized during the year in which transactions entered into the determination of financial statement income, with deferred taxes being provided for timing differences. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," was issued by the Financial Accounting Standards Board ("FASB") in February 1992. SFAS No. 109 requires an asset and liability approach for financial accounting and reporting of income taxes. Under the asset and liability method, a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Under SFAS No. 109, the measurement of current and deferred tax liabilities is based on provisions of the enacted tax law. The Company elected to adopt SFAS No. 109 in 1992 and has reported the cumulative effect, which was not material, of the change in method of accounting for income taxes as of the beginning of 1992 in the provision for income taxes in the consolidated statement of operations for the year ended December 31, 1992. Earnings (Loss) Per Share - Earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common stock and common stock equivalents outstanding during each period. Reclassifications-Certain amounts in the 1993 and 1992 consolidated financial statements have been reclassified to conform to the 1994 presentation. Note 2-Restructuring Charge Effective second quarter 1994, the Company adopted a definitive plan for a company-wide restructuring, including the closing and consolidation of duplicate facilities in areas where the Company has made acquisitions. The Company will close or consolidate its 23 branch warehouses by June 30, 1995 as the CustomerCare Direct program, which decreases the Company's need to maintain inventory, is fully implemented. Under the CustomerCare Direct program, IE configures product sold by the Company and ships it directly to the Company's clients, thereby eliminating the Company's need to carry that inventory. In connection with the restructuring, the Company consolidated or closed offices in six geographic areas, including the consolidation of the Company's three Southern California offices into one operation, and its two facilities into one in each of the New York, Northeast Ohio and Dallas markets. The Company took these actions to integrate and consolidate the 15 companies it has acquired over the past five years. As a part of this restructuring, the Company will centralize certain of its operations and has reorganized management to continue its emphasis on higher margin professional services. Professional services will continue to be the principal focus of the Company's strategy. The restructuring resulted in a charge of $33.0 million against second quarter results. During 1994, the Company closed or consolidated 13 branch warehouses in various geographic locations and utilized the restructuring reserves in the following amounts:
Utilized to Reclass- Offset ification Expenses to Other in Payment of Reserve Balance Statement Other Reserve June 30, Sheet of Restruct- December 1994 Accounts Operations ing Costs Transfers 31, 1994 -------- -------- ---------- --------- --------- ---------- (in millions) Provision for loss on disposition of inventory ............. $ 14.5 (7.5) (3.5) -- 2.7 6.2 Closure of warehouse facilities ....... 7.6 -- (.9) -- (2.7) 4.0 Goodwill related to closed locations .. 5.0 (5.0) -- -- -- -- Personnel separation costs ............ 3.1 -- (1.1) (.6) -- 1.4 Other.................................. 2.8 (.6) -- (1.0) -- 1.2 ------ ------ ---- ----- ---- ---- Total .......................... $ 33.0 (13.1) (5.5) (1.6) -- 12.8 ====== ====== ==== ===== ==== ====
The restructuring charge related to the provision for loss on disposition of inventory represents anticipated losses on the sale of inventory after the branches' closure date and restocking fees associated with the Company's return of inventory to its vendors. Reserves reclassified to other balance sheet accounts of $7.5 million were principally comprised of the following: * $2.8 million transferred to reduce the carrying value of assets received in exchange for certain of the Company's inventories. * $4.1 million transferred to reduce property and equipment in conjunction with the reclassification of its demonstration and trial assets. Inventory reserves of $2.8 million were utilized to offset costs related to the bulk disposal of inventories. In addition, reserves of $0.7 million were utilized to offset restocking fees related to the bulk return of inventories to certain of the Company's vendors. Reserves of $2.7 million principally related to future minimum lease payments for the five branches sold to IE (see Note 3) were transferred to the reserve for inventories. As further discussed in Note 3, IE assumed all future lease obligations related to these branches. Management determined that the reclassification was necessary based on the amount and age of the remaining inventories subject to the Company's restructuring actions. The restructuring charge related to the closure of warehouse facilities includes $5.5 million of future minimum lease payments, net of $1.4 million of estimated sublease revenue, from each warehouse closure date through the remaining lease period. The charge for closure of warehouse facilities also includes $2.1 million for anticipated costs for the disposal of warehouse equipment and other warehouse assets. Reserves of $0.9 million were utilized principally to offset costs related to minimum lease payments, net of sublease receipts, from each warehouse closure date through December 31, 1994. The restructuring charge related to goodwill resulted from the write-off of the net unamortized balance of goodwill associated with the closure of branch locations in four markets which the Company no longer intends to serve. The restructuring charge related to personnel separation costs principally consists of severance costs associated with terminated warehouse and administrative personnel. At the beginning of the restructuring, the Company intended to reduce its workforce on a company-wide basis by approximately 190 employees, or 14% of the total. Reserves of $1.1 million were utilized principally to offset personnel separation and other transition costs associated with terminated warehouse and administrative employees. Approximately 120 warehouse and administrative employees have been terminated as of December 31, 1994. Reserves of $0.6 million were utilized to offset other personnel separation costs that would not have been incurred by the Company absent its restructuring actions. The restructuring charge of other costs principally relates to expenses that have no future economic benefit to the Company. Reserves of $0.6 million were utilized to write-off deferred loan fees existing as of June 30, 1994 as the restructuring actions required the Company to renegotiate its long-term credit facility. Reserves of $1.0 million were utilized to offset other restructuring charges, including professional fees and other expenses that would not have been incurred by the Company absent its restructuring actions. In total, the restructuring charge of $33.0 million includes $22.4 million of non-cash write downs of recorded assets and $10.6 million of cash which will be funded through normal operations for each of the years as follows: Cash Outflow Year Ended December 31, (in millions) - - - ----------------------- ----------- 1994 (actual) $ 3.5 1995 4.8 1996 .7 1997 .4 Thereafter 1.2 ------ $10.6 ====== In addition, the Company expects future operating costs to be incurred related to the restructuring that are not included in the restructuring charge. These costs include anticipated enhancements to the management information system of $1.6 million and bank charges of $0.5 million. The 1994 charges against the restructuring reserve represent $3.5 million of cash outflow and $16.7 million of non-cash charges. At December 31, 1994, $3.5 million of the projected total cash requirement had been paid by the Company, with $4.4 million remaining as a current accrued expense, $2.3 million as a non-current accrued expense and $0.4 million in inventory reserves for restocking fee payments. Other reductions in operating expenses of approximately $800,000 related to reductions in personnel, lease and amortization expenses and are reflected in the results of operations for 1994. Management believes that the restructuring actions being taken will enhance the Company's ability to compete effectively through the professional services oriented business strategy. However, competition in this industry is significant and is dependent upon a number of factors which may be beyond the Company's control, such as general economic conditions, hardware and software margins, demand for professional services and various other industry pressures. A significant deterioration in anticipated levels of business or a significant decline in margin could require the Company to make additional adjustments to its expense structure, including additional restructuring actions. Note 3-Sale of Branches to Intelligent Electronics, Inc. On December 30, 1994, the Company sold certain assets of five branch locations to IE for approximately $34.2 million in cash received on December 30, 1994 and $5.0 million received January 9, 1995 (see Note 6). The cash was used to reduce the Company's debt. The five branch locations serve the Boston, New York City, Orange County, San Francisco and Baltimore/Washington, D.C. metropolitan areas. A gain on the sale of these branches of approximately $2.5 million was recognized in the Consolidated Statement of Operations for the year ended December 31, 1994. The Asset Purchase Agreements ("Agreements") provided for IE's purchase of $23.0 million of receivables, $5.0 million of inventory, and $3.0 million of fixed assets. IE assumed the future lease obligations for each branch location. The Company wrote-off $4.4 million of goodwill associated with these branches and adjusted certain other assets and liabilities by approximately $1.5 million as a result of the sale of the branches. The Agreements provide that title to all trade receivables of the branches sold, in the aggregate amount of $34.1 million, shall transfer to IE at December 30, 1994. The Agreements further provide that IE must remit to the Company all cash receipts on such receivables in excess of the first $23.0 million collected. Accordingly, at December 31, 1994 the Company has recorded a receivable due from IE in the amount of $11.1 million for the trade receivables in excess of $23.0 million. Any losses due to uncollectibility of such trade receivables will be borne by the Company and have been considered in establishing the allowance for receivables at December 31, 1994. The transaction also includes a Management Agreement which provides for the Company to manage these facilities for IE and retain its employees at these locations. All direct expenses of these branches will be paid by IE and certain indirect costs will be reimbursed each month by IE in the amount of $20,000 per branch. Additionally, the Management Agreement contains an incentive compensation arrangement whereby IE shall pay incentive compensation to the Company based upon the future operating results of the branches. The following table sets forth for the periods indicated the revenue and income from operations of the branches sold reflected in the Company's Consolidated Statements of Operations (in thousands): Years Ended Six Months Ended December 31, December 31, ----------------------- ---------------- 1994 1993(1) 1992(2) -------- -------- ------- Revenue $184,554 $167,943 $49,130 Income from Operations Before Allocation of Corporate Overhead........................ 992(3) 2,132 880 (1) The Orange County location was acquired August 1993 (see Note 5). (2) The Boston, New York City, Washington, D.C. and San Francisco locations were acquired July 1992 from IE (see Note 5). (3) Excludes goodwill impairment related to New York branch (see Note 9). Note 4-Common Stock Transactions On June 12, 1992, the Company's shareholders approved an increase in the authorized shares of common stock from 5,000,000 to 20,000,000. In March 1993, the Company sold 1,467,500 shares of its common stock, at $12.375 per share, in a public offering. Net proceeds from the sale after underwriting discount and offering expenses of $1.5 million ($.996 per share) were $16.7 million ($11.379 per share). The proceeds from the offering were applied to the indebtedness under the Company's Secured Credit Agreement. In October 1993, the Company sold 681,447 shares of its common stock, at $12.8375 per share, to IE resulting in proceeds to the Company of $8.7 million. IE is the Company's largest shareholder, having acquired 31.1% (1,638,377 shares) of the Company's total outstanding stock in July 1992 in exchange for IE's computer reselling operation. With the Company's public offering in March 1993, IE's ownership percentage decreased to 24.3%. IE increased its ownership percentage to 31.1% with the October 1993 purchase. IE is also the Company's largest vendor (see Note 13). Note 5-Acquisitions Following is a summary of the Company's business acquisitions made since January 1, 1992. See Note 13 for discussion of the related party relationship created by the acquisition of the Company Center Division ("CCD") of IE.
Company/Location Date of Acquisition Consideration Paid ---------------- ------------------- ------------------- Basicomputer Corporation September 1993 $12.0 million in cash Akron, Ohio Atlanta, Georgia Columbus, Ohio Dayton, Ohio Detroit, Michigan Kansas City, Kansas White Plains, New York Pittsburgh, Pennsylvania Raleigh, North Carolina Dallas, Texas Premium Computer Corporate Center August 1993 $1.0 million in cash plus up to Colton, California $1.5 million in contingent payments Irvine, California Direct Computer Corporation January 1993 $1.1 million in cash Direct Technology Corporation Dallas and Houston, Texas CCD July 1992 $16.4 million in common Boston, Massachusetts stock of the Company Dallas, Texas Los Angeles, California Nashville, Tennessee New York, New York Pittsburgh, Pennsylvania St. Louis, Missouri San Francisco, California Washington, D.C. Evergreen Systems, Inc. January 1992 $0.8 million in cash and Milwaukee, Wisconsin $0.2 million in common stock of the Company
Consideration paid includes cash paid and stock issued to the owners of the businesses acquired. The Company also assumed current and long-term liabilities totalling $0.8 million in 1994, $56.6 million in 1993 and $22.8 million in 1992 in connection with these acquisitions. Consideration paid does not include cash used in 1992, and classified as an investing activity in the Company's consolidated statement of cash flows, of $15.5 million expended to retire CCD's obligations to IE, principally for product inventory. The "investing" portion of these payments represents the amount paid to IE in excess of what could be financed through the Company's inventory financing. The acquisitions have been accounted for as purchases and, accordingly, the results of operations of the companies have been included in the Company's consolidated financial statements since the dates of acquisition. The Company recorded cost in excess of net assets acquired of $1.4 million, $29.1 million and $17.9 million in connection with these acquisitions during 1994, 1993 and 1992, respectively, which is being amortized on a straight-line basis over 20 years. Certain of the purchase agreements provide for additional payments for noncompete agreements totalling $1.0 million, of which $0.5 million was paid in 1994 and $0.5 million is to be paid in 1995. The following unaudited pro forma financial information presents the combined results of operations of the Company and the businesses acquired in 1993 and 1992 as though these acquisitions had actually been made as of the beginning of 1993 and as of the beginning of 1992, after giving effect to certain adjustments, including certain adjustments of assets of businesses acquired to fair values and liabilities to settlement amounts, elimination of duplicate facilities and functions, amortization of goodwill, additional interest expense, reductions in the cost of sales actually achieved as a result of the Company's increased purchasing levels, and related income tax effects. No adjustments have been made to reflect reductions in any other expenses or from any other economies of scale which may have resulted from the combinations had they taken place at the beginning of each of the respective years. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during such periods. Years Ended December 31, ------------------------- 1993 1992 --------- --------- (in thousands, except per share data) Revenue............................................ $852,171 $656,645 Net Income......................................... 9,200 9,066 Earnings Per Share................................. $1.23 $1.21 Pro forma financial information for the year ended December 31, 1994 is not presented because the acquired entities are included in the historical financial statements of the Company for the entire period. Note 6-Receivables Receivables due from IE consist of the following: December 31, December 31, 1994 1993 ------------- ------------- Sale of Branches to IE (see Note 3): Inventory ...................... $ 4,981,704 -- Receivables .................... 11,142,629 -- Rebates and Price Protection ....... 3,454,857 1,708,122 ----------- ----------- $19,579,190 $ 1,708,122 =========== =========== At December 31, 1993, a receivable of $11.0 million was due from the Hewlett-Packard Company; $2.8 million of such receivable was included in Other Receivables and $8.2 million was shown as Long-Term Receivable on the Consolidated Balance Sheet. This receivable arose from the sale by the Company in late 1993 of the Company's service contract base and repair parts inventory in connection with an alliance formed by the Company with the Hewlett-Packard Company to provide hardware repair services to the Company's clients. At December 31, 1994, $4.9 million remained of the total of such receivable which is included in Other Receivables. Effective January 1, 1995, the Company negotiated the return of the service contract base and repair services from Hewlett-Packard. Also, at December 31, 1994, Other Receivables include $6.0 due from an insurance carrier principally related to a fire at one of the Company's warehouses. No individual customer accounted for more than 10% of the Company's sales during 1994, 1993 or 1992. Note 7-Inventories Inventories consist of items held for resale and for rental and are composed of the following: December 31, December 31, 1994 1993 ------------- ------------- Equipment Held for Resale.......... $ 50,161,456 $ 57,280,865 Rental Equipment .................. 1,424,357 3,858,601 ------------- ------------- 51,585,813 61,139,466 Allowance ......................... (7,510,397) (6,489,474) ------------- ------------- Total ................... $ 44,075,416 $ 54,649,992 ============= ============= Note 8-Property and Equipment
December 31, 1994 December 31, 1993 -------------------------------- ------------------------------ Accumulated Accumulated Cost Depreciation Cost Depreciation ---------- ------------ ---------- ------------ Office Equipment................. $11,847,996 $2,614,874 $9,303,580 $2,330,200 Computer Software................ 1,686,228 687,971 908,040 400,621 Equipment Under Capital Leases... 1,023,775 380,483 814,826 258,772 Vehicles and Other............... 326,797 166,154 256,512 140,988 ----------- ----------- ------------ ---------- $14,884,796 $3,849,482 $11,282,958 $3,130,581 =========== =========== ============ ==========
Note 9-Intangible Assets and Goodwill Impairment
December 31, 1994 December 31, 1993 -------------------------------- ------------------------------ Accumulated Accumulated Cost Depreciation Cost Depreciation ---------- ------------ ----------- ------------ Goodwill......................... $36,414,933 $3,733,574 $51,785,397 $2,842,178 Organization Costs............... -- -- 328,779 321,212 ----------- ---------- ----------- ---------- $36,414,933 $3,733,574 $52,114,176 $3,163,390 =========== =========== =========== ==========
During 1994, the unamortized balance of goodwill decreased $15.4 million due primarily to the write-off of impaired goodwill and the sale of five branches to IE. During 1993, goodwill increased $29.1 million due to the acquisitions discussed in Note 5. Amortization of goodwill and organization costs totalled $2.5 million for 1994, $2.0 million for 1993 and $0.7 million for 1992. The Company determined in the second quarter of 1994 that the New York branch's undiscounted future operating cash flows as adjusted for expected savings from the Company's restructuring actions would not support future recovery of the recorded unamortized goodwill balance of $7.0 million at June 30, 1994. This forecast indicated that cumulative negative results of operations and use of operating cash over the remaining 18 year life is expected to approximate $11.5 million and $2.6 million, respectively. These losses and use of cash principally result from the extremely competitive environment resulting in lower margins and the increased operating costs associated with this location as compared to other locations of the Company. Accordingly, the Company expensed its remaining unamortized goodwill balance for this branch in the second quarter of 1994. Note 10-Debt and Lease Obligations
December 31, December 31, 1994 1993 ------------ ------------- Secured Credit Agreement............................................ $ -- $ 74,649,213 Obligations Under Capital Leases.................................... 478,215 469,217 Other............................................................... 770,024 868,323 ---------- ------------ 1,248,239 75,986,753 Less Current Portion................................................ 687,964 588,897 ---------- ------------ $ 560,275 $ 75,397,856 ========== ============
As of December 31, 1994, the Company was party to a Secured Credit Agreement ("Agreement") with certain banks. This revolving credit facility permits borrowing of up to $85.0 with interest rates varying based on the prime rate (8.50% at December 31, 1994) offered by the agent plus 1 1/4% and is payable in full in September 1996. Advances against this Agreement are based on the Company's trade receivables and are subject to eligibility requirements contained within the Agreement. The outstanding balance on this Agreement as of December 31, 1994 was $39.9 million with an eligibility of $67.4 million. Collateral pledged for this Agreement includes all of the Company's assets with the exception of inventory, which is pledged as security to the third party inventory finance companies. The provisions of the facility contain various restrictive covenants with respect to the maintenance of minimum tangible net worth, restrictions on fixed asset additions, restrictions on fixed charges, maintenance of a minimum current ratio, and restrictions on certain additional indebtedness. As a result of the restructuring charge during the second quarter of 1994, the Company failed to comply with several of the financial covenants required under the Agreement. Effective July 8, 1994, an initial amendment to the Agreement waived until September 30, 1994 any default which occurred on June 30, 1994 as a result of the Company's failure to comply with these covenants. Subsequent amendments extended the waiver until July 31, 1995. The Company must complete its merger with IE, secure new financing, or obtain a further waiver of these covenants prior to July 31, 1995. The Company expects that there will no longer be a need for this financing when the merger with IE described in Note 13 is consummated. The maximum level of borrowing under this Agreement was reduced from $85.0 million to $70.0 million effective January 1, 1995 as specified under a waiver of financial covenants and as a result of the sale of certain assets to IE (see Note 3). During the year ended December 31, 1994, the outstanding borrowings under the Agreement ranged from $39.9 million to $93.7 million and averaged $78.9 million. Borrowings vary based on seasonal needs and typically are higher during the Company's first quarter due to increased levels of accounts receivable resulting from the seasonally higher sales activity of the previous fourth quarter. As of December 31, 1993, the Secured Credit Agreement permitted borrowing of up to $85.0 million ($95.0 million from January 19, 1994 to March 31, 1994) with interest rates varying based on the prime rate offered by the agent bank up to a maximum of prime (6% at December 31, 1993) plus 1 1/4%. During the year ended December 31, 1993, the Company was party to two separate Secured Credit Agreements with certain banks. The first Secured Credit Agreement allowed for borrowings up to $50.0 million through September 8, 1993 and the second Secured Credit Agreement allowed for borrowings up to $85.0 million from September 9, 1993 forward. During 1993, outstanding borrowings under these Secured Credit Agreements ranged from $23.3 million to $83.9 million and averaged $48.9 million. The average balance outstanding under the second Secured Credit Agreement increased substantially after September 9, 1993 due to the acquisition of Basicomputer Corporation. Aggregate payments of long-term debt, excluding capital lease obligations, after December 31, 1994 are as follows:
Year Ending: December 31, 1995............................................................ $429,121 December 31, 1996............................................................ 249,593 December 31, 1997............................................................ 18,146 December 31, 1998............................................................ 20,047 December 31, 1999 and thereafter............................................. 53,117
The Company has agreements with third parties principally to finance certain of its inventory purchases from IE as of December 31, 1994 and 1993. Under these credit agreements, the Company may purchase up to $105.0 million and $95.0 million, respectively, of inventories with extended payment terms. Such agreements generally are secured by inventories and, in certain instances, the proceeds related thereto, and may be terminated immediately upon default by the Company or otherwise within 60 to 90 days by either the third party or the Company. Further, to maintain this level of third party inventory financing, IE guarantees up to $20.0 million on one of these agreements. One of these agreements contains various restrictive covenants with respect to the maintenance of a minimum level of tangible net worth and subordinated debt, maintenance of a minimum current ratio, maintenance of a minimum ratio of debt to tangible net worth and a prohibition against the payment of dividends. The Company failed to comply with certain of these covenants as of June 30, 1994, September 30, 1994 and December 31, 1994. The Company has obtained amendments to the agreement waiving the attainment of the financial objectives until July 31, 1995. The Company must complete its merger with IE, renegotiate and reset these covenants or obtain a further waiver of these covenants prior to July 31, 1995. As of December 31, 1993, all such covenants were met. The amounts outstanding under these agreements are included in accounts payable and totalled $88.9 million and $69.6 million as of December 31, 1994 and 1993, respectively. If principal payments on these payables are made on a timely basis, no interest accrues. Interest payments to these third party finance companies were $1.1 million, $0.1 million and $0.1 million, respectively, for the years 1994, 1993 and 1992. The Company leases office space and equipment under operating leases and certain other equipment under capital leases. Future minimum payments under noncancelable leases with initial or remaining terms in excess of one year as of December 31, 1994 are as follows:
Capital Operating Leases Leases ---------- ------------- Year Ending: December 31, 1995............................................. $ 284,334 $ 8,777,237 December 31, 1996............................................. 120,114 8,554,289 December 31, 1997............................................. 92,958 6,276,887 December 31, 1998............................................. 12,777 2,562,344 December 31, 1999............................................. 8,113 2,336,254 Thereafter.................................................... -- 4,718,928 ---------- ------------ Total Minimum Lease Payments...................................... 518,296 $ 33,225,939 ============ Less Amount Representing Interest................................. 40,081 ---------- Present Value of Net Minimum Lease Payments....................... $ 478,215 ==========
Rent expense totalled $6,703,000 in 1994, $4,630,000 in 1993 and $2,654,000 in 1992. Note 11-Income Taxes As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1, 1992. The cumulative effect of this change in accounting for income taxes is not material and is included in the provision for income taxes for the year ended December 31, 1992. Income taxes for the years ended December 31 consist of the following:
1994 1993 1992 ------------- ---------- ----------- Current: Federal (Benefit)............................. $ 984,000 $(1,100,000) $ 924,000 State and Local............................... 400,000 700,000 588,000 Deferred (Benefit)................................ (3,651,411) 6,946,000 2,089,000 ------------ ---------- ---------- $ (2,267,411) $ 6,546,000 $3,601,000 ============ =========== ==========
A reconciliation of the Company's effective income tax rate and the statutory federal income tax rate is as follows for the years ended December 31:
1994 1993 1992 -------- ------ ------ Statutory U.S. Federal Tax Rate................................... (35%) 34% 34% Valuation Allowance............................................... 14 -- -- Goodwill Write-off................................................ 12 -- -- Amortization of Intangibles....................................... 2 3 2 State and Local Income Taxes, Net of Federal Benefit 1 5 5 Other, Net........................................................ 1 (1) (2) ---- ---- ---- (5%) 41% 39% ==== ==== ==== Deferred tax expense for the years ended December 31 consists of the following:
1994 1993 1992 ------- ------- ------- Charge in lieu of taxes resulting from the initial recognition of acquired tax benefits that are allocated to reduce goodwill related to the acquired entities............................. $ -- $3,935,000 $1,943,000 Other............................................. (3,651,411) 3,011,000 146,000 ----------- ---------- ---------- $(3,651,411) $6,946,000 $2,089,000 =========== ========== ==========
As of December 31, 1994 and 1993, the total of all deferred tax liabilities, consisting principally of acquisition related intangibles and property and equipment, approximated $8.8 million and $5.3 million, respectively. The total of all deferred tax assets, consisting principally of inventory valuation reserves, allowance for doubtful accounts, accruals and net operating loss carryforwards, approximated $15.3 million and $1.6 million, respectively. As of December 31, 1994, a valuation allowance has been provided for the entire net deferred tax asset of $6.5 million. Management has determined that sufficient evidence does not currently exist to support a more likely than not criterion that sufficient taxable income is expected to be available in future years or through carryback to realize the tax benefit. At December 31, 1994, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $11.0 million which are available to offset future Federal taxable income, if any, through 2009. Note 12-Deferred Compensation Plan, Stock Warrants and Stock Option Plans The Company has a 401(k) plan for all employees meeting minimum age and service requirements. Employees may elect to defer a portion of their salaries, subject to percentage and dollar limits. The Company has agreed to contribute 20% of the first 5% of compensation deferred by the employee, subject to a limit of 1% of eligible employee compensation. Additional contributions may be made at the discretion of the Board of Directors. Employees' rights to employer contributions vest ratably over a five-year period. Employer contributions to this plan totalled $266,000 in 1994, $305,000 in 1993 and $140,000 in 1992. The Company has two stock option plans, a 1991 and a 1994 Plan, which provide for options to be granted to full time management of the Company. The 1991 Plan, as amended, provides for the granting of options to purchase 510,000 shares of common stock of the Company and the 1994 Plan provides for the granting of options to purchase 750,000 shares of common stock of the Company. Both plans provide for the purchase of common stock at the market value at date of grant. All options become exercisable in increments of 20% on the first anniversary date of the date of the grant and 80% in equal installments beginning six months after the first anniversary date of the original date of grant. At December 31, 1994, options for 222,000 shares were exercisable. Changes in options outstanding under the two plans are as follows:
Number Exercise of Shares Price --------- ---------- Outstanding, December 31, 1991 175,000 $10.50 Granted............................................ 155,000 10.75 to 11.88 Exercised.......................................... -- -- Cancelled.......................................... -- -- -------- Outstanding, December 31, 1992 330,000 10.50 to 11.88 Granted............................................ 174,000 9.75 to 11.75 Exercised.......................................... (3,900) 10.50 to 11.88 Cancelled.......................................... (20,400) 9.75 to 11.88 --------- Outstanding, December 31, 1993 479,700 9.75 to 11.88 Granted............................................ 197,000 8.50 to 12.25 Exercised.......................................... -- -- Cancelled.......................................... (21,200) 9.75 to 11.50 -------- Outstanding, December 31, 1994 655,500 8.50 to 12.25 ========
Included in the 1994 grant of 197,000 shares are 40,000 restricted shares and included in the 1993 grant of 174,000 options are 35,000 restricted shares which were granted to certain employees. The market value of shares awarded of $490,000 in 1994 and $341,000 in 1993 has been recorded net of unearned compensation as a component of shareholders' equity. Unearned compensation is being amortized to expense over the three year vesting period. Effective June 1991, the Company adopted The Future Now, Inc. 1991 Director Stock Option Plan (the "1991 Director Plan"). The maximum number of common shares reserved for issuance pursuant to grants under the 1991 Director Plan is 50,000 shares. The 1991 Director Plan provides that options may be granted to non-employee directors for the purchase of common stock at the market price at date of grant. All options are immediately exercisable. As of December 31, 1994, 8,000 options had been exercised and 5,000 options had lapsed. Options granted under the 1991 Director Plan are as follows:
1994 1993 1992 ------ ------ ------ Number of options granted............................ 5,000 8,000 8,000 Exercise price....................................... $12.25 $10.00 to $12.375 $11.88
Warrants to purchase 184,498 shares of the Company's common stock were issued to IE in connection with the Company's purchase of CCD from IE on July 2, 1992 (see Note 13). The exercise price is equal to the exercise price of all other options and warrants outstanding on July 2, 1992. These warrants become exercisable as the options and warrants which were outstanding as of the acquisition date are exercised. In 1994, warrants were exercised by IE to purchase 24,200 shares of the Company's common stock at an aggregate price of $99,000. No warrants had been exercised as of December 31, 1993. As of January 1, 1992, 1991 and 1990, the Company issued warrants to purchase 18,375, 13,125 and 11,725 shares, respectively, of its common stock to certain individuals who were officers and/or directors during the years for which the warrants were issued. These warrants had exercise prices of $5.67, $2.40, and $.86 per share. The $5.67 and $2.40 warrants were exercised in 1994, and the $.86 warrants were exercised in 1993. In addition, on November 30, 1990, the Company issued warrants to purchase 17,500 shares of common stock to a related entity, of which warrants to purchase 2,100 shares of common stock were subsequently transferred to a shareholder and director for investment banking services rendered during 1990 and one-half of the remaining 15,400 shares were transferred to each of its two principals in November 1993. Warrants to purchase 7,700 shares were exercised in 1994. These warrants have an exercise price of $5.72 per share. The remaining warrants to purchase 9,800 shares expire on November 15, 1995. Note 13-Subsequent Events and Other Related Party Transactions On March 6, 1995, the Company and IE signed a letter of intent for IE to acquire the outstanding stock of the Company. The acquisition will be a stock-for-stock, tax-free transaction. Based on the exchange ratio set forth in the letter of intent, Company shareholders will receive .6588 shares of IE stock in exchange for each share of the Company stock. The transaction is subject to the completion of due diligence, the execution of a definitive agreement and other customary conditions and approvals, including approval by the Company's shareholders. On December 30, 1994, the Company sold certain assets of five branch locations to IE (see Note 3). On July 2, 1992, in connection with the acquisition of CCD from IE, the Company issued 1,638,377 shares, or 31.1% of the Company's total outstanding stock, to IE. On that date, IE became a principal shareholder and, therefore, a related party. The Company is a party to franchise agreements with IE. Among other terms, these franchise agreements provide that the Company will purchase certain products, including IBM, Apple, Compaq and Hewlett-Packard, only from IE. These franchise agreements expire in either December 2000 or September 2003 and are renewable by the Company for an additional 10-year term under certain conditions. These agreements may be terminated by the franchisor upon the occurrence of certain events, including loss of certain vendor authorizations, financial impairment and failure to maintain operating standards. Upon termination, the Company would be bound by a noncompete agreement that states that the Company would not engage in a competing business with the franchisor for a six-month term, subject to certain product exclusions and the buyout provision noted in the following paragraph. The Company has the right to terminate the franchise agreements upon 90 days written notice and the payment of a termination fee equivalent to the markup on products purchased from the franchisor during the preceding twelve-month period. This fee shall not be less than $1.0 million, and would have been approximately $17.0 million as of December 31, 1994 ($10.5 million as of December 31, 1993). An additional payment of $0.5 million is required to release the Company from its noncompete clause in the franchise agreements. Payments by the Company during the years ended December 31, 1994, 1993 and the six months ended December 31, 1992 for purchases from IE aggregated approximately $580.0 million, $442.0 million and $114.0 million, respectively. In management's opinion, these franchise agreements permit the Company to more effectively manage its product inventories and receive certain other benefits. IE also serves as guarantor of up to $20.0 million of amounts owed by the Company to an inventory finance company (see Note 10). IE has the right to designate, so long as it beneficially owns at least 10% of the outstanding shares of the Company's Common Stock, one person to serve on the Board of Directors of the Company (and any Executive Committee of the Company). Since August 1994, IE has not designated a person to serve on the Board of Directors. The Company uses the services of a professional services firm in which a director is a principal. Fees paid to the related party's firm were $105,000 in 1994 and $25,000 in 1993. In addition, the Company uses the services of a law firm in which a director is a partner and paid such firm $220,000 in 1992. Note 14-Supplemental Cash Flow Information The following are the non cash investing and financing activities for the years ended December 31:
1994 1993 1992 ---------- ------------ ------------ Fair Value of Assets of Companies Acquired................ $1,436,999 $ 88,188,100 $ 60,875,795 Cash Paid and Stock Issued................................ (636,999) (31,574,500) (38,113,598) ---------- ------------ ------------ Liabilities Assumed....................................... $ 800,000 $ 56,613,600 $ 22,762,197 ========== ============ ============
In 1993, in connection with the alliance formed by the Company with the Hewlett-Packard Company, the Company recorded current and long-term receivables aggregating approximately $11.0 million, and transferred service parts inventory and deferred service income and certain other assets and liabilities with a net carrying value of approximately $11.0 million to the Hewlett-Packard Company (See Note 6). In 1994, in connection with the sale of branches to IE, the Company recorded receivables due from IE in exchange for the Company's trade receivables and inventories in the amount of $11.1 million and $5.0 million, respectively. Note 15-Contingencies The Company continuously evaluates contingencies based upon the best available evidence. Management believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. Various suits and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, these suits and claims are not reasonably likely to have a material adverse effect on the financial condition or results of operations of the Company. However, management cannot predict the outcome of these suits and claims and any adverse findings may affect the results of operations in future reporting periods. THE FUTURE NOW, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at Beginning Costs and Other End of Period Expenses Accounts Deductions of Period ------------ ------------ ----------- ------------ ------------ Year Ended December 31, 1992 Allowance for Doubtful Accounts.............. $ 285,000 270,831 175,524(1) 19,216(3) $ 712,139 Inventory Valuation Reserve ................. 996,433 49,575 1,452,871(1) 678,755(4) 1,820,124 ------------ ------------ ------------ ------------ ------------ $ 1,281,433 320,406 1,628,395 697,971 $ 2,532,263 ============ ============ ============ ============ ============ Year Ended December 31, 1993 Allowance for Doubtful Accounts.............. $ 712,139 801,516 978,735(2) 1,374,449(3) $ 1,117,941 Inventory Valuation Reserve ................. 1,820,124 214,654 4,454,696(1) -- 6,489,474 ------------ ------------ ------------ ------------ ------------ $ 2,532,263 1,016,170 5,433,431 1,374,449 $ 7,607,415 ============ ============ ============ ============ ============ Year Ended December 31, 1994 Allowance for Doubtful Accounts.............. $ 1,117,941 2,219,184 -- 1,899,713(3) $ 1,437,412 Inventory Valuation Reserve ................. 6,489,474 19,730,044(5) -- 18,709,121(6) 7,510,397 ------------ ------------ ------------ ------------ ------------ $ 7,607,415 21,949,228 -- 20,608,834 $ 8,947,809 ============ ============ ============ ============ ============
(1) Valuation included in assets acquired in business acquisitions. (2) Valuation included in assets acquired in business acquisitions and amounts established in connection with the Company's transfer of certain assets and liabilities to the Hewlett-Packard Company. (3) Accounts written off. (4) Specific inventory items written off or sold. (5) Includes restructuring reserve of $17.2 million established in second quarter of 1994. (6) Includes transfers of reserves from restructuring to other Balance Sheet accounts of $7.5 million. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- Joseph Beech III 49 Director James J. Dealy 59 Director William G. Kagler 62 Director Lewis E. Miller 41 President, Chief Operating Officer and Director Timothy M. Mooney 47 Vice President, Treasurer and Chief Financial Officer Norma Skoog 44 Vice President, Secretary and General Counsel Dennis J. Sullivan 63 Director Dudley S. Taft 54 Director Terry L. Theye 50 Chairman of the Board of Directors and Chief Executive Officer The Company's directors are elected at its Annual Meeting of Shareholders. Each director is elected for a term of one year or until his successor is duly elected and qualified. Officers serve at the discretion of the Company's Board of Directors, and are elected on an annual basis. The following is a brief summary of the business experience of each of the directors and executive officers of the Company: Mr. Beech was elected as a director of the Company in December, 1988. He was Secretary of the Company from December, 1988 to May, 1991. Since May 1, 1991, Mr. Beech has been a member of the law firm of Kohnen & Patton. Prior to that he was Vice President and General Counsel of Reynolds, DeWitt & Co., a Cincinnati-based investment banking firm, and Reynolds DeWitt Securities Company from 1981 through April, 1991. Mr. Beech is chair of the Audit Committee and a member of the Executive Committee. Mr. Dealy was elected as a director of the Company in December, 1988. He was Chairman of the Executive Committee from February 22, 1993 to May 25, 1994. Prior to that he was the Company's Chairman of the Board from December, 1988. Mr. Dealy also served as the Company's Chief Executive Officer during the second quarter of 1990. Mr. Dealy is a Vice President of Reynolds, DeWitt & Co., a Cincinnati-based investment banking firm and has been associated with the company or its affiliate Reynolds DeWitt Securities Company as a Vice President since 1986. Mr. Dealy is also a director and Chairman of the Board of Restaurant Management, Inc., a retail food franchisee based in Cincinnati and served as a director and President from 1988 through 1994. Mr. Dealy is also a director of Compania Boliviana De Energia Electrica, S.A.-Bolivian Power Company Limited, an electric utility company. Mr. Dealy is a member of the Audit Committee. Mr. Kagler was elected as a director of the Company in June, 1992. Mr. Kagler is the Chairman of the Executive Committee of the Board of Directors of Skyline Chili, Inc., a Cincinnati-based restaurant and frozen food firm. He has held that position since November 1, 1992. Previously, he served as President and Chief Executive Officer from 1989 to 1992. Mr. Kagler is also a director of Fifth Third Bancorp and Fifth Third Bank; Union Central Life Insurance Co.; and The Ryland Group, Inc. Mr. Kagler is chair of the Compensation Committee and a member of the Audit and Nominating Committees. Mr. Miller was elected President and Chief Operating Officer of the Company effective February 22, 1993. Prior to that he served as Executive Vice President and Senior Vice President. Mr. Miller has been with the Company since December, 1988 and was first elected a director in December, 1990. From 1985 to December, 1988, Mr. Miller was with the Company's predecessor business. Mr. Miller is a member of the Executive Committee. Mr. Mooney was elected Vice President, Treasurer and Chief Financial Officer of the Company effective August 29, 1994. Prior to that he served for six years as Senior Vice President and Chief Financial Officer of Hook-SupeRx, Inc., a Cincinnati-based retail drugstore chain. In addition, Mr. Mooney spent nearly 20 years with the Cincinnati office of the accounting firm of Coopers & Lybrand, where he was General Practice Partner. Ms. Skoog was elected Vice President, Secretary and General Counsel of the Company in June, 1992. She was Vice President and Secretary of The Kroger Co., a Cincinnati-based supermarket chain, from June, 1989 until May, 1992. From 1980 to June, 1989, Ms. Skoog held various positions in The Kroger Co.'s law department. Mr. Sullivan was elected as a director of the Company in June, 1993. Mr. Sullivan is an Executive Counselor at Dan Pinger Public Relations, Inc. Prior to that he was Executive Vice President and Chief Financial Officer of Cincinnati Bell, Inc., former President of Cincinnati Bell Telephone and served on the board of Cincinnati Bell, Inc. and Cincinnati Bell Telephone Company for ten years. Mr. Sullivan is also a director of Fifth Third Bancorp, Fifth Third Bank, Community Mutual Insurance and ACCESS Corporation. Mr. Sullivan is a member of the Compensation and Finance Committees. Mr. Taft was elected as a director of the Company in August, 1991. Mr. Taft is President and Chief Executive Officer of Taft Broadcasting Company. He has held that position since 1987. Mr. Taft is also a director of Fifth Third Bank; Cincinnati Gas and Electric Co.; Union Central Life Insurance Co.; and U.S. Playing Card Company. Mr. Taft is chair of the Finance Committee and a member of the Compensation and Nominating Committees. Mr. Theye was elected Chairman of the Board effective February 22, 1993. Prior to that, except for a brief period in 1990, he was President and Chief Executive Officer of the Company since December, 1988. From 1981 to December, 1988, Mr. Theye was with the Company's predecessor business. Mr. Theye is Chairman of the Executive Committee and a member of the Nominating Committee. Item 11. EXECUTIVE COMPENSATION The information required by this item is set forth in the section entitled "Executive Compensation" in the Company's proxy statement for its Annual Meeting to be held on or about May 25, 1995, which will be filed by the Company with the Securities and Exchange Commission, and is hereby incorporated by reference into this Form 10-K. In the event such proxy statement is not filed with the Commission by April 30, 1995, the Registrant will amend this annual report on Form 10-K to include the required items in Part III of this Report. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the section entitled "Beneficial Ownership of the Company's Common Stock" in the Company's proxy statement for its Annual Meeting to be held on or about May 25, 1995, which will be filed by the Company with the Securities and Exchange Commission, and is hereby incorporated by reference into this Form 10-K. In the event such proxy statement is not filed with the Commission by April 30, 1995, the Registrant will amend this annual report on Form 10-K to include the required items in Part III of this Report. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the section entitled "Certain Transactions" in the Company's proxy statement for its Annual Meeting to be held on or about May 25, 1995, which will be filed by the Company with the Securities and Exchange Commission, and is hereby incorporated by reference into this Form 10-K. In the event such proxy statement is not filed with the Commission by April 30, 1995, the Registrant will amend this annual report on Form 10-K to include the required items in Part III of this Report. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements: Page Independent Auditors' Report - KPMG Peat Marwick LLP 19 Consolidated Balance Sheets at December 31, 1994 and 1993 20 Consolidated Statements of Operation for the Years Ended December 31, 1994, 1993 and 1992 21 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1993 and 1992 22 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 23 Notes to Consolidated Financial Statements 24 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts 37 (3) Exhibits: The following exhibits are filed with this Report or are incorporated by reference to the file indicated. Number Description ------ ----------- 3.1 Amended and Restated Articles of Incorporation (File No. 33-40634, Form S-1) 3.2 Code of Regulations (File No. 33-40634, Form S-1) 4.1 Form of Warrant Agreement (with schedule identifying substantially identical documents omitted) (File No. 33-40634, Form S-1) 4.2 Specimen Common Stock Certificate (File No. 33-40634, Form S-1) 4.3 Registration Rights Agreement, dated July 2, 1992 with Intelligent Electronics, Inc. (File No. 1-9296, Form 8-K dated July 2, 1992) 4.4 Standstill Agreement, dated July 2, 1992, with Intelligent Electronics, Inc. (File No. 1-9296, Form 8-K dated July 2, 1992) 10.1 Franchise Agreement with Today's Computers Business Centers, Inc. ("TCBC") dated December 4, 1990, and Amendment to Franchise Agreement with TCBC and Intelligent Electronics, Inc. dated December 31, 1990 (with schedule identifying substantially identical documents omitted) (File No. 33-40634, Form S-1) Number Description Page ------ ----------- ---- 10.2 Franchise Agreement with TCBC and 47 Intelligent Electronics, Inc. dated November 27, 1993 10.3 Employment Agreement with Terry L. Theye, 64 Chairman of the Board and Chief Executive Officer, dated January 1, 1993* 10.4 Employment Agreement with Lewis E. Miller, 71 President and Chief Operating Officer, dated January 1, 1993* 10.5 Employment Agreement with Norma Skoog, 78 Vice President, Secretary and General Counsel dated June 8, 1992, and Amendment No. 1 to said Employment Agreement dated January 1, 1993* 10.6 Employment Agreement with Timothy M. 91 Mooney, Vice President, Treasurer and Chief Financial Officer, dated August 29, 1994* 10.7 1991 Stock Option and Stock Incentive Plan (File No. 33-40634, Form S-1)* 10.8 1991 Director Stock Option Plan (File No. 33-40634, Form S-1)* 10.9 1994 Stock Option and Stock Incentive Plan (File No. 33-81678, Form S-8)* 10.10 Agreement and Plan of Merger, dated July 28, 1993 by and between the Company and Basicomputer Corporation and Amendments No. 1 and 2 to said Agreement and Plan of Merger, dated September 2, and September 9, 1993, respectively (File No. 1-9296, Form 8-K dated September 9, 1993) 10.11 Secured Credit Agreement, dated as of September 9, 1993 by and among the Company, its subsidiaries and PNC Bank Ohio, National Association, as Agent, The First National Bank of Chicago as Co-Agent and other participating banks ("Secured Credit Agreement") (File No. 1-9296, Form 8-K dated September 9, 1993) 10.12 Amendment No. 1 to the Secured Credit 98 Agreement dated January 19, 1994 10.13 Amendment No. 2 to the Secured Credit 109 Agreement dated March 8, 1994 Number Description Page ------ ----------- ---- 10.14 Amendment and Waiver No. 3 to the Secured Credit Agreement (File No. 1-9296, Form 10-Q June 30, 1994) 10.15 Amendment and Waiver No. 4 to the Secured Credit Agreement (File No. 1-9296, Form 8-K dated September 30, 1994) 10.16 Amendment and Waiver No. 5 to the Secured Credit Agreement (File No. 1-9296, Form 8-K dated October 11, 1994) 10.17 Amendment and Waiver No. 6 to the Secured Credit Agreement 122 10.18 Amendment and Waiver No. 7 to the Secured Credit Agreement (File No. 1-9296, Form 8-K dated November 1, 1994) 10.19 Amendment and Waiver No. 8 to the Secured Credit Agreement (File No. 1-9296, Form 8-K dated December 30, 1994) 10.20 Asset Purchase Agreement covering non- California sites by and among the Company, certain of its wholly owned subsidiaries and Intelligent Electronics, Inc. (File No. 1-9296, Form 8-K dated December 30, 1994) 10.21 Asset Purchase Agreement covering California sites by and among the Company, certain of its wholly owned subsidiaries and Intelligent Electronics, Inc. (File No. 1-9296, Form 8-K dated December 30, 1994) 10.22 Management Agreement between the Company and Intelligent Electronics, Inc. (File No. 1-9296, Form 8-K dated December 30, 1994) 22.1 Subsidiaries of the Registrant 129 23.1 Consent of KPMG Peat Marwick 130 24.1 Powers of Attorney 131 99.1 Annual Report on Form 11-K for The Future Now, Inc.'s 401(k) Plan will be filed by amendment on or before April 30, 1995 * Indicates management contract or compensatory plan or arrangement. (b) The following Current Reports on Form 8-K were filed by the Company during the fourth quarter, 1994: Forms 8-K dated as of September 30, October 11, and November 1, 1994, reporting Amendments No. 4, 5 and 7 to the Secured Credit Agreement, dated as of September 9, 1993, by and among the Company, its subsidiaries and PNC Bank, Ohio, National Association, as Agent, The First National Bank of Chicago as Co-Agent and other participating banks. Form 8-K dated as of December 30, 1994, reporting (i) the sale of the assets of five branches to Intelligent Electronics, Inc. and (ii) Amendment No. 8 to the Secured Credit Agreement, dated as of September 9, 1993, by and among the Company, its subsidiaries and PNC Bank, Ohio, National Association, as Agent, The First National Bank of Chicago as Co-Agent and other participating banks. SIGNATURES Pursuant to the requirements of Section 13 or Section 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, on March 30, 1995. THE FUTURE NOW, INC., Registrant By: /s/Terry L. Theye* ------------------ Terry L. Theye, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities indicated as of the 30th day of March, 1995. SIGNATURE TITLE --------- ----- /s/Joseph Beech III* Director - - - ------------------------- Joseph Beech III /s/James J. Dealy* Director - - - ------------------------- James J. Dealy - - - ------------------------- Director William G. Kagler /s/Lewis E. Miller* President and Chief Operating Officer - - - ------------------------- Lewis E. Miller /s/Timothy M. Mooney Vice President, Treasurer and Chief - - - ------------------------- Financial Officer Timothy M. Mooney (Principal Financial Officer) /s/ Jacqueline C. Neumann Vice President and Controller - - - ------------------------- (Principal Accounting Officer) Jacqueline C. Neumann /s/Dennis J. Sullivan* Director - - - ------------------------- Dennis J. Sullivan /s/Dudley S. Taft* Director - - - ------------------------- Dudley S. Taft /s/Terry L. Theye* Chairman of the Board and Chief - - - ------------------------- Executive Officer Terry L. Theye * By: /s/Norma Skoog -------------------------- Norma Skoog Attorney-in-fact EX-11 6
INTELLIGENT ELECTRONICS, INC. and subsidiaries Exhibit 11 Primary Earnings Per Share Calculation Page 1 of 2 Year ended --------------------------------------------------------------------- January 28, 1995 January 29, 1994 January 30, 1993 --------------------- --------------------- --------------------- $ Per Share $ Per Share $ Per Share --------- --------- ----------- --------- ---------- --------- Continuing operations 8,060,000 $0.23 41,117,000 $1.14 22,134,000 $0.58 Discontinued operation -- -- (2,468,000) (0.07) (20,160,000) (0.52) Sale of BizMart -- -- 4,276,000 0.12 -- -- Extraordinary item -- -- -- -- (3,269,000) (0.09) --------- --------- ----------- ---------- ---------- -------- Net income (loss) 8,060,000 $0.23 42,925,000 $1.19 (1,295,000) ($0.03) ========= ========= =========== ========== ========== ========= Weighted average common shares and share equivalents 34,847,553 36,127,061 37,947,071 ========== ========== ========== Computation of Common Shares and Common Share Equivalents: Year ended ----------------------------------------------------------------------------------- January 28, 1995 January 29, 1994 January 30, 1993 ------------------------ ------------------------- ------------------------ End of Weighted End of Weighted End of Weighted Period Average Period Average Period Average ---------- ---------- ---------- ---------- ---------- ---------- Common shares outstanding 39,519,949 34,262,118 39,310,439 35,028,207 36,961,154 36,807,833 Common share equivalents: Options 3,352,025 3,262,724 2,852,095 3,150,026 4,750,300 5,201,258 Assumed repurchased @ average price (2,677,289) (2,114,506) (4,137,041) Warrants 0 0 0 86,374 120,000 120,000 Assumed repurchased @ average price 0 (23,040) (44,979) ---------- ---------- ---------- Total common share equivalents 585,435 1,098,854 1,139,238 ---------- ---------- ---------- Total common shares and common share equivalents 34,847,553 36,127,061 37,947,071 ========== ========== ==========
INTELLIGENT ELECTRONICS, INC. and subsidiaries Exhibit 11 Fully Diluted Earnings Per Share Calculation Page 2 of 2 Year ended --------------------------------------------------------------------- January 28, 1995(1) January 29, 1994 January 30, 1993 --------------------- --------------------- --------------------- $ Per Share $ Per Share $ Per Share --------- --------- ----------- --------- ---------- --------- Continuing operations 8,060,000 $0.23 41,117,000 $1.13 22,134,000 $0.58 Discontinued operation -- -- (2,468,000) (0.07) (20,160,000) (0.52) Sale of BizMart -- -- 4,276,000 0.12 -- -- Extraordinary item -- -- -- -- (3,269,000) (0.09) --------- --------- ----------- --------- ---------- --------- Net income (loss) 8,060,000 $0.23 42,925,000 $1.18 (1,295,000) ($0.03) ========= ========= ========== ========= ========== ========== Weighted average common shares and share equivalents 34,847,553 36,520,787 38,204,419 ========== ========== ========== Computation of Common Shares and Common Share Equivalents: Year ended ----------------------------------------------------------------------------------- January 28, 1995(1) January 29, 1994 January 30, 1993 ------------------------ ------------------------- ------------------------ End of Weighted End of Weighted End of Weighted Period Average Period Average Period Average ---------- ---------- ---------- ---------- ---------- ---------- Common shares outstanding 39,519,949 34,262,118 39,310,439 35,028,207 36,961,154 36,807,833 Common share equivalents: Options 3,352,025 3,262,724 2,852,095 3,150,026 4,750,300 5,201,258 Assumed repurchased @ ending price (2,677,289) (1,728,625) (3,885,362) Warrants 0 0 0 86,374 120,000 120,000 Assumed repurchased @ ending price 0 (15,195) (39,310) ---------- ---------- ---------- Total common share equivalents 585,435 1,492,580 1,396,586 ---------- ---------- ---------- Weighted average common shares and common share equivalents 34,847,553 36,520,787 38,204,419 ========== ========== ========== (1) For the year ended January 28, 1995, the average market price for the period exceeded the ending market price. As such, fully dilutive earnings per share was antidilutive.
EX-21 7 Exhibit 21 SUBSIDIARIES OF INTELLIGENT ELECTRONICS, INC. The following is a list of the Company's subsidiaries. Omitted from the list are certain subsidiaries of the Company which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Intelligent Advanced Systems, Inc., a Delaware corporation Intelligent Distribution Services, Inc., a Delaware corporation Intellinet, Ltd., a Pennsylvania corporation Intelligent Express, Inc., a Pennsylvania corporation Intelligent SP, Inc., a Colorado corporation RND, Inc., a Colorado corporation Missing Link Communications, Inc., a Colorado corporation Intelligent Systems Group, Inc., a Colorado corporation Intelevest Holdings, Inc., a Delaware corporation Intelevest Business Trust, a Pennsylvania trust IntelliCom Solutions, Inc., A Pennsylvania corporation CS Computers, Inc., a Colorado corporation CS Computers of California, Inc., a California corporation EX-23 8 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (File No. 33-39398) and Forms S-8 (File Nos. 33-14436, 33- 35174, and 33-42119) of Intelligent Electronics, Inc. of our report dated April 12, 1995, appearing on page 12 of this Form 10-K. PRICE WATERHOUSE LLP Philadelphia, Pennsylvania April 20, 1995 EX-23 9 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors The Future Now, Inc. We consent to the inclusion of our report dated March 23, 1995, with respect to the consolidated balance sheets of The Future Now, Inc. and subsidiaries as of December 31, 1994 and December 31, 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the Form 10-K of Intelligent Electronics, Inc. dated April 20, 1995. KPMG Peat Marwick LLP Cincinnati, OH April 20, 1995 PRICE WATERHOUSE LLP Philadelphia, Pennsylvania April 20, 1995 EX-27 10
5 1,000 12-MOS JAN-28-1995 JAN-30-1994 JAN-28-1995 69,027 8,398 78,188 298 364,606 535,150 51,254 14,791 670,774 503,290 0 395 0 0 167,089 167,484 3,208,083 3,208,083 3,075,342 3,075,342 100,951 336 1,238 34,926 13,853 8,060 0 0 0 8,060 0.23 0.23
-----END PRIVACY-ENHANCED MESSAGE-----