SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED June 30, 1997 .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-28892
XLConnect Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2832796
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
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(Address of principal executive offices) (Zip Code)
(610) 458-5500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 16,655,000 shares of
Common Stock, par value $0.01 per share were outstanding on August 13,
1997.
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports Filed on Form 8-K 17
SIGNATURES 19
<PAGE>
<TABLE> <CAPTION>
Part I. Financial Information
Item 1. Consolidated Financial Statements
XLConnect Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share-related data)
June 30, December 31,
1997 1996
----------- ------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 11,941 $ 3,467
Trade accounts receivable, less allowance of $1,196 at June 30, 1997
and $1,072 at December 31, 1996 30,204 23,063
Deferred tax asset 670 1,225
Prepayments and other current assets 1,497 1,155
----------- ------------
Total current assets 44,312 28,910
Property and equipment, net of accumulated depreciation 4,763 4,985
Intangible assets, net of accumulated amortization 26,281 27,006
Other long-term assets 1,278 766
----------- ------------
Total assets $ 76,634 $ 61,667
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 50 $ 67
Accounts payable 1,389 3,144
Accrued expenses 8,130 4,464
Deferred income and other 1,231 1,449
Due to Parent 6,046 257
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Total current liabilities 16,846 9,381
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Long-term liabilities:
Long-term debt 5,081 -
----------- ------------
Total liabilities 21,927 9,381
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Commitments and contingencies ( Notes 3, 5 and 7)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
no shares issued and outstanding as of June 30, 1997
and December 31, 1996 - -
Common stock, $.01 par value, 100,000,000 shares authorized;
16,655,000 shares issued and outstanding as of June 30, 1997
and December 31, 1996 166 166
Additional paid-in capital 50,437 50,074
Retained earnings 4,104 2,046
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Total shareholders' equity 54,707 52,286
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Total liabilities and shareholders' equity $ 76,634 $ 61,667
========== ============
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
XLConnect Solutions, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 36,547 $ 28,283 $ 69,622 $ 52,001
Cost of revenues 25,044 19,370 48,118 36,374
-------- -------- -------- --------
Gross profit 11,503 8,913 21,504 15,627
Operating expenses:
Selling and marketing 3,214 2,096 6,072 3,749
General and administrative 4,766 2,779 9,369 5,109
Depreciation and amortization 1,189 1,189 2,216 2,491
-------- -------- -------- --------
9,169 6,064 17,657 11,349
-------- -------- -------- --------
Income from operations 2,334 2,849 3,847 4,278
Other expense (income), net:
Interest (30) 985 (55) 2,059
Other (48) 11 (48) 16
-------- -------- -------- --------
(78) 996 (103) 2,075
-------- -------- -------- --------
Income before income taxes 2,412 1,853 3,950 2,203
Provision for income taxes 1,121 898 1,892 1,189
-------- -------- -------- --------
Net income $ 1,291 $ 955 $ 2,058 $ 1,014
======== ======== ======== ========
Earnings per common share
Net income per common share $ 0.08 $ 0.07 $ 0.12 $ 0.07
Weighted average number of common shares 16,655 13,888 16,799 13,888
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statement
<PAGE>
<TABLE><CAPTION>
XLConnect Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Six Months Ended
June 30,
-----------------
1997 1996
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,058 $ 1,014
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,216 2,491
Loss on disposal of property and equipment 2 16
Provision for allowance on trade accounts receivable 173 148
Amortization of debt discount 20 -
Deferred income taxes 436 (17)
Changes in assets and liabilities:
Trade accounts receivable (7,314) (4,163)
Prepayments and other current assets (342) (1,710)
Other long-term assets (395) (98)
Due to parent 6,046 -
Accounts payable (1,755) (1)
Accrued expenses 3,666 343
Deferred income and other (218) 35
------- -------
Net cash provided by (used in) operating activities 4,593 (1,942)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,271) (700)
------- -------
Net cash used in investing activities (1,271) (700)
------- -------
Cash flows from financing activities:
Repayments of long-term debt (17) (101)
Borrowings of long-term debt 5,500 -
Net changes in due to parent (257) 2,743
Payment of initial public offering costs (74) -
------- -------
Net cash provided by financing activities 5,152 2,642
------- -------
Net change in cash and cash equivalents 8,474 -
Cash and cash equivalents-beginning of period 3,467 -
------- -------
Cash and cash equivalents-end of period $11,941 $ -
======= =======
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of
XLConnect Solutions, Inc. (the Company or XLConnect) and its wholly-owned
subsidiaries. All material transactions between entities included in these
financial statements have been eliminated. Prior to January 1, 1996, the
Company had no separate legal status or existence. The Company was
incorporated under the laws of the Commonwealth of Pennsylvania in January
1996 and issued 1,000 shares of Common Stock to Intelligent Electronics,
Inc. (IE) at such time in connection with its initial capitalization. The
Company changed its name to XLConnect Solutions, Inc. in May 1996. In
addition (i) as of May 31, 1996, IE contributed to the Company the stock of
IntelliCom Solutions, Inc. (IntelliCom), formerly a wholly-owned subsidiary
of IE, and the assets and liabilities, including debt, relating to the
Professional Services Organizations of The Future Now, Inc. and IE, and
began accumulating its retained earnings, (ii) the Company and IE entered
into certain contractual arrangements effective as of the date set forth on
each agreement for the purpose of defining certain relationships between
them (see Note 5) and (iii) on September 6, 1996, the Company effected a
13,325-for-1 stock split of the Company's issued and outstanding shares of
Common Stock. On October 17, 1996, the Company consummated an initial
public offering (IPO) of 3,330,000 of its authorized and unissued shares of
Common Stock, or approximately 20% of the Company's outstanding shares
after the IPO, at an initial public offering price of $15 per share.
Approximately $41,000 of the total net proceeds of $45,110 were used to
repay the Company's then outstanding indebtedness to IE, with the remaining
proceeds used for working capital and general corporate purposes. As a
result of the IPO, the Company currently is an indirect, 80%-owned
subsidiary of IE.
The Consolidated Financial Statements include historical assets,
liabilities, sales and expenses directly related to the Company's
operations that were either specifically identifiable or allocable using
methods which took into consideration personnel, business volume or other
appropriate factors. For the periods presented, certain general and
administrative expenses reflected in the Consolidated Financial Statements
include allocations of certain corporate expenses from IE. These
allocations generally include administrative expenses related to general
management, insurance, information management and other miscellaneous
services. Allocations of corporate expenses are estimates based on
management's best estimate of actual expenses. Interest expense for the
six months ended June 30, 1996 reflects interest expense associated with
the Company's share of the aggregate borrowings of IE and all of its
subsidiaries. Income taxes were calculated on a separate tax return basis.
Management believes that the allocations in its Consolidated Financial
Statements are reasonable.
Prior to January 1, 1997, the Company participated in IE's central cash
management system which resulted in all cash that was generated from and
required to support the Company's operations being deposited and received
through IE's corporate operating cash accounts. As a result, there were no
separate bank accounts or accounting records for these transactions.
Accordingly, the amounts represented by the caption "Net changes in due to
parent" to the Company's Consolidated Statements of Cash Flows represent
the net effect of all cash transactions between the Company and IE.
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Company in
the future or what the balance sheets, results of operations or cash flows
of the Company would have been if it had been a separate, stand-alone
publicly-held corporation during the six months ended June 30, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
use assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
This information is unaudited but, in the opinion of management, reflects
all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of the financial position and operating results for the
interim periods presented. These financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Certain amounts in the prior year have been reclassified to conform with
the current year's presentation.
Note 2. Revenue and Cost Recognition
Revenues from internetworking and applications development service
contracts are primarily recognized as services are provided to the client
and billed on a time and materials basis, and to a lesser extent, are
recognized on the percentage-of-completion basis for fixed price contracts.
Costs are recognized as incurred. Revenues associated with managed service
contracts are recorded ratably over the service period of the contract
while costs are also recognized as incurred. Revenues and costs from
telecommunications services are recognized on the basis of client usage or
pursuant to a fixed rate. Funds received through IE from vendors for
training, capital expenditures and marketing programs are accounted for
either as fee income or as a reduction of cost of revenues, capitalized
costs or selling and marketing expenses, according to the nature of the
program when earned. The Company received allocations of IE's total vendor
funding related to the businesses of the Company in the amounts of $725 and
$568 for the six months ended June 30, 1997 and 1996, respectively. These
allocations were based on the relationship of services business volumes to
total business volumes of the Company and TFN for 1996 except for funding
specifically related to IntelliCom's telecommunications services. The
Company and IE renegotiated the basis of this allocation for 1997 based on
the Company's contribution to IE's generation of vendor funding.
Note 3. Debt Obligations
During 1996, the Company was a party to IE's credit facility (the IE Credit
Facility) with IBM Credit Corporation (IBMCC). The IE Credit Facility
allowed for total borrowings by IE of up to $225,000, subject to a
collateral-based formula, and was secured by all of the assets of IE and
its subsidiaries, including the Company. During October 1996, IE and IBMCC
amended the IE Credit Facility to allow the Company to borrow directly from
IBMCC up to $20,000 of the total $225,000, subject to a collateral-based
formula (the Sub-facility), and to limit the Company's joint and several
liability with IE to IBMCC to up to $20,000 (whether arising from direct
borrowings or a guaranty of IE's borrowings). Outstanding balances under
the Sub-facility initially bore interest at the prime rate plus .875 (1.5%
prior to November 1996) and the Sub-facility had a maturity date of April
5, 1997. IE was permitted under the IE Credit Facility to borrow up to the
total amount of the IE Credit Facility, including amounts not then
outstanding to the Company under the Sub-facility, provided IE satisfied
its collateral-based formula, inclusive of the Company's assets. However,
the Company and IE entered into an Intercompany Debt Agreement dated
October 22, 1996 which permitted IE to borrow against the Company's assets
only up to an amount of borrowing equal to any remaining intercompany
indebtedness owed by the Company to IE from time to time. As of March 26,
1997, the Company, IE and IBMCC further amended the IE Credit Facility to
terminate the Sub-facility (including the Company's joint and several
liability to IE), and the Company and IBMCC entered into a separate credit
agreement providing the Company with a credit facility in the amount of
$25,000, subject to a collateral-based formula, which is secured by all of
the assets of the Company and its subsidiaries (the XLC Credit Facility).
Interest is payable at LIBOR plus 1.5% decreasing to 1.2% depending upon
outstanding borrowings. The Company was in compliance with its covenants
during the period and, as of June 30, 1997, the Company had no outstanding
borrowings under the XLC Credit Facility. In addition, IE was required by
IBMCC to guarantee any borrowings under the XLC Credit Facility.
Concurrent with establishing the XLC Credit Facility, the Company and IE
have amended the Intercompany Debt Agreement whereby IE will reimburse the
Company for the difference between LIBOR plus .75% and the interest rate
paid by the Company to IBMCC and for other direct expenses that the Company
would not have been required to incur if it had entered into an unsecured
credit facility.
On February 28, 1997, the Company entered into a transaction with a third
party whereby the third party agreed to provide an unsecured loan of up to
$11,000 (the Loan) to be used for specific business purposes. The Company
borrowed the full $5,500 available under the first traunch, which remained
outstanding as of June 30, 1997. The remaining amount may be drawn after
August 28, 1997 and prior to February 28, 1998 subject to the Company
satisfying certain financial criteria. Interest is payable at an initial
annual rate of 4% for the first two years and adjusts to 5% and then 6% for
the remaining term. Principal payments of $750 will be made quarterly
beginning in August 1999 with a final payment of $1,250 due on August 28,
2002. In connection with the Loan, the Company issued to the third party a
warrant to purchase up to 325,000 shares of its Common Stock, which becomes
exercisable on February 28, 1998, August 28, 1998 or February 28, 2002,
depending upon the occurrence of certain events, at a per share exercise
price of $6.65, and expires on February 27, 2007. After considering the
effect of the additional interest associated with the issuance of the
warrant and the resultant discounting of the Loan, the effective interest
rate is 7.4%.
Note 4. Net Income Per Common Share
Net income per common share is based on the weighted average number of
outstanding shares of Common Stock for each period. The per share
calculations include the effect of the Company's 13,325-for-1 stock split
of Common Stock prior to the IPO.
Note 5. Related Party Transactions
The Company and IE have entered into a number of agreements, in addition to
the Intercompany Debt Agreement referred to herein, for the purpose of
defining certain relationships between them. As a result of IE's
approximately 80% ownership interest in the Company, the terms of such
agreements were not, and the terms of any future amendments to those
agreements may not be, the result of arms-length negotiation. The
following summaries of these agreements are qualified in all material
respects by the terms and conditions of the agreements.
The "Due to Parent" balance of $6,046 at June 30, 1997 represents the net
payable to IE for the services provided by IE to XLConnect under the
Services and Space Sharing Agreements described below. This amount was
subsequently paid in full.
Services Agreement
The Company and IE have entered into a Services Agreement pursuant to which
IE will continue, on an interim basis, to provide the Company, upon the
Company's request, various services, including insurance and risk
management, employee benefit administration and similar administrative and
management services, that IE has historically provided to the Company, and
the Company will continue on an interim basis to provide service call
support to IE. The Company will pay the direct costs of services provided
by IE, and IE will pay the Company for service call support at the
Company's standard billing rates. To the extent that the direct costs of
services provided by IE cannot be separately measured, the Company will pay
its allocable portion of the total cost to IE for any such services,
determined in accordance with described methodologies, using such objective
factors as are available to IE and the Company. The Services Agreement
also provides that IE will furnish additional services as may be reasonably
requested by the Company on similar terms. The Services Agreement will
automatically terminate on (i) the occurrence of a pro rata distribution to
IE's shareholders of its remaining shares by means of a tax-free or taxable
transaction (the Distribution) or (ii) such time that IE no longer owns a
majority of the outstanding shares of Common Stock. In addition, the
Services Agreement may also be terminable by either party on 90 days' prior
written notice. Under the Services Agreement, IE and the Company each have
the option to make advances from time to time to the other upon request.
In the case of the Company, such advances would be made as directed or
within specific parameters prescribed by its Board of Directors. Interest
is payable monthly in arrears at market rates on all net advances by the
Company or IE, as the case may be, and, prior to termination of the
Services Agreement, will be accounted for as additional advances. Advances
will be repayable on the date specified in the request for such advance.
Funds advanced by the Company to IE will not be segregated from other funds
of IE, and IE may use such funds for its own benefit, subject to certain
limitations under the IBMCC credit facility. Consequently, the Company
will be subject to risk of loss in respect to such funds. Upon
termination of the Services Agreement, all outstanding advances and accrued
but unpaid interest will become due and payable.
In addition, the Services Agreement provides that IE will permit employees
of the Company to continue to participate in the benefit plans and programs
sponsored by IE until the termination of the Services Agreement.
The Services Agreement also recognizes that IE's direct sales force may
continue to provide to the Company sales leads and referrals. The Services
Agreement provides that the Company shall continue to compensate IE at
least through December 31, 1997 for such leads and referrals that result in
revenues to the Company in a manner consistent with and substantially
similar to then current practices between the companies.
The Services Agreement further provides that the Company will continue to
receive from IE for an interim period, consistent with past practices, a
portion of the funds received by IE from vendors for training, capital
expenditures and marketing programs. The Company and IE have renegotiated
the basis of the Company's allocation of vendor funding for 1997 based on
the Company's relative contribution to the generation of the funding.
Space Sharing Agreement
The Company and IE have entered into a Space Sharing Agreement providing
for the sharing by the Company and IE of certain office facilities,
including the offices located in Exton, Pennsylvania at which the Company's
and IE's principal executive offices are located. Under the Space Sharing
Agreement, the costs associated with leasing and maintaining facilities
will, in general, be allocated between the Company and IE on a pro rata
basis determined by the square footage utilized by each Company or the
number of employees of each Company at the specified location, in
accordance with historical practice. The Company's rights to use portions
of the shared facilities leased from third parties and the corresponding
obligations to pay for such use, may be terminated as to any facility by
either the Company or IE on 90 days' prior written notice.
Tax Allocation Agreement
The Company and IE have entered into a Tax Allocation Agreement to provide
for (i) the allocation of payments of taxes for periods during which the
Company and IE are included in the same consolidated group for Federal
income tax purposes or the same consolidated, combined or unitary tax
returns for state, local or foreign tax purposes, (ii) the allocation of
responsibility for the filing of tax returns, (iii) the conduct of tax
audits and the handling of tax controversies, and (iv) various related
matters. For periods during which the Company is included in the
aforementioned returns, the Company will be required to pay IE its
allocable share of any tax benefit attributable to the use of the Company's
losses, if any. The Company will be responsible for the filing of Federal,
state, local and foreign tax returns and related liabilities for itself for
all periods, to the extent not included in IE's combined or consolidated
tax returns. Notwithstanding the Tax Allocation Agreement, under Federal
income tax law, each member of a consolidated group for Federal income tax
purposes is also jointly and severally liable for the Federal income tax
liability of each member of the consolidated group. Similar rules may
apply under state income tax laws.
Indemnification Agreement
The Company and IE have entered into an Indemnification Agreement under
which, among other things and subject to limited exceptions, the Company is
required to indemnify IE and its directors, officers, employees, agents and
representatives for all liabilities relating to the Company's business and
operations and for all contingent liabilities relating to the Company's
business and operations or otherwise assigned to the Company. In addition,
indemnification will be granted to IE for liabilities arising out of or
based upon alleged misrepresentations in or omissions from the Registration
Statement relating to the IPO.
The Indemnification Agreement also provides that each party thereto (the
Obligor Party) (i) will use reasonable efforts to obtain the release of the
other party thereto (the Guarantor Party from its obligations under or in
respect of all material guarantees, surety and performance bonds, letters
of credit and other arrangements guaranteeing or securing any liability or
obligation of the Obligor Party (except with respect to the Company's
obligations under the Sub-facility and IE's guarantee obligations with
respect to the XLC Credit Facility that replaces the Sub-facility), (ii)
will indemnify the Guarantor Party for any liabilities incurred under such
guarantees, bonds, letters of credit and other arrangements, and (iii) will
reimburse the Guarantor Party for its direct costs (or, in certain
circumstances, the Obligor Party's pro rata share of such direct costs) of
maintaining such guarantees, bonds, letters of credit and other
arrangements pending the release of the Guarantor Party thereunder.
Stock Registration and Option Agreement
Pursuant to the terms of the Stock Registration and Option Agreement with
IE, the Company has provided IE with certain registration rights, including
demand registration rights and "piggy-back" registration rights, with
respect to Common Stock owned by IE after the IPO. The Company's
obligation is subject to certain limitations relating to a minimum amount
of Common Stock required for registration, the timing of registration and
other similar matters. The Company is obligated to pay all expenses
incidental to such registration, excluding underwriters' discounts and
commissions and certain legal fees and expenses. The Company has also
granted to IE, pursuant to the Stock Registration and Option Agreement,
during the period between the completion of the IPO and the earlier to
occur of (i) the completion of a distribution by IE to its shareholders of
the shares of Common Stock of the Company held by IE (the Distribution) and
(ii) the sale by IE of such number of shares of Common Stock that IE is
no longer eligible to make the Distribution tax free or to include the
Company in IE's consolidated Federal income tax return, a continuous,
cumulative option to purchase from the Company at then-current market
prices such number of shares of Common Stock as IE may determine to be
necessary (a) to allow IE to continue to include the Company in IE's
consolidated Federal income tax return or (b) to increase the likelihood
that the Distribution would be tax-free to IE and its shareholders. This
number of shares is expected to be the number necessary for IE to continue
to own at least 80% of the outstanding shares of Common Stock. The option
may only be exercised upon the original issuance of shares by the Company.
In the event that any shares of Common Stock are issued prior to the
Distribution upon the exercise of any option granted under the Company's
1996 Long-Term Incentive Plan and such issuance would otherwise prevent IE
from continuing to include the Company in IE's consolidated Federal income
tax return or effecting the Distribution on a tax-free basis, the option
described in the immediately preceding sentence will automatically be
deemed to have been exercised in respect of a number of shares of Common
Stock equal to four times the number of shares of Common Stock issued upon
the exercise of the option granted under the 1996 Long-Term Incentive Plan
unless IE shall have earlier terminated such automatic exercise feature.
Existing Telecommunications Services Agreement
Pursuant to the terms of a services agreement between IE and the Company
dated as of January 1, 1996, IE has agreed to purchase from the Company all
of the telecommunications services required by IE. The services provided
by the Company under the services agreement involve the transmission of
voice, data, video and other information as well as enhanced
telecommunication services such as frame relay and asynchronous transfer
mode transmission services. The services provided by the Company also
include capacity planning, call accounting, network design and similar
services. Total revenues received from IE were $2,095 and $1,990 for the
six months ended June 30, 1997 and 1996, respectively. The services
agreement requires IE to purchase sufficient telecommunications services to
permit the Company to meet the minimum volume requirements imposed by the
Company's agreement with MCI Telecommunications Corporation (MCI). The
services agreement has a term of five years and will renew automatically
for six successive two year periods, unless terminated earlier in
accordance with its terms. IE may terminate the services agreement at the
conclusion of any such term if it provides the Company with at least 90
days' notice prior to the expiration of such term that it has received a
bona fide offer to provide telecommunications services that in quantity,
quality and duration are equal to or better than the services being
provided to IE by the Company at a price of 5% or more below the price of
the Company charges for such services and the Company does not match the
offer.
Note 6. Supplemental Cash Flow Information
Non-cash financing activities of $437 for the six months ended June 30,
1997 related to the discounting of the Loan as a result of issuing
detachable warrants (see Note 3). The Company made no cash payments for
interest and income taxes for the six months ended June 30, 1997.
Note 7. 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.
The Company, through IntelliCom, entered into an agreement with MCI in
December 1994, whereby the Company is authorized to sell certain of MCI's
data and voice communications services under the Company's name. This
relationship generates recurring revenues for the Company from clients'
monthly usages. The Company is required to meet a certain minimum billing
level of $2,000 in 1997, or pay MCI the shortfall. The Company has
exceeded its minimum under this agreement in the past and believes that it
will exceed its minimum in 1997.
Note 8. Subsequent Event
On July 18, 1997, XLConnect and IE completed a transaction with GE Capital
Information Technology Solutions Acquisition Corp. (Buyer), a subsidiary of
GE Capital Information Technology Solutions, Inc. (GECITS), whereby
XLConnect sold to Buyer specified "Power-by-the-Hour" managed service
contracts and related assets, consisting principally of accounts receivable
and fixed assets. In the transaction, IE also sold the majority of its
direct computer sales operations to Buyer. The transaction was pursuant to
an Asset Purchase Agreement dated July 1, 1997, as amended on July 18, 1997
(the Purchase Agreement). The Purchase Agreement includes mutual one year
non-competition and no-hire provisions between the parties.
Of the total purchase price of approximately $136,000 paid by Buyer in the
transaction, the Company received $9,283 (based on the estimated net book
value of the assets sold of approximately $4,533). The purchase price is
subject to adjustment after closing based on the actual net book value of
such assets as of the closing date. A portion of the purchase price due to
IE was placed in escrow pending receipt of certain third-party consents and
to fund purchase price adjustments and obligations of IE and the Company
under the Purchase Agreement, including the obligation to repurchase from
Buyer any transferred accounts receivable which remain uncollected after
120 days.
The Company has agreed to repay IE for any of the Company's accounts
receivable required to be repurchased by IE and for certain other
liquidated damages incurred by IE to Buyer as a result of the non-
performance of certain undertakings by the Company in the Purchase
Agreement. The Company has also agreed to reimburse IE for any losses by
reason of the indemnification undertakings in the Purchase Agreement
arising out of or based upon misrepresentations or material breaches of
covenants in the Purchase Agreement by the Company. IE has agreed to
indemnify, defend and hold harmless the Company from any claim asserted
against or liability imposed on the Company under the Purchase Agreement
arising out of or based upon misrepresentations or material breaches of
covenants in the Purchase Agreement by IE.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months
Ended June 30, 1996.
The following table sets forth the components of revenues of the Company
for the periods presented:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------ ------------------------------------
1997 1996 (1) 1997 1996 (1)
----------------- ----------------- ----------------- -----------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
----------------- ----------------- ----------------- -----------------
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Internetworking $ 10,674 29.2 % $ 8,843 31.3 % $ 20,861 30.0 % $ 15,779 30.4 %
Applications development 6,229 17.0 4,533 16.0 11,617 16.7 8,093 15.6
Managed services 13,704 37.5 10,654 37.7 25,919 37.2 20,078 38.6
Telecommunications and
other fees 5,940 16.3 4,253 15.0 11,225 16.1 8,051 15.4
-------- ------- -------- ------- -------- ------- -------- -------
Total Revenues $ 36,547 100.0 % $ 28,283 100.0 % $ 69,622 100.0 % $ 52,001 100.0 %
======== ======= ======== ======= ======== ======= ======== =======
_________________
(1) Restated to reflect current years presentation
</TABLE>
Revenues. Revenues increased 29.2% for the quarter ended June 30, 1997 to
$36.5 million from $28.3 million for the quarter ended June 30, 1996. The
increase was attributable to growth in most of the Company's eleven
services disciplines.
Revenues increased 33.9% for the six months ended June 30, 1997 to $69.6
million from $52.0 million for the six months ended June 30, 1996. The
increase was attributable to growth in all of the Company's services
disciplines.
On July 18, 1997 the Company sold to Buyer specified Power-by-the-Hour
managed service contracts which include the Company's largest account,
General Electric Aircraft Engines. Revenues relating to these accounts
were $8.3 million and $7.4 million for the six months ended June 30, 1997
and 1996, respectively. In addition, concurrent with the Company's sale,
IE also sold the majority of its direct computer sales operations to Buyer
and on July 21, 1997, IE completed the sale of its indirect computer sales
business to a third party. During the six months ended June 30, 1997 and
1996, the Company generated revenues from sales of telecommunication
services to IE of approximately $2.1 million and $2.0 million,
respectively, which will substantially decrease as a result of the
dispositions by IE.
Cost of Revenues. Cost of revenues increased 29.3% for the quarter ended
June 30, 1997 to $25.0 million from $19.4 million for the quarter ended
June 30, 1996. This increase was primarily the result of incremental costs
associated with increased revenues from the Company's Power-by-the-Hour
program combined with an increased number of technical personnel needed to
support the growth in revenues. Cost of revenues as a percentage of
revenues remained constant at 68.5%. Improvements in the Company's
utilization of engineers and management of warranty parts under its
hardware repair services business were offset by pricing adjustments,
effective as of January 1, 1997 due to the renewal of the Company's largest
contract, which was subsequently sold to Buyer. As a result of the sale,
the Company anticipates that cost of revenues as a percentage of revenues
will decrease by approximately two to three percentage points, as the
Company continues to focus on its higher margin disciplines.
Cost of revenues increased 32.3% for the six months ended June 30, 1997 to
$48.1 million from $36.4 million for the six months ended June 30, 1996.
This increase was primarily the result of incremental costs associated with
increased revenues from the Company's Power-by-the-Hour program combined
with an increased number of technical personnel needed to support the
growth in revenues. Cost of revenues as a percentage of revenues decreased
to 69.1% for the six months ended June 30, 1997, as compared to 69.9% for
the six months ended June 30, 1996, resulting from an improvement in the
utilization of the Company's engineers and technicians combined with better
management of warranty parts under its hardware repair services business,
which were partially offset by the pricing adjustments made to the
Company's largest contract.
Selling and Marketing. Selling and marketing expenses increased 53.3% for
the quarter ended June 30, 1997 to $3.2 million from $2.1 million for the
quarter ended June 30, 1996 and increased as a percentage of revenues to
8.8% for the quarter ended June 30, 1997 from 7.4% for the quarter ended
June 30, 1996. Selling and marketing expenses increased 62.0% for the six
months ended June 30, 1997 to $6.1 million from $3.7 million for the six
months ended June 30, 1996 and increased as a percentage of revenues to
8.7% for the six months ended June 30, 1997 from 7.2% for the six months
ended June 30, 1996. The increase in both comparison periods resulted
from the continued development of the Company's direct sales force.
General and Administrative. General and administrative expenses increased
71.5% for the quarter ended June 30, 1997 to $4.8 million from $2.8 million
for the quarter ended June 30, 1996 and increased as a percentage of
revenues to 13.0% for the quarter ended June 30, 1997 from 9.8% for the
quarter ended June 30, 1996. General and administrative expenses increased
83.4% for the six months ended June 30, 1997 to $9.4 million from $5.1
million for the six months ended June 30, 1996 and increased as a
percentage of revenues to 13.5% for the six months ended June 30, 1997 from
9.8% for the six months ended June 30, 1996. The increase in both
comparison periods was due to increased overhead costs which were required
to support the Company's growth and to enable it to operate as a separate
public company and also resulting from the continued separation of
XLConnect from the direct hardware sales business of IE (the majority of
which has now been sold to Buyer) with which XLConnect during the
comparison periods, shared certain facilities and related expenses,
employee benefits and insurance costs. The overhead costs include an
expanded management and operations team and increased facility costs
necessary to support overall personnel growth and new market expansion.
The Company anticipates continued pressure on general and administrative
expenses in this regard.
Depreciation and Amortization. Depreciation and amortization remained
constant for the quarter ended June 30, 1997 at $1.2 million as compared to
the quarter ended June 30, 1996 and decreased as a percentage of revenues
to 3.3% for the quarter ended June 30, 1997 from 4.2% for the quarter ended
June 30, 1996. The decrease as a percentage of revenues was primarily due
to the increase in revenues while capital additions equaled the amount of
assets becoming fully depreciated during the quarter.
Depreciation and amortization decreased 11.0% for the six months ended June
30, 1997 to $2.2 million from $2.5 million for the six months ended June
30, 1996 and decreased as a percentage of revenues to 3.2% for the six
months ended June 30, 1997 from 4.8% for the six months ended June 30,
1996. The decrease was due to more assets becoming fully depreciated
during the six months than capital additions.
Income from Operations. Income from operations decreased 18.1% for the
quarter ended June 30, 1997 to $2.3 million from $2.8 million for the
quarter ended June 30, 1996 and decreased as a percentage of revenues to
6.4% for the quarter ended June 30, 1997 from 10.1% for the quarter ended
June 30, 1996, due to the increase as a percentage of revenues of selling
and marketing and general and administrative expenses for the reasons
stated above.
Income from operations decreased 10.1% for the six months ended June 30,
1997 to $3.8 million from $4.3 million for the six months ended June 30,
1996 and decreased as a percentage of revenues to 5.5% for the six months
ended June 30, 1997 from 8.2% for the six months ended June 30, 1996, due
to the increase as a percentage of revenues of selling and marketing and
general and administrative expenses for the reasons stated above.
Other Expense (Income), Net. Other expense (income), net decreased 107.8%
for the quarter ended June 30, 1997 to ($78,000) from $996,000 for the
quarter ended June 30, 1996, which was primarily a result of the decrease
in interest expense. Other expense (income), net decreased 105.0% for the
six months ended June 30, 1997 to ($103,000) from $2.1 million for the six
months ended June 30, 1996, which was primarily a result of the decrease in
interest expense. Interest expense decreased as a result of the Company
paying off its then outstanding borrowings from IE with the proceeds of the
IPO and investing the remaining net proceeds from the IPO combined with the
proceeds from the Loan in short-term securities generating interest income.
Provision for Income Taxes. Provision for income taxes increased 24.8% for
the quarter ended June 30, 1997 to $1.1 million from $898,000 for the
quarter ended June 30, 1996, which was primarily due to higher income
before income taxes. The effective income tax rate decreased to 46.5% for
the quarter ended June 30, 1997 from 48.5% for the quarter ended June 30,
1996, primarily due to higher income before income taxes.
Provision for income taxes increased 59.1% for the six months ended June
30, 1997 to $1.9 million from $1.2 million for the six months ended June
30, 1996, which was primarily due to higher income before income taxes.
The effective income tax rate decreased to 47.9% for the six months ended
June 30, 1997 from 54.0% for the quarter ended June 30, 1996, primarily due
to higher income before income taxes
Quarterly Results and Seasonality
The Company's quarterly results may vary depending upon a number of
factors, including the following: changes in the levels of revenues
derived from internetworking, applications development, managed services
and telecommunication fees and other services; the size and timing of
significant projects; changes in the mix of employee and subcontractor
technicians; the number of business days in a period and the closing of
client facilities for holidays and other reasons; cost overruns on fixed-
price contracts; the potential for increased expenditures and the loss of
sales generation activity resulting from the sale of the majority of the
direct computer sales business of IE with which XLConnect shares facilities
and related expenses, employee benefits, insurance policies and other
services and has relied on significantly for sales leads; business
distractions resulting from the relocation of approximately six branch
locations due to the sale of IE's direct computer sales business and other
business reasons; the timing of new service offerings by the Company or its
competitors; new branch office openings by the Company; the loss of senior
management or key technical personnel; changes in pricing policies by the
Company or its competitors; market acceptance of new and enhanced services
offered by the Company or its competitors; changes in operating expenses;
the availability of qualified technical personnel; disruptions in sources
of supply of computer, telecommunications and related products and
services; the effect of acquisitions; and industry and general economic
factors. In addition, the Company believes that its business is subject to
some seasonality, and that weaker sales may be experienced during the
fourth and first quarters due to fewer business days and by some clients'
decisions at year end to postpone large internetworking and applications
development projects until the following year when capital budgets are
renewed.
The Company believes that revenues in the third quarter will decrease due
to the sale of the Power-by-the-Hour contracts and competition with Buyer
in service areas that were not covered by the non-competition provisions
between the parties, particularly hardware repair.
Effects of Inflation
The Company believes it has not been adversely affected by inflation during
the past three years.
Liquidity and Capital Resources
The Company's operating activities provided cash of $4.6 million for the
six months ended June 30, 1997 due to a timing difference between IE's and
the Company's fiscal period ending dates which resulted in XLConnect
maintaining the Due to Parent liability to IE as of June 30, 1997 for
intercompany services provided and rent paid by IE on behalf of XLConnect.
Offsetting this increase is the increase in working capital requirements,
primarily accounts receivable resulting from the significant growth in
revenues. The Company believes that it may use cash from operations
through the end of the year because of continued revenue growth in the
Company's retained business and the associated use of working capital in
connection with this growth.
The Company's investing activities used cash of $1.3 million for the six
months ended June 30, 1997 relating to capital expenditures necessary to
support the continued growth in the number of technical service and
administrative personnel and new market expansion.
The Company's financing activities provided cash of $5.2 million for the
six months ended June 30, 1997 resulting primarily from borrowings against
the Loan provided by a third party.
Prior to January 1, 1997, the Company participated in IE's central cash
management system, pursuant to which all cash generated from the Company's
operations was transferred to IE on a daily basis, and all cash required to
operate the Company's business was transferred back to the Company from IE.
Consequently, during the six months ended June 30, 1996 the Company did not
maintain separate cash accounts.
During 1996, the Company was a party to the IE Credit Facility with IBMCC.
The IE Credit Facility allowed for total borrowings by IE of up to $225
million, subject to a collateral-based formula, and was secured by all of
the assets of IE and its subsidiaries, including the Company. During
October 1996, IE and IBMCC amended the IE Credit Facility to allow the
Company to borrow the $20 million Sub-facility directly from IBMCC, subject
to a collateral-based formula, and to limit the Company's joint and several
liability with IE to IBMCC at $20 million (whether arising from direct
borrowings or a guaranty of IE's borrowings). Outstanding balances under
the Sub-facility initially bore interest at the prime rate plus .875% (1.5%
prior to November 1, 1996) and the Sub-facility had a maturity date of
April 5, 1997. IE was permitted under the IE Credit Facility to borrow up
to the total amount of the IE Credit Facility, including amounts not then
outstanding to the Company under the Sub-facility, provided IE satisfied
its collateral-based formula, inclusive of the Company's assets. However,
the Company and IE entered into an Intercompany Debt Agreement dated
October 22, 1996 which permitted IE to borrow against the Company's assets
only up to an amount of borrowing equal to any remaining intercompany
indebtedness owed by the Company to IE from time to time. As of March 26,
1997, the Company, IE and IBMCC further amended the IE Credit Facility to
terminate the Sub-facility (including the Company's joint and several
liability to IE under the IE Credit Facility), and the Company and IBMCC
entered into a separate credit agreement providing the Company with the XLC
Credit Facility in the amount of $25 million, subject to a collateral-based
formula, which is secured by all of the assets of the Company and its
subsidiaries. Interest is payable at LIBOR plus 1.5% decreasing to 1.2%,
depending upon the amount of outstanding borrowings. The Company was in
compliance with its covenants during the period and, as of June 30, 1997,
the Company had no outstanding borrowings under the XLC Credit Facility.
In addition, IE was required by IBMCC to guarantee any borrowings under the
XLC Credit Facility. Concurrent with establishing the XLC Credit Facility,
the Company and IE amended the Intercompany Debt Agreement whereby IE will
reimburse the Company for the difference between LIBOR plus.75% and the
interest rate paid by the Company to IBMCC and for other direct expenses
that the Company would not have been required to incur if it had entered
into an unsecured credit facility.
Additionally, on February 28, 1997, the Company entered into a transaction
with a third party whereby the third party agreed to provide the Loan in an
amount up to $11 million to be used for specific business purposes. The
Company borrowed the full $5.5 million available under the first traunch,
which remained outstanding as of June 30, 1997. The remaining amount may
be drawn after August 28, 1997 and prior to February 28, 1998 subject to
the Company satisfying certain financial criteria. Interest is payable at
an initial annual rate of 4% for the first two years and adjusts to 5% and
then 6% for the remaining term. Principal payments of $750,000 will be
made quarterly beginning in August 1999 with a final payment of $1.25
million due on August 28, 2002. In connection with the Loan, the Company
issued to the third party a warrant to purchase up to 325,000 shares of its
Common Stock, which becomes exercisable on February 28, 1998, August 28,
1998 or February 28, 2002, depending upon the occurrence of certain events,
at a per share exercise price of $6.65, and expires on February 27, 2007.
After considering the effect of the additional interest associated with the
issuance of the warrant and the resultant discounting of the Loan, the
effective interest rate is 7.4%.
On July 18, 1997, XLConnect and IE completed a transaction with Buyer
whereby XLConnect sold to Buyer specified "Power-by-the-Hour" managed
service contracts and related assets, consisting principally of accounts
receivable and fixed assets. In the transaction, IE also sold the majority
of its direct computer sales operations to Buyer. Of the total purchase
price of approximately $136 million paid by Buyer in the transaction, the
Company received $9.3 million (based on the estimated net book value of the
assets sold of approximately $4.5 million). The purchase price is subject
to adjustment after closing based on the actual net book value of such
assets as of the closing date (see Note 8).
Forward Looking Statements
The matters discussed in this Form 10-Q that are forward-looking statements
within the meaning of the federal securities laws are based on current
management expectations that involve risks and uncertainties that could
cause actual results to differ materially from expected results. Potential
risks and uncertainties, the occurrence of one or more of which could have
a material adverse effect on the Company, include, without limitation:
risks related to the impact on the Company of the sale by IE of its
indirect computer sales business and the majority of its direct computer
sales operations; the risks of any substantial legal proceedings that could
be instituted in the future; the factors described herein under "Quarterly
Results and Seasonality"; and the risk factors described generally in the
Company's Prospectus dated October 17, 1996 filed with the Securities and
Exchange Commission in connection with its initial public offering.
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on June 25,
1997. Shareholders voted on the following items:
(a) For the Election of Directors:
Term Votes Votes Broker
Director Expiration For Withheld Non-Votes
----------------- ---------- ---------- -------- ---------
Richard D. Sanford 1998 16,281,565 49,140 -
Timothy W. Wallace 1998 16,288,315 42,390 -
Barry M. Abelson 1998 16,296,165 34,540 -
J.B. Doherty 1998 16,296,165 34,540 -
William E. Johnson 1998 16,297,465 33,240 -
John A. Porter 1998 16,296,465 34,240 -
(b) For the ratification of appointment of KPMG Peat Marwick LLP as
independent auditors for the fiscal year ending December 31, 1997:
Votes Votes Broker
For Withheld Non-Votes
---------- -------- ---------
16,313,305 8,100 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
2.1 -- Asset Purchase Agreement between GE Capital Information
Technology Solutions Acquisition Corp. and IE and certain of
its subsidiaries dated as of July 1, 1997 (7)
2.2 -- First Amendment to Asset Purchase Agreement between GE
Capital Information Technology Solutions Acquisition Corp.
and IE and certain of its subsidiaries dated as of July 18,
1997 (7)
2.3 -- Agreement between the Company, IE and certain of its
subsidiaries dated as of July 18, 1997 relating to allocation
of purchase price and indemnities (7)
3.1 -- Articles of Incorporation of the Company, as amended (2)
3.2 -- By-Laws of the Company (1)
4.1 -- Specimen Stock Certificate (4)
10.1 -- Contribution Agreement between IE, TFN, the Future Now, Inc.
of Arkansas and the Company dated as of May 31, 1996 (2)
10.2 -- 1996 Long-Term Incentive Plan (including form of option
agreement) (2)
10.3 -- Services Agreement between the Company and IE dated as of
October 22, 1996 (5)
10.4 -- Space Sharing Agreement between the Company, IE and TFN, with
respect to the Company's principal executive offices and
branch offices dated as of May 31, 1996 (5)
10.5 -- Tax Allocation Agreement between the Company, IE and IE's
other subsidiaries effective as of January 29, 1995 (5)
10.6 -- Stock Registration and Option Agreement between the Company,
IE and The Future Now, Inc. of Arkansas dated as of May 31,
1996, and Amendment No. 1 thereto dated as of February 28,
1997 (5)
10.7 -- Indemnification Agreement between the Company and IE dated as
of October 22, 1996 (5)
10.8 -- Offer Letters for Executive Officers of the Company (2)
10.9 -- Amended Credit Agreement between IBMCC and IE and the Company
terminating the $20 million Sub-facility and Credit Agreement
between IBMCC and the Company dated as of March 26, 1997 (6)
10.10 -- Amended and Restated Intercompany Debt Agreement dated as of
March 26, 1997 by and between IE and the Company
10.11 -- Services Agreement for Telecommunications Services by and
between XLConnect Service, Inc. (a wholly-owned subsidiary
of the Company Formerly named IntelliCom Solutions, Inc.)
and IE dated as of January 1, 1996 (5)
10.12 -- Services Practice Agreement between Microsoft Corporation
and the Company dated as of February 28, 1997 (6)
27.1 -- Financial Data Schedule (submitted electronically only to
Securities and Exchange Commission)
(1) Incorporated by reference herein from the Company's Registration
Statement on Form S-1 (No. 333-08735) filed on July 24, 1996.
(2) Incorporated by reference herein from Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed on September 16, 1996.
(3) Incorporated by reference herein from Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed on October 3, 1996.
(4) Incorporated by reference herein from Amendment No. 3 to the Company's
Registration Statement on Form S-1 filed on October 15, 1996.
(5) Incorporated by reference herein from the Company's Quarterly Report
on Form 10-Q filed on December 2, 1996.
(6) Incorporated by reference herein from the Company's Quarterly Report
on Form 10-Q filed on May 15, 1997. The Company has requested and
received confidential treatment for portions of Exhibit 10.12.
(7) Incorporated by reference herein from the Company's Current Report on
Form 8-K filed on August 1, 1997.
(b) Reports filed on Form 8-K.
No Reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1997.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XLConnect Solutions, Inc.
/s/Timothy W. Wallace
-------------------------
Timothy W. Wallace
President and
Chief Operating Officer
/s/ Stephanie D. Cohen
-------------------------
Stephanie D. Cohen
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: August 14, 1997
Exhibit 10.10
AMENDED AND RESTATED
INTERCOMPANY DEBT AGREEMENT
This Amended and Restated Intercompany Debt Agreement (this
"Agreement") is made and entered into as of the 26th day of March, 1997 by
and between Intelligent Electronics, Inc., a Pennsylvania corporation
("IE"), and XLConnect Solutions, Inc., a Pennsylvania corporation ("XLC").
BACKGROUND
A. XLC is an indirect 80%-owned subsidiary of IE.
B. IE and its subsidiaries have available to them a $225 million
credit facility (the "IE Credit Facility") pursuant that certain Amended
and Restated Inventory and Working Capital Financing Agreement dated as of
April 5, 1996, among IBM Credit Corporation ("IBMCC") and IE and its
subsidiaries (as amended from time to time, the "Financing Agreement").
C. The IE Credit Facility is secured by all assets of IE and its
subsidiaries, including XLC and its subsidiaries, and borrowings thereunder
are subject to a collateral-based formula (the "Borrowing Base").
D. Pursuant to Amendment No. 2 to the Financing Agreement dated
October 17, 1996 ("Amendment No. 2"), IBMCC provided to XLC borrowing
availability of, and joint and several liability (in the form of a
guaranty) with IE for up to, the aggregate principal amount of $20,000,000
under the IE Credit Facility (the "Sublimit").
E. IE and XLConnect have entered into that certain Intercompany Debt
Agreement as of the 22nd day of October 1996 in order to set forth
additional limitations on, and conditions for, the use of the IE Credit
Facility between the parties (the "Initial Agreement").
F. XLC desires to establish a separate credit facility and, at the
request of IE, has agreed to enter into a secured Working Capital Financing
Agreement with IBMCC (including any successor facility with IBMCC, the "XLC
Secured Facility"), as a replacement to the Sublimit and as an alternative
to an unsecured credit facility with a commercial bank.
G. In connection with the execution of the XLC Secured Facility, XLC
and IE will enter into Amendment No. 7 to the Financing Agreement, which
will have the effect of eliminating XLC's contingent guaranty liability
under the IE Credit Facility and terminating the Sublimit.
H. The parties hereto desire to amend and restate the terms of the
Intercompany Debt Agreement to reflect the modifications thereto required
as a result of the XLC Secured Facility and the Amendment No. 7.
NOW, THEREFORE, the parties hereto, in consideration of the
foregoing premises and of the mutual covenants and agreements herein
contained, intending to be legally bound hereby, agree as follows:
1. Amendment and Restatement. Except as expressly set forth below,
this Agreement hereby amends and restates the Initial Agreement in all
respects.
2. Definitions. The definitions in Section 1 of the Initial Agreement
are hereby incorporated herein and shall have the meanings ascribed to them
in the Agreement.
3. Financial Incentives For XLC Secured Facility. IE agrees to pay
XLC, on or before twelve o'clock noon (12:00 p.m.) on each business day,
either as a credit to XLC's intercompany advance account to the extent of
any positive balance of such account, or by wire transfer to the extent
such balance has reached zero, the difference between the interest expense
actually incurred by XLC on any outstanding borrowings for the previous day
under the XLC Secured Facility and the interest expense that XLC would have
incurred had XLC entered into an unsecured revolving credit facility with a
commercial bank at an interest of LIBOR plus [0.75%] per annum (which rate
is initially [0.75%] less than the interest rate under the XLC Secured
Facility. In addition, IE agrees to pay XLC on the date hereof [$15,000],
representing the estimated incremental legal fees and expenses that will be
incurred by XLC as a result of XLC entering into the Secured Facility
rather than an unsecured facility. Further, IE agrees to pay to XLC an
amount equal to $40,000 annually, payable in equal quarterly amounts on the
first day of each calendar quarter after the date hereof, for so long as
the XLC Secured Facility remains in place, in order to reimburse XLC for
the estimated additional incremental internal and external costs XLC will
incur in administering the XLC Secured Facility in comparison to an
unsecured facility, including without limitation, borrowing base
calculations, monitoring, notification and consents required with respect
to collateral location, enhanced reporting requirements, auditor
certifications, landlord waivers, intercreditor agreements, recording taxes
and fees, filing fees and other similar charges and attorneys' fees and
personnel costs in connection with such activity.
4. Remaining Balance. The parties acknowledge that the Remaining
Balance has been paid in full and IE may no longer borrow against XLC's
assets under the IE Credit Facility, and following the execution of the XLC
Secured Facility. XLC's assets will no longer be pledged under or
constitute collateral security for the IE Credit Facility. Notwithstanding
the foregoing, the parties acknowledge that XLC will continue to be liable
to IE for intercompany services provided by IE on behalf of XLC as
described in that certain Services Agreement by and between the parties
dated as of October 22, 1996, which outstanding balance was $-0- as of
March 4, 1997. Similarly, IE will continue to be liable to XLC for
payments made to IE for accounts receivable of XLC. Each of the foregoing
liabilities shall continue to be reflected in the intercompany advance
account.
5. XLC Account and Lockbox Account. In order to facilitate the
calculation of the XLC's Borrowing Base under the XLC Secured Facility,
each of IE and XLC shall use its best efforts to cause accounts payable
owing to be paid directly to the XLC Account and the XLC Lockbox Account.
6. Rights of Indemnity and Subrogation.
(a) IE shall indemnify, defend and hold harmless XLC and its
subsidiaries, and their respective officers, directors, employees, agents
and representatives, successors and assigns, from, against and with respect
to any and all claims, expenses, demands, losses, costs, fines or
liabilities of any kind (including, without limitation, attorneys' fees and
costs) arising from or in any way related to payments made by XLC under the
Finance Agreement in respect of Indirect IBMCC Liabilities. The provisions
of this paragraph shall survive the termination of this Agreement and the
Finance Agreement, and shall be and remain effective notwithstanding the
payment of the Indirect IBMCC Liabilities, the release of any security
interest, lien or encumbrance securing the Indirect IBMCC Liabilities or
any other action IBMCC may have taken in reliance upon its receipt of such
payment.
(b) XLC shall indemnify, defend and hold harmless IE and its
subsidiaries, and their respective officers, directors, employees, agents
and representatives, successors and assigns, from, against and with respect
to any and all claims, expenses, demands, losses, costs, fines or
liabilities of any kind (including, without limitation, attorneys' fees and
costs) arising from or in any way related to payments made by IE under the
Finance Agreement in respect of (i) Primary IBMCC Liabilities and (ii)
XLC's liabilities to IBMCC under the XLC Secured Facility (except to the
extent IE is required to make payments to XLC pursuant to Section 3
hereof). The provisions of this paragraph shall survive the termination of
this Agreement and the Finance Agreement, and shall be and remain effective
notwithstanding the payment of the Primary IBMCC Liabilities, the XLC
Secured Facility obligations, the release of any security interest, lien or
encumbrance securing the Primary IBMCC Liabilities or the XLC Secured
Facility or any other action IBMCC may have taken in reliance upon its
receipt of such payment.
(c) The provisions of this Section 6 shall survive any
termination of this Agreement.
7. Term. This Agreement shall be in full force and effect until such
time as XLC no longer has the XLC Secured Facility or any other credit
facility with IBMCC.
8. Miscellaneous.
(a) Successors and Assigns. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their
respective successors and permitted assigns. This Agreement may not be
assigned by either party hereto to any other person.
(b) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
may not be further amended except by an instrument signed by the parties
hereto.
(c) Add Third Party Beneficiary language.
(d) Waivers. Either party hereto may (i) extend the time for
the performance of any of the obligations or other act of the other party
or (ii) waive compliance with any of the agreements contained herein. No
waiver of any term shall be construed as a waiver of the same term, or a
waiver of any other term, of this Agreement. The failure of any party to
assert any of its rights hereunder will not constitute a waiver of any such
rights.
(e) Severability. If any provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, such provision shall be deemed severable and all other
provisions of the Agreement shall nevertheless remain in full force and
effect.
(f) Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
(g) Notices. All notices given in connection with this
Amendment shall be in writing. Service of such notices shall be deemed
complete (i) if hand delivered, on the date of delivery, (ii) if by mail,
on the fourth business day following the day of deposit in the United
States mail, by certified or registered mail, first-class postage prepaid,
(iii) if sent by Federal Express or equivalent nationally recognized
courier service, on the next business day, or (iv) if transmitted by
telecopier, upon receipt by the sender of confirmation of successful
transmission. Such notices shall be addressed to the parties at the
following addresses or at such other address for a party as shall be
specified by like notice (except that notices of change of address shall be
effective upon receipt):
If to IE:
5700 South Quebec Street
Englewood, CO 80111
Attention: President
Telecopier: 303-796-4465
If to XLC:
411 Eagleview Boulevard
Exton, PA 19341
Attention: President
Telecopier: 610-458-6640
(h) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania,
without giving effect to the principles of conflict of laws thereof.
(i) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute but one and the same instrument.
IN WITNESS WHEREOF, IE and XLC have caused this Agreement to be
executed on the date first above written.
INTELLIGENT ELECTRONICS, INC.
By: /s/ Richard D. Sanford
----------------------------------
Name: Richard D. Sanford
Title: CEO
XLCONNECT SOLUTIONS, INC.
By: /s/ John E. Royer, Jr.
---------------------------------
Name: John E. Royer, Jr.
Title: Vice President
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
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<SECURITIES> 0
<RECEIVABLES> 31,400
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<CURRENT-ASSETS> 44,312
<PP&E> 13,788
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0
0
<COMMON> 166
<OTHER-SE> 54,541
<TOTAL-LIABILITY-AND-EQUITY> 76,634
<SALES> 36,547
<TOTAL-REVENUES> 36,547
<CGS> 25,044
<TOTAL-COSTS> 25,044
<OTHER-EXPENSES> 9,169
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 2,412
<INCOME-TAX> 1,121
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