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 March 31, 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.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2832796
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 Eagleview Boulevard, Exton, PA 19341
(Address of principal executive offices) (Zip Code)
(610) 458-5500
(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 May 14, 1997.
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XLConnect Solutions, Inc. and Subsidiaries
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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 6. Exhibits and Reports Filed on Form 8-K 16
SIGNATURES 18
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<TABLE>
<CAPTION>
XLConnect Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share-related data)
March 31, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,445 $ 3,467
Trade accounts receivable, less allowance
of $1,152 at March 31, 1997
and $1,072 at December 31, 1996 28,817 23,063
Due from parent 786 -
Deferred tax asset 1,133 1,225
Prepayments and other current assets 960 1,155
------------ ------------
Total current assets 33,141 28,910
Property and equipment, net of accumulated depreciation 4,562 4,985
Intangible assets, net of accumulated amortization 26,644 27,006
Other long-term assets 1,290 766
------------ ------------
Total assets $ 65,637 $ 61,667
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 67 $ 67
Accounts payable 2,643 3,144
Accrued expenses 7,812 4,464
Deferred income and other 1,259 1,449
Due to Parent - 257
------------ ------------
Total current liabilities 11,781 9,381
------------ ------------
Long-term liabilities:
Long-term debt 809 -
------------ ------------
Total liabilities 12,590 9,381
------------ ------------
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 March 31, 1997
and December 31, 1996 - -
Common stock, $.01 par value, 100,000,000 shares authorized;
16,655,000 shares issued and outstanding as of March 31, 1997
and December 31, 1996 166 166
Additional paid-in capital 50,068 50,074
Retained earnings 2,813 2,046
------------ ------------
Total shareholders' equity 53,047 52,286
------------ ------------
Total liabilities and shareholders' equity $ 65,637 $ 61,667
============ ============
See accompanying notes to unaudited Consolidated Financial Statements
</TABLE>
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
--------------------
1997 1996
--------- ---------
Revenues $ 33,075 $ 23,718
Cost of revenues 23,074 17,004
--------- ---------
Gross profit 10,001 6,714
Operating expenses:
Selling and marketing 2,858 1,653
General and administrative 4,603 2,330
Depreciation and amortization 1,027 1,302
--------- ---------
8,488 5,285
--------- ---------
Income from operations 1,513 1,429
Other expense (income), net:
Interest (25) 1,073
Other - 6
--------- ---------
(25) 1,079
--------- ---------
Income before income taxes 1,538 350
Provision for income taxes 771 291
--------- ---------
Net income $ 767 $ 59
========= =========
Earnings per common share
Net income per common share $ 0.05 -
Weighted average number of common shares 16,655 13,888
See accompanying notes to unaudited Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
XLConnect Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 767 $ 59
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,027 1,302
Loss on disposal of property and equipment - 5
Provision for allowance on trade accounts receivable 84 40
Deferred income taxes (56) (115)
Changes in assets and liabilities:
Trade accounts receivable (5,838) (167)
Prepayments and other current assets 195 (363)
Other long-term assets (376) (1,366)
Due from parent (1,043) -
Accounts payable (501) 109
Accrued expenses 3,348 (355)
Deferred income and other (190) (350)
-------- --------
Net cash used in operating activities (2,583) (1,201)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (242) (385)
-------- --------
Net cash used in investing activities (242) (385)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt - (19)
Borrowings of long-term debt 877 -
Net changes in due to parent - 1,605
Payment of initial public offering costs (74) -
-------- --------
Net cash provided by financing activities 803 1,586
-------- --------
Net change in cash and cash equivalents (2,022) -
Cash and cash equivalents-beginning of period 3,467 -
-------- --------
Cash and cash equivalents-end of period $1,445 $ -
======== ========
See accompanying notes to unaudited Consolidated Financial Statements
/TABLE
<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 incorpor-
ated 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
three months ended March 31, 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 quarter ended March 31, 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.
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(unaudited)
Note 1. Basis of Presentation, continued
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 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 $479 and $259 for the three months ended
March 31, 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 March 31, 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
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(unaudited)
Note 3. Debt Obligations, continued
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. Up to $5,500
is available to be drawn prior to August 28, 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. As of March 31, 1997, $877 was outstanding under the
Loan; however, on April 29, 1997 the Company borrowed the remaining $4,623
of the first traunch. 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.
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
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(unaudited)
Note 5. Related Party Transactions, continued
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 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.
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(unaudited)
Note 5. Related Party Transactions, continued
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 tele-
<PAGE>
XLConnect Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(unaudited)
Note 5. Related Party Transactions, continued
communication 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 $743 and $1001 for the three months
ended March 31, 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 $68 for the three months ended March 31,
1997 related to the discounting of the Loan as a result of issuing
attachable warranty (see Note 3). The Company made no cash payments for
interest and income taxes for the quarters ended March 31, 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. In addition, pursuant to the terms of the
existing telecommunications services agreement between IE and the Company,
IE has agreed to purchase from the Company all of the telecommunications
services required by IE which is sufficient to permit the Company to meet
the minimum volume requirements imposed by the Company's agreement with
MCI.
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996.
The following table sets forth the components of revenues of the Company
for the periods presented:
------------------ -------------------
1997 1996(1)
------------------ -------------------
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- --------
(In Thousands)
Revenues:
Internetworking $10,186 30.8% $ 6,936 29.3%
Applications development 5,388 16.3 3,560 15.0
Managed services 12,215 36.9 9,424 39.7
Telecommunication fees and other 5,286 16.0 3,798 16.0
-------- -------- -------- --------
Total Revenues 33,075 100.0% 23,718 100.0%
======== ======== ======== =========
_________________
(1) Restated to reflect current years presentation
Revenues. Revenues increased 39.5% for the quarter ended March 31, 1997 to
$33.1 million from $23.7 million for the quarter ended March 31, 1996. The
increase was attributable to growth in all of the Company's services
disciplines.
Cost of Revenues. Cost of revenues increased 35.7% for the quarter ended
March 31, 1997 to $23.1 million from $17.0 million for the quarter ended
March 31, 1996. This increase was primarily the result of an increased
number of technical personnel needed to support the growth in revenues
combined with incremental costs associated with increased revenues from the
Company's Power-by-the-Hour Program. Cost of revenues as a percentage of
revenues decreased to 69.8% for the quarter ended March 31, 1997, as
compared to 71.7% for the quarter ended March 31, 1996, resulting from an
improvement in the utilization of the Company's engineers and technicians.
This improvement was partially offset by pricing adjustments, effective
as of January 1, 1997, to the Company's contract with its largest customer
as a result of a recent renewal thereof.
Selling and Marketing. Selling and marketing expenses increased 72.9% for
the quarter ended March 31, 1997 to $2.9 million from $1.7 million for the
quarter ended March 31, 1996 and increased as a percentage of revenues to
8.6% for the quarter ended March 31, 1997 from 7.0% for the quarter ended
March 31, 1996. The dollar increase was due to the continued development
of the Company's direct sales force, while the increase as a percentage of
revenues also resulted from the development of its direct sales channel,
combined with an increase in marketing programs to further the Company's
presence in the marketplace.
General and Administrative. General and administrative expenses increased
97.6% for the quarter ended March 31, 1997 to $4.6 million from $2.3
million for the quarter ended March 31, 1996 and increased as a percentage
of revenues to 13.9% for the quarter ended March 31, 1997 from 9.8% for the
quarter ended March 31, 1996. The increase 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 with
which XLConnect shares facilities and related expenses and 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 decreased
21.1% for the quarter ended March 31, 1997 to $1.0 million from $1.3
million for the quarter ended March 31, 1996 and decreased as a percentage
of revenues to 3.1% in the quarter ended March 31, 1997 from 5.5% for the
quarter ended March 31, 1996. The decrease was due to the amount of assets
becoming fully depreciated during the quarter.
Income from Operations. Income from operations increased 5.9% for the
quarter ended March 31, 1997 to $1.5 million from $1.4 million for the
quarter ended March 31, 1996 and decreased as a percentage of revenues to
4.6% for the quarter ended March 31, 1997 from 6.0% for the quarter ended
March 31, 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, net decreased 102.3% for the
quarter ended March 31, 1997 to $(25,000) from $1.1 million for the quarter
ended March 31, 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. The Company invested the remaining net proceeds from the IPO in
short-term securities generating interest income.
Provision for Income Taxes. Provision for income taxes increased 164.9%
for the quarter ended March 31, 1997 to $771,000 from $291,000 for the
quarter ended March 31, 1996, which was primarily due to higher income
before income taxes. The effective income tax rate decreased to 50.1% for
the quarter ended March 31, 1997 from 83.1% for the quarter ended March 31,
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 continued separation
of XLConnect from the direct hardware sales business of IE with
which XLConnect shares facilities and related expenses, employee benefits,
insurance policies and other services and relies on significantly
for sales leads; 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.
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 used cash of $2.6 million for the
quarter ended March 31, 1997 due to the increase in working capital
requirements, primarily accounts receivable resulting from the significant
growth in revenues, partially offset by an increase in accrued expenses.
The Company's investing activities used cash of $242,000 for the quarter
ended March 31, 1997 relating to capital expenditures necessary to support
the continued growth in the number of technical service and administrative
personnel.
The Company's financing activities provided cash of $803,000 for the
quarter ended March 31, 1997 resulting primarily from borrowings against an
unsecured 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 quarter ended March 31, 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 March 31, 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. Up to
$5.5 million is available to be drawn prior to August 28, 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. As of March 31, 1997,
$877,000 was outstanding under the Loan; however, on April 29, 1997 the
Company borrowed the remaining $4.6 million of the first traunch. 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%.
During 1997, the Company anticipates making approximately $6 million in
capital expenditures, expected to be funded from cash flows from operations
and available external financing sources. These expenditures are expected
to include the implementation of a new remote time, billing and contract
management system, additional purchases of computers to support the
technical staff and construction of an executive briefing center to be used
to demonstrate the Company's network management and help desk capabilities
to clients. The Company has no current plans for any additional material
capital expenditures through December 31, 1997.
The Company believes that its cash flows from operations, funds available
from the XLC Credit Facility and the Loan, and the use of operating or
capital leases will be sufficient to satisfy its working capital needs and
planned growth through the next twelve months, except to the extent that
additional financing may be required in connection with any acquisition.
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 potential impact on the Company of financial and
transactional events and circumstances affecting IE, which has stated
that it has entered into a definitive agreement to sell its indirect hardware
business unit and is continuing to explore its strategic options with respect
to its direct hardware business unit, including the implementation of
operating plans to improve its results and the possible sale of all or part
of the unit; the risks of any substantial legal proceedings that could be
instituted in the future; the factors described 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 the initial public offering.
<PAGE>
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 -- Articles of Incorporation of the Company, as amended**
3.2 -- By-Laws of the Company*
4.1 -- Specimen Stock Certificate****
10.1 -- Contribution Agreement between IE, TFN, the Future Now, Inc.
of Arkansas and the Company dated as of May 31, 1996**
10.2 -- 1996 Long-Term Incentive Plan (including form of
option agreement)**
10.3 -- Services Agreement between the Company and IE dated as of
October 22, 1996*****
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*****
10.5 -- Tax Allocation Agreement between the Company, IE and IE's
other subsidiaries effective as of January 29, 1995*****
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*****
10.7 -- Indemnification Agreement between the Company and IE dated as
of October 22, 1996*****
10.8 -- Offer Letters for Executive Officers of the Company**
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
10.10 -- Intercompany Debt Agreement dated as of October 22, 1996
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*****
10.12 -- Services Practice Agreement between Microsoft Corporation
and the Company dated as of February 28, 1997******
27.1 -- Financial Data Schedule (submitted electronically only to
Securities and Exchange Commission)
* Incorporated by reference herein from the Company's Registration
Statement on Form S-1 (No. 333-08735) filed on July 24, 1996.
** Incorporated by reference herein from Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed on September 16, 1996.
*** Incorporated by reference herein from Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed on October 3, 1996.
**** Incorporated by reference herein from Amendment No. 3 to the Company's
Registration Statement on Form S-1 filed on October 15, 1996.
***** Incorporated by reference herein from the Company's Quarterly Report
on Form 10-Q filed on December 2, 1996.
****** The Registrant has requested confidential treatment of portions of
this Exhibit.
(b) Reports filed on Form 8-K.
The Company filed a Report on Form 8-K with the Securities and Exchange
Commission on February 10, 1997 to disclose the approval by IE's Board of
Directors of the distribution of IE's 13,325,000 shares of Common Stock of
the Company to IE's shareholders, conditioned upon the receipt of an IRS
ruling as to its tax-free nature and customary regulatory and contractual
approvals and consents.
<PAGE>
<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: May 15, 1997
Exhibit 10.9
AMENDMENT #7 TO THE INTELLIGENT ELECTRONICS, INC.
AMENDED AND RESTATED INVENTORY
AND WORKING CAPITAL FINANCING AGREEMENT
THIS AMENDMENT #7 dated as of March 26, 1997 (this "Amendment"),
hereby amends that certain Amended and Restated Inventory and Working
Capital Financing Agreement by and among Intelligent Electronics, Inc., a
Pennsylvania corporation ("IE"), various direct and indirect subsidiaries
of IE who are signatories thereto, and IBM Credit Corporation, a Delaware
corporation ("IBM Credit").
RECITALS
WHEREAS, the Existing Borrowers and IBM Credit have entered into
that certain Amended and Restated Inventory and Working Capital
Financing Agreement dated as of April 5, 1996 (as amended, supplemented
or as otherwise modified from time to time, the "Agreement");
WHEREAS, the Agreement was amended to add the Restricted
Subsidiaries as co-borrowers under the Agreement by that certain
Amendment #2 dated October 16, 1996 by and among the Existing Borrowers,
the Restricted Subsidiaries and IBM Credit ("Amendment #2");
WHEREAS, the Existing Borrowers and the Restricted Subsidiaries have
requested that IBM Credit terminate financing the working capital
requirements of the Restricted Subsidiaries under the Agreement; and
WHEREAS, IBM Credit, the Existing Borrowers and the Restricted
Subsidiaries have agreed to modify the Agreement as more specifically
set forth below, upon and subject to the terms and conditions set forth
herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises set forth above
and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Existing Borrowers, the Restricted
Subsidiaries and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Agreement.
Section 2. Modification of the Agreement. The Agreement is hereby
modified by (i) deleting the Restricted Subsidiaries as co-borrowers
under the Agreement, and (ii) terminating any provision contained in
Amendment #2 with respect to the Restricted Subsidiaries, including
without limitation, any contingent liability on account of guaranties
set forth in Section 7.17 of the Agreement. The collateral security
granted by the Restricted Subsidiaries to IBM Credit pursuant to
Amendment #2 shall be deemed to secure any obligations arising out of
the Working Capital Financing Agreement dated as of March 26, 1997
by and between IBM Credit and XLConnect Solutions, Inc., XLConnect
Systems, Inc., and XLConnect Services, Inc. but shall no longer
constitute collateral security for the Existing Borrowers' Obligations.
All provisions of Amendment #2 are hereby deemed to be in full force
and effect with respect to the Existing Borrowers.
Section 3. Amendment to Attachment A to the Agreement. Attachment A
dated as of January 1, 1997 is hereby amended by deleting such
Attachment A in its entirety and substituting in lieu thereof, the
Attachment A attached hereto. Such new Attachment A shall be effective
as of March 26, 1997.
Section 4. Waiver by IBM Credit. IBM Credit hereby acknowledges notice
of the dissolution of Entre Computer Centers of New York, Inc. and
hereby waives any default which may have occurred under the Agreement
as a result of such dissolution.
Section 5. Representations and Warranties. Customer makes to IBM Credit
the following representations and warranties all of which are material
and are made to induce IBM Credit to enter into this Amendment.
Section 5.1. Representation of Dissolution. Customer represents
and warrants that Entre Computer Centers of New York, Inc., a
New York corporation and a co-borrower under the Agreement, has
been legally dissolved pursuant to Business Corporation Law of
New York.
Section 5.2. Accuracy and Completeness of Warranties and
Representations. The representations and Warranties contained
in the Agreement are true and correct in all material respects
on and as of the date of this Amendment except to the extent
waived by IBM Credit in writing.
Section 5.3. Litigation. Except as has been disclosed by Customer
to IBM Credit in writing, there is no litigation, proceeding,
investigation or labor dispute pending or threatened against
Customer, which if adversely determined, would materially
adversely affect Customer's ability to perform its obligations
under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
Section 5.4 Enforceability of Amendment. This Amendment has been
duly authorized, executed and delivered by Customer and is
enforceable against Customer in accordance with its terms, except
as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other laws
now or hereafter in effect relating to creditor's rights generally.
Section 6. Ratification of Agreement. Except as specifically amended
hereby, all of the provisions of the Agreement shall remain unamended
and in full force and effect. Customer hereby, ratifies, confirms and
agrees that the Agreement, as amended hereby, represents a valid and
enforceable obligation of Customer's, and is not subject to any claims,
offsets or defense.
Section 7. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of New York.
Section 8. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
authorized officers of the undersigned as of the day and year first above
written.
IBM CREDIT CORPORATION INTELLIGENT ELECTRONICS, INC.
By: /s/ Paul M. Lieba By: /s/ T.J. Coffey
- ---------------------------- --------------------------------
Name: Paul M. Lieba Name: Thomas J. Coffey
Title: Credit Manager Title: _______________________
THE FUTURE NOW, INC.
By: /s/ Alan Resneck
-------------------------------
Name: Alan Resneck
Title: _______________________
INTELLIGENT ADVANCED SYSTEMS, INC.
By: /s/ T.J. Coffey
--------------------------------
Name: Thomas J. Coffey
Title: _______________________
INTELLIGENT EXPRESS, INC.
By: /s/ T.J. Coffey
---------------------------------
Name: Thomas J. Coffey
Title: _______________________
RND, INC.
By: /s/ T.J. Coffey
---------------------------------
Name: Thomas J. Coffey
Title: _______________________
INTELLINET, LTD.
By: /s/ T.J. Coffey
---------------------------------
Name: Thomas J. Coffey
Title: _______________________
INTELLIGENT DISTRIBUTION SERVICES,
INC.
By: /s/ T.J. Coffey
---------------------------------
Name: Thomas J. Coffey
Title: _______________________
INTELLIGENT SP, INC.
By: /s/ T.J. Coffey
---------------------------------
Name: Thomas J. Coffey
Title: _______________________
XLSOURCE, INC. (formerly known as
THE FUTURE NOW, INC. OF ARKANSAS)
By: /s/ Alan Resneck
---------------------------------
Name: Alan Resneck
Title: _______________________
XLCONNECT SERVICES, INC. (formerly
known as INTELLICOM SOLUTIONS, INC.)
By: /s/ Stephanie Cohen
----------------------------------
Name: Stephanie Cohen
Title: _______________________
XLCONNECT SOLUTIONS, INC.
By: /s/ Stephanie Cohen
----------------------------------
Name: Stephanie Cohen
Title: _______________________
XLCONNECT SYSTEMS, INC.
By: /s/ Stephanie Cohen
---------------------------------
Name: Stephanie Cohen
Title: _______________________
E-C COMPUTER TECHNICAL SERVICES, INC.
By: /s/ T.J. Coffey
----------------------------------
Name: Thomas J. Coffey
Title: _______________________
RCK COMPUTERS, INC.
By: /s/ T.J. Coffey
---------------------------------
Name: Thomas J. Coffey
Title: _______________________
<PAGE>
<PAGE>
WORKING CAPITAL
FINANCING AGREEMENT
dated as of March 26, 1997
by and among
XLConnect Systems, Inc.
and
XLConnect Solutions, Inc.
and
XLConnect Services, Inc.
and
IBM Credit Corporation
<PAGE>
WORKING CAPITAL FINANCING AGREEMENT
Section 1. DEFINITIONS 4
1.1 Special Definitions 4
1.2 Other Defined Terms 12
Section 2. CREDIT LINE; FINANCE CHARGES; OTHER CHARGES 13
2.1 Credit Line 13
2.2 Advances 13
2.3 Finance and Other Charges 14
2.4 Statements Regarding Customer's Account 15
2.5 Shortfall 16
2.6 Application of Payments 16
2.7 Prepayment and Reborrowing By Customer 16
Section 3. CREDIT LINE ADDITIONAL PROVISIONS 16
3.1 Ineligible Accounts 16
3.2 Reimbursement for Charges 20
3.3 Lockbox and Special Account 20
3.4 Collections 20
3.5 Application of Remittances and Credits 21
3.6 Power of Attorney 21
Section 4. SECURITY -- COLLATERAL 23
4.1 Grant 23
4.2 Further Assurances 24
Section 5. CONDITIONS PRECEDENT 24
5.1 Conditions Precedent to the Effectiveness of This Agreement 24
5.2 Conditions Precedent to Each Advance 26
Section 6. REPRESENTATIONS AND WARRANTIES 27
6.1 Organization and Qualifications 27
6.2 Rights in Collateral; Priority of Liens 27
6.3 No Conflicts 28
6.4 Enforceability 28
6.5 Locations of Offices 28
6.6 Fictitious Business Names 28
6.7 Organization 28
6.8 No Judgments or Litigation 29
6.9 No Defaults 29
6.10 Labor Matters 29
6.11 Compliance with Law 29
6.12 ERISA 29
6.13 Compliance with Environmental Laws 30
6.14 Intellectual Property 31
6.15 Licenses and Permits 31
6.16 Investment Company 31
6.17 Taxes and Tax Returns 31
6.18 Status of Accounts 31
6.19 Affiliate/Subsidiary Transactions 32
6.20 Accuracy and Completeness of Information 32
6.21 Recording Taxes 32
6.22 Indebtedness 32
Section 7. AFFIRMATIVE COVENANTS 33
7.1 Financial and Other Information 33
7.2 Location of Collateral 36
7.3 Changes in Customer 37
7.4 Corporate Existence 37
7.5 ERISA 37
7.6 Environmental Matters 37
7.7 Collateral Books and Records; Collateral Audit 38
7.8 Insurance; Casualty Loss 39
7.9 Taxes 39
7.10 Compliance With Laws 40
7.11 Fiscal Year 40
7.12 Intellectual Property 40
7.13 Maintenance of Property 40
7.14 Collateral 40
7.15 Subsidiaries 42
7.16 Financial Covenants; Additional Covenants 42
7.17 Joint and Several Guaranty 42
Section 8. NEGATIVE COVENANTS 44
8.1 Liens 44
8.2 Disposition of Assets 44
8.3 Corporate Changes 45
8.4 Guaranties 45
8.5 Restricted Payments 45
8.6 Investments 45
8.7 Affiliate/Subsidiary Transactions 46
8.8 ERISA 46
8.9 Additional Negative Pledges 47
8.10 Use of Proceeds 47
8.11 Accounts 47
8.12 Indebtedness 47
8.13 Loans 48
Section 9. DEFAULT 48
9.1 Event of Default 48
9.2 Acceleration 50
9.3 Remedies 51
9.4 Waiver 53
Section 10. MISCELLANEOUS 53
10.1 Term; Termination 53
10.2 Indemnification 53
10.3 Additional Obligations 54
10.4 LIMITATION OF LIABILITY 54
10.5 Alteration/Waiver 55
10.6 Severability 55
10.7 One Loan 55
10.8 Additional Collateral 56
10.9 No Merger or Novations 56
10.10 Paragraph Titles 56
10.11 Binding Effect; Assignment 56
10.12 Notices 57
10.13 Counterparts 57
10.14 SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW 58
10.15 JURY TRIAL WAIVER 59
<PAGE>
WORKING CAPITAL
FINANCING AGREEMENT
This WORKING CAPITAL FINANCING AGREEMENT (as amended, supplemented or
otherwise modified from time to time, this "Agreement") is executed by and
among IBM CREDIT CORPORATION, a Delaware corporation ("IBM Credit"),
XLCONNECT SOLUTIONS, INC., a Pennsylvania corporation ("XLConnect
Solutions"), XLCONNECT SYSTEMS, INC., a Pennsylvania corporation
("XLConnect Systems") and XLCONNECT SERVICES, INC., a Pennsylvania
corporation, as of the 26th day of March, 1997 (XLConnect Solutions,
XLConnect Systems and XLConnect Services are collectively referred to
herein as the "Customer").
W I T N E S S E T H
WHEREAS, Customer has requested that IBM Credit finance its working
capital requirements, and IBM Credit is willing to provide such financing
to Customer subject to the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Section 1. DEFINITIONS; ATTACHMENTS
1.1 Special Definitions. The following terms shall have the following
respective meaning in this Agreement:
"Advance": any loan or advance of funds made by IBM Credit to Customer
pursuant to Section 2.2 of this Agreement.
"Advance Date": the Business Day on which IBM Credit makes an Advance
under this Agreement.
Advance Charges": as defined on Attachment A.
"Accounts": as defined in the U.C.C.
"Affiliate": with respect to the Customer, excluding IE (as defined
below), any Person meeting one of the following: (i) at least 10% of such
Person's equity is owned, directly or indirectly, by Customer; (ii) at
least 10% of Customer's equity is owned, directly or indirectly, by such
Person; or (iii) at least 10% of Customer's equity and at least 10% of such
Person's equity is owned, directly or indirectly, by the same Person or
Persons. All of Customer's officers, directors, and partners (to the
extent any Customer is a partnership) shall also be deemed to be Affiliates
of Customer for purposes of this Agreement.
"Agreement": as defined in the caption.
"Auditors": a nationally recognized firm of independent certified public
accountants selected by Customer and satisfactory to IBM Credit.
"Available Credit": at any time, (1) the Maximum Advance Amount less (2)
the Outstanding Advances at such time.
"Average Daily Balance": the sum of the Outstanding Advances as of the end
of each day during a calendar month, divided by the number of days in the
calendar month.
"Bloomberg": the on-line financial service provided by Bloomberg, L.P.
"Borrowing Base": as defined in Attachment A.
"Business Day": any day other than a Saturday, Sunday or other day on
which commercial banks in New York, New York are generally closed or on
which IBM Credit is closed.
"Closing Date": the date on which the conditions precedent to the
effectiveness of this Agreement set forth in Section 5.1 hereof are
satisfied or waived in writing by IBM Credit.
"Code": the Internal Revenue Code of 1986, as amended, or any successor
statute.
"Collateral": as defined in Section 4.1.
"Collateral Management Report": a report to be delivered by XLConnect
Solutions to IBM Credit from time to time, as provided herein, signed by
the president, chief operating officer or chief financial officer of
XLConnect Solutions, in the form of Attachment F hereto, detailing and
certifying, among other items: a summary of all Customer's Eligible
Accounts, the amounts and aging of all of Customer's Accounts, the amounts
and aging of Customer's accounts payable as of a specified date, all of
Customer's IBM Credit borrowing activity during a specified period and the
total amount of Customer's Borrowing Base as well as Customer's Outstanding
Advances, Available Credit and any Shortfall Amount as of a specified date.
"Compliance Certificate": a certificate substantially in the form of
Attachment C.
"Credit Line": as defined in Section 2.1.
"Customer": as defined in the caption, Customer shall mean XLConnect
Solutions, Inc., XLConnect Systems, Inc. and XLConnect Services, Inc.,
jointly and severally, as the context may require.
"Default": either (1) an Event of Default or (2) any event or condition
which, but for the requirement that notice be given or time lapse or both,
would be an Event of Default.
"Delinquency Fee Rate": as defined in Attachment A.
"Eligible Accounts": as defined in Section 3.1.
"Environmental Laws": all statutes, laws, judicial decisions, regulations,
ordinances, and other governmental restrictions relating to pollution, the
protection of the environment, occupational health and safety, or to
emissions, discharges or release of pollutants, contaminants, hazardous
substances or wastes into the environment.
"Environmental Liability": any claim, demand, obligation, cause of action,
allegation, order, violation, injury, judgment, penalty or fine, cost or
expense, resulting from the violation or alleged violation of any
Environmental Laws or the imposition of any Lien pursuant to any
Environmental Laws.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended,
or any successor statutes.
"Event of Default": as defined in Section 9.1.
"Financial Statements": (i) the consolidating balance sheets and
statements of operations from Customer by division, if applicable, in form
and detail satisfactory to IBM Credit, and (ii) the consolidated balance
sheets, statements of operations, statements of cash flows and statements
of changes in shareholder's equity of Customer and its Subsidiaries for the
period specified, all prepared in accordance with GAAP and consistent with
prior practices.
"GAAP": generally accepted accounting principles in the United States as
in effect from time to time.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled (through stock or capital ownership or otherwise) by any of the
foregoing.
"Hazardous Substances": all substances, wastes or materials, to the extent
subject to regulation as "hazardous substances" or "hazardous waste" under
any Environmental Laws.
"IBM Credit": as defined in the caption.
"Indebtedness": with respect to any Person, (1) all obligations of such
Person for borrowed money or for the deferred purchase price of property or
services (other than trade liabilities incurred in the ordinary course of
business and payable in accordance with customary practices) or which is
evidenced by a note, bond, debenture or similar instrument, (2) all
obligations of such Person under capital leases, (3) all obligations of
such Person in respect of letters of credit, banker's acceptances or
similar obligations issued or created for the account of such Person, (4)
liabilities arising under any interest rate protection, future, option
swap, cap or hedge agreement or arrangement under which such Person is a
party or beneficiary, (5) all obligations under guaranties of such Person
and (6) all liabilities secured by any Lien on any property owned by such
Person even though such Person has not assumed or otherwise become liable
for the payment thereof.
"IE": Intelligent Electronics, Inc. and any and all of its subsidiaries.
"Investment": with respect to any Person (the "Investor"), (1) any
investment by the Investor in any other Person, whether by means of share
purchase, capital contribution, purchase or other acquisition of a
partnership or joint venture interest, loan, time deposit, demand deposit
or otherwise, and (2) any guaranty by the Investor of any Indebtedness or
other obligation of any other Person.
"LIBOR": for the calendar month during which the Advance is made or
continues to be outstanding, the thirty-day average of the one-month (01M)
London Interbank Offered Rate as published by Bloomberg, L.P. for the
previous calendar month. LIBOR is based on a 360-day calendar year.
"Lien(s)": any lien, claim, charge, pledge, security interest, deed of
trust, mortgage, other encumbrance or other arrangement having the
practical effect of the foregoing, including the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"Material Adverse Effect": an event or condition which has a material
adverse effect (1) on the business, operations, results of operations,
assets, or financial condition of the Customer, (2) on the aggregate value
of the Collateral or the aggregate amount which IBM Credit would be likely
to receive (after giving consideration to reasonably likely delays in
payment and reasonable costs of enforcement) in the liquidation of such
Collateral to recover the Obligations in full, or (3) on the rights and
remedies of IBM Credit under this Agreement.
"Maximum Advance Amount": at any time, the lesser of (1) the Credit Line
and (2) the Borrowing Base at such time.
"Obligations": all covenants, agreements, warranties, duties,
representations, loans, advances, interest (including interest accruing on
or after the filing of any petition in bankruptcy, or the commencement of
any insolvency, reorganization or like proceeding, relating to Customer,
whether or not a claim for post-filing or post-petition interest is allowed
in such proceeding), fees, reasonable expenses, indemnities, liabilities
and Indebtedness of any kind and nature whatsoever, now or hereafter
arising, owing, due or payable from Customer to IBM Credit.
"Other Documents": all security agreements, mortgages, leases, instruments,
documents, guarantees, schedules of assignment, contracts and similar
agreements executed by Customer and delivered to IBM Credit, pursuant to
this Agreement or any other agreements between IBM Credit and Customer or
any of Customer's Affiliates and all amendments, supplements and other
modifications to the foregoing from time to time.
"Other Charges": as set forth in Attachment A.
"Outstanding Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all Advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related
to Advances charged to Customer's account with IBM Credit.
"Permitted Indebtedness": any of the following:
(1) Indebtedness to IBM Credit;
(2) Indebtedness described in Section VII of Attachment B;
(3) Purchase Money Indebtedness;
(4) Guaranties in favor of IBM Credit;
(5) Indebtedness to Microsoft Corporation subject to that certain
Subordination Agreement among Customer, Microsoft Corporation and IBM
Credit dated as of February 28, 1997;
(6) Indebtedness incurred by Customer in the ordinary course of business
for operating or capital leases;
(7) Other Indebtedness consented to by IBM Credit in writing prior to
incurring such Indebtedness.
"Permitted Liens": any of the following:
(1) Liens which are the subject of an Intercreditor Agreement, in effect
from time to time between IBM Credit and any other secured creditor;
(2) Purchase Money Security Interests;
(3) Liens described in Section I of Attachment B;
(4) Liens of warehousemen, mechanics, materialmen, workers, repairmen,
common carriers, landlords and other similar Liens arising by operation of
law or otherwise, not waived in connection herewith, for amounts that are
not yet due and payable or being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted if an adequate
reserve or other appropriate provisions shall have been made therefor as
required to be in conformity with GAAP and an adverse determination in such
proceedings could not reasonably be expected to have a Material Adverse
Effect;
(5) attachment or judgment Liens individually or in the aggregate not in
excess of Five Hundred Thousand Dollars ($500,000) (exclusive of (A) any
amounts that are duly bonded to the satisfaction of IBM Credit or (B) any
amount fully covered by insurance as to which the insurance company has
acknowledged its obligation to pay such judgment in full);
(6) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are
not substantial in amount and which do not materially detract from the
value of the property subject thereto or materially interfere with the
ordinary conduct of the business of Customer;
(7) extensions and renewals of the foregoing permitted Liens; provided
that (A) the aggregate amount of such extended or renewed Liens do not
exceed the original principal amount of the Indebtedness for which it
secures, (B) such Liens do not extend to any property other than property
already previously subject to the Lien and (C) such extended or renewed
Liens are on terms and conditions no more restrictive than the terms and
conditions of the Liens being extended or renewed;
(8) Liens arising from deposits or pledges to secure bids, tenders,
contracts, leases, surety and appeal bonds and other obligations of like
nature arising in the ordinary course of the Customer's business;
(9) Liens for taxes, assessments or governmental charges not delinquent or
being contested, in good faith, by appropriate proceedings promptly
instituted and diligently conducted if an adequate reserve or other
appropriate provisions shall have been made therefor as required in order
to be in conformity with GAAP and an adverse determination in such
proceedings could not reasonably be expected to have a Material Adverse
Effect;
(10) Liens arising out of deposits in connection with workers'
compensation, unemployment insurance or other social security or similar
legislation;
(11) Liens arising pursuant to this Agreement;
(12) Precautionary UCC financing statements evidencing leases of
equipment;
(13) other Liens consented to by IBM Credit in writing prior to incurring
such Liens.
"Person": any individual, association, firm, corporation, partnership,
trust, unincorporated organization or other entity whatsoever.
"Policies": all policies of insurance required to be maintained by
Customer under this Agreement or any of the Other Documents.
"Prime Rate": as of the date of determination, the average of the rates of
interest announced by Citibank, N.A., The Chase Manhattan Bank, N.A. and
Bank of America National Trust & Savings Association as their prime or base
rate, as of the last Business Day of the calendar month immediately
preceding the date of determination, whether or not such announced rates
are the actual rates charged by such banking institutions to their most
creditworthy borrowers.
"Purchase Money Indebtedness": any Indebtedness (including operating and
capital leases) incurred to finance the acquisition of assets to be used in
the Customer's business not to exceed the lesser of (1) the purchase price
or acquisition cost of such asset and (2) the fair market value of such
asset.
"Purchase Money Security Interest": any security interest securing
Purchase Money Indebtedness, which security interest applies solely to the
particular asset acquired with the Purchase Money Indebtedness.
"Request for Advance": as defined in Section 2.2.
"Requirement of Law": as to any Person, the articles of incorporation and
by-laws of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other governmental authority,
in each case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is subject.
"Shortfall Amount": as defined in Section 2.5.
"Subsidiary": with respect to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned
by such Person.
"Termination Date": shall mean twenty-four months following the date of
this Agreement or such other date as IBM Credit and Customer may agree to
in writing from time to time.
"Tier I Period": as defined in Attachment A.
"Tier II Period": as defined in Attachment A.
"Voting Stock": securities, the holders of which are ordinarily, in the
absence of contingencies, entitled to elect the corporate directors (or
persons performing similar functions).
1.2 Other Defined Terms.. Terms not otherwise defined in this
Agreement shall have the meanings assigned to them in the Uniform
Commercial Code in the State of New York ("UCC") or such other jurisdiction
as may be required by the laws of such other jurisdiction.
1.3 Attachments. All attachments, exhibits, schedules and other
addenda hereto, including, but not limited to, Attachment A and Attachment
B, are specifically incorporated herein by reference and made a part of
this Agreement.
Section 2. CREDIT LINE; FINANCE CHARGES; OTHER CHARGES
2.1 Credit Line. Subject to the terms and conditions set forth in this
Agreement, on and after the Closing Date to but not including the date that
is the earlier of (i) the date on which this Agreement is terminated
pursuant to Section 10.1 and (ii) the date on which IBM Credit terminates
the Credit Line pursuant to Section 9.2, IBM Credit agrees to extend to the
Customer a credit line ("Credit Line") in the amount set forth in
Attachment A pursuant to which IBM Credit will make to the Customer, from
time to time, Advances in an aggregate amount at any one time outstanding
not to exceed the Maximum Advance Amount. Notwithstanding any other term
or provision of this Agreement, IBM Credit may, at any time and from time
to time, in its sole and absolute discretion (x) temporarily increase the
amount of the Credit Line set forth in Attachment A and decrease the amount
of the Credit Line to the amount of the Credit Line set forth in Attachment
A, in each case upon notice to the Customer, and (y) make Advances pursuant
to this Agreement in an aggregate amount at any one time outstanding in
excess of the Credit Line. Notwithstanding anything herein to the
contrary, except for seasonal uplifts and temporary increases due to
overadvances of funds under the Credit Line which may occur from time to
time, IBM Credit shall not increase Customer's Credit Line without the
prior written consent of Customer.
2.2 Advances .2 Advances. (A) Whenever Customer shall desire IBM
Credit to provide an Advance, XLSolutions, Inc. shall deliver to IBM Credit
written notice of Customer's request for such an Advance ("Request for
Advance"). For any requested Advance pursuant to which monies will be
disbursed to Customer or any Person other than IBM Credit, a Request for
Advance shall be delivered to IBM Credit on or prior to 10:30 a.m. (Eastern
Standard time) on the day such Advance is to be made. The Request for
Advance shall specify (i) the requested Advance Date and (ii) the amount of
the requested Advance. Customer may deliver a Request for Advance via
facsimile. Any Request for Advance delivered to IBM Credit shall be
irrevocable. Each Customer hereto hereby irrevocably authorizes and
requests that XLConnect Solutions, Inc. execute all Requests for Advance on
its respective behalf, in each case, with the same force and effect as if
such entity had executed such Request for Advance itself.
(B) Subject to the terms and conditions of this Agreement, on the
Advance Date specified in a Request for Advance, IBM Credit shall make the
principal amount of each Advance available to the Customer in immediately
available funds to an account maintained by Customer. If IBM Credit is
making an Advance hereunder on a day on which Customer is to repay all or
any part of an Outstanding Advance (or any other amount owing hereunder),
IBM Credit shall apply the proceeds of the Advance to such repayment and
only an amount equal to the difference, if any, between the amount of the
Advance and the amount being repaid shall be made available to Customer as
provided in the immediately preceding sentence.
(C) Each Advance shall accrue a finance charge on the unpaid
principal amount thereof, at a per annum rate equal to the lesser of (a)
the finance charge set forth in Attachment A to this Agreement under the
caption "A/R Finance Charge", and (b) the highest rate from time to time
permitted by applicable law. If it is determined that amounts received
from the Customer were in excess of such highest rate, then the amount
representing such excess shall be considered reductions to principal of
Advances.
2.3 Finance and Other Charges . (A) Finance charges shall be
calculated by multiplying the applicable Delinquency Fee Rate or A/R
Finance Charge provided for in this Agreement by Customer's applicable
Average Daily Balance. The Delinquency Fee Rate and the various A/R
Finance Charges provided for in this Agreement are each computed on the
basis of an actual day, 360 day year.
(B) The Customer hereby agrees to pay to IBM Credit the charges set
forth as "Other Charges" in Attachment A. The Customer also agrees to pay
IBM Credit additional charges for any returned items of payment received
(i) by Customer from any Account obligor, or (ii) by IBM Credit from
Customer. The Customer hereby acknowledges that any such charges are not
interest but that such charges, if unpaid, will constitute part of the
Outstanding Advances.
(C) The Customer hereby agrees to pay throughout the term of this
Agreement any and all recording taxes, recording fees, filing fees or other
charges incurred by IBM Credit in connection with the filing and recording
of this Agreement or any other documents necessary to perfect or maintain
IBM Credit's first priority, perfected security interest in the Collateral.
(D) The finance charges and Other Charges owed under this Agreement,
and any charges hereafter agreed to in writing by the parties, are payable
monthly upon receipt of IBM Credit's bill or statement therefor or IBM
Credit may, in its sole discretion, add unpaid finance charges and Other
Charges to the Customer's Outstanding Advances.
(E) If any amount owed under this Agreement, including, without
limitation, any Advance, is not paid when due (whether at maturity, by
acceleration or otherwise), the unpaid amount thereof will bear a late
charge from and including its due date to and including the date IBM Credit
receives payment thereof, at a per annum rate equal to the lesser of (a)
the amount set forth in Attachment A to this Agreement as the "Delinquency
Fee Rate" and (b) the highest rate from time to time permitted by
applicable law. In addition, if any Shortfall Amount shall not be paid
when due pursuant to Section 2.5 hereof, Customer shall pay IBM Credit an
additional late charge equal to the product of the Shortfall Amount
multiplied by thirty (30) basis points ("Shortfall Transaction Fee"). If
it is determined that amounts received from Customer were in excess of such
highest rate, then the amount representing such excess shall be considered
reductions to principal of Advances.
2.4 Statements Regarding Customer's Account. IBM Credit will send
statements of each transaction hereunder as well as monthly billing
statements to Customer with respect to Advances and other charges due on
Customer's account with IBM Credit. Each statement of transaction and
monthly billing statement shall be deemed, absent manifest error, to be
correct and shall constitute an account stated with respect to each
transaction or amount described therein unless within seven (7) calendar
days after such statement of transaction or billing statement is received
by Customer, Customer provides IBM Credit written notice objecting that
such amount or transaction is incorrectly described therein and specifying
the error(s), if any, contained therein. IBM Credit may at any time adjust
such statements of transaction or billing statements to comply with
applicable law and this Agreement.
2.5 Shortfall. If, on any date, the Outstanding Advances shall exceed
the Maximum Advance Amount (such excess, the "Shortfall Amount"), then the
Customer shall prepay, within twenty-four hours, the Outstanding Advances
in an amount equal to such Shortfall Amount.
2.6 Application of Payments. The Customer hereby agrees that all
checks and other instruments delivered to IBM Credit on account of
Customer's Obligations shall constitute conditional payment until such
items are actually collected by IBM Credit. Subject to the following
sentence, the Customer waives the right to direct the application of any
and all payments at any time or times hereafter received by IBM Credit on
account of the Customer's Obligations. Provided Customer is not in default
hereunder and has not instructed IBM Credit otherwise, Customer agrees that
IBM Credit shall have the continuing exclusive right to apply and reapply,
to the extent that any such reapplication has no material adverse effect on
Customer which would not otherwise have existed had the payment been
correctly applied, any and all such payments to Customer's Obligations in
such manner as IBM Credit may deem advisable notwithstanding any entry by
IBM Credit upon any of its books and records.
2.7 Prepayment and Reborrowing By Customer. (A) Customer may at any
time prepay, without notice or penalty, in whole or in part amounts owed
under this Agreement. Notwithstanding anything to the contrary in 2.6
above, IBM Credit may apply payments made to it (whether by the Customer or
otherwise) to pay finance charges and other amounts owing under this
Agreement first and then to the principal amount owed by the Customer.
(B) Subject to the terms and conditions of this Agreement, any amount
prepaid or repaid to IBM Credit in respect to the Outstanding Advances may
be reborrowed by Customer in accordance with the provisions of this
Agreement.
Section 3. CREDIT LINE ADDITIONAL PROVISIONS
3.1 Ineligible Accounts. IBM Credit and Customer agree that IBM Credit
shall have the sole right to determine eligibility of Accounts from an
Account obligor for purposes of determining the Borrowing Base; however,
without limiting such right, the following Accounts will be deemed to be
ineligible for purposes of determining the Borrowing Base:
(A) Accounts created from the sale of goods and/or performance of
services: (i) that allow for payment to be made more than thirty (30) days
from the date of invoice, or (ii) which have not been billed within forty-
five (45) days from the date of such sale or performance of services;
except for Accounts arising from the sale of goods and/or performance of
services to General Electric Corporation and any of its subsidiaries ("GE")
(and such other account debtors as may be agreed in writing by IBM Credit);
(B) Accounts unpaid more than ninety (90) days from date of invoice,
except for (i) Accounts payable by GE which shall be deemed ineligible if
unpaid more than one hundred five (105) days from date of invoice; and (ii)
Accounts payable by International Business Machines Corporation and any of
its affiliates ("IBM") with shall be deemed ineligible if unpaid more than
one hundred twenty (120) days from date of invoice unless IBM Credit
receives verification from IBM that such Account payable is due and owing
from IBM;
(C) Accounts payable by an account debtor if fifty percent (50%) or
more of the aggregate outstanding balance of all such Accounts remain
unpaid for more than ninety (90) days from the date of invoice, except for
(i) Accounts payable by GE which shall be deemed ineligible if 50% or more
of the aggregate outstanding balance of such Accounts remain unpaid for
more than one hundred five (105) days; and (ii) Accounts payable by IBM
which shall be deemed ineligible if 50% or more of the aggregate
outstanding balance of such Accounts remain unpaid for more than one
hundred twenty (120) days unless IBM Credit receives verification from IBM
that such Account payable is due and owing from IBM;
(D) Accounts payable by IE or any account debtor that is an Affiliate
of Customer or an officer, employee, agent, guarantor, stockholder of IE or
Customer or Affiliate of Customer or is related to or has common
shareholders, officers or directors with Customer.
(E) Accounts arising from consignment sales;
(F) Accounts with respect to which the payment by the account debtor
is or may be conditional;
(G) Except for state, local and United States government institutions
and public educational institutions, accounts with respect to which:
(i) the account debtor is not a commercial entity, or
(ii) the account debtor is not a resident of the United
States;
(H) Accounts payable by any account debtor to which Customer is or
may become liable for goods sold or services rendered by such account
debtor to Customer, except to the extent of an offset between Customer and
(i) IBM, (ii) Corestaff, Inc., (iii) Pepper, Hamilton & Scheetz or (iv)
any other account debtor as may be agreed in writing by IBM Credit,
including without limitation those listed on Attachment B hereto; provided
that upon and during any Tier II Period, any such offset shall be evidenced
in Customer's Collateral Management Report to IBM Credit;
(I) Accounts arising from the sale or lease of goods purchased for a
personal, family or household purpose;
(J) Accounts arising from the sale or other disposition of goods that
has been used for demonstration purposes or loaned or leased by the
Customer to another party, except in connection with Customer's "Power by
the Hour" programs in effect from time to time;
(K) Accounts which are progress payment accounts or contra accounts;
(L) Accounts upon which IBM Credit does not have a valid, perfected,
first priority security interest;
(M) Accounts payable by an account debtor that is or Customer knows
will become, subject to proceedings under United States Bankruptcy Law or
other law for the relief of debtors;
(N) Accounts that are not payable in US dollars;
(O) Accounts payable by any account debtor that is a remarketer of
computer hardware and software products and whose purchases of such
products from Customer have been financed by another person who pays the
proceeds of such financing directly to Customer on behalf of such obligor;
(P) Accounts arising from the sale or lease of goods which are billed
to any account debtor but have not yet been shipped by Customer;
(Q) Accounts with respect to which Customer has permitted or agreed
to any extension, compromise or settlement, or made any change or
modification of any kind or nature, including, but not limited to, any
change or modification to the terms relating thereto;
(R) Accounts that do not arise from undisputed bona fide transactions
completed in accordance with the terms and conditions contained in the
invoices, purchase orders and contracts relating thereto;
(S) Accounts that are discounted for the full payment term specified
in Customer's terms and conditions with its account debtors, or for any
longer period of time;
(T) Accounts on cash on delivery (C.O.D.) terms;
(U) Accounts arising from maintenance or service contracts that are
billed in advance of full performance of service, except as agreed in
writing from time to time by IBM Credit;
(V) Accounts arising from bartered transactions;
(W) Accounts arising from incentive payments, rebates, discounts,
credits, and refunds from a supplier; and
(X) Any and all other Accounts that IBM Credit deems, in its sole and
absolute discretion, to be ineligible.
The aggregate of all Accounts that are not ineligible Accounts shall
hereinafter be referred to as "Eligible Accounts".
3.2 Reimbursement for Charges. Customer agrees to pay for all costs
and expenses of Customer's bank in respect to collection of checks and
other items of payment, all fees relating to the use and maintenance of the
Lockbox and the Special Account (each as defined in Section 3.3) and with
respect to remittances of proceeds of the Advances hereunder.
3.3 Lockbox and Special Account. Customer shall establish and maintain
lockboxes (each, a "Lockbox") at the addresses set forth in Attachment A
with the financial institutions listed in Attachment A (each, a "Bank")
pursuant to an agreement between the Customer and each Bank in form and
substance satisfactory to IBM Credit. Customer shall also establish and
maintain a deposit account which shall contain only proceeds of Customer's
Accounts ("Special Account") with each Bank. Customer shall enter into and
maintain a contingent blocked account agreement or similar agreement with
each Bank for the benefit of IBM Credit in form and substance satisfactory
to IBM Credit pursuant to which, among other things, such Bank shall agree
that, upon notice from IBM Credit, disbursements from the Special Account
shall be made only as IBM Credit shall direct.
3.4 Collections. Customer shall instruct, all Account obligors to
remit payments directly to the Lockbox. In addition, Customer shall have
such instruction printed in conspicuous type on all invoices. Customer
shall instruct Bank to deposit all remittances to such Bank's Lockbox into
its Special Account. Customer further agrees that it shall not deposit or
permit any deposits of funds other than remittances paid in respect of the
Accounts into the Special Account(s) or permit any commingling of funds
with such remittances in any Lockbox or Special Account. Without limiting
the Customer's foregoing obligations, if, at any time, Customer receives a
remittance directly from an Account obligor, then Customer shall make
entries on its books and records in a manner that shall reasonably identify
such remittances and shall keep a separate account on its record books of
all remittances so received and deposit the same into a Special Account.
Until so deposited into the Special Account, Customer shall keep all
remittances received in respect of Accounts separate and apart from
Customer's other property so that they are capable of identification as the
proceeds of Accounts in which IBM Credit has a security interest.
Notwithstanding any of the foregoing, IBM Credit acknowledges that Account
obligors may currently be remitting to a lockbox shared with Intelligent
Electronics, Inc. and/or its affiliates and subsidiaries, however, Customer
will immediately instruct such Account obligors to remit to the Lockbox in
accordance with the terms of this Section 3.4.
3.5 Application of Remittances and Credits. Customer shall apply all
remittances against the aggregate of Customer's outstanding Accounts no
later than the end of the next Business Day on which such remittances are
deposited into the Special Account. Customer also agrees to apply each
remittance against its respective Account no later than three (3) Business
Days from the date such remittance is deposited into the Special Account.
In addition, Customer shall promptly apply any credits owing in respect to
any Account when due.
3.6 Power of Attorney. Customer hereby irrevocably appoints IBM
Credit, with full power of substitution, as its true and lawful
attorney-in-fact with full power, in good faith and in compliance with
commercially reasonable standards, in the discretion of IBM Credit, to:
(A) sign the name of Customer on any document or instrument that IBM
Credit shall deem necessary or appropriate to perfect and maintain
perfected the security interest in the Collateral contemplated under this
Agreement and the Other Documents; and
(B) in the event IBM Credit exercises its right to block the Special
Account(s) or upon the occurrence and during the continuance of an Event of
Default as defined in Section 9.1 hereof, endorse the name of Customer upon
any of the items of payment of proceeds and deposit the same in the account
of IBM Credit for application to the Obligations; and
upon the occurrence and during the continuance of an Event of Default:
(C) demand payment, enforce payment and otherwise exercise all
Customer's rights and remedies with respect to the collection of any
Accounts;
(D) settle, adjust, compromise, extend or renew any Accounts;
(E) settle, adjust or compromise any legal proceedings brought to
collect any Accounts;
(F) sell or assign any Accounts upon such terms, for such amounts and
at such time or times as IBM Credit may deem advisable;
(G) discharge and release any Accounts;
(H) prepare, file and sign Customer's name on any Proof of Claim in
Bankruptcy or similar document against any Account obligor;
(I) prepare, file and sign Customer's name on any notice of lien,
claim of mechanic's lien, assignment or satisfaction of lien or mechanic's
lien, or similar document in connection with any Accounts;
(J) endorse the name of Customer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to any Account or goods pertaining thereto;
(K) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application
to the Obligations;
(L) sign the name of Customer to requests for verification of
Accounts and notices thereof to Account obligors;
(M) sign the name of Customer on any document or instrument that IBM
Credit shall deem necessary or appropriate to enforce any and all remedies
it may have under this Agreement, at law or otherwise;
(N) make, settle and adjust claims under the Policies with respect to
the Collateral and endorse Customer's name on any check, draft, instrument
or other item of payment of the proceeds of the Policies with respect to
the Collateral; and
(O) take control in any manner of any term of payment or proceeds and
for such purpose to notify the postal authorities to change the address for
delivery of mail addressed to Customer to such address as IBM Credit may
designate. If IBM Credit takes control of Customer's mail pursuant to this
subsection, IBM Credit agrees to segregate Customer's mail from payments
and agrees to promptly return Customer's mail to Customer.
The power of attorney granted by this Section is for value and coupled with
an interest and is irrevocable so long as this Agreement is in effect or
any Obligations remain outstanding. Nothing done by IBM Credit pursuant to
such power of attorney will reduce any of Customer's Obligations other than
Customer's payment Obligations to the extent IBM Credit has received
monies.
Section 4. SECURITY -- COLLATERAL
4.1 Grant To secure Customer's full and punctual payment and
performance of the Obligations when due (whether at the stated maturity, by
acceleration or otherwise), Customer hereby grants IBM Credit a security
interest in all of Customer's right, title and interest in and to the
following property, whether now owned or hereafter acquired or existing and
wherever located:
(A) all inventory and equipment, and all parts thereof, attachments,
accessories and accessions thereto, products thereof and documents
therefor;
(B) all accounts, contract rights, chattel paper, instruments,
deposit accounts, obligations of any kind owing to Customer, whether or not
arising out of or in connection with the sale or lease of goods or the
rendering of services and all books, invoices, documents and other records
in any form evidencing or relating to any of the foregoing;
(C) general intangibles;
(D) all rights now or hereafter existing in and to all mortgages,
security agreements, leases or other contracts securing or otherwise
relating to any of the foregoing; and
(E) all substitutions and replacements for all of the foregoing, all
proceeds of all of the foregoing and, to the extent not otherwise included,
all payments under insurance or any indemnity, warranty or guaranty,
payable by reason of loss or damage to or otherwise with respect to any of
the foregoing.
All of the above assets shall be collectively defined herein as the
"Collateral".
Customer covenants and agrees with IBM Credit that: (a) the security
constituted to by this Agreement is in addition to any other security from
time to time held by IBM Credit and (b) the security hereby created is a
continuing security interest and will cover and secure the payment of all
Obligations both present and future of Customer to IBM Credit pursuant to
this Agreement and the Other Documents.
4.2 Further Assurances. Customer shall, from time to time upon the
request of IBM Credit, execute and deliver to IBM Credit, or cause to be
executed and delivered, at such time or times as IBM Credit may request
such other and further documents, certificates and instruments that IBM
Credit may deem necessary to perfect and maintain perfected IBM Credit's
security interests in the Collateral and in order to fully consummate all
of the transactions contemplated under this Agreement and the Other
Documents.
Section 5. CONDITIONS PRECEDENT
5.1 Conditions Precedent to the Effectiveness of This Agreement. The
effectiveness of this Agreement is subject to the receipt by IBM Credit of,
or waiver in writing by IBM Credit of compliance with, the following
conditions precedent:
(A) this Agreement executed and delivered by Customer and IBM Credit;
(B) (i) copies of the resolutions of the Board of Directors of
Customer certified by the secretary or assistant secretary of Customer
authorizing the execution, delivery and performance of this Agreement and
each of the Other Documents executed and delivered in connection herewith,
(ii) a certificate of the secretary or an assistant secretary of Customer,
in form and substance satisfactory to IBM Credit, certifying the names and
true signatures of the officers of Customer authorized to sign this
Agreement and the Other Documents and (iii) copies of the articles of
incorporation and by-laws of Customer certified by the secretary or
assistant secretary of Customer;
(C) certificates dated as of a recent date from the Secretary of
State or other appropriate authority evidencing the good standing of
Customer in the jurisdiction of its organization and in each other
jurisdiction where the ownership or lease of its property or the conduct of
its business requires it to qualify to do business;
(D) copies of all approvals and consents from any Person, in each
case in form and substance satisfactory to IBM Credit, which are required
to enable Customer to authorize, or required in connection with, (a) the
execution, delivery or performance of this Agreement and each of the Other
Documents, and (b) the legality, validity, binding effect or enforceability
of this Agreement and each of the Other Documents;
(E) a lockbox agreement executed by Customer and each Bank in form and
substance satisfactory to IBM Credit;
(F) a contingent blocked account agreement executed by Customer and
each Bank in form and substance satisfactory to IBM Credit;
(G) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to IBM Credit, executed by each other secured
creditor of Customer as set forth in Attachment A;
(H) a favorable opinion of counsel for Customer in substantially the
form of Attachment H;
(I) UCC-1 financing statements for each jurisdiction reasonably
requested by IBM Credit executed by Customer and each guarantor whose
guaranty to IBM Credit is intended to be secured by a pledge of its assets;
(J) the statements, certificates, documents, instruments, financing
statements, agreements and information set forth in Attachment A and
Attachment B;
(K) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as IBM Credit shall have reasonably
requested;
(L) guaranties, in form and substance satisfactory to IBM Credit,
duly executed by the following entities:
Intelligent Electronics, Inc.("IE")
Intelevest Holdings, Inc.
Intelligent Advanced Systems, Inc.
Intelligent Distribution Services, Inc.
Intelligent Express, Inc.
Intelligent SP, Inc.
Intelligent Systems Group, Inc.
Intellinet, Ltd.
RND, Inc.
The Future Now, Inc.
XLSource, Inc.
E-C Computer Technical Services, Inc.
RCK Computers, Inc.; and
(M) trademark security agreements, in form and substance satisfactory
to IBM Credit, assigning all trademarks owned by Customer from time to time
to IBM Credit.
5.2 Conditions Precedent to Each. No Advance will be required to be
made or renewed by IBM Credit under this Agreement unless, on and as of the
date of such Advance, the following statements shall be true to the
satisfaction of IBM Credit:
(A) The representations and warranties contained in this Agreement or
in any document, instrument or agreement executed in connection herewith,
are true and correct in all material respects on and as of the date of such
Advance as though made on and as of such date;
(B) No event has occurred and is continuing or after giving effect to
such Advance or the application of the proceeds thereof would result which
would constitute a Default;
(C) No event has occurred and is continuing which could reasonably be
expected to have a Material Adverse Effect;
(D) Both before and after giving effect to the making of such Advance,
no Shortfall Amount exists.
Except as Customer has otherwise disclosed to IBM Credit in writing prior
to each request, each request (or deemed request pursuant to Section 2.2
(D)) for an Advance hereunder and the receipt (or deemed receipt) by the
Customer of the proceeds of any Advance hereunder shall be deemed to be a
representation and warranty by Customer that, as of and on the date of such
Advance, the statements set forth in (A) through (D) above are true
statements. No such disclosures by Customer to IBM Credit shall in any
manner be deemed to satisfy the conditions precedent to each Advance that
are set forth in this Section 5.2 unless such condition precedent is waived
in writing by IBM Credit.
Section 6. REPRESENTATIONS AND WARRANTIES
To induce IBM Credit to enter into this Agreement, Customer represents and
warrants to IBM Credit as follows:
6.1 Organization and Qualifications. Customer and each of its
Subsidiaries (i) is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, (ii)
has the power and authority to own its properties and assets and to
transact the businesses in which it presently is engaged and (iii) is duly
qualified and is authorized to do business and is in good standing in each
jurisdiction where it presently is engaged in business and is required to
be so qualified.
6.2 Rights in Collateral; Priority of Liens. Customer and each of its
Subsidiaries owns the property granted by it respectively as Collateral to
IBM Credit, free and clear of any and all Liens in favor of third parties
except for the Liens otherwise permitted pursuant to Section 8.1. The
Liens granted by the Customer and each of its Subsidiaries pursuant to this
Agreement, the Guaranties and the Other Documents in the Collateral
constitute the valid and enforceable first, prior and perfected Liens on
the Collateral, except to the extent any Liens that are prior to IBM
Credit's Liens are (i) the subject of an Intercreditor Agreement or (ii)
Purchase Money Security Interests.
6.3 No Conflicts. The execution, delivery and performance by Customer
of this Agreement and each of the Other Documents (i) are within its
corporate power; (ii) are duly authorized by all necessary corporate
action; (iii) are not in contravention in any respect of any Requirement of
Law or any indenture, contract, lease, agreement, instrument or other
commitment to which it is a party or by which it or any of its properties
are bound; (iv) do not require the consent, registration or approval of any
Governmental Authority or any other Person (except such as have been duly
obtained, made or given, and are in full force and effect); and (v) will
not, except as contemplated herein, result in the imposition of any Liens
upon any of its properties.
6.4 Enforceability. This Agreement and all of the other documents
executed and delivered by the Customer in connection herewith are the
legal, valid and binding obligations of Customer, and are enforceable in
accordance with their terms, except as such enforceability may be limited
by the effect of any applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or similar laws affecting creditors'
rights generally or the general equitable principles relating thereto.
6.5 Locations of Offices. The address of the principal place of
business and chief executive office of Customer is as set forth on
Attachment B or on any notice provided by Customer to IBM Credit pursuant
to Section 7.7(C) of this Agreement. The books and records of Customer,
and all of its chattel paper (other than the chattel paper delivered to IBM
Credit pursuant to Section 7.14(E)) and records of Accounts, are maintained
exclusively at such location. There is no jurisdiction in which Customer
has any assets, equipment or inventory (except for vehicles and inventory
in transit for processing) other than those jurisdictions identified on
Attachment B or on any notice provided by Customer to IBM Credit pursuant
to Section 7.7(C) of this Agreement.
6.6 Fictitious Business Names. Customer has not used any corporate or
fictitious name during the five (5) years preceding the date of this
Agreement, other than those listed on Attachment B.
6.7 Organization. All of the outstanding capital stock of Customer has
been validly issued, is fully paid and nonassessable.
6.8 No Judgments or Litigation. Except as set forth on Attachment B,
no judgments, orders, writs or decrees are outstanding against Customer nor
is there now pending or, to the best of Customer's knowledge after due
inquiry, threatened, any litigation, contested claim, investigation,
arbitration, or governmental proceeding by or against Customer which could
reasonably be expected to have a Material Adverse Effect.
6.9 No Defaults. The Customer is not in default under any term of any
indenture, contract, lease, agreement, instrument or other commitment to
which it is a party or by which it, or any of its properties are bound.
Customer has no knowledge of any dispute regarding any such indenture,
contract, lease, agreement, instrument or other commitment. No Default or
Event of Default has occurred and is continuing.
6.10 Labor Matters. Except as set forth on any notice provided by Customer
to IBM Credit pursuant to Section 7.1(G) of this Agreement, the Customer is
not a party to any labor dispute. There are no strikes or walkouts or labor
controversies pending or threatened against the Customer which could
reasonably be expected to have a Material Adverse Effect.
6.11 Compliance with Law. Customer has not violated or failed to comply
with any Requirement of Law or any requirement of any self regulatory
organization.
6.12 ERISAEach "employee benefit plan," "employee pension benefit plan," or
"defined benefit plan," which Customer has established, maintained, or to
which it is required to contribute (collectively, the "Plans") is in
compliance with all applicable provisions of ERISA and the Code and the
rules and regulations thereunder as well as the Plan's terms and
conditions. There have been no "prohibited transactions" and no
"reportable event" has occurred within the last 60 months with respect to
any Plan. Customer has no "multi- employer benefit plan". As used in this
Agreement the terms "employee benefit plan", "employee pension benefit
plan", "defined benefit plan", and "multi-employer benefit plan" have the
respective meanings assigned to them in Section 3 of ERISA and any
applicable rules and regulations thereunder. The Customer has not incurred
any "accumulated funding deficiency" within the meaning of ERISA or
incurred any liability to the Pension Benefit Guaranty Corporation (the
"PBGC") in connection with a Plan (other than for premiums due in the
ordinary course).
6.13 Compliance with Environmental Laws. Except as otherwise disclosed in
Attachment B:
(A) The Customer has obtained all government approvals required with
respect to the operation of their businesses under any Environmental Law.
(B) (i) the Customer has not generated, transported or disposed of
any Hazardous Substances; (ii) the Customer is not currently generating,
transporting or disposing of any Hazardous Substances; (iii) the Customer
has no knowledge that (a) any of its real property (whether owned, leased,
or otherwise directly or indirectly controlled) has been used for the
disposal of or has been contaminated by any Hazardous Substances, or (b)
any of its business operations have contaminated lands or waters of others
with any Hazardous Substances; (iv) the Customer and its respective assets
are not subject to any Environmental Liability and, to the best of the
Customer's knowledge, any threatened Environmental Liability; (v) the
Customer has not received any notice of or otherwise learned of any
governmental investigation evaluating whether any remedial action is
necessary to respond to a release or threatened release of any Hazardous
Substance for which the Customer may be liable; (vi) the Customer is not in
violation of any Environmental Law; (vii) there are no proceedings or
investigations pending against Customer with respect to any violation or
alleged violation of any Environmental Law; provided however, that the
parties acknowledge that any generation, transportation, use, storage and
disposal of certain such Hazardous Substances in Customer's or its
Subsidiaries' business shall be excluded from representations (i) and (ii)
above, provided, further, that Customer is at all times generating,
transporting, utilizing, storing and disposing such Hazardous Substances in
accordance with all applicable Environmental Laws and in a manner designed
to minimize the risk of any spill, contamination, release or discharge of
Hazardous Substances other than as authorized by Environmental Laws.
6.14 Intellectual Property. Customer possesses such assets, licenses,
patents, patent applications, copyrights, service marks, trademarks, trade
names and trade secrets and all rights and other property relating thereto
or arising therefrom ("Intellectual Property") as are necessary or
advisable to continue to conduct its present and proposed business
activities.
6.15 Licenses and Permits. Customer has obtained and holds in full force
and effect all franchises, licenses, leases, permits, certificates,
authorizations, qualifications, easements, rights of way and other rights
and approvals which are necessary for the operation of its businesses as
presently conducted. Customer is not in violation of the terms of any such
franchise, license, lease, permit, certificate, authorization,
qualification, easement, right of way, right or approval.
6.16 Investment Company. The Customer is not (i) an investment company or
a company controlled by an investment company within the meaning of the
Investment Company Act of 1940, as amended, (ii) a holding company or a
subsidiary of a holding company, or an Affiliate of a holding company or of
a subsidiary of a holding Company, within the meaning of the Public Utility
Holding Company Act of 1935, as amended, or (iii) subject to any other law
which purports to regulate or restrict its ability to borrow money or to
consummate the transactions contemplated by this Agreement or the Other
Documents or to perform its obligations hereunder or thereunder.
6.17 Taxes and Tax Returns. Customer has timely filed all federal, state,
and local tax returns and other reports which it is required by law to
file, and has either duly paid all taxes, fees and other governmental
charges indicated to be due on the basis of such reports and returns or
pursuant to any assessment received by the Customer, or made provision for
the payment thereof in accordance with GAAP. The charges and reserves on
the books of the Customer in respect of taxes or other governmental charges
are in accordance with GAAP. No tax liens have been filed against Customer
or any of its property.
6.18 Status of Accounts. Each Account is based on an actual and bona fide
sale and delivery of goods or rendition of services to customers, made by
Customer, in the ordinary course of its business; the goods and inventory
being sold and the Accounts created are its exclusive property and are not
and shall not be subject to any Lien, consignment arrangement, encumbrance,
security interest or financing statement whatsoever (other than Permitted
Liens). The Customer's customers have accepted goods or services and owe
and are obligated to pay the full amounts stated in the invoices according
to their terms. There are no proceedings or actions known to Customer
which are pending or threatened against any Material Account Obligor (as
defined in Section 7.14(B) of this Agreement) of any of the Accounts which
could reasonably be expected to result in a material adverse effect on the
obligor's ability to pay the full amounts due to Customer.
6.19 Affiliate/Subsidiary Transactions. Customer is not a party to or
bound by any agreement or arrangement (whether oral or written) to which IE
or any Affiliate or Subsidiary of the Customer is a party except (i) in the
ordinary course of and pursuant to the reasonable requirements of
Customer's business and (ii) upon fair and reasonable terms no less
favorable to Customer than it could obtain in a comparable arm's-length
transaction with an unaffiliated Person.
6.20 Accuracy and Completeness of Information. All factual information
furnished by or on behalf of the Customer to IBM Credit or the Auditors for
purposes of or in connection with this Agreement or any of the Other
Documents, or any transaction contemplated hereby or thereby is or will be
true and accurate in all material respects on the date as of which such
information is dated or certified and not incomplete by omitting to state
any material fact necessary to make such information not misleading at such
time.
6.21 Recording Taxes. All recording taxes, recording fees, filing fees and
other charges payable in connection with the filing and recording of this
Agreement or any of the Other Documents have either been paid in full by
Customer or arrangements for the payment of such amounts by Customer have
been made to the satisfaction of IBM Credit.
6.22 IndebtednessCustomer (i) has no Indebtedness, other than Permitted
Indebtedness; and (ii) has not guaranteed the obligations of any other
Person (except as permitted by Section 8.4).
Section 7. AFFIRMATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations:
7.1 Financial and Other Information. Customer shall cause to be
furnished to IBM Credit the following information within the following time
periods:
(A) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of Customer (i) audited Financial
Statements (provided that, to the extent not otherwise audited by the
Auditors as described below, the consolidating Financial Statements may be
unaudited) as of the close of the fiscal year and for the fiscal year,
together with a comparison to the Financial Statements for the prior year,
in each case accompanied by (a) either an opinion of the Auditors with
respect to Customer, without a "going concern" or like qualification or
exception, or qualification arising out of the scope of the audit or, if so
qualified, an opinion which shall be in scope and substance reasonably
satisfactory to IBM Credit, (b) such Auditors' "Management Letter" to
Customer, if any and (c) a written statement signed by the Auditors stating
that in the course of the regular audit of the business of Customer, which
audit was conducted by the Auditors in accordance with generally accepted
auditing standards, the Auditors have not obtained any knowledge of the
existence of any Default under any provision of this Agreement, or, if such
Auditors shall have obtained from such examination any such knowledge, they
shall disclose in such written statement the existence of the Default and
the nature thereof, it being understood that such Auditors shall have no
liability, directly or indirectly, to anyone for failure to obtain
knowledge of any such Default; (ii) if composed, a narrative discussion of
the consolidated financial condition and results of operations and the
consolidated liquidity and capital resources of Customer and its
Subsidiaries for such fiscal year prepared by the chief operating officer
or chief financial officer of Customer; and (iii) a Compliance Certificate
along with a schedule, in substantially the form of Attachment C hereto, of
the calculations used in determining, as of the end of such fiscal year,
whether Customer is in compliance with the financial covenants set forth in
Attachment A;
(B) as soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Customer (i) Financial Statements
as of the end of such period and for the fiscal year to date, together with
a comparison to the Financial Statements for the same periods in the prior
year, all in reasonable detail and duly certified (subject to normal
year-end audit adjustments and except for the absence of footnotes) by the
chief operating officer or chief financial officer of Customer as having
been prepared in accordance with GAAP; (ii) if composed, a narrative
discussion of the consolidated financial condition and results of
operations and the consolidated liquidity and capital resources of Customer
and its Subsidiaries for such period and for the fiscal year to date
prepared by the chief operating officer or chief financial officer of
Customer; and (iii) a Compliance Certificate along with a schedule, in
substantially the form of Attachment C hereto, of the calculations used in
determining, as of the end of such fiscal quarter, whether Customer is in
compliance with the financial covenants set forth in Attachment A;
(C) as soon as available and in any event within forty five (45) days
after the end of each fiscal month of Customer (i) balance sheets and
profit and loss statements as of the end of such period and for the fiscal
year to date, together with a comparison to the balance sheets and profit
and loss statements for the same periods in the prior year, all in
reasonable detail and duly certified (subject to normal year-end audit
adjustments and except for the absence of footnotes) by the chief operating
officer or chief financial officer of Customer as having been prepared in
accordance with GAAP, and (ii) if composed, a narrative discussion of the
consolidated financial condition and results of operations and the
consolidated liquidity and capital resources of Customer and its
Subsidiaries for such period and for the fiscal year to date prepared by
the chief operating officer or chief financial officer of Customer.
(D) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of Customer (i) projected Financial
Statements, broken down by quarter, for the current and following fiscal
year; and (ii) a narrative discussion relating to such projected Financial
Statements;
(E) promptly after Customer obtains knowledge of (i) an occurrence of any
event or condition which enables the holder of any Indebtedness arising in
one or more unrelated transactions in aggregate principal amount exceeding
Five Hundred Thousand Dollars ($500,000) to accelerate the maturity thereof
or the failure of Customer to pay when due any such Indebtedness, (ii) the
occurrence of a Default or Event of Default, or (iii) the existence of any
condition or event which would result in the Customer's failure to satisfy
the conditions precedent to Advances set forth in Section 5, a certificate
of the chief executive officer or chief financial officer of Customer
specifying the nature thereof and the Customer's proposed response thereto,
each in reasonable detail;
(F) promptly after Customer obtains knowledge of (i) any
proceeding(s) being instituted or threatened to be instituted by or against
Customer in any federal, state, local or foreign court or before any
commission or other regulatory body (federal, state, local or foreign), or
(ii) any actual or prospective change, development or event which, in any
such case, has had or could reasonably be expected to have a Material
Adverse Effect, a certificate of the chief executive officer or chief
financial officer of Customer specifying the nature thereof and the
Customer's proposed response thereto, each in reasonable detail;
(G) promptly after Customer obtains knowledge that (i) any order,
judgment or decree in excess of Two Hundred Fifty Thousand Dollars
($250,000) shall have been entered against Customer or any of its
properties or assets, or (ii) it has received any notification of a
material violation of any Requirement of Law from any Governmental
Authority, a certificate of the chief executive officer or chief financial
officer of Customer specifying the nature thereof and the Customer's
proposed response thereto, each in reasonable detail;
(H) promptly after Customer learns of any material labor dispute to
which Customer may become a party, any strikes or walkouts relating to any
of its plants or other facilities, and the expiration of any labor contract
to which Customer is a party or by which it is bound, a certificate of the
chief executive officer or chief financial officer of Customer specifying
the nature thereof and the Customer's proposed response thereto, each in
reasonable detail;
(I) within five (5) Business Days after request by IBM Credit, any
written certificates, schedules and reports together with all supporting
documents as IBM Credit may reasonably request relating to the Collateral
or the Customer's or any guarantor's business affairs and financial
condition;
(J) with respect to any Tier II Period, by the fifth (5th) day of
each month, or as otherwise agreed in writing, a Collateral Management
Report as of a date no earlier than the last day of the immediately
preceding month;
(K) with respect to any Tier II Period, along with the Financial
Statements set forth in Section 7.1(A) and (B), the name, address and phone
number, if such phone number is readily available, of each of its account
debtors' primary contacts for each Account on the Accounts aging report
contained in its most recent Collateral Management Report; and
(L) within five (5) days after the same are sent, copies of all
financial statements and reports which Customer sends to its stockholders,
and within five (5) days after the same are filed, copies of all financial
statements and reports which Customer may make to, or file with, the
Securities and Exchange Commission or any successor or analogous
governmental authority.
Each certificate, schedule and report provided by Customer to IBM Credit
shall be signed by an authorized officer of Customer, and which signature
shall be deemed a representation and warranty that the information
contained in such certificate, schedule or report is true and accurate in
all material respects on the date as of which such certificate, schedule or
report is made and does not omit to state a material fact necessary in
order to make the statements contained therein not misleading at such time.
Each financial statement delivered pursuant to this Section 7.1 shall be
prepared in accordance with GAAP applied consistently throughout the
periods reflected therein and with prior periods.
7.2 Location of Collateral. Any inventory, equipment and other
tangible Collateral, shall be kept or sold at the addresses as set forth on
Attachment B or on any notice provided by Customer to IBM Credit in
accordance with Section 7.7(C). During any Tier II Period, such locations
shall be certified quarterly to IBM Credit substantially in the form of
Attachment G.
7.3 Changes in Customer. Customer shall provide thirty (30) days prior
written notice to IBM Credit of any change in Customer's name, chief
executive office and principal place of business, organization, form of
ownership or corporate structure; provided, however, that Customer's
compliance with this covenant shall not relieve it of any of its other
obligations or any other provisions under this Agreement or any of the
Other Documents limiting actions of the type described in this Section.
7.4 Corporate Existence. Customer shall (A) maintain its corporate
existence, maintain in full force and effect all licenses, bonds,
franchises, leases and qualifications to do business, and all contracts and
other rights necessary to the profitable conduct of its business, (B)
continue in, and limit its operations to, the same general lines of
business as presently conducted by it unless otherwise permitted in writing
by IBM Credit and (C) comply with all Requirements of Law.
7.5 ERISA. Customer shall promptly notify IBM Credit in writing after
it learns of the occurrence of any event which would constitute a
"reportable event" under ERISA or any regulations thereunder with respect
to any Plan, or that the PBGC has instituted or will institute proceedings
to terminate any Plan. Notwithstanding the foregoing, the Customer shall
have no obligation to notify IBM Credit as to any "reportable event" as to
which the 30-day notice requirement of Section 4043(b) has been waived by
the PBGC, until such time as such Customer is required to notify the PBGC
of such reportable event. Such notification shall include a certificate of
the chief financial officer of Customer setting forth details as to such
"reportable event" and the action which Customer proposes to take with
respect thereto, together with a copy of any notice of such "reportable
event" which may be required to be filed with the PBGC, or any notice
delivered by the PBGC evidencing its intent to institute such proceedings.
Upon request of IBM Credit, Customer shall furnish, or cause the plan
administrator to furnish, to IBM Credit the most recently filed annual
report for each Plan.
7.6 Environmental Matters. (A) Customer and any other Person under
Customer's control (including, without limitation, agents and Affiliates
under such control) shall (i) comply with all Environmental Laws in all
material respects, and (ii) undertake to use commercially reasonable
efforts to prevent any unlawful release of any Hazardous Substances by
Customer or such Person into, upon, over or under any property now or
hereinafter owned, leased or otherwise controlled (directly or indirectly)
by Customer.
(B) Customer shall notify IBM Credit, promptly upon its obtaining
knowledge of (i) any non-routine proceeding or investigation by any
Governmental Authority with respect to the presence of any Hazardous
Substances on or in any property now or hereinafter owned, leased or
otherwise controlled (directly or indirectly) by Customer, (ii) all claims
made or threatened by any Person or Governmental Authority against Customer
or any of Customer's assets relating to any loss or injury resulting from
any Hazardous Substances (iii) Customer's discovery of evidence of
unlawful disposal of or environmental contamination by any Hazardous
Substance on any property now or hereinafter owned, leased or otherwise
controlled (directly or indirectly) by Customer, and (iv) any occurrence or
condition which could constitute a violation of any Environmental Law.
7.7 Collateral Books and Records; Collateral Audit. (A) Customer agrees
to maintain books and records pertaining to the Collateral in such detail,
form and scope as is consistent with good business practice.
(B) Customer agrees that IBM Credit or its agents may enter upon the
premises of Customer at any time and from time to time, during normal
business hours and upon reasonable notice under the circumstances, and at
any time at all on and after the occurrence and during the continuance of
an Event of Default for the purposes of (i) inspecting the Collateral, (ii)
inspecting and/or copying (at Customer's expense) any and all records
pertaining thereto, (iii) discussing the affairs, finances and business of
Customer with any officers, employees and directors of Customer or with the
Auditors and (iv) verifying Eligible Accounts and other Collateral.
Customer also agrees to provide IBM Credit with such reasonable information
and documentation that IBM Credit deems necessary to conduct the foregoing
activities, including, without limitation, reasonably requested samplings
of purchase orders, invoices and evidences of delivery or other
performance. Upon the occurrence and during the continuance of an Event of
Default which has not been waived by IBM Credit in writing, IBM Credit may
conduct any of the foregoing activities in any manner that IBM Credit deems
reasonably necessary.
(C) Customer shall exercise best efforts to provide IBM Credit thirty
(30) days and shall provide, in any event, at least ten (10) days prior
written notice of any change in the location of any Collateral, the
location of its books and records or in the location of its chief executive
office or place of business from the locations specified in Attachment B,
and will execute in advance of such change and cause to be filed and/or
delivered to IBM Credit any financing statements, landlord or other lien
waivers, or other documents reasonably required by IBM Credit, all in form
and substance reasonably satisfactory to IBM Credit.
(D) Customer agrees to advise IBM Credit promptly, in reasonably
sufficient detail, of any substantial change relating to the type, quantity
or quality of the Collateral, or any event which could reasonably be
expected to have a Material Adverse Effect on the value of the Collateral
or on the security interests granted to IBM Credit therein.
7.8 Insurance; Casualty Loss. Customer agrees to maintain with
financially sound and reputable insurance companies: (i) insurance on its
properties, (ii) public liability insurance against claims for personal
injury or death as a result of the use of any products sold by it and (iii)
insurance coverage against other business risks, in each case, in at least
such amounts and against at least such risks as are usually and prudently
insured against in the same general geographical area by companies of
established repute engaged in the same or a similar business. Customer
will furnish to IBM Credit, upon its written request, the insurance
certificates with respect to such insurance. In addition, all Policies so
maintained are to name IBM Credit as an additional insured as its interest
may appear.
7.9 Taxes. Customer agrees to pay, when due, all taxes lawfully levied or
assessed against Customer or any of the Collateral before any penalty or
interest accrues thereon unless such taxes are being contested, in good
faith, by appropriate proceedings promptly instituted and diligently
conducted and an adequate reserve or other appropriate provisions have been
made therefor as required in order to be in conformity with GAAP and an
adverse determination in such proceedings could not reasonably be expected
to have a Material Adverse Effect.
7.10 Compliance With Laws. Customer agrees to comply with all Requirements
of Law applicable to the Collateral or any part thereof, or to the
operation of its business.
7.11 Fiscal Year. Customer agrees to maintain its fiscal year as a year
ending December 31st unless Customer provides IBM Credit at least thirty
(30) days prior written notice of any change thereof.
7.12 Intellectual Property. Customer shall do and cause to be done all
things necessary to preserve and keep in full force and effect all
registrations of Intellectual Property which the failure to do or cause to
be done could reasonably be expected to have a Material Adverse Effect.
7.13 Maintenance of Property. Customer shall maintain all of its material
properties (business and otherwise) in good condition and repair (ordinary
wear and tear excepted) and pay and discharge all costs of repair and
maintenance thereof and all rental and mortgage payments and related
charges pertaining thereto and not commit or permit any material waste with
respect to any of its material properties.
7.14 Collateral. Customer shall:
(A) if from time to time reasonably required by IBM Credit, provide
IBM Credit with access to copies of all invoices, delivery evidences and
other such documents relating to each Account;
(B) promptly upon Customer's obtaining knowledge thereof, furnish to
and inform IBM Credit of all material adverse information relating to the
financial condition of any Account obligor whose outstanding obligations to
Customer constitute two percent (2%) or more of the Accounts at such time
(a "Material Account Obligor");
(C) promptly upon Customer's learning thereof, notify IBM Credit in
writing of any event which would cause any obligation of a Material Account
Obligor to become an Ineligible Account;
(D) if applicable, keep all goods rejected or returned by any account
debtor and all goods repossessed or stopped in transit by Customer from any
account debtor segregated from other property of Customer, holding the same
in trust for IBM Credit until Customer applies a credit against such
account debtor's outstanding obligations to Customer or sells such goods in
the ordinary course of business, whichever occurs earlier;
(E) stamp or otherwise mark chattel paper and instruments now owned
or hereafter acquired by it in conspicuous type to show that the same are
subject to IBM Credit's security interest and immediately thereafter
deliver or cause such chattel paper and instruments to be delivered to IBM
Credit or any agent designated by IBM Credit with appropriate endorsements
and assignments to vest title and possession in IBM Credit;
(F) use commercially reasonable efforts to collect all Accounts owed;
(G) promptly notify IBM Credit of any loss, theft or destruction of
or damage to any of the Collateral whereby the value of such Collateral
lost, stolen, destroyed or damaged exceeds Five Hundred Thousand Dollars
($500,000). Customer shall diligently file and prosecute its claim for any
award or payment in connection with any such loss, theft, destruction of or
damage to Collateral. Customer shall, upon demand of IBM Credit, make,
execute and deliver any assignments and other instruments sufficient for
the purpose of assigning any such award or payment to IBM Credit, free of
any encumbrances of any kind whatsoever;
(H) consistent with reasonable commercial practice, observe and
perform all matters and things necessary or expedient to be observed or
performed under or by virtue of any lease, license, concession or franchise
forming part of the Collateral in order to preserve, protect and maintain
all the rights of IBM Credit thereunder;
(I) consistent with reasonable commercial practice, maintain, use and
operate the Collateral and carry on and conduct its business in a proper
and efficient manner so as to preserve and protect the Collateral and the
earnings, incomes, rents, issues and profits thereof; and
(J) at any time and from time to time, upon the request of IBM Credit,
and at the sole expense of Customer, Customer will promptly and duly
execute and deliver such further instruments and documents and take such
further action as IBM Credit may reasonably request for the purpose of
obtaining or preserving the full benefits of this Agreement and of the
rights and powers herein granted, including, without limitation, the filing
of any financing or continuation statements under the Uniform Commercial
Code in effect in any jurisdiction with respect to the security interests
granted herein and the payment of any and all recording taxes and filing
fees in connection therewith.
7.15 Subsidiaries. IBM Credit may require that any Subsidiaries of
Customer become parties to this Agreement or any other agreement executed
in connection with this Agreement as guarantors or sureties. Customer will
comply, and cause all Subsidiaries of Customer to comply with Sections 7
and 8 of this Agreement, as if such sections applied directly to such
Subsidiaries.
7.16 Financial Covenants; Additional Covenants. Customer acknowledges and
agrees that Customer shall at all relevant times maintain the financial
covenants and other covenants set forth in the attachments, exhibits and
other addenda incorporated in this Agreement.
7.17 Joint and Several Guaranty.
(A) Each Customer hereby jointly and severally guarantees to IBM
Credit the prompt payment when due and the full, prompt, and faithful
performance of any and all Obligations upon which either Customer is in any
manner obligated, heretofore, now, or hereafter owned, contracted or
acquired by IBM Credit pursuant to this Agreement, whether the same are
individual, joint or several, primary, secondary, direct, contingent or
otherwise. Each Customer irrevocably subordinates to the full payment of
amounts due IBM Credit any and all rights to which it may be entitled, by
operation of law or otherwise, upon making any payment hereunder (i) to be
subrogated to the rights of IBM Credit against either Customer hereto with
respect to such payment or otherwise to be reimbursed, indemnified or
exonerated by either Customer in respect thereof, or (ii) to receive any
payment, in the nature of contribution or for any other reason, from either
Customer hereto with respect to such payment.
(B) Notwithstanding any provision herein to the contrary, the
liability of each Customer hereunder shall in no event exceed the maximum
amount that is valid and enforceable in any action or proceeding involving
any applicable state corporate law or any applicable state or federal
bankruptcy, insolvency, reorganization, fraudulent conveyance or other law
involving the rights of creditors generally.
(C) The liability of each Customer hereunder is direct and
unconditional and shall not be affected by any extension, renewal or other
change in the terms of payment or performance thereof, or the release,
settlement or compromise of or with any party liable for the payment or
performance thereof, the release or nonperfection of any security
thereunder, or any change in either Customer's financial condition. Each
Customer's obligation pursuant to this Section 7.17 shall continue for so
long as any sums owing to you by either Customer remains outstanding and
unpaid, unless terminated in the manner provided herein. Each Customer
acknowledges that its obligations hereunder are in addition to and
independent of any agreement or transaction between IBM Credit and any
other Customer or any other person creating or reserving any lien,
encumbrance or security interest in any property of either Customer or any
other person as security for any obligation of such Customer.
(D) Each Customer has made an independent investigation of the
financial condition of each other Customer and guarantees the Obligations
based on that investigation and not upon any representations made by IBM
Credit. Each Customer acknowledges that it has access to current and
future Customer financial information which will enable each Customer to
continuously remain informed of each other Customer's financial condition.
Each Customer also consents to and agrees that the Obligations shall not
be affected by IBM Credit's subsequent increases or decreases in the credit
line that IBM Credit may grant to either Customer; substitutions, exchanges
or releases of all or any part of the Collateral nor or hereafter securing
any of the Obligations; sales or other dispositions of any or all of the
Collateral nor or hereafter securing any of the Obligations realizing on
the Collateral to the extent you, in your sole discretion deem proper.
(E) Each Customer waives if permitted by applicable law (1)
demand, protest and all notices of protest or dishonor, (2) all notices of
payment and nonpayment, (3) all notices required by law, and (4) all
notices of nonpayment at maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, contract
rights, documents, instruments, chattel paper and guarantees at any time
held by IBM Credit on which either Customer may, in any way, be liable and
each Customer hereby ratifies and confirms whatever IBM Credit may do in
that regard.
(F) This guaranty obligation and any and all obligations,
liabilities, terms and provisions herein shall survive any and all
bankruptcy or insolvency proceedings, actions and/or claims brought by or
against either Customer, whether such proceedings, actions and/or claims
are federal and/or state.
(G) The Obligations are joint and several, shall be binding upon
each Customer and each Customer's respective successors and assigns, and
will be for IBM Credit's benefit and the benefit of IBM Credit's successors
and assigns. The Obligations and any terms or provisions herein may be
modified or amended only by a document signed by both IBM Credit and
Customer.
Section 8. NEGATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations due hereunder:
8.1 Liens. The Customer will not, directly or indirectly mortgage,
assign, pledge, transfer, create, incur, assume, permit to exist or
otherwise permit any Lien or judgment to exist on any of its property,
assets, revenues or goods, whether real, personal or mixed, whether now
owned or hereafter acquired, except for Permitted Liens.
8.2 Disposition of Assets. The Customer will not, directly or
indirectly, sell, lease, assign, transfer or otherwise dispose of any
assets other than (i) sales or leases of inventory in the ordinary course
of business and short term rental of inventory as demonstrations in amounts
not material to Customer, and (ii) voluntary dispositions of individual
assets and obsolete or worn out property in the ordinary course of
business, provided, that the aggregate book value of all such assets and
property so sold or disposed of under this section 8.2 (ii) in any fiscal
year shall not exceed 5% of the consolidated assets of the Customer as of
the beginning of such fiscal year.
8.3 Corporate Changes. The Customer will not, without the prior
written consent of IBM Credit, directly or indirectly, merge, consolidate,
liquidate, dissolve or enter into or engage in any operation or activity
materially different from that presently being conducted by Customer.
8.4 Guaranties. The Customer will not, directly or indirectly, assume,
guaranty, endorse, or otherwise become liable upon the obligations of any
other Person, except (i) by the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business, (ii) by the giving of indemnities in connection with the sale of
inventory or other asset dispositions permitted hereunder, and (iii) for
guaranties in favor of IBM Credit.
8.5 Restricted Payments. Subject to the last sentence in this Section
8.5, the Customer will not, directly or indirectly: (i) declare or pay any
dividend (other than dividends payable solely in common stock of Customer)
on, or make any payment on account of, or set apart assets for a sinking or
other analogous fund for, the purchase, redemption, defeasance, retirement
or other acquisition of, any shares of any class of capital stock of
Customer or any warrants, options or rights to purchase any such capital
stock, whether now or hereafter outstanding, or make any other distribution
in respect thereof, either directly or indirectly, whether in cash or
property or in obligations of Customer; or (ii) make any optional payment
or prepayment on or redemption (including, without limitation, by making
payments to a sinking or analogous fund) or repurchase of any Indebtedness
(other than the Obligations). Notwithstanding the above restrictions,
Customer shall not be restricted from declaring or paying any cash
dividends to its stockholders, provided that immediately after giving
effect to such action, no Default would exist.
8.6 Investments. The Customer will not, directly or indirectly, make,
maintain or acquire any Investment in any Person other than:
(A) interest bearing deposit accounts (including certificates of
deposit) which are insured by the Federal Deposit Insurance Corporation
("FDIC") or a similar federal insurance program;
(B) direct obligations of the government of the United States of
America or any agency or instrumentality thereof or obligations guaranteed
as to principal and interest by the United States of America or any agency
thereof;
(C) stock or obligations issued to Customer in settlement of claims
against others by reason of an event of bankruptcy or a composition or the
readjustment of debt or a reorganization of any debtor of Customer;
(D) commercial paper of any corporation organized under the laws of
any State of the United States or any bank organized or licensed to conduct
a banking business under the laws of the United States or any State thereof
having the short-term highest rating then given by Moody's Investor's
Services, Inc. or Standard & Poor's Corporation;
(E) funds invested by First Union National Bank pursuant to its sweep
investment service agreement with Customer; and
(F) investments which at any one time outstanding do not exceed in the
aggregate Five Hundred Thousand Dollars ($500,000).
8.7 Affiliate/Subsidiary Transactions. The Customer will not, directly
or indirectly, enter into any transaction with IE, any Affiliate or
Subsidiary, including, without limitation, the purchase, sale or exchange
of property or the rendering of any service to IE, any Affiliate or
Subsidiary of Customer except in the ordinary course of business and
pursuant to the reasonable requirements of Customer's business upon fair
and reasonable terms no less favorable to Customer than could be obtained
in a comparable arm's-length transaction with an unaffiliated Person.
8.8 ERISA. The Customer will not (A) terminate any Plan so as to incur a
material liability to the PBGC, (B) permit any "prohibited transaction"
involving any Plan (other than a "multi-employer benefit plan") which would
subject the Customer to a material tax or penalty on "prohibited
transactions" under the Code or ERISA, (C) fail to pay to any Plan any
contribution which they are obligated to pay under the terms of such Plan,
if such failure would result in a material "accumulated funding
deficiency", whether or not waived, (D) allow or suffer to exist any
occurrence and during the continuance of a "reportable event" or any other
event or condition, which presents a material risk of termination by the
PBGC of any Plan (other than a "multi-employer benefit plan"), or (E) fail
to notify IBM Credit as required in Section 7.5. As used in this
Agreement, the terms "accumulated funding deficiency" and "reportable
event" shall have the respective meanings assigned to them in ERISA, and
the term "prohibited transaction" shall have the meaning assigned to it in
the Code and ERISA. For purposes of this Section 8.8, the terms material
liability, tax, penalty, accumulated funding deficiency and risk of
termination shall mean a liability, tax, penalty, accumulated funding
deficiency or risk of termination which could reasonably be expected to
have a Material Adverse Effect.
8.9 Additional Negative Pledges. Customer will not, directly or
indirectly, create or otherwise cause or permit to exist or become
effective any contractual obligation which may restrict or inhibit IBM
Credit's rights or ability to sell or otherwise dispose of the Collateral
or any part thereof after the occurrence and during the continuance of an
Event of Default.
8.10 Use of Proceeds. The Customer shall not use any portion of the
proceeds of any Advances other than for its general working capital
requirements.
8.11 Accounts. The Customer shall not permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or
nature with respect to any Account, including any of the terms relating
thereto, which would affect IBM Credit's ability to collect payment on any
Account in whole or in part, except for such extensions, compromises or
settlements made by Customer in the ordinary course of its business,
provided, however, that the aggregate amount of such extensions,
compromises or settlements does not exceed five percent (5%) of the
Customer's Accounts at any time.
8.12 Indebtedness. The Customer will not create, incur, assume or permit
to exist any Indebtedness, except for Permitted Indebtedness.
8.13 Loans. The Customer will not make any loans, advances, contributions
or payments of money or goods to IE, any Subsidiary, Affiliate or parent
corporation other than another Customer, or to any officer, director or
stockholder of Customer or of any such corporation (except for compensation
for personal services actually rendered), except for transactions expressly
authorized in this Agreement.
Section 9. DEFAULT
9.1 Event of Default. Any one or more of the following events shall
constitute an Event of Default by the Customer under this Agreement and the
Other Documents:
(A) The failure to make timely payment of the Obligations or any part
thereof when due and payable;
(B) Customer fails to comply with or observe any term, covenant or
agreement contained in this Agreement or any of the Other Documents;
(C) Any representation, warranty, statement, report or certificate
made or delivered by or on behalf of Customer or any of its officers,
employees or agents or by or on behalf of any guarantor to IBM Credit was
false in any material respect at the time when made or deemed made;
(D) The occurrence of any event or circumstance which could reasonably
be expected to have a Material Adverse Effect;
(E) Customer, any Subsidiary or any guarantor shall generally not pay
its debts as such debts become due, become or otherwise declare itself
insolvent, file a voluntary petition for bankruptcy protection, have filed
against it any involuntary bankruptcy petition, cease to do business as a
going concern, make any assignment for the benefit of creditors, or a
custodian, receiver, trustee, liquidator, administrator or person with
similar powers shall be appointed for Customer, any Subsidiary or any
guarantor or any of its respective properties or have any of its respective
properties seized or attached, or take any action to authorize, or for the
purpose of effectuating, the foregoing, provided, however, that Customer,
any Subsidiary or any guarantor shall have a period of forty-five (45) days
within which to discharge any involuntary petition for bankruptcy or
similar proceeding;
(F) The use of any funds borrowed from IBM Credit under this Agreement
for any purpose other than as provided in this Agreement;
(G) The entry of any judgment against Customer or any guarantor in an
amount in excess of Five Hundred Thousand Dollars ($500,000) and such
judgment is not satisfied, dismissed, stayed or superseded by bond within
thirty (30) days after the day of entry thereof (and in the event of a stay
or supersedeas bond, such judgment is not discharged within thirty (30)
days after termination of any such stay or bond) or such judgment is not
fully covered by insurance as to which the insurance company has
acknowledged its obligation to pay such judgment in full;
(H) The dissolution or liquidation of Customer or any guarantor, or
Customer or any guarantor or its directors or stockholders shall take any
action to dissolve or liquidate Customer or any guarantor;
(I) Any "going concern" or like qualification or exception, or
qualification arising out of the scope of a final audit by an Auditor of
his opinion relative to any Financial Statement delivered to IBM Credit
under this Agreement;
(J) There issues a warrant of distress for any rent or taxes with
respect to any premises occupied by Customer in or upon which the
Collateral, or any part thereof, may at any time be situated and such
warrant shall continue for a period of ten (10) Business Days from the date
such warrant is issued;
(K) Customer suspends business;
(L) The occurrence of any event or condition which causes the holder
of
any Indebtedness arising in one or more related or unrelated transactions,
in aggregate principal amount exceeding Five Hundred Thousand Dollars
($500,000) to accelerate the maturity thereof;
(M) Any guaranty of any or all of the Customer's Obligations executed
by any guarantor in favor of IBM Credit, shall at any time for any reason
cease to be in full force and effect or shall be declared to be null and
void by a court of competent jurisdiction or the validity or enforceability
thereof shall be contested or denied by any such guarantor, or any such
guarantor shall deny that it has any further liability or obligation
thereunder or any such guarantor shall fail to comply with or observe any
of the terms, provisions or conditions contained in any such guaranty
relating to (i) payment of any amounts due and payable by such guarantor
following demand therefor by IBM Credit under the terms of the Guaranty; or
(ii) the unauthorized transfer of any asset of Customer to such guarantor;
provided, however, that it shall not be an Event of Default if any such
guaranty executed by any guarantor other than Intelligent Electronics, Inc.
ceases to be in full force and effect due to the merger, sale or other
disposition or dissolution or insolvency of any such guarantor.
(N) Customer is in default under the material terms of any of the
Other Documents after the expiration of any applicable cure periods;
(O) There shall occur a "reportable event" with respect to any Plan,
or any Plan shall be subject to termination proceedings (whether voluntary
or involuntary) and there shall result from such "reportable event" or
termination proceedings a liability of Customer to the PBGC which in the
reasonable opinion of IBM Credit will have a Material Adverse Effect;
(P) Any "person" (as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) acquires a beneficial interest in 50% or
more of the Voting Stock of Customer.
9.2 Acceleration. Upon the occurrence and during the continuance of an
Event of Default which has not been waived in writing by IBM Credit, IBM
Credit may, in its sole discretion, take any or all of the following
actions, without prejudice to any other rights it may have at law or under
this Agreement to enforce its claims against the Customer: (a) declare all
Obligations to be immediately due and payable (except with respect to any
Event of Default set forth in Section 9.1(E) hereof, in which case all
Obligations shall automatically become immediately due and payable without
the necessity of any notice or other demand) without presentment, demand,
protest or any other action or obligation of IBM Credit; and
(b) immediately terminate the Credit Line hereunder.
9.3 Remedies. (A) Upon the occurrence and during the continuance of
any Event of Default which has not been waived in writing by IBM Credit,
IBM Credit may exercise all rights and remedies of a secured party under
the U.C.C. Without limiting the generality of the foregoing, IBM Credit
may: (i) remove from any premises where same may be located any and all
documents, instruments, files and records (including the copying of any
computer records), and any receptacles or cabinets containing same,
relating to the Accounts, or IBM Credit may use (at the expense of the
Customer) such of the supplies or space of the Customer at Customer's place
of business or otherwise, as may be necessary to properly administer and
control the Accounts or the handling of collections and realizations
thereon; (ii) bring suit, in the name of the Customer or IBM Credit and
generally shall have all other rights respecting said Accounts, including
without limitation the right to accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Customer or IBM Credit; (iii)
sell, assign and deliver the Accounts and any returned, reclaimed or
repossessed merchandise, with or without advertisement, at public or
private sale, for cash, on credit or otherwise, at IBM Credit's sole option
and discretion, and IBM Credit may bid or become a purchaser at any such
sale; and (iv) foreclose the security interests created pursuant to this
Agreement by any available judicial procedure, or to take possession of any
or all of the Collateral without judicial process and to enter any premises
where any Collateral may be located for the purpose of taking possession of
or removing the same.
(B) Upon the occurrence and during the continuance of any Event of
Default which has not been waived in writing by IBM Credit, IBM Credit
shall have the right to sell, lease, or otherwise dispose of all or any
part of the Collateral, whether in its then condition or after further
preparation or processing, in the name of Customer or IBM Credit, or in the
name of such other party as IBM Credit may designate, either at public or
private sale or at any broker's board, in lots or in bulk, for cash or for
credit, with or without warranties or representations, and upon such other
terms and conditions as IBM Credit in its sole discretion may deem
advisable, and IBM Credit shall have the right to purchase at any such
sale. If IBM Credit, in its sole discretion determines that any of the
Collateral requires rebuilding, repairing, maintenance or preparation, IBM
Credit shall have the right, at its option, to do such of the aforesaid as
it deems necessary for the purpose of putting such Collateral in such
saleable form as IBM Credit shall deem appropriate. The Customer hereby
agrees that any disposition by IBM Credit of any Collateral pursuant to and
in accordance with the terms of a repurchase agreement between IBM Credit
and the manufacturer or any supplier of such Collateral constitutes a
commercially reasonable sale. The Customer agrees, at the request of IBM
Credit, to assemble the Collateral and to make it available to IBM Credit
at places which IBM Credit shall select, whether at the premises of the
Customer or elsewhere, and to make available to IBM Credit the premises and
facilities of the Customer for the purpose of IBM Credit's taking
possession of, removing or putting such Collateral in saleable form. If
notice of intended disposition of any Collateral is required by law, it is
agreed that ten (10) Business Days notice shall constitute reasonable
notification.
(C) Unless expressly prohibited by the licensor thereof, if any, IBM
Credit is hereby granted, upon the occurrence and during the continuance of
any Event of Default which has not been waived in writing by IBM Credit, an
irrevocable, non-exclusive license to use, assign, license or sublicense
all computer software programs, data bases, processes and materials used by
the Customer in its businesses or in connection with any of the Collateral.
(D) The net cash proceeds resulting from IBM Credit's exercise of any
of the foregoing rights (after deducting all charges, costs and expenses,
including reasonable attorneys' fees) shall be applied by IBM Credit to the
payment of Customer's Obligations, whether due or to become due, in such
order as IBM Credit may in it sole discretion elect. Customer shall remain
liable to IBM Credit for any deficiencies, and IBM Credit in turn agrees to
remit to Customer or its successors or assigns, any surplus resulting
therefrom.
(E) The enumeration of the foregoing rights is not intended to be
exhaustive and the exercise of any right shall not preclude the exercise
of any other rights, all of which shall be cumulative.
9.4 Waiver. If IBM Credit seeks to take possession of any of the
Collateral by any court process Customer hereby irrevocably waives to the
extent permitted by applicable law any bonds, surety and security relating
thereto required by any statute, court rule or otherwise as an incident to
such possession and any demand for possession of the Collateral prior to
the commencement of any suit or action to recover possession thereof. In
addition, Customer waives to the extent permitted by applicable law all
rights of set-off it may have against IBM Credit. Customer further waives
to the extent permitted by applicable law presentment, demand and protest,
and notices of non-payment, non-performance, any right of contribution,
dishonor, and any other demands, and notices required by law.
Section 10. MISCELLANEOUS
10.1 Term; Termination. (A) This Agreement shall remain in force
until the earlier of (i) the Termination Date, (ii) the date specified in a
written notice by the Customer that they intend to terminate this Agreement
which date shall be no less than thirty (30) days following the receipt by
IBM Credit of such written notice, and (iii) termination by IBM Credit
after the occurrence and during the continuance of an Event of Default.
Upon the date that this Agreement is terminated, all of Customer's
Obligations shall be immediately due and payable in their entirety, even if
they are not yet due under their terms.
(B) Until the indefeasible payment in full of all of Customer's
Obligations, no termination of this Agreement or any of the Other
Agreements shall in any way affect or impair (i) the Customer's Obligations
to IBM Credit, including, without limitation, any transaction or event
occurring prior to such termination, and (ii) IBM Credit's rights
hereunder, including, without limitation, IBM Credit's security interest in
the Collateral.
10.2 Indemnification. The Customer hereby agrees to indemnify and hold
harmless IBM Credit and each of its officers, directors, agents and assigns
(collectively, the "Indemnified Persons") against all losses, claims,
damages, liabilities or other expenses (including reasonable attorneys'
fees and court costs now or hereinafter arising from the enforcement of
this Agreement, the "Losses") to which any of them may become subject
insofar as such Losses arise out of or are based upon any event,
circumstance or condition (a) occurring or existing on or before the date
of this Agreement relating to any financing arrangements IBM Credit may
from time to time have with (i) Customer, (ii) any Person that shall be
acquired by Customer or (iii) any Person that Customer may acquire all or
substantially all of the assets of, or (b) directly or indirectly, relating
to the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby or thereby or to any
of the Collateral or to any act or omission of the Customer in connection
therewith. Notwithstanding the foregoing, the Customer shall not be
obligated to indemnify IBM Credit for any Losses incurred by IBM Credit
which are a result of IBM Credit's gross negligence or willful misconduct.
The indemnity provided herein shall survive the termination of this
Agreement.
10.3 Additional Obligations. IBM Credit, without waiving or releasing
any Obligation or Default of the Customer, may perform any Obligations of
the Customer that the Customer shall fail or refuse to perform and IBM
Credit may, at any time or times hereafter, but shall be under no
obligation so to do, pay, acquire or accept any assignment of any security
interest, lien, encumbrance or claim against the Collateral asserted by any
person. All sums paid by IBM Credit in performing in satisfaction or on
account of the foregoing and any expenses, including reasonable attorney's
fees, court costs, and other charges relating thereto, shall be a part of
the Obligations, payable on demand and secured by the Collateral.
10.4 LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER
INDEMNIFIED PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH
THIS AGREEMENT, ANY OTHER DOCUMENTS OR ANY CLAIMS IN ANY MANNER RELATED
THERETO. NOR SHALL IBM CREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY
LIABILITY TO CUSTOMER OR ANY OTHER PERSON FOR ANY ACTION TAKEN OR OMITTED
TO BE TAKEN BY IT OR THEM HEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.
10.5 Alteration/Waiver. This Agreement and the Other Documents may not
be altered or amended except by an agreement in writing signed by the
Customer and by IBM Credit. No delay or omission of IBM Credit to exercise
any right or remedy hereunder, whether before or after the occurrence of
any Event of Default, shall impair any such right or remedy or shall
operate as a waiver thereof or as a waiver of any such Event of Default.
In the event that IBM Credit at any time or from time to time dispenses
with any one or more of the requirements specified in this Agreement or any
of the Other Documents, such dispensation may be revoked by IBM Credit at
any time and shall not be deemed to constitute a waiver of any such
requirement subsequent thereto. IBM Credit's failure at any time or times
to require strict compliance and performance by the Customer of any
undertakings, agreements, covenants, warranties and representations of this
Agreement or any of the Other Documents shall not waive, affect or diminish
any right of IBM Credit thereafter to demand strict compliance and
performance thereof. Any waiver by IBM Credit of any Default by the
Customer under this Agreement or any of the Other Documents shall not waive
or affect any other Default by the Customer under this Agreement or any of
the Other Documents, whether such Default is prior or subsequent to such
other Default and whether of the same or a different type. None of the
undertakings, agreements, warranties, covenants, and representations of the
Customer contained in this Agreement or the Other Documents and no Default
by the Customer shall be deemed waived by IBM Credit unless such waiver is
in writing signed by an authorized representative of IBM Credit.
10.6 Severability. If any provision of this Agreement or the Other
Documents or the application thereof to any Person or circumstance is held
invalid or unenforceable, the remainder of this Agreement and the Other
Documents and the application of such provision to other Persons or
circumstances will not be affected thereby, the provisions of this
Agreement and the Other Documents being severable in any such instance.
10.7 One Loan. All Advances heretofore, now or at any time or times
hereafter made by IBM Credit to the Customer under this Agreement or the
Other Documents shall constitute one loan secured by IBM Credit's security
interests in the Collateral and by all other security interests, liens and
encumbrances heretofore, now or from time to time hereafter granted by the
Customer to IBM Credit or any assignor of IBM Credit.
10.8 Additional Collateral. All monies, reserves and proceeds received
or collected by IBM Credit with respect to Accounts and other property of
the Customer in possession of IBM Credit at any time or times hereafter are
hereby pledged by Customer to IBM Credit as security for the payment of
Customer's Obligations and shall be applied promptly by IBM Credit on
account of the Customer's Obligations; provided, however, IBM Credit may
release to the Customer such portions of such monies, reserves and proceeds
as IBM Credit may from time to time determine, in its sole discretion.
10.9 No Merger or Novations. (A) Notwithstanding anything contained in
any document to the contrary, it is understood and agreed by the Customer
and IBM Credit that the claims of IBM Credit arising hereunder and existing
as of the date hereof constitute continuing claims arising out of the
Obligations of Customer under the Financing Agreement and any Other
Agreement. Customer acknowledges and agrees that such Obligations
outstanding as of the date hereof have not been satisfied or discharged and
that this Agreement is not intended to effect a novation of the Customer's
Obligations under the Financing Agreement or any of the Other Documents.
(B) Neither the obtaining of any judgment nor the exercise of any
power of seizure or sale shall operate to extinguish the Obligations of the
Customer to IBM Credit secured by this Agreement and shall not operate as a
merger of any covenant in this Agreement, and the acceptance of any payment
or alternate security shall not constitute or create a novation and the
obtaining of a judgment or judgments under a covenant herein contained
shall not operate as a merger of that covenant or affect IBM Credit's
rights under this Agreement.
10.10 Paragraph Titles. The Section titles used in this Agreement and the
Other Documents are for convenience only and do not define or limit the
contents of any Section.
10.11 Binding Effect; Assignment. This Agreement and the Other Documents
shall be binding upon and inure to the benefit of IBM Credit and the
Customer and their respective successors and assigns; provided, that the
Customer shall have no right to assign this Agreement or any of the Other
Documents without the prior written consent of IBM Credit.
10.12 Notices. Except as otherwise expressly provided in this Agreement,
any notice required or desired to be served, given or delivered hereunder
shall be in writing, and shall be deemed to have been validly served, given
or delivered (A) upon receipt if deposited in the United States mails,
first class mail, with proper postage prepaid, (B) upon receipt of
confirmation or answerback if sent by telecopy, or other similar facsimile
transmission, (C) one Business Day after deposit with a reputable overnight
courier with all charges prepaid, or (D) when delivered, if hand-delivered
by messenger, all of which shall be properly addressed to the party to be
notified and sent to the address or number indicated as follows:
If to IBM Credit at:
IBM Credit Corporation
2707 W. Butterfield Road
Oak Brook, IL 60521
Attention: Remarketer Finance Center Manager
Telecopy: (708) 573-7510
If to Customer at:
XLConnect Solutions, Inc.
411 Eagleview Boulevard
Exton, PA 19341
Attention: Stephanie Cohen
Telecopy: (610) 458-0599
with a copy to John E. Royer, Jr., Esq.
at Customer address shown above.
or to such other address or number as each party designates to the other in
the manner prescribed herein.
10.13 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, with the same effect as
if the signatures thereto were upon the same instrument.
10.14 SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE
IBM CREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, THE CUSTOMER
HEREBY IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND ANY OTHER AGREEMENT, OR FOR THE RECOGNITION
AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE
GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL
DISTRICT COURT IN NEW YORK.
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO
THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH
ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO
PLEAD OR CLAIM THE SAME.
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL
(OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO CUSTOMER
AT ITS ADDRESS SET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH
IBM CREDIT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO;
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION.
(E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT AND THE OTHER DOCUMENTS SHALL BE GOVERNED BY THE LAWS (WITHOUT
GIVING EFFECT TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW YORK.
10.15 JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBY
IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
(INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE
CUSTOMER ARE PARTIES AS TO ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT
OF THIS AGREEMENT OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN
CONNECTION HEREWITH.
IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has
caused its authorized representatives to execute this Agreement and has
caused its corporate seal to be affixed hereto as of the date first written
above.
IBM CREDIT CORPORATION, XLCONNECT SYSTEMS, INC.
a Delaware corporation a Pennsylvania corporation
By: /s/ Paul M. Lieba By: /s/ Stephanie D. Cohen
------------------------- -----------------------------
Print Name: Paul M. Lieba Print Name: Stephanie D. Cohen
Title: Credit Manager Title: EVP and Chief Financial Officer
XLCONNECT SOLUTIONS, INC. XLCONNECT SERVICES, INC.
a Pennsylvania corporation a Pennsylvania corporation
By: /s/ Stephanie D. Cohen By: /s/ Stephanie D. Cohen
- ----------------------------- ------------------------------
Print Name: Stephanie D. Cohen Print Name: Stephanie D. Cohen
Title: EVP and Chief Financial Officer Title: EVP and Chief Financial Officer
Exhibit 10.12
XLCONNECT MICROSOFT SERVICES PRACTICE AGREEMENT
THIS MICROSOFT SERVICES PRACTICE AGREEMENT (the "Agreement"),
dated as of February 28, 1997 ("Effective Date"), is executed by and
between XLConnect Solutions, Inc., a Pennsylvania corporation
("XLConnect"), and Microsoft Corporation, a Washington corporation
("Microsoft"). XLConnect and Microsoft are referred to herein collectively
as the "parties" and individually as a "party."
WHEREAS, Microsoft has agreed, subject to certain conditions, to
loan XLConnect funds to develop and support a deployed systems integration
and services business providing consulting, integration and support
services for Microsoft BackOffice products and other Microsoft server
software products (the "Business"), for the purpose of making such services
available to customers in the United States.
WHEREAS, Microsoft has required, as a condition to loaning such
funds to XLConnect, that XLConnect execute and deliver this Agreement and
the other documents and instruments contemplated hereby.
NOW, THEREFORE, for and in consideration of the foregoing and for
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, XLConnect and Microsoft hereby agree as follows:
1. Funding by Microsoft
(a) Loan Commitment. Subject to the terms and conditions of this
Agreement, Microsoft agrees to loan XLConnect up to * less the Warrant
Purchase Price (as defined in Section 1(d)) (the " Loan"). The Loan may be
drawn by XLConnect in up to four installments. Up to * (the "First
Traunch") shall be available to be drawn on or after the Effective Date and
prior to the date which is six (6) months after the Effective Date. Up to
an additional * plus any amount not drawn under the First Traunch (the
"Second Traunch") shall be available to be drawn after the date which is
six (6) months after the Effective Date and on or prior to the date which
is one year after the Effective Date (the "Final Draw Date") if, and only
if, XLConnect shall deliver to Microsoft financial statements of XLConnect
for the period ended June 30, 1997 (the "June Financials") which shall be
prepared in accordance with generally accepted accounting principles
consistently applied (other than the omission of footnotes and routine year
end adjustments) and which, in the reasonable opinion of Microsoft shall
reflect no material adverse change in the business of XLConnect from the
Effective Date and shall indicate income from operations for both the six
months and quarter ended June 30, 1997. Within ten (10) business days of
receipt of the June Financials, Microsoft shall notify XLConnect whether
the conditions for funding the Second Traunch have been satisfied.
Notwithstanding the foregoing, in the event the conditions for funding the
Second Traunch have not been satisfied with respect to the period ended
June 30, 1997, XLConnect shall be entitled to draw under the Second Traunch
up to the Final Draw Date if XLConnect delivers to Microsoft financial
statements of XLConnect for the period ended September 30, 1997 (the
"September Financials") which shall be prepared in accordance with
generally accepted accounting principles consistently applied (other than
the omission of footnotes and routine year end adjustments) and which, in
the reasonable opinion of Microsoft shall reflect no material adverse
change in the business of XLConnect from the Effective Date and shall
indicate income from operations for both the nine months and quarter ended
September 30, 1997. Within ten (10) business days of receipt of the
September Financials, Microsoft shall notify XLConnect whether the
conditions for funding the Second Traunch have been satisfied. In order to
draw funds under the Loan, and as a condition to receipt of such funding,
XLConnect will deliver to Microsoft a duly executed promissory note (each a
"Note" and collectively the "Notes") in the form attached hereto as
Schedule 1(a) representing the full principal amount to be received on such
draw. In the case of the first draw by XLConnect, the Note shall be in a
principal amount equal to the full principal amount to be received on such
draw plus the Warrant Purchase Price. The parties agree that the proceeds
of the Loan (the "Proceeds") shall be used exclusively as set forth in
Section 2.
(b) Principal and Interest Payments on the Loans. Interest on
the aggregate outstanding principal amount under the Notes (the
"Outstanding Principal Amount") shall be paid in arrears on each date for
payment of interest set forth in the next paragraph, and shall be computed
at the Applicable Rate (as defined below), compounded quarterly on the
basis of the actual days elapsed and a year consisting of four quarterly
periods each consisting of 90 days. The "Applicable Rate" shall mean * per
annum for the periods up to and including the eighth Quarterly Date (as
defined below); * per annum for the periods after the eighth Quarterly Date
up to and including the sixteenth Quarterly Date, and * per annum for all
periods following the sixteenth Quarterly Date. The "Quarterly Date" shall
mean each quarterly anniversary of the Effective Date (i.e., each May 28,
August 28, November 28, and February 28).
Interest on the Notes shall be payable in accordance with the
following schedule: on each Quarterly Date up to and including the *
Quarterly Date (*), XLConnect agrees to pay Microsoft all accrued but
unpaid interest through and including such date on the Outstanding
Principal Amount; in addition, on the * Quarterly Date and each Quarterly
Date thereafter up to and including the * Quarterly Date, XLConnect shall
pay Microsoft principal in an amount amortized at the rate of * per
Quarterly Date (not to exceed the Outstanding Principal Amount at any such
date) and on the * Quarterly Date XLConnect shall pay Microsoft any
remaining Outstanding Principal Amount. In addition, the entire
Outstanding Principal Amount and all accrued but unpaid interest thereunder
shall become immediately due and payable in accordance with the provisions
of Sections 2(j) and (k) hereof and as otherwise specified in the Notes.
(c) Cap on Secured Debt; Priority of Loan. As an inducement for
Microsoft to provide the Loan, XLConnect hereby agrees that at all times
while any Outstanding Principal Amount remains unpaid, it will limit its
outstanding debt to Secured Lenders (as defined below) in an amount not to
exceed * of XLConnect's tangible net worth (defined as shareholders' equity
less intangible assets) as reported on XLConnect's balance sheet for the
fiscal quarter (prepared in accordance with generally accepted accounting
principles consistently applied (other than, in the case of interim balance
sheets, the omission of footnotes and normal routine year end adjustments))
completed most recently to the date such determination is made. Microsoft
agrees to consider in good faith any request by XLConnect to exceed the
limitation set forth in the previous sentence but Microsoft shall be under
no obligation to consent to any such excess debt to Secured Lenders.
"Secured Lenders" shall mean all creditors and lenders, other than trade
creditors, which have rights to repayment which are secured by rights to or
a pledge of any assets of XLConnect (including, but not limited to,
tangible and intangible assets and rights to future assets or revenues),
and shall also include commercial lenders who agree to provide unsecured
financing to XLConnect. Subject to the compliance by XLConnect with the
foregoing cap on debt due to Secured Lenders, Microsoft agrees that the
Outstanding Principal Amount shall be subordinate to repayment of any
outstanding debt to Secured Lenders. XLConnect covenants and agrees that
all debt for borrowed money other than debt to Secured Lenders, whether now
in existence or hereafter incurred (collectively, "Subordinated Debt") is
and shall be subordinated in right to repayment to the Loan. Prior to the
incurrence of any Subordinated Debt on or after the Effective Date,
XLConnect shall provide evidence of compliance with the preceding sentence
reasonably satisfactory in form and substance to Microsoft.
(d) Warrant. In connection with the execution of this Agreement,
XLConnect is simultaneously issuing to Microsoft a Common Stock Purchase
Warrant (the "Warrant") for a purchase price of * (the "Warrant Purchase
Price") in accordance with the terms of the Warrant Purchase Agreement
dated the date hereof between Microsoft and XLConnect (the "Warrant
Purchase Agreement," and collectively with the Warrant, the "Warrant
Documents").
2. Agreements of XLConnect and Funding Conditions. For the
term of this Agreement, XLConnect hereby covenants and agrees with
Microsoft:
(a) Use of Proceeds. XLConnect will use the Proceeds
exclusively to (i) recruit and hire employees of the Business (the
"Employees"), (ii) train and equip the Employees, (iii) promote and market
the Business, and (iv) pay direct expenses of the Business.
(b) Business Plan. XLConnect will operate, manage, promote and
market the Business in a manner consistent with the business plan attached
as Schedule 2(b)(i) (the "Business Plan"). XLConnect will use the Proceeds
in accordance with the objectives of the Business Plan. Schedule 2(b)(ii)
lists the specific Microsoft BackOffice products that the Business will
support, such list to be updated periodically by Microsoft.
(c) Hiring. XLConnect will hire no fewer than * Employees. Of
the Employees no fewer than * shall be XLConnect SE's The timing of such
hires is set forth in Schedule 2(c).
(d) SE Retention. As of * and until all Outstanding Principal
Amount and accrued interest under the Notes is fully repaid, XLConnect
will continuously employ in the Business no fewer than * Employees, of
which * are SE's. An Employee shall be counted as an SE from his/her date
of hire; provided however, that he/she shall cease to count as an SE if
he/she fails to acquire the requisite certifications within the time
periods set forth in the following subsection (e). Further, without the
prior written consent of Microsoft (which consent will not be unreasonably
withheld), an Employee shall be counted as an SE only if the Employee is
exclusively dedicated to the Business.
(e) SE Training and Certification. *.
(f) Status Reports. XLConnect shall provide Microsoft within
thirty (30) days following the end of each month a detailed report in an
electronic format mutually acceptable to the parties (a "Status Report"),
consisting of a statement of revenues for the Business and information
relating to the hiring and certification of SEs, including names, date of
hire, salaries, prior certifications, new certifications, area of
deployment, and turnover rates.
(g) Access to XLConnect Information. In addition to the Status
Reports to be provided hereunder, XLConnect will provide Microsoft with
reasonable access to all necessary supporting and other materials relating
to the Business as Microsoft shall reasonably request.
(h) Hiring and Sourcing. *.
(i) Business Product Standardization. All Employees must * in
all activities of the Business, according to the following schedule: *.
(j) Performance. Should XLConnect fail to attain or maintain
the committed levels of Employees or SE's in any quarter, XLConnect shall
submit to Microsoft within fifteen (15) days after the end of such quarter
a written explanation and a detailed plan to rectify such failure. If the
failure is corrected within thirty (30) days after the rectification plan
has been submitted to Microsoft that quarter shall not be considered a
failed quarter. Should XLConnect fail to attain or maintain the committed
levels of Employees, for either (i) two (2) consecutive quarters or (ii)
any three (3) quarters during the term of the Agreement, exclusive in
either case of any rectified quarters, Microsoft's obligation to disburse
additional funding under Section 1(a) shall immediately terminate and the
Outstanding Principal Amount and all accrued but unpaid interest under the
Notes shall become immediately due and payable.
(k) Funding Limitations. Except as otherwise provided by
Section 2(j), if XLConnect does not comply in all material respects with
the covenants and agreements in this Section 2 (subject to any applicable
cure periods set forth in paragraph (l) below), or if XLConnect is in
Default (as defined in the Notes) under the Notes, Microsoft's obligation
to disburse additional funding under Section 1(a) shall immediately
terminate and the Outstanding Principal Amount and all accrued but unpaid
interest under the Notes shall become immediately due and payable. The
covenants and agreements of XLConnect in this Section 2 are for the benefit
of Microsoft, any of which may be waived or modified by Microsoft without
affecting the validity of any other covenant or agreement in this Section 2
or under the Agreement.
(l) Cure Period. Notwithstanding anything to the contrary
herein, in the event Microsoft shall notify XLConnect that XLConnect is not
in compliance in all material respects with any covenant or agreement in
this Section 2 (a "Deficiency") and such Deficiency is subject to cure
within a reasonable period by XLConnect, XLConnect shall not be deemed to
be in default for purposes of paragraph (k) above if XLConnect shall
promptly take steps to cure such Deficiency reasonably acceptable to
Microsoft and shall cure such Deficiency within thirty days (or such longer
period as mutually agreed to by the parties) after receipt of notice
thereof.
3. Representations of XLConnect. XLConnect represents as
follows as of the date of this Agreement and on and as of the date of
delivery of the Note hereunder:
(a) XLConnect has full corporate authority to enter into this
Agreement and to deliver the Notes, the Warrant Documents and each of this
Agreement, the Note and the Warrant Documents does not conflict with or
constitute a breach of the Articles of Incorporation or Bylaws of XLConnect
or any agreement, instrument or document to which XLConnect is a party or
by which XLConnect is bound;
(b) no authorization, approval, or other action by, and no
notice to or filing with, any governmental authority, regulatory body or
third-party is required for the execution, delivery or performance of this
Agreement, the Notes and the Warrant Documents by XLConnect; and
(c) each of this Agreement, the Note and the Warrant Documents is
the legal, valid and binding obligation of XLConnect enforceable against
XLConnect in accordance with its terms, except as rights to indemnity and
contribution may be limited by applicable law and except as the enforcement
hereof or thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or by general equitable principles.
4. Representations of Microsoft. Microsoft represents as follows
as of the date of this Agreement:
(a) Microsoft has full corporate authority to enter into this
Agreement and this Agreement does not conflict with or constitute a breach
of the Articles of Incorporation or Bylaws of Microsoft or any agreement,
instrument or document to which Microsoft is a party or by which Microsoft
is bound;
(b) no authorization, approval, or other action by, and no notice
to or filing with, any governmental authority, regulatory body or third-
party is required for the execution, delivery or performance of this
Agreement by Microsoft; and
(c) each of this Agreement and the Warrant Documents are the
legal, valid and binding obligation of Microsoft enforceable against
Microsoft in accordance with its terms, except as rights to indemnity and
contribution may be limited by applicable law and except as the enforcement
hereof or thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or by general equitable principles.
5. Indemnification. (a) XLConnect agrees to defend, indemnify
and hold harmless Microsoft and its directors, officers, employees and
agents, and any person deemed to control or be under common control with
any such person, from and against all liabilities, costs, damages and
expenses, including reasonable attorneys' fees and court costs, with
respect to any claim arising out of (i) any material breach of this
Agreement by XLConnect or (ii) the Business or any act or omission of an
Employee; provided, that, XLConnect's obligation under this Section 5(a)
shall be relieved if and to the extent that it is determined by a court of
competent jurisdiction that the action or conduct giving rise to such
obligation was attributable to (a) the negligence of Microsoft or any
officer, director or employee of Microsoft or (b) any Microsoft product
infringing any patent, copyright, trade secret, trademark or other third
party intellectual property right.
(b) Microsoft agrees to defend, indemnify and hold harmless
XLConnect and its directors, officers, employees and agents, and any person
deemed to control or be under common control with any such person, from and
against all liabilities, costs, damages and expenses, including reasonable
attorneys' fees and court costs, with respect to any claim arising out of
any material breach of this Agreement by Microsoft; provided, that,
Microsoft's obligation under this Section 5(b) shall be relieved if and to
the extent that it is determined by a court of competent jurisdiction that
the action or conduct giving rise to such obligation was attributable to
(a) the negligence of XLConnect or any officer, director or employee of
XLConnect or (b) any XLConnect product infringing any patent, copyright,
trade secret, trademark or other third party intellectual property right.
(c) Each party shall indemnify the other party with respect to
third-party claims as set forth above provided that: (i) the indemnified
party promptly notifies the other party in writing of the claim; (ii) the
indemnifying party has sole control of the defense and all related
settlement negotiations with respect to the claim, provided, however, that
the indemnified party has the right, but not the obligation, to participate
in the defense of any such claim or action through counsel of its own
choosing; (iii) the indemnified party cooperates fully to the extent
necessary, and executes all documents necessary for the defense of such
claim, and (iv) the indemnified party has the right to approve settlement
of any claim, such approval not to be unreasonably withheld.
(d) XLConnect covenants and agrees to maintain suitable errors
and omissions and general liability insurance providing a reasonably
adequate amount of coverage relating to the Business and the acts and
omissions of the Employees and will name Microsoft as an additional insured
under all such coverage.
6. Confidentiality. Each of Microsoft and XLConnect agrees to
hold in confidence all information disclosed by each party to the other
that the disclosing party considers confidential or proprietary, including
all information regarding the Business and the terms of this Agreement,
other than information which is required by law to be disclosed or which is
or becomes publicly available other than through the other party's
disclosure. The parties agree to use any and all such confidential
information only in accordance with the purposes and intent of this
Agreement. This duty shall survive until three years after the later of (i)
termination or expiration of this Agreement and (ii) repayment of the Loan.
XLConnect shall execute appropriate written agreements with Employees
sufficient to enable it to comply with all the provisions of this
Agreement.
7. Term and Termination. Except as expressly set forth herein,
this Agreement shall terminate upon the earlier to occur of (i) the close
of business on * and (ii) the written agreement of the parties.
Notwithstanding the foregoing, this Agreement may be terminated by one
party in the event that the other party (i) materially breaches this
Agreement and shall not have cured such breach within 60 days of receipt of
a written notice of breach provided by the non-breaching party or (ii)
voluntarily or involuntarily is placed in bankruptcy or receivership,
becomes insolvent, files an assignment for the benefit of creditors or
undertakes any similar action for the benefit of creditors or is otherwise
unable to perform its obligations hereunder. Any termination pursuant to
clause (ii) of the preceding sentence shall be effective upon the
terminating party giving 15 days prior written notice of termination to the
other party. Except as expressly set forth herein, the termination of this
Agreement will not affect the obligations of any party under the Notes or
the Warrant. Upon the termination of this Agreement, each party agrees to
promptly return all confidential information and other materials of the
other party received during the term of or in connection with this
Agreement. Any terms of this Agreement which by their nature extend beyond
termination of the Agreement shall remain in effect until fulfilled and
apply to respective successors and assignees.
8. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns. A party's successors and assigns shall include, without
limitation, a receiver, trustee or debtor in possession of or for such
party. Notwithstanding the foregoing, this Agreement may not be assigned
nor duties delegated, by operation of law or otherwise, by either party
without the express prior written consent of the other party, which shall
not be unreasonably withheld.
9. Applicable Law; Severability. This Agreement shall be
governed by, and construed in accordance with, the internal laws (as
opposed to the conflict of laws provisions) and decisions of the State of
Washington. XLConnect further consents to jurisdiction by the state and
federal courts sitting in the King County, Washington. Process may be
served on either party by U.S. Mail, postage prepaid, certified or
registered, return receipt requested, or by such other method as is
authorized by the long arm statute provisions contained in the Revised Code
of Washington. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable
law, but, if any provision of this Agreement shall be held to be prohibited
or invalid under applicable law, such provision shall be ineffective only
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
10. Notices. All notices and other communications required or
desired to be served, given or delivered hereunder shall be made in writing
and shall be addressed to the party to be notified as follows:
If to Microsoft: Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attn: Deborah Willingham
Vice President, Enterprise Customer Unit
Tel: (206) 882-8080
Fax: (206) 936-7329
Copy to: Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attn: Robert A. Eshelman
Law & Corporate Affairs
Tel: (206) 882-8080
Fax: (206) 936-7329
If to XLConnect XLConnect Solutions Inc.
411 Eagleview Blvd.
Exton, PA 19341
Attn: Timothy Wallace
President and Chief Operating Officer
Tel: (610) 458-6664
Fax: (610) 458-6640
Copy to: XLConnect Solutions Inc.
411 Eagleview Blvd.
Exton, PA 19341
Attn: John Royer
Vice President and General Counsel
Tel: (610) 458-6611
Fax: (610) 458-6690
or, as to each party, at such other address as designated by such party in
a written notice to the other party. All such notices and communications
shall be deemed to be validly served, given or delivered (i) three (3) days
following deposit in the United States mails, with proper postage prepaid;
(ii) upon delivery thereof if delivered by hand to the party to be
notified; or (iii) one (1) day (or the next business day) following
delivery to a reputable overnight delivery service for delivery the next
day (or the next business day, as the case may be).
11. Amendments, Waivers and Consents. Except as expressly set
forth herein, no amendment or waiver of any provision of this Agreement nor
consent to any departure by any party here from, shall in any event be
effective unless the same shall be in writing and signed by the other
party, and then such amendment, waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
12. Section Headings. The section headings herein are for
convenience of reference only, and shall not affect in any way the
iterpretation of any of the provisions hereof.
13. Complete Agreement. This Agreement, including the Schedules
referred to herein, the Notes and the Warrant Documents constitute the
complete and sole agreement between the parties hereto with respect to the
matters covered herein, and supersede and replace all prior
representations, understandings and agreements between the parties.
14. Relationship. The relationship between the parties shall be
solely that of independent contractors, and neither party shall be
authorized to commit the other to any expense or liability, or make any
representation on behalf of the other, and the officers, employees,
servants, agents or other representatives of the parties shall not be
deemed, expressly or by implication, to be the officers, employees,
servants, agents or other representatives of the other party. Under no
circumstances shall the arrangements hereunder result in any partnership,
joint venture or franchise relationship between the parties. XLConnect
shall be solely responsible for the Business and all acts or omissions of
the Employees and for compliance with all laws and regulations applicable
to the Business and employment of the Employees. Microsoft makes no
representations or warranties relating to the Business or the acts or
omissions of the Employees beyond those contained in the product(s)
licenses supplied by Microsoft.
15. Public Announcements. The contents of all press releases or
other public announcements or disclosures (whether voluntary or required by
law, if any) regarding this Agreement and the relationship between the
parties shall be approved in writing by both parties prior to the release
thereof.
16. No Third Party Rights. This Agreement is intended for the
exclusive benefit of the parties and, except as provided in Section 5
hereof, no third party shall have any rights hereunder or be entitled to
enforce any provision hereof.
17. Execution in Counterparts. This Agreement may be executed
in two counterparts, each of which shall be an original, but all of which
shall together shall be deemed to constitute one and the same agreement.
18. Limitation on Liability. Except for breaches of Section 6
and indemnification obligations under Section 5 of this Agreement, to the
maximum extent permitted by applicable law, in no event will either party
be liable to the other party for special, incidental, indirect, punitive or
consequential damages (including, without limitation, damages for loss of
business profits, business interruption, loss of business information, or
any other pecuniary loss), even if a party has been advised of the
possibility of such damages.
19. Removing Employees. XLConnect acknowledges Microsoft's
right to require immediate removal and prompt replacement from the Business
of any Employee, or other XLConnect employee or agent performing
XLConnect's obligations under this Agreement who is convicted of a crime
(other than a misdemeanor or traffic or parking violation) or who engages
in conduct Microsoft reasonably deems to have an adverse impact on either
XLConnect or Microsoft.
[remainder of page intentionally blank]
IN WITNESS WHEREOF, XLConnect and Microsoft have executed this
Services Practice Agreement as of the date first above written.
XLCONNECT SOLUTIONS, INC.
By: /s/ Timothy Wallace
-------------------------------------
Timothy Wallace
President and Chief Operating Officer
MICROSOFT CORPORATION
By: /s/ Gregory B. Maffei
-------------------------------------
Gregory B. Maffei
Vice President, Corporate Development
and Treasurer
* Information omitted and filed separately with the SEC pursuant to
request for confidential treatment under Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
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