As Filed with the Securities and Exchange Commission on August 16, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended June 30, 1999
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: 000-26020
APPLIED DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction
of incorporation or organization)
43-1641533
(IRS Employer
Identification number)
400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
(561) 366-4800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
APPLIED CELLULAR TECHNOLOGY, INC.
(Former Name)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of business on August 12, 1999:
Class Number of Shares
Common Stock; $.001 Par Value 46,449,084
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations -
Three and Six Months ended June 30, 1999 and 1998
(unaudited) 4
Consolidated Statements of Stockholders' Equity -
Six Months ended June 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows -
Six Months ended June 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
3. Quantitative and Qualitative Disclosures About Market Risk 34
PART II - OTHER INFORMATION
1. Legal Proceedings 35
2. Changes In Securities 36
3. Defaults Upon Senior Securities 36
4. Submission of Matters to a Vote of Security Holders 37
5. Other Information 38
6. Exhibits and Reports on Form 8-K 38
SIGNATURE 39
EXHIBITS 40
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Assets
<TABLE>
<CAPTION>
June 30, 1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,575 $ 4,555
Accounts receivable (net of allowance for doubtful accounts
of $1,504 in 1999 and $990 in 1998) 54,202 34,390
Inventories 31,444 20,657
Notes receivable 3,324 3,600
Prepaid expenses and other current assets 3,253 2,042
-------- ---------
Total Current Assets 97,798 65,244
Property And Equipment, Net 18,709 15,627
Notes Receivable 920 1,445
Goodwill, Net 78,255 33,430
Other Assets 11,939 8,370
--------- ---------
$ 207,621 $ 124,116
========= =========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities
Notes payable $ 17,814 $ 23,217
Current maturities of long-term debt 9,195 1,158
Due to shareholders of acquired subsidiary 15,000 --
Accounts payable and accrued expenses 37,304 26,382
--------- ---------
Total Current Liabilities 79,313 50,757
Long-Term Debt 34,404 2,838
--------- ---------
Total Liabilities 113,717 53,595
--------- ---------
Minority Interest 9,275 2,961
--------- ---------
Stockholders' Equity
Preferred shares:
Authorized 5,000 shares of $10 par value; special voting,
issued and outstanding 1 share, Class B voting, issued
and outstanding 1 share -- --
Common shares:
Authorized 80,000 shares of $.001 par value; issued 46,078
shares and outstanding 45,972 shares in 1999 and issued
35,683 shares and outstanding 35,577 shares in 1998 46 36
Common and preferred additional paid-in capital 79,119 60,517
Retained earnings 5,928 7,232
Treasury stock (carried at cost, 106 shares) (337) (337)
Accumulated other comprehensive income (127) 112
--------- ---------
Total Stockholders' Equity 84,629 67,560
--------- ---------
$ 207,621 $ 124,116
========= =========
</TABLE>
See the accompanying notes to consolidated financial statements.
3
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
---------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $72,955 $53,680 $124,528 $92,464
Cost Of Goods Sold 46,672 36,072 79,782 64,299
------- ------- -------- -------
Gross Profit 26,283 17,608 44,746 28,165
------- ------- -------- -------
Operating Costs And Expenses
Selling, general and administrative
expenses 21,724 12,333 37,816 20,840
Depreciation and amortization 2,275 1,092 3,761 1,787
Restructuring and unusual costs -- -- 2,550 --
------- ------- -------- -------
Total Operating Costs And Expenses 23,999 13,425 44,127 22,627
------- ------- -------- -------
Operating Income 2,284 4,183 619 5,538
Interest Income 144 113 278 219
Interest Expense (690) (432) (1,135) (666)
------- ------- -------- -------
Income (Loss) Before Provision For Income Taxes,
Minority Interest And Extraordinary Loss 1,738 3,864 (238) 5,091
Provision For Income Taxes 1,017 1,224 442 1,742
------- ------- -------- -------
Income (Loss) Before Minority Interest And
Extraordinary Loss 721 2,640 (680) 3,349
Minority Interest 220 275 464 369
------- ------- -------- ------
Income (Loss) Before Extraordinary Loss 501 2,365 (1,144) 2,980
Extraordinary Loss (net of taxes of $89) 160 -- 160 --
------- ------- -------- -------
Net Income 341 2,365 (1,304) 2,980
Preferred Stock Dividends -- 14 -- 32
------- ------- -------- -------
Net Income (Loss) Available to Common
Stockholders $ 341 $ 2,351 $ (1,304) $ 2,948
======= ======= ======== =======
Income (Loss) Before Extraordinary Loss $ .01 $ .07 $ (.03) $ .11
Extraordinary Loss -- -- -- --
------- ------- -------- -------
Net Income (Loss) Per Common Share - Basic $ .01 $ .07 $ (.03) $ .11
======= ======= ======== =======
Income (Loss) Before Extraordinary Loss $ .01 $ .07 $ (.03) $ .10
Extraordinary Loss -- -- -- --
------- ------- -------- -------
Net Income (Loss) Per Common Share - Diluted $ .01 $ .07 $ (.03) $ .10
------- ------- -------- -------
Weighted Average Number Of
Common Shares Outstanding - Basic 46,325 31,761 45,347 27,759
Weighted Average Number of Common
Shares Outstanding - Diluted 46,829 32,928 45,989 29,053
------- ------- -------- -------
</TABLE>
See the accompanying notes to consolidated financial statements.
4
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six Month Periods Ended June 30, 1999 And 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Shares Common Shares Other Total
---------------- -------------- Additional Retained Tresaury Comprehensive Stockholders'
Number Amount Number Amount Paid-In Earnings Stock Income Equity
------- ------ ------ ------ ---------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 -- $ -- 20,672 $ 21 $33,680 $ 2,586 $ -- $ (2) $ 36,285
------- ------ ------ ------ ------- ------- ------ ------ ---------
Net income -- -- -- -- -- 2,980 -- -- 2,980
Comprehensive income -
foreign currency translation -- -- -- -- -- -- -- 75 75
unrealized gain on securities -- -- -- -- -- -- -- 14 14
------- ------ ------ ------ ------- ------- ------ ------ ---------
Total Comprehensive Income -- -- -- -- -- 2,980 -- 89 3,069
Issuance of common shares -- -- 9,629 9 15,666 -- -- -- 15,675
Issuance of preferred shares -- -- -- -- 7,825 -- -- -- 7,825
Warrants redeemed -- -- 850 1 1,949 -- -- -- 1,950
Preferred shares dividends paid -- -- -- -- -- (32) -- -- (32)
------- ------ ------ ------ ------- ------- ------ ------ ---------
Balance - June 30, 1998 -- $ -- 31,151 $ 31 $59,120 $ 5,534 $ -- $ 87 $ 64,772
======= ====== ====== ====== ======= ======= ====== ====== =========
Balance - January 1, 1999 -- $ -- 35,577 $ 36 $60,517 $ 7,232 $(337) $ 112 $ 67,560
------- ------ ------ ------ ------- ------- ------ ------ ---------
Net loss -- -- -- -- -- (1,304) -- -- (1,304)
Comprehensive income - --
foreign currency translation -- -- -- -- -- -- -- (241) (241)
unrealized gain on securities -- -- -- -- -- -- -- 2 2
------- ------ ------ ------ ------- ------- ------ ------ ---------
Total Comprehensive Income -- -- -- -- -- (1,304) -- (239) (1,543)
Issuance of common shares -- -- 5 -- 16 -- -- -- 16
Issuance of common shares
for acquisition -- -- 10,390 10 18,586 -- -- -- 18,596
------- ------ ------ ------ ------- ------- ------ ------ ---------
Balance - June 30, 1999 -- $ -- 45,972 $ 46 $79,119 $ 5,928 $(337) $(127) $ 84,629
======= ====== ====== ====== ======= ======= ====== ====== =========
</TABLE>
See the accompanying notes to consolidated financial statements.
5
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $(1,304) $2,980
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 3,761 1,787
Minority interest 464 369
Loss on sale of equipment 59 73
Non-cash on restructuring cost 251 --
Change in assets and liabilities:
(Increase) in accounts receivable (4,781) (3,012)
(Increase) in inventories (5,809) (1,842)
(Increase) in prepaid expenses (277) (1,142)
(Increase) in deferred tax asset -- (38)
Increase (decrease) in accounts payable and accrued
expenses 4,776 (45)
------- -------
Net Cash Used In Operating Activities (2,860) (870)
------- -------
Cash Flows From Investing Activities
Increase in notes receivable - officers (34) (276)
(Increase) in other assets (1,081) (1,359)
Proceeds from sale of property and equipment 90 111
Payments for property and equipment (2,586) (1,933)
Proceeds from (payments for) asset and business
acquisitions (net of cash balances acquired) (15,838) 639
------- -------
Net Cash Used In Investing Activities (19,449) (2,818)
------- -------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable (11,119) 481
Proceeds from long-term debt 44,765 891
Payments on long-term debt (7,252) (2,115)
Redemption of preferred shares -- (200)
Preferred stock dividends paid -- (72)
Issuance of common shares -- 2,350
Other financing costs (3,065) --
------- -------
Net Cash Provided By Financing Activities 23,329 1,335
------- -------
Net Increase (Decrease) In Cash And Cash Equivalents 1,020 (2,353)
Cash And Cash Equivalents - Beginning Of Period 4,555 7,657
------- -------
Cash And Cash Equivalents - End Of Period $ 5,575 $5,304
======= ======
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 483 $1,479
Interest paid 1,275 587
Noncash investing and financing activities:
Assets acquired for long-term debt 633 508
Due to shareholders of acquired subsidiary 15,000 --
------- -------
See the accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Applied
Digital Solutions, Inc. (formerly Applied Cellular Technology, Inc.) (the
"Company") as of June 30, 1999 and December 31, 1998 and for the three and six
months ended June 30, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities Exchange Act of 1934. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Copmpany's management,
all adjustments (consisting of only normal recurring adjustments) considered
necessary to present fairly the consolidated financial statements have been
made.
The consolidated statement of operations for the three and six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year. These statements should be read in conjunction
with the consolidated financial statements and related notes thereto included in
our Annual Report on Form 10-K for the year ended December 31, 1998.
2. Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly owned and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. Inventory
Inventory at June 30, 1999 and December 31, 1998 consists of:
June 30, December 31,
1999 1998
---------------- -----------------
Raw materials $ 4,033 $ 4,437
Work in process 2,742 2,349
Finished goods 25,633 15,246
---------------- -----------------
32,408 22,032
Allowance for warranty, excess (964) (1,375)
and obsolescence ================ =================
$31,444 $ 20,657
================ =================
4. Financing Agreements
In August, 1998, the Company entered into a $20 million line of credit
with State Street Bank and Trust Company secured by all of our domestic assets
at the prime lending rate or at the London Interbank Offered Rate, at our
discretion. In February 1999, the amount of the credit available under the
facility was increased to $23 million.
7
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
On May 25, 1999, the Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation (the "IBM Agreement"). On May 26, 1999,
the Company repaid the amount due to State Street Bank and Trust Company. The
Term and Revolving Credit Agreement provides for:
(a) a revolving credit line of up to $33.5 million, designated
as follows: (i) a USA revolving credit line of up to $22
million, (ii) a Canadian revolving credit line of up to $8.5
million, and (iii) a United Kingdom revolving credit line of
up to $3 million.
(b) a term loan A of up $22 million.
(c) a term loan B of up to $35 million, and
(d) a term loan C designated in Canadian dollars of up to
CND$6.645 million (See Note 11).
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes. The USA
revolving credit line bears interest at the 30-day LIBOR rate plus 1.75%; the
Canadian revolving credit line bears interest at the base rate as announced by
the Toronto-Dominion Bank of Canada each month plus 0.1707%; the UK revolving
credit line bears interest at the base rate as announced by the National
Westminster Bank PLC of England each month plus 1.4207%. As of June 30, 1999,
the LIBOR rate was approximately 4.9% and approximately $9.8 million was
outstanding on the revolving credit line.
Term loan A, which was used to pay off State Street Bank and Trust
Company, bears interest at the 30-day LIBOR rate plus 1.75%, will be amortized
in quarterly installments over six years and is repayable in full on the third
anniversary of the closing date of the loan. As of June 30, 1999, approximately
$22.0 million was outstanding on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75%, will be amortized in quarterly installments over
six years and is repayable in full on the third anniversary of the closing date
of the loan. As of June 30, 1999, approximately $15.8 million was outstanding on
this loan.
Term loan C, which will be used by our Canadian subsidiaries to repay
their outstanding loans to their existing lenders, bears interest at the base
rate as announced by the Toronto-Dominion Bank of Canada each month plus
0.1707%, will be amortized in quarterly installments over six years and is
repayable in full on the third anniversary of the closing date of the loan. As
of June 30, 1999, no advances had been made under the Term loan C facility. (See
Note 11).
The agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the declarations
and payment of dividends. As of June 30, 1999, the Company was in compliance
with all debt covenants.
8
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
5. Restructuring and Unusual Charges
In the first quarter of 1999, a pre-tax charge of $2,550 was recorded
to cover restructuring costs of $2,236 and unusual charges of $314.
Restructuring Charge
As part of the Company's reorganization of its core business into five
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telecommunications and Application Technology business groups, and
the associated write-off of assets. The restructuring charge of $2,236 includes
asset impairments, primarily software and other intangible assets, of $1,522,
lease terminations of $541, and employee separations of $173. The total charge
reduced net income by $1,588.
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through June 30, 1999:
<TABLE>
<CAPTION>
Balance, Balance,
January 1, June 30,
Type of Cost 1999 Additions Deductions 1999
--------------------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Asset Impairment $ -- $ 1,522 $ (1,522) $ --
Lease terminations -- 541 (30) 511
Employee separations -- 173 (30) 143
========= ======== ========= ========
Total $ -- $ 2,236 $ (1,582) $ 654
========= ======== ========= ========
</TABLE>
Management believes that the remaining reserves for business
restructuring are adequate to complete its plan and anticipates completing the
plan and paying all related cash amounts by the end of 1999.
Unusual Items
During the first quarter of 1999, as part of the Company's core
business reorganization, the Company realigned certain operations within its
Telecommunications division and has recognized impairment charges and other
related costs of $314. The total charge reduced net income by $223.
6. Extraordinary Loss
In connection with the early retirement of the Company's line of
credit with State Street Bank and Trust Company and its simultaneous refinancing
with IBM Credit Corporation, deferred financing fees associated with the State
Street Bank and Trust agreement were written off during the second quarter of
1999. The total amount of the write off classified as an extraordinary loss was
$160, net of income taxes.
9
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
7. Earnings Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $341 $2,365 $(1,304) $2,980
Preferred stock dividends -- (14) -- (32)
------------------------------------------------------
Numerator for basic earnings per share -
Net income available to common stockholders 341 2,351 (1,304) 2,948
Effect of dilutive securities:
Preferred stock dividends -- 14 -- 32
------------------------------------------------------
Numerator for diluted earnings per share -
Net income available to common stockholders $341 $2,365 $(1,304) $2,980
======================================================
Denominator:
Denominator for basic earnings per share -
Weighted-average shares (1) 46,325 31,761 45,347 27,759
------------------------------------------------------
Effect of dilutive securities -
Redeemable preferred stock -- 122 -- 122
Warrants 155 752 229 860
Employee stock options 349 201 413 266
Contingent stock - acquisitions -- 92 -- 46
------------------------------------------------------
Dilutive potential common shares 504 1,167 642 1,294
------------------------------------------------------
Denominator for diluted earnings per share - Adjusted
Weighted-average shares and assumed conversions
46,829 32,928 45,989 29,053
======================================================
Basic earnings per share $0.01 $0.07 $ (0.03) $0.11
======================================================
Diluted earnings per share $0.01 $0.07 $ (0.03) $0.10
======================================================
<FN>
- -----------------------
1. Includes, for the three and six month periods ended June 30, 1999,
1,393 and 1,353 shares of common stock reserved for issuance to the
holders of TigerTel Services Ltd.,'s Exchangeable Shares and ACT-GFX
Canada, Inc.'s Exchangeable Shares, respectively.
</FN>
</TABLE>
10
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
8. Segment Information
In 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, Disclosures about Segments of an Enterprise and Related
Information. Prior year information has been restated to present our reportable
segments.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K filed for the year ended December 31, 1998, except
that intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices. It is on this
basis that management utilizes the financial information to assist in making
internal operating decisions. Segment performance is evaluated based on
stand-alone segment operating income.
Following is the selected segment data as of and for the three months
ended June 30, 1999:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $13,523 $8,501 2,121 $12,096 $7,943 $23,499 $ 5,253 $19 $ -- $72,955
Intersegment revenue -- -- -- -- -- 655 -- -- (655) --
--------- -------- ------ ---------- ------- -------- -------- --------- ---------- ----------
Total revenue 13,523 8,501 2,121 12,096 7,943 24,154 5,253 19 (655) 72,955
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
Operating income
(loss) 285 796 274 631 443 1,566 198 (1,221) (688) 2,284
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
Total assets 27,382 8,250 2,128 17,912 26,367 49,664 14,196 61,722 -- 207,621
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
</TABLE>
Following is the selected segment data as of and for the six months
ended June 30, 1999:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $23,532 $12,507 2,121 $22,389 $14,698 $39,072 $10,170 $39 $ -- $ 124,528
Intersegment revenue -- -- -- -- -- 2,188 -- -- (2,188) --
--------- -------- ------ ---------- ------- -------- -------- --------- --------- ----------
Total revenue 23,532 12,507 2,121 22,389 14,698 41,260 10,170 39 (2,188) $ 124,528
========= ======== ====== ========== ======= ======== ======== ========= ========= ==========
Operating income
(loss) 750 1,014 271 691 61 3,936 387 (5,416) (1,075) 619
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
Total assets 27,382 8,250 2,128 17,912 26,367 49,664 14,196 61,722 -- 207,621
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
</TABLE>
11
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Following is the selected segment data as of and for the three months
ended June 30, 1998:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- --------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $ 8,497 $ 5,131 $ -- $ 11,881 $ 4,585 $ 17,575 $ 6,224 $ (213) $ -- $ 53,680
Intersegment revenue -- -- -- -- -- 299 -- -- (299) --
--------- -------- ------ ---------- -------- --------- -------- --------- ---------- ----------
Total revenue 8,497 5,131 -- 11,881 4,585 17,874 6,224 (213) (299) 53,680
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Operating income
(loss) 1,514 197 -- 1,274 434 1,556 280 (763) (309) 4,183
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Total assets 19,128 4,574 -- 16,624 20,448 12,651 13,684 26,576 -- 113,685
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
</TABLE>
Following is the selected segment data as of and for the six months
ended June 30, 1998:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $ 15,521 $10,577 $ -- $ 23,803 $ 6,288 $ 28,196 $ 8,079 $ -- $ -- $ 92,464
Intersegment revenue -- -- -- -- -- 532 -- -- (532) --
--------- -------- ------ ---------- -------- --------- -------- --------- ---------- ----------
Total revenue 15,521 10,577 -- 23,803 6,288 28,728 8,079 -- (532) 92,464
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Operating income
(loss) 1,874 809 -- 1,724 475 2,391 232 (1,426) (541) 5,538
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Total assets 19,128 4,574 -- 16,624 20,448 12,651 13,684 26,576 -- 113,685
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
</TABLE>
During the second quarter of 1999, several adjustments were made to the
composition of the Telecommunications, Internet, Communications Infrastructure
and Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. Following is the selected segment data
as of and for the three months ended June 30, 1998 had these adjustments not
occurred.
<TABLE>
<CAPTION>
----------------- -------- -------------- --------
Communications
Telecommunications Internet Infrastructure Non-Core
------------------ -------- -------------- --------
<S> <C> <C> <C> <C>
External revenue $ 7,599 $ 898 $ 10,342 $ 7,763
Intersegment revenue -- -- -- --
------- ------ -------- -------
Total revenue 7,599 898 10,342 7,763
======= ====== ======== =======
Operating income (loss)
1,359 155 1,242 312
======= ====== ======== =======
Total assets 18,460 668 13,997 16,311
======= ====== ======== =======
</TABLE>
12
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Following is the selected segment data as of and for the six months
ended June 30, 1998 had these adjustments not occurred.
<TABLE>
<CAPTION>
----------------- -------- -------------- --------
Communications
Telecommunications Internet Infrastructure Non-Core
------------------ -------- -------------- --------
<S> <C> <C> <C> <C>
External revenue $ 14,623 $ 898 $ 20,346 $11,536
Intersegment revenue -- -- -- --
-------- ------ --------- -------
Total revenue 14,623 898 20,346 11,536
======== ====== ========= =======
Operating income (loss)
1,719 155 1,654 302
======== ====== ========= =======
Total assets 18,460 668 13,997 16,311
======== ====== ========= =======
</TABLE>
9. Mergers and Acquisitions
In April 1999, in transactions accounted for under the purchase method
of accounting, we acquired:
(a) 100% of the outstanding shares of common stock of Port Consulting,
Inc., an integrator of information technology application systems and custom
application development services in consideration for $621 at closing, and the
assumption of debt of approximately $579. Up to an additional $2,000 is payable
in each of 2002 and 2004 if certain earnings targets are achieved.
(b) 100% of the outstanding common shares of Hornbuckle Engineering,
Inc., an integrated voice and data solutions provider based in Monterey,
California, for $3,680 paid with 555 shares of our Common Stock with a fair
value of approximately $2,000 and a cash payment of approximately $1,700. Up to
an additional $2,000 is payable in the future if certain earnings targets are
achieved.
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California in exchange for 773 shares of our Common
Stock with a fair value of $2,526 and up to an additional $3,200 payable in the
future if certain earnings targets are achieved.
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio in exchange for 932 shares of our Common Stock with a fair value of $3,050
and up to an additional $8,000 payable in the future if certain earnings targets
are achieved.
These four acquisitions were accounted for using the purchase method of
accounting. Fair value of net assets acquired and liabilities assumed was
$1,029, resulting in goodwill of $8,898. This goodwill will be amortized over 20
years.
In May 1999, the Company entered into an agreement to merge its wholly
owned Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. The Company received, in a reverse merger
transaction, 19,769 shares of Contour's common stock, representing approximately
75% of the total outstanding shares, with a fair value of $5,627. The
transaction was accounted for under the purchase method of accounting. Fair
value of net assets acquired and liabilities assumed was $875, resulting in
goodwill of $4,752. This goodwill will be amortized over 20 years.
13
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
In June 1999, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek") for $25,200, of which $10,200 was paid in cash at
closing. Upon a successful initial public offering of Intellesale.com, $10,000
will be payable in stock of Intellesale.com and the remaining amount will be
payable in cash over time. In the event an initial public offering does not
occur, the $10,000 will be payable in cash. An additional $5,000 is contingent
upon the achievement of certain earnings targets. Bostek is engaged in the
business of acquiring open-box and off-specification computer equipment and
selling such equipment, using the internet and other selling channels. The
transaction was accounted for under the purchase method of accounting. Fair
value of net assets acquired and liabilities assumed was $3,747, resulting in
goodwill of $21,458. This goodwill will be amortized over 20 years.
Total assets acquired, including goodwill, during the second quarter of
1999 are summarized as follows:
Purchase price $40,759
Net assets acquired 5,650
-----------
Goodwill $35,109
===========
Unaudited pro forma results of operations for the six months ended June
30, 1999 and 1998 are included below. Such pro forma information assumes that
the above transactions had occurred as of January 1, 1999 and 1998,
respectively.
Six Months Ended June 30,
1999 1998
----------- -------------
Revenues $178,205 $149,223
Income (loss) before extraordinary loss (1,286) 2,909
Net income (loss) (1,446) 2,909
10. Amendments to Purchase Agreements
In the second quarter of 1999, the Company settled put options that
were entered into with the selling shareholders of various companies in which
the Company acquired a less than 100% interest. The Company agreed to pay $3.9
million in a combination of cash and stock of one of the Company's subsidiaries,
Intellesale.com, in exchange for the remaining ownership interest.
Several of the purchase agreements for the subsidiaries contained a
provision whereby the seller could obtain additional "earnout paymnents" upon
achievement of certain earnings targets. The Company entered into agreements
during the second quarter of 1999 to fix the amount of these payments at $6.4
million in a combination of cash and stock of Intellesale.com.
The above settlements are contingent upon the successful completion of
a planned public offering of Intellesale.com within one year of the date of the
settlement.
14
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
11. Subsequent Events
On July 30, 1999, we amended and restated the IBM Agreement to reflect
the refinancing of our Canadian subsidiaries' term debt and revolving credit
lines with an affiliate of IBM Credit Corporation. The amended and restated IBM
Agreement provides for, amongst other things, (i) an increase in the Canadian
revolving line of credit from C$8.5 million to C$9.0 million, and (ii) an
increase in Term Loan C from C$6.645 million to C$10.0 million. On July 30, 1999
and August 4, 1999, C$6.0 million and C$4.0 million were borrowed against Term
Loan C, respectively.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes in Item 1 of this report as
well as our Annual Report on Form 10-K for the year ended December 31, 1998.
Certain statements made in this report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see the Risk Factors sections later in this Item.
OUTLOOK
Our objective is to continue to grow each of our operating segments
internally and through acquisitions, both domestically and abroad. Our strategy
has been, and continues to be, to invest in and acquire businesses that
complement and add to our existing business base. We have expanded significantly
through acquisitions in the past and continue to do so. Our financial results
and cash flows are substantially dependent on not only our ability to sustain
and grow existing businesses, but to continue to grow through acquisition. We
expect to continue to pursue our acquisition strategy in 1999 and future years,
but there can be no assurance that management will be able to continue to find,
acquire, finance and integrate high quality companies at attractive prices.
RECENT DEVELOPMENTS
During the second quarter of 1999, the Company undertook several
acquisitions. In April 1999, we acquired:
(a) 100% of the outstanding shares of common stock of Port Consulting,
Inc., an integrator of information technology application systems and custom
application development services,
(b) 100% of the outstanding common shares of Hornbuckle Engineering,
Inc., an integrated voice and data solutions provider based in Monterey,
California,
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California,
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio.
In May 1999, the Company entered into an agreement to merge its wholly
owned Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. The Company received, in a reverse merger
transaction, 19,769 shares of Contour's common stock, representing approximately
75% of the total outstanding shares.
In June 1999, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek"). Bostek is engaged in the business of acquiring
open-box and off-specification computer equipment and selling such equipment,
using the internet and other selling channels.
16
<PAGE>
All acquisitions were accounted for using the purchase method of
accounting. Total assets acquired, including goodwill, during the second quarter
of 1999 are summarized as follows:
Purchase price $40,759
Net assets acquired 5,650
==========
Goodwill $35,109
==========
The Company is planning to file a registration statement with the
Securities and Exchange Commission (SEC) in preparation for the offering of
shares of one of its subsidiaries, Intellesale.com, to the public. In connection
with the proposed registration, in the second quarter of 1999, the Company
settled put options that were entered into with the selling shareholders of
various companies in which the Company acquired a less than 100% interest. The
Company agreed to pay $3.9 million in a combination of cash and stock of
Intellesale.com, in exchange for the remaining ownership interest. Several of
the purchase agreements for the subsidiaries contained a provision whereby the
seller could obtain additional "earnout payments" upon achievement of certain
earnings targets. The Company entered into agreements during the second quarter
of 1999 to fix the amount of these payments at $6.4 million in a combination of
cash and stock of Intellesale.com. The above settlements are contingent upon the
successful completion of the planned public offering of Intellesale.com within
one year of the date of the settlement.
During the second quarter of 1999, several adjustments were made to the
composition of the Telecommunications, Internet, Communications Infrastructure
and Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. Prior year information has been restated
to present our reportable segments.
As part of the Company's reorganization of its core business into five
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telecommunications and Application Technology business groups, and
the associated write-off of assets. In the first quarter of 1999, the Company
incurred a restructuring charge of $2,236 that includes asset impairments,
primarily software and other intangible assets, of $1,522, lease terminations of
$541, and employee separations of $173. In addition, during the first quarter of
1999, as part of the Company's core business reorganization, the Company
realigned certain operations within its Telecommunications division and has
recognized impairment charges and other related costs of $314.
The Company negotiated the early retirement of its line of credit with State
Street Bank and Trust Company ("State Street Debt") and its simultaneous
refinancing with IBM Credit Corporation. The IBM Credit Corporation agreement
provides for a revolving credit line of up to $33.5 million, a term loan A of up
$22 million, a term loan B of up to $35 million, and term loan C designated in
Canadian dollars of up to C$10.0 million. Deferred financing fees associated
with the State Street Debt were written off during the second quarter of 1999.
The total amount of the write off recorded as an extraordinary loss was $160,
net of income taxes.
Beginning in the fourth quarter of 1998 and continuing into 1999, we
reorganized into seven operating segments to more effectively and efficiently
provide integrated communications products and services to a broad base of
customers. During the second quarter of 1999, several adjustments were made to
the composition of the Telecommunications, Internet and Non-core divisions to
better align the strengths of the respective divisions with the objectives of
17
<PAGE>
those divisions. Prior year information has been restated to present our
reportable segments. The five operating segments that represent our core
competency are:
o Telecommunications - The Telecommunications division provides
telephone services and systems, computer telephony integration,
interactive voice response, call centers and voice messaging.
o Network Infrastructure - The Network Infrastructure division
provides computer systems, local area networks and application
servers.
o Internet - The Internet division provides electronic commerce,
intranet and extranet services and wide area networks.
o Communications Infrastructure - The Communications Infrastructure
division provides communications towers, fiber optics, cabling,
power distribution and communications equipment.
o Application Technology - The Application Technology division
provides global positioning systems, satellite systems, field
automation, asset management, corporate enterprise access,
decision support and voice/data technology.
Operating segments outside our core competency are:
o Intellesale.com - The Intellesale.com division, formerly known as
Inteletek, purchases and sells new and used computer equipment,
and provides peripherals, components, consulting, systems
integration and transportation of all types of computer systems.
o Non-Core - The Non-Core division provides electrical components,
control panels, design engineering, manufacturing engineering,
automation systems and vacuum pumps.
18
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a
percentage of revenue for the three and six month periods ended June 30, 1999
and 1998 and is derived from the unaudited consolidated statements of operations
in Part I, Item, 1 of this report.
<TABLE>
<CAPTION>
Relationship to Revenue
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
% % % %
Revenue 100.0 100.0 100.0 100.0
Cost of goods sold 64.0 67.2 64.1 69.5
--------------------------------------------------
Gross profit 36.0 32.8 35.9 30.5
Selling, general and administrative expenses 29.8 23.0 30.4 22.5
Depreciation and amortization 3.1 2.0 3.0 2.0
Restructuring and unusual charges 0.0 0.0 2.0 0.0
--------------------------------------------------
Operating income 3.1 7.8 0.5 6.0
Interest income 0.2 0.2 0.2 0.2
Interest expense (0.9) (0.8) (0.9) (0.7)
--------------------------------------------------
Income (loss) before provision for income taxes, 2.4 7.2 (0.2) 5.5
minority interest and extraordinary loss
Provision for income taxes 1.4 2.3 0.3 1.9
--------------------------------------------------
Income (loss) before minority interest and 1.0 4.9 (0.5) 3.6
extraordinary loss
Minority interest 0.3 0.5 0.4 0.4
--------------------------------------------------
Income (loss) before extraordinary loss 0.7 4.4 (0.9) 3.2
Extraordinary loss 0.2 0.0 0.1 0.0
==================================================
Net income (loss) available to common stockholders 0.5 4.4 (1.0) 3.2
==================================================
</TABLE>
Company Overview
Revenue
Revenue for the three months ended June 30, 1999 was $73.0 million, an
increase of $19.3 million, or 35.9%, from $53.7 million for the three months
ended June 30, 1998. Revenue for the six months ended June 30, 1999 was $124.5
million, an increase of $32.1 million, or 34.7%, from $92.5 million for the six
months ended June 30, 1998.
19
<PAGE>
Revenue generated during the three and six months ended June 30, 1999
and 1998 by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications $13,523 $ 8,497 $ 23,532 $15,521
Network Infrastructure 8,501 5,131 12,507 10,577
Internet 2,121 -- 2,121 --
Communications Infrastructure 12,096 11,881 22,389 23,803
Application Technology 7,943 4,585 14,698 6,288
Intellesale.com 24,154 17,874 41,260 28,728
Non-Core 5,253 6,224 10,170 8,079
Corporate (including amounts incurred during (636) (512) (2,149) (532)
consolidation)
--------------------------------------------------
Consolidated $72,955 $53,680 $124,528 $92,464
==================================================
</TABLE>
Revenue growth occurred in almost every division in the second quarter
of 1999 compared to the second quarter of 1998 and in the six months ended June
30, 1999 compared to the six months ended June 30, 1998. In the Intellesale.com
division, revenue for the three and six month periods ended June 30, 1999
compared to the three and six month periods ended June 30, 1998 grew 35.1% and
43.6%, respectively. Approximately 20.6% and 60.0% came from internal growth for
the three and six month periods, respectively. In the Application Technology
division, revenue for the three and six month periods ended June 30, 1999
compared to the three and six month periods ended June 30, 1998 grew 73.2% and
133.7%, respectively. Almost all of this growth came from companies acquired
subsequent to March 31, 1998. In the Telecommunications division, revenue for
the three and six month periods ended June 30, 1999 compared to the three and
six month periods ended June 30, 1998 grew 59.2% and 51.6%, respectively.
Approximately 50.0% and 68.8% came from internal growth for the three and six
month periods, respectively. The Internet division is a new division in 1999. In
addition to several acquisitions made after March 31, 1998, the Intellesale.com
division increased revenue as a result of the divisions' growth of business
conducted over the Internet and the Telecommunications division increased
revenue through continued expansion into the Canadian marketplace.
Gross Profit and Margin
Gross profit for the three months ended June 30, 1999 was $26.3
million, an increase of $8.7 million, or 49.3%, from $17.6 million for the three
months ended June 30, 1998. Gross profit for the six months ended June 30, 1999
was $44.7 million, an increase of $16.6 million, or 58.9%, from $28.2 million
for the six months ended June 30, 1998. As a percentage of revenue, the gross
margin was 36.0% and 32.8% for the three months ended June 30, 1999 and 1998,
respectively and was 35.9% and 30.5% for the six months ended June 30, 1999 and
1998, respectively.
20
<PAGE>
Gross profit for the three and six months ended June 30, 1999 and 1998
by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications $ 5,606 $4,586 $11,017 $ 8,188
Network Infrastructure 2,833 757 3,654 1,897
Internet 1,618 -- 1,618 --
Communications Infrastructure 2,676 3,093 4,802 4,955
Application Technology 5,538 2,956 9,169 4,266
Intellesale.com 6,514 4,624 11,643 6,537
Non-Core 1,480 1,686 2,804 2,322
Corporate (including amounts incurred during 18 (94) 39 --
consolidation) --------------------------------------------------
Consolidated $26,283 $17,608 $44,746 $28,165
==================================================
</TABLE>
Gross margin for the three and six months ended June 30, 1999 and 1998
by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
% % % %
--- --- --- ---
Telecommunications 41.5 54.0 46.8 52.8
Network Infrastructure 33.3 14.8 29.2 17.9
Internet 76.3 -- 76.3 --
Communications Infrastructure 22.1 26.0 21.4 20.8
Application Technology 69.7 64.5 62.4 67.8
Intellesale.com 27.0 25.9 28.2 22.8
Non-Core 28.2 27.1 27.6 28.7
------------------------------------------------
Consolidated 36.0 32.8 35.9 30.5
================================================
</TABLE>
This significant dollar increase is attributable to growth through
acquisition of companies acquired after March 31, 1998. The change in percentage
is primarily a result of the different cost structures amongst the acquired
companies. Also affecting the gross margin percentages were changes within the
business mix and shifts in the competitive marketplace.
The largest growth of gross profit dollar contributions in the second
quarter of 1999 compared to the second quarter of 1998 came from the Application
Technology, Intellesale.com and Internet divisions. The Application Technology
division contributed $5.5 million in gross profit during the three months ended
June 30, 1999, an increase of $2.5 million or 87.3% over the $3.0 million for
the three months ended June 30, 1998. This growth was largely a result of a new
acquisition in the second quarter of 1999. The Intellesale.com division
contributed $6.5 million in gross profit for the three months ended June 30,
1999, an increase of $1.9 million or 40.9% over the $4.6 million for the three
months ended June 30, 1998. This increase was a result of the division's growth
of business conducted over the Internet and a new acquisition made in the second
21
<PAGE>
quarter of 1999. Gross margin percentages in the Intellesale.com division have
increased due to changes in the mix of products sold and additional services
offered as a result of new business lines acquired. The Internet division is a
new division in 1999. The birth of the Internet division, with its high gross
margin percentage was the largest factor in the increase of the consolidated
gross margin percentage to 36.0% during the three months ended June 30, 1999
compared to 32.8% during the three months ended June 30, 1998. Gross profit
dollars and gross margin percentages increased in the Network Infrastructure
division due to acquisitions made in the second quarter of 1999.
For the first six months of 1999 compared to the first six months of
1998, the largest growth of gross profit dollar contributions came from the
Intellesale.com, Application Technology and Telecommunications divisions. The
Intellesale.com division contributed $11.6 million in gross profit for the six
months ended June 30, 1999, an increase of $5.1 million or 78.1% over the $6.5
million for the six months ended June 30, 1998. This increase was a result of
the division's growth of business conducted over the Internet and a new
acquisition made in the second quarter of 1999. Gross margin percentages have
increased in the Intellesale.com division due to changes in the mix of products
sold and additional services offered as a result of new business lines acquired.
The Application Technology division contributed $9.2 million in gross profit for
the six months ended June 30, 1999, an increase of $4.9 million or 114.9% over
the $4.3 million for the six months ended June 30, 1998. This increase was a
result of new companies acquired subsequent to March 31, 1998. The
Telecommunications division contributed $11.0 million in gross profit for the
six months ended June 30, 1999, an increase of $2.8 million or 34.6% over the
$8.2 million for the six months ended June 30, 1998. This growth came mostly
from the division's continued expansion into the Canadian marketplace, both
through internal growth and via acquisition. The decreases in the gross margin
percentage in the Telecommunications division are a result of the continued
overall competitive pressures experienced in the telecommunications industry.
Gross profit dollars and gross margin percentages increased in the Network
Infrastructure division due to acquisitions made in the second quarter of 1999.
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended
June 30, 1999 was $21.7 million, an increase of $9.4 million, or 76.2%, from
$12.3 million for the three months ended June 30, 1998. Selling, general and
administrative expense for the six months ended June 30, 1999 was $37.8 million,
an increase of $17.0 million, or 81.5%, from $20.8 million for the six months
ended June 30, 1998. As a percentage of revenue, selling, general and
administrative expense was 29.8% and 23.0% for the three months ended June 30,
1999 and 1998, respectively and was 30.4% and 22.5% for the six months ended
June 30, 1999 and 1998, respectively.
22
<PAGE>
Selling, general and administrative expense for the three and six
months ended June 30, 1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications $ 4,928 $ 2,902 $ 9,605 $ 6,085
Network Infrastructure 2,007 551 2,605 1,071
Internet 1,321 -- 1,324 --
Communications Infrastructure 1,886 1,686 3,830 2,993
Application Technology (1) 4,696 2,238 8,014 3,311
Intellesale.com 4,860 3,004 7,522 4,038
Non-Core 1,121 1,288 2,113 1,940
Corporate (including amounts incurred during 905 664 2,803 1,402
consolidation) (1) --------------------------------------------
Consolidated $21,724 $12,333 $37,816 $20,840
============================================
<FN>
- ----------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of $348 in the Application Technology division and
$2,202 in the corporate overhead expense.
</FN>
</TABLE>
Selling, general and administrative expense as a percentage of revenue
for the three and six months ended June 30, 1999 and 1998 by operating segment
was:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
1999 1998 1999 1998
------- ------ ------ -----
<S> <C> <C> <C> <C>
% % % %
---- ---- ---- ----
Telecommunications 36.4 34.2 40.8 39.2
Network Infrastructure 23.6 10.7 20.8 10.1
Internet 62.3 -- 62.3 --
Communications Infrastructure 15.6 14.2 17.1 12.6
Application Technology (1) 59.1 48.8 54.5 52.7
Intellesale.com 20.1 16.8 18.2 14.1
Non-Core 21.3 20.7 20.8 24.0
-------------------------------------------
Consolidated (1) 29.8 23.0 30.4 22.5
===========================================
<FN>
- --------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of 0.3% in the Application Technology division and 1.8%
in the corporate overhead expense.
</FN>
</TABLE>
The increased dollars spent on selling, general and administrative
expenses is partially a result of several acquisitions made after March 31,
1998. Acquisitions were made in the Network Infrastructure, Intenet, Application
Technology and Intellesale.com divisions. In addition, investments were made in
the Intellesale.com division related to the growth of the Internet business and
in the Telecommunications division to fuel the expansion into Canada. As a
percentage of revenue, the increase is due to the strengthening of the corporate
infrastructure and additional costs incurred as part of our reorganization into
seven business segments. Also contributing to the changes in percentage are the
different cost structures amongst the acquired companies.
23
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense for the three months ended June
30, 1999 was $2.3 million, an increase of $1.2 million, or 108.2%, from $1.1
million for the three months ended June 30, 1998. Depreciation and amortization
expense for the six months ended June 30, 1999 was $3.8 million, an increase of
$2.0 million, or 110.4%, from $1.8 million for the six months ended June 30,
1998. The increase in expense is due to depreciation on assets of companies
acquired subsequent to March 31, 1998 and to additional purchases of property,
plant and equipment of existing companies. Amortization expense is associated
with the Company's intangible assets and goodwill from acquired companies. The
increase in amortization expense is predominantly a result of additional
goodwill associated with companies acquired subsequent to March 31, 1998. As of
June 30, 1999 the Company has goodwill of $78.3 million which is being amortized
over a period of 20 years.
Depreciation and amortization expense for the three and six months
ended June 30, 1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Telecommunications $ 393 $ 170 $ 662 $ 229
Network Infrastructure 30 9 35 17
Internet 23 -- 23 --
Communications Infrastructure 159 133 281 238
Application Technology 399 284 746 480
Intellesale.com 88 64 185 108
Non-Core 160 118 304 150
Corporate (including amounts incurred during 1,023 314 1,525 565
consolidation)
------ ------ ------ ------
Consolidated $2,275 $1,092 $3,761 $1,787
====== ====== ====== ======
</TABLE>
Restructuring and Unusual Charges
As part of the Company's reorganization of its core business into five
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telecommunications and Application Technology business groups, and
the associated write-off of assets. The restructuring charge of $2,236 includes
asset impairments, primarily software and other intangible assets, of $1,522,
lease terminations of $541, and employee separations of $173. In addition,
during the first quarter of 1999, as part of the Company's core business
reorganization, the Company realigned certain operations within its
Telecommunications division and has recognized impairment charges and other
related costs of $314.
Operating Income (Loss)
Operating income for the three months ended June 30, 1999 was $2.3
million, a decrease of $1.9 million, or 45.4%, from $4.2 million for the three
months ended June 30, 1998. Operating income for the six months ended June 30,
1999 was $0.6 million, a decrease of $4.9 million, or 88.8%, from $5.5 million
24
<PAGE>
for the six months ended June 30, 1998. Changes in operating income are a result
of the factors discussed above.
Excluding the $2.6 million restructuring and unusual charges mentioned
above, operating income for the six months ended June 30, 1999 was $3.2 million.
Operating income (loss) during the three and six months ended June 30,
1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Telecommunications $ 285 $1,514 $ 750 $1,874
Network Infrastructure 796 197 1,014 809
Internet 274 -- 274 --
Communications Infrastructure 631 1,274 691 1,724
Application Technology (1) 443 434 409 475
Intellesale.com 1,566 1,556 3,936 2,391
Non-Core 198 280 387 232
Corporate (including amounts incurred during (1,909) (1,072) (4,291) (1,967)
consolidation) (1)
--------------------------------------------
Consolidated $2,284 $4,183 $3,170 $5,538
============================================
<FN>
- -------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of $348 in the Application Technology division and
$2,202 in the corporate overhead expense.
</FN>
</TABLE>
Operating income as a percentage of revenue for the three and six
months ended June 30, 1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
1999 1998 1999 1998
% % % %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telecommunications 2.1 17.8 3.2 12.1
Network Infrastructure 9.4 3.8 8.1 7.6
Internet 12.9 -- 12.9 --
Communications Infrastructure 5.2 10.7 3.1 7.2
Application Technology (1) 5.6 9.5 2.8 7.6
Intellesale.com 6.5 8.7 9.5 8.3
Non-Core 3.8 4.5 3.8 2.9
-------------------------------------------
Consolidated (1) 3.1 7.8 2.5 6.0
===========================================
<FN>
- -------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of 0.3% in the Application Technology division and 1.8%
in the corporate overhead expense.
</FN>
</TABLE>
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<PAGE>
Interest Income and Expense
Interest income was $0.1 million for the three months ended June 30,
1999 and 1998 and was $0.3 million and $0.2 million for the six months ended
June 30, 1999 and 1998, respectively. Interest income is earned primarily from
short term investments and notes receivable.
Interest expense was $0.7 million and $0.4 million for the three months
ended June 30, 1999 and 1998, respectively and was $1.1 million and $0.7 million
for the six months ended June 30, 1999 and 1998, respectively. Interest expense
is principally associated with revolving credit lines and notes payable.
Income Taxes
We had an effective income tax rate of 58.5% and 31.7% for the three
months ended June 30, 1999 and 1998, respectively and 34.2% for the six months
ended June 30, 1998. For the six months ended June 30, 1999, there was a
provision of $0.4 million on a pre-tax loss of $0.2 million. The fluctuations in
the tax rate during 1999 are a result of the loss arising in the first quarter
of 1999, primarily due to the $2.6 million restructuring and unusual charges
mentioned above, and the effect of various State income tax laws. Changes in the
effective rate also arise from the effect of purchase accounting and the
resulting amortization of goodwill, which is substantially non-deductible for
income tax purposes.
Extraordinary Loss
In connection with the early retirement of the Company's line of
credit with State Street Bank and Trust Company and its simultaneous refinancing
with IBM Credit Corporation, deferred financing fees associated with the State
Street Bank and Trust agreement were written off during the second quarter of
1999. The total amount of the write off classified as an extraordinary loss was
$160, net of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, cash and cash equivalents totaled $5.6 million, an
increase of $1.0 million, or 22.4% from $4.6 million at December 31, 1998. Cash
of $2.9 million and $0.9 million was used in operations during the first six
months of 1999 and 1998, respectively. Excluding assets and liabilities acquired
or assumed in connection with acquisitions, cash used in the first six months of
1999 was due to the net loss, after adjusting for non-cash expenses and
increases in accounts receivable, inventories and accounts payable and accrued
expenses. Accounts receivable increased $4.8 million, or 13.9% from $34.4
million at December 31, 1998 as a result of increased levels of sales and
slightly slower collections. Inventories increased by $5.8 million, or 28.1%
from $20.7 million at December 31, 1998. This increase was related primarily to
the growth in sales over the Internet within the Intellesale.com division.
Accounts payable and accrued expenses increased by $4.8 million, or 18.1% from
$26.4 million at December 31, 1998 due to the higher inventory levels discussed
above. Excluding assets and liabilities acquired or assumed in connection with
acquisitions, cash used in the first six months of 1998 was primarily due to net
income, after adjusting for non-cash expenses, and increases in accounts
receivable, inventories and prepaid expenses of $3.0 million, $1.8 million and
$1.1 million, respectively.
Investing activities used cash of $19.4 million and $2.8 million during
the first six months of 1999 and 1998, respectively. In the first six months of
1999, cash of $15.8 million was used to pay for the cost of asset and business
acquisitions, $1.1 million was spent on other assets and payments of $2.6
26
<PAGE>
million were made for property and equipment. During the first six months of
1998, $1.9 million was used to purchase property and equipment, $1.3 million was
paid for other assets and $0.3 million was loaned to officers of the Company.
This use of cash was partially offset by proceeds from the cost of asset and
business acquisitions (net of cash balances acquired) totaling $0.7 million.
Financing activities provided cash of $23.3 million and $1.3 million
during the first six months of 1999 and 1998, respectively. During the first six
months of 1999, $44.8 million was raised through long term debt, which was
offset mainly by payments of $11.1 million on notes payable, $7.3 million on
long term debt and $3.1 million in other financing costs. During the first six
months of 1998, $2.4 million was raised through the issuance of common shares,
$0.9 million was raised through long term debt and $0.5 million was raised
through notes payable. These sources of cash were offset mostly by payments of
$2.1 million on long term debt and $0.2 million paid for the redemption of
preferred shares.
One of our stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength. However, due
to our significant growth rate, our investment needs have increased.
Consequently, we may continue, in the future, to use cash from operations and
may continue to finance this use of cash through financing activities such as
the sale of common stock and/or bank borrowing, if available.
In August, 1998, we entered into a $20 million line of credit with
State Street Bank and Trust Company secured by all of our domestic assets at the
prime lending rate or at the London Interbank Offered Rate, at our discretion.
In February 1999, the amount of the credit available under the facility was
increased to $23 million.
On May 25, 1999, we entered into a Term and Revolving Credit Agreement
with IBM Credit Corporation (the "IBM Agreement"). On May 26, 1999 we repaid the
amount due to State Street Bank and Trust Company. On July 30, 1999, the IBM
Agreement was amended and restated to reflect the refinancing of the debt of our
Canadian subsidiaries. The Amended and Restated Term and Revolving Credit
Agreement provides for:
(a) a revolving credit line of up to $33.5 million, designated as
follows: (i) a USA revolving credit line of up to $22 million,
(ii) a Canadian revolving credit line of up to $8.5 million, and
(iii) a United Kingdom revolving credit line of up to $3 million.
(b) a term loan A of up $22 million.
(c) a term loan B of up to $35 million, and
(d) a term loan C designated in Canadian dollars of up to C$10.0
million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes. The USA
revolving credit line bears interest at the 30-day LIBOR rate plus 1.75%; the
Canadian revolving credit line bears interest at the base rate as announced by
the Toronto-Dominion Bank of Canada each month plus 0.1707%; the UK revolving
credit line bears interest at the base rate as announced by the National
Westminster Bank PLC of England each month plus 1.4207%. As of August 4, 1999,
the LIBOR rate was approximately 5.0% and approximately $19.0 million was
outstanding on the revolving credit line.
27
<PAGE>
Term loan A, which was used to pay off State Street Bank and Trust
Company, bears interest at the 30-day LIBOR rate plus 1.75%, will be amortized
in quarterly installments over six years and is repayable in full on the third
anniversary of the closing date of the loan. As of August 4, 1999, approximately
$21.1 million was outstanding on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75%, will be amortized in quarterly installments over
six years and is repayable in full on the third anniversary of the closing date
of the loan. As of August 4, 1999, approximately $20.4 million was outstanding
on this loan.
Term loan C, which will be used by our Canadian subsidiaries to repay
their outstanding loans to their existing lenders, bears interest at the base
rate as announced by the Toronto-Dominion Bank of Canada each month plus
0.1707%, will be amortized in quarterly installments over six years and is
repayable in full on the third anniversary of the closing date of the loan. As
of August 4, 1999, approximately $6.7 million was outstanding on this loan.
The agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the declarations
and payment of dividends. As of August 4, 1999, the Company was in compliance
with all debt covenants.
As of June 30, 1999, there were 45,972,339 shares of Common Stock
outstanding. In addition, 1,352,877 shares of Common Stock are reserved for
issuance in exchange for the exchangeable shares of ACT-GFX Canada, Inc. and the
exchangeable shares of TigerTel Services Limited (formerly Commstar, Ltd.), both
wholly owned subsidiaries. Since January 1, 1999, we have issued an aggregate of
10,417,253 shares of Common Stock, of which 5,928,220 shares of Common Stock
were issued as earnout payments in acquisitions, 2,432,104 were issued in
connection with new acquisitions, 1,992,263 were issued in exchange for
exchangeable shares, and 64,666 shares of Common Stock were issued for services
rendered, including services under employment agreements and employee bonuses.
We have entered into earnout arrangements with selling shareholders
under which they are entitled to additional consideration for their interests in
the companies they sold to us. Under these agreements, assuming that all
earnouts are achieved, and assuming certain levels of profitability in the
future, we are contingently liable for additional consideration amounting to
approximately $4.5 million based on achieved 1999 results, approximately $8.3
million based on achieved 2000 results, approximately $10.9 million based on
achieved 2001 results and approximately $2.0 million in each of the years 2002,
2003 and 2004. All amounts earned and payable have been accrued in the
accompanying balance sheets. During the second quarter of 1999, the Company
entered into agreements with some of the subsidiaries to fix the earnout
payments due to such subsidiaries' former shareholders at $6.4 million in a
combination of cash and stock of one of the Company's subsidiaries,
Intellesale.com. These agreements are contingent upon the successful completion
of a planned public offering of Intellesale.com within one year of the date of
the agreements.
We have entered into put options with the selling shareholders of those
companies in which we acquired less than a 100% interest. These options provide
for us to acquire the remaining portion we do not own after periods ranging from
4 to 5 years from the dates of acquisition at amounts per share generally equal
to 10% - 20% of the average annual earnings per share of the company before
income taxes for, generally, a two-year period ending on the effective date of
the put multiplied by a multiple ranging from 4 to 5. These requirements are
recorded as changes in minority interest based upon current operating results.
28
<PAGE>
During the second quarter of 1999, the Company agreed to pay $3.9 million in a
combination of cash and stock of one of the Company's subsidiaries,
Intellesale.com, in exchange for the remaining ownership interest of certain of
its subsidiaries. These agreements are contingent upon the successful completion
of a planned public offering of Intellesale.com within one year of the date of
the agreements.
Our sources of liquidity include, but are not limited to, funds from
operations and funds available under the IBM Agreement. We may be able to use
additional bank borrowings, proceeds from the sale of common and preferred
shares, proceeds from the exercise of stock options and warrants, and the
raising of other forms of debt or equity through private placement or public
offerings. There can be no assurance however, that these options will be
available, or if available, on favorable terms. We believe that our current cash
position, augmented by financing activities, if available, will provide us with
sufficient resources to finance our working capital requirements for the
foreseeable future. Our capital requirements depend on a variety of factors,
including but not limited to, the rate of increase or decrease in our existing
business base; the success, timing, and amount of investment required to bring
new products on-line; revenue growth or decline; and potential acquisitions. We
believe that we have the financial resources to meet our future business
requirements.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements in this Form 10-Q, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Applied Digital Solutions intends that such forward-looking statements be
subject to the safe harbors created thereby. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
our continued ability to sustain our growth through product development and
business acquisitions; the successful completion and integration of future
acquisitions; the ability to hire and retain key personnel; the continued
development of technical, manufacturing, sales, marketing and management
capabilities; relationships with and dependence on third-party suppliers;
anticipated competition; uncertainties relating to economic conditions where we
operate; uncertainties relating to government and regulatory policies;
uncertainties relating to customer plans and commitments; rapid technological
developments and obsolescence in the industries in which we operate and compete;
potential performance issues with suppliers and customers; governmental export
and import policies; global trade policies; worldwide political stability and
economic growth; the highly competitive environment in which we operate;
potential entry of new, well-capitalized competitors into our markets; changes
in our capital structure and cost of capital; and uncertainties inherent in
international operations and foreign currency fluctuations. The words "believe",
"expect", "anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
Risk Factors
In addition to the other information contained herein, the following
factors should be considered carefully in evaluating our company and its
business.
29
<PAGE>
Competition
Each segment of our business is highly competitive, and it is expected
that competitive pressures will continue. Many of our competitors have far
greater financial, technological, marketing, personnel and other resources. The
areas that we have identified for continued growth and expansion are also target
market segments for some of the largest and most strongly capitalized companies
in the United States, Canada and Europe. There can be no assurance that we will
have the financial, technical, marketing and other resources required to compete
successfully in this environment in the future.
Uncertainty of Future Financial Results
While we have been profitable for the last three fiscal years, future
financial results are uncertain. There can be no assurance that we will continue
to be operated in a profitable manner. Profitability depends upon many factors,
including the success of our various marketing programs, the maintenance or
reduction of expense levels and our ability to successfully coordinate the
efforts of the different segments of our company and its business.
Future Sales of and Market for the Shares
Although we previously announced that we intended to limit the use of
stock in future acquisitions and to focus on cash transactions, we have
effected, and may continue to effect, acquisitions or contract for certain
services through the issuance of Common Stock or other equity securities as we
have typically done in the past. In addition, we have agreed to certain "price
protection" provisions in acquisition agreements which may result in additional
shares of common stock being issued to selling shareholders as of the effective
date of the registration of the shares such selling shareholder previously
received as consideration. Such issuances of additional securities may be viewed
as being dilutive of the value of the Common Stock in certain circumstances and
may have an adverse impact on the market price of the Common Stock.
Risks Associated with Acquisitions and Expansion
We have engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to our lines of business,
and it is anticipated that such acquisitions will continue to occur. Our total
assets were approximately $208 million as of June 30, 1999 and $124 million, $61
million, $33 million and $4 million as of December 31, 1998, 1997, 1996 and
1995, respectively. Our revenue was approximately $125 million for the six
months ended March 31, 1999 and approximately $207 million, $103 million, $20
million and $2 million for the years ended December 31, 1998, 1997, 1996 and
1995, respectively. Managing these dramatic changes in the scope of the business
will present ongoing challenges to management, and there can be no assurance
that our operations as currently structured, or as affected by future
acquisitions, will be successful.
We may require substantial additional capital, and there can be no
assurance as to the availability of such capital when needed, nor as to the
terms on which such capital might be made available to us.
It is our policy to retain existing management of acquired companies,
under the overall supervision of senior management. The success of the
operations of these subsidiaries will depend, to a great extent, on the
continued efforts of the management of the acquired companies.
30
<PAGE>
Dependence on Key Individuals
Our future success is highly dependent upon our ability to attract and
retain qualified key employees. We are organized with a small senior management
team, with each of our separate operations under the day-to-day control of local
managers. If we were to lose the services of any member of our central
management team, the overall operations could be adversely affected, and the
operations of any of the individual facilities could be adversely affected if
the services of the local managers should be unavailable. We have entered into
employment contracts with key officers and employees of senior management and
certain subsidiaries. The agreements are for periods of one to ten years through
June 2009. Some of the employment contracts also call for bonus arrangements
based on earnings.
Lack of Dividends on Common Stock; Issuance of Preferred Stock
We do not have a history of paying dividends on our Common Stock, and
there can be no assurance that such dividends will be paid in the foreseeable
future. Under the terms of the IBM Agreement, there are restrictions on the
declaration and payment of dividends. We intend to use any earnings which may be
generated to finance the growth of the businesses. Our Board of Directors has
the right to authorize the issuance of preferred stock, without further
stockholder approval, the holders of which may have preferences as to payment of
dividends.
Possible Volatility of Stock Price
Our Common Stock is quoted on the Nasdaq Stock Market(R), which stock
market has experienced and is likely to experience in the future significant
price and volume fluctuations which could adversely affect the market price of
our Common Stock without regard to our operating performance. In addition, we
believe that factors such as the significant changes to the business resulting
from continued acquisitions and expansions, quarterly fluctuations in the
financial results or cash flows, shortfalls in earnings or sales below analyst
expectations, changes in the performance of other companies in the same market
sectors and the performance of the overall economy and the financial markets
could cause the price of our Common Stock to fluctuate substantially.
YEAR 2000 COMPLIANCE
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millenium Bug" or "Year 2000 problem".
Assessment. The Year 2000 problem could affect computers, software, and
other equipment used, operated, or maintained by us. Accordingly, we are
reviewing our internal computers, software, applications and related equipment
and our systems other than information technology systems to ensure that they
will be Year 2000 compliant. We believe that our Year 2000 plan will be
completed in all material respects prior to the anticipated Year 2000 failure
dates. We spent approximately $200,000 in 1998 on our Year 2000 compliance plan
and estimate an additional $450,000 will be spent in 1999, most of which relates
31
<PAGE>
to new equipment. There can be no assurance however, that the total costs will
be limited to this amount.
Software Sold to Consumers. We are in the process of identifying all
potential Year 2000 problems with any of the software products we develop and
market. However, we believe that it is not possible to determine with complete
certainty that all Year 2000 problems affecting our software products will be
identified or corrected due to the complexity of these products. In addition,
these products interact with other third party vendor products and operate on
computer systems which are not under our control. For non-compliant products, we
are providing recommendations as to how an organization may address possible
Year 2000 issues regarding that product. Software updates are available for
most, but not all, known issues. Such information is the most currently
available concerning the behavior of our products and is provided "as is"
without warranty of any kind. However, variability of definitions of
"compliance" with the Year 2000 and of different combinations of software,
firmware, and hardware may lead to lawsuits against us. The outcome of any such
lawsuits and the impact on our financial results of operations, cash flow and
financial position are not estimable at this time.
Internal Infrastructure. We believe that our major computers, software
applications, and related equipment used in connection with our internal
operations are not subject to significant Year 2000 problems, because the
computer programs we use are primarily off-the-shelf, recently developed
programs from third-party vendors. We are in the process of obtaining assurances
from such vendors as to the Year 2000 compliance of their products. Most vendors
are reluctant to provide written assurances and, although some vendors may make
verbal assurances of Year 2000 compliance, there can be no certainty that the
systems utilized will not be affected. We have assessed all 39 of our operating
locations and have determined that 25 of the 39 locations are Year 2000
compliant. Of the remaining 14 locations, 9 are in the process of upgrading
their current systems and 4 are replacing their systems. We are in the process
of evaluating the alternatives for 1 location. All internal infrastructure
systems and equipment are expected to be Year 2000 compliant prior to the
anticipated Year 2000 failure dates.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 problem. We
have assessed all 39 of our operating locations and have determined that 37 of
the 39 locations are Year 2000 compliant. The remaining 2 locations are in the
process of upgrading or replacing the current systems. All non-information
technology systems and equipment are expected to be Year 2000 compliant prior to
the anticipated Year 2000 failure dates.
Suppliers. We have initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by us to identify and, to the extent possible, to resolve issues
involving the Year 2000 problem. However, we have limited or no control over the
actions of these third party suppliers. Thus, while we expect that we will be
able to resolve any significant Year 2000 problems with these systems, there can
be no assurance that these suppliers will resolve any or all Year 2000 problems
with these systems before the occurrence of a material disruption to our
business or any of our customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
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<PAGE>
Internet. As more of our business is conducted over the internet, it is
possible that we experience dispersed, intermittent telecommunications problems
experienced by local internet service providers and their users throughout the
country and world, preventing those customers from being able to access our
Web-site. This could be combined with, or result from, intermittent power
problems which could cause similar problems with accessing the Web-site.
Additionally, many customers may be using older systems which may not be Year
2000 compliant, and this would prevent them from accessing our Web-site. Under
this scenario, we would continue operations, but our Web-site would be
inaccessible to the individuals or groups affected by these problems. If our
credit card processors are not Year 2000 compliant, we will not be able to
process credit card sales. If our vendors are not Year 2000 compliant, we will
not be able to obtain products from our vendors or our vendors may not be able
to ship products sold to our customers. In the event of this worst case
scenario, we could lose significant revenues from customers unable to purchase
from the site, be unable to ensure delivery of products to customers, incur
expenses to repair our systems, face interruptions in the work of our employees,
lose advertising revenue and suffer damage to our reputation.
Contingency Plans. At certain subsidiaries, where we feel it is
necessary, we are preparing contingency plans relating specifically to
identified Year 2000 risks and developing cost estimates relating to these
plans. Contingency plans may include stockpiling raw materials, increasing
inventory levels, securing alternate sources of supply and other appropriate
measures. We anticipate completion of the Year 2000 contingency plans prior to
the anticipated Year 2000 failure dates. Once developed, Year 2000 contingency
plans and related cost estimates will be tested in certain respects and
continually refined as additional information becomes available.
Most Likely Consequences of Year 2000 Problems. We expect to identify
and resolve all Year 2000 problems that could materially adversely affect our
business operations and cash flows. However, we believe that it is not possible
to determine with complete certainty that all Year 2000 problems have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, one
cannot accurately predict how many Year 2000 problem-related failures will occur
or the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we expect that we may suffer the following consequences:
1. A significant number of operational inconveniences and
inefficiencies for us and our clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. A lesser number of serious system failures that may require
significant efforts by us or our customers to prevent or alleviate material
business disruptions.
Based on the activities described above, we do not believe that the
Year 2000 problem will have a material adverse effect on our business, results
of operations or cash flows. The estimate of the potential impact on our
financial position, overall results of operations or cash flows for the Year
2000 problem could change in the future. The discussion of our efforts, and
management's expectations, relating to Year 2000 compliance are forward-looking
statements. Our ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
33
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued FAS 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FAS 133. We do not have any derivative instruments or hedging
transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With our Canadian and United Kingdom subsidiaries, we have operations
and sales in various regions of the world. Additionally, we may export and
import to and from other countries. Our operations may therefore be subject to
volatility because of currency fluctuations, inflation and changes in political
and economic conditions in these countries. Sales and expenses may be
denominated in local currencies and may be affected as currency fluctuations
affect our product prices and operating costs or those of our competitors.
We presently do not use any derivative financial instruments to hedge
our exposure to adverse fluctuations in interest rates, foreign exchange rates,
fluctuations in commodity prices or other market risks, nor do we invest in
speculative financial instruments.
Borrowings under our Credit Agreement are at the London Interbank
Offered Rate. Such rate is subject to adjustment at any time.
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<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and certain of our subsidiaries are parties to various legal
actions as either plaintiff or defendant. In the opinion of management, these
proceedings will not have a material adverse effect on the financial position,
cash flows or overall trends in our results. The estimate of the potential
impact on our financial position, overall results of operations or cash flows
for these proceedings could change in the future. We are not subject to any
environmental or governmental proceedings.
On May 17, 1999, we were named as defendants in a suit brought in the
United States District Court for the District of New Hampshire, in a matter
styled John H. Martin, Jr. v. Applied Cellular Technology, Inc. The plaintiff, a
former Vice President of sales and Chief Operating Officer of our former
subsidiary, Tech Tools, Inc., alleges that: (i) we verbally agreed to sell our
controlling interest in Tech Tools to plaintiff; (ii) we repudiated the sale;
and (iii) we caused Tech Tools to commence a wrongful civil action against
plaintiff for conversion and to file a false report against plaintiff alleging
plaintiff's illegal diversion of Tech Tool's funds which subjected plaintiff to
criminal proceedings. Based on these allegations, plaintiff is seeking monetary
damages in the amount of $20 million. We believe that plaintiff's claims are
without merit and intend to defend ourselves vigorously. We do not expect this
litigation to have a material adverse effect on our financial position, overall
results of operations or cash flows.
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ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by us from
January 1, 1999 through June 30, 1999. These shares were issued without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
<TABLE>
<CAPTION>
Number of
Issued Common
Name/Entity/Nature Note For Shares
<S> <C> <C> <C>
The Americom Group, Inc. 1 Acquisition 106,581
Advanced Telecommunications, Inc. 1 Acquisition 550,000
Consolidated Micro Components 1,2 Acquisition 649,696
Cra-Tek Company 5 Acquisition 121,465
Cybertech Station, Inc. 1 Acquisition 49,806
Data Path Technologies, Inc. 1,2 Acquisition 1,393,230
GDB Software Services, Inc. 1,2 Acquisition 627,879
Hornbuckle Engineering, Inc. 7 Acquisition 554,563
Information Products Center, Inc. 1 Acquisition 662,252
Innovative Vacuum Solutions, Inc. 1 Acquisition 426,213
Lynch, Marks & Associates, Inc. 6 Acquisition 773,142
PPL, Ltd. 1 Acquisition 929,230
STR, Inc. 6 Acquisition 932,039
TigerTel Services Limited 2 Acquisition 43,877
Winward Electric Service Inc. 1 Acquisition 533,333
Charles Phillips 3 Asset Acquisition 7,018
Services 4 Services 64,666
---------------
Total 8,424,990
===============
<FN>
-----------------
1. Represents shares issued in connection with the earnout provision of
the Agreement of Sale.
2. Represents shares issued as a finders fee in connection with the
acquisition of the company.
3. Represents shares issued in connection with the acquisition of certain
assets by one of the Company's subsidiaries, Intellesale.com.
4. Represents shares issued for professional services or under employment
or other such agreements.
5. Represents shares issued to a selling shareholder to acquire such
shareholders minority interest.
6. Represents shares issued to the selling shareholders to acquire such
shareholders 100% interest in such company.
7. Represents shares issued to the selling shareholders, as partial
consideration, to acquire such shareholders 100% interest in such
company.
</FN>
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
36
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUTIRY HOLDERS
An Annual Meeting of Stockholders was held on June 5, 1999 to:
(a) Elect three directors, one to hold office until the 2000 Annual
Meeting of Stockholders (Group B), and two to hold office until the
2002 Annual Meeting of Stockholders (Group A), or in each case until
their respective successors have been elected or appointed. The result
of the vote to elect the three directors were as follows:
Votes Received
----------------------------------------
Name Group For Against Abstentions
---------------------- ------- ------------ ----------- ---------------
Daniel E. Penni A 26,665,968 -- 3,090,206
Angela M. Sullivan A 28,274,038 -- 4,482,168
Constance K. Weaver B 31,464,007 -- 1,292,199
(b) Ratify the appointment of PricewaterhouseCoopers LLP as independent
auditors of the Company for the 1999 calendar year. The proposal
received 30,739,667 votes for, 1,959,277 votes against, and 57,262
abstentions.
(c) Approve the change of the Company's name to Applied Digital Solutions,
Inc. The proposal received 31,954,378 votes for, 763,077 votes
against, and 38,744 abstentions.
(d) Approve an amendment and restatement of the Company's Articles of
Incorporation to reflect the name change. The proposal received
31,417,791 votes for, 1,252,884 votes against, and 85,524 abstentions.
(e) Approve the Company's 1999 Flexible Stock Plan. The proposal received
9,790,993 votes for, 4,102,439 votes against, and 75,899 abstentions.
(f) Approve the Company's 1999 Employees Stock Purchase Plan. The proposal
received 11,617,045 votes for, 2,275,705 votes against, and 76,581
abstentions.
(g) Ratify options granted under the Company's 1996 Non Qualified Stock
Option Plan. The proposal received 10,451,478 votes for, 3,910,051
votes against, and 118,527 abstentions.
ITEM 5. OTHER INFORMATION
Mergers and Acquisitions
During the second quarter of 1999, the Company undertook several acquisitions.
In April 1999, we acquired:
(a) 100% of the outstanding shares of common stock of Port Consulting,
Inc., an integrator of information technology application systems and custom
application development services,
(b) 100% of the outstanding common shares of Hornbuckle Engineering,
Inc., an integrated voice and data solutions provider based in Monterey,
California,
37
<PAGE>
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California,
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio.
In May 1999, the Company entered into an agreement to merge its wholly
owned Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. The Company received, in a reverse merger
transaction, 19,769 shares of Contour's common stock, representing approximately
75% of the total outstanding shares.
In June 1999, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek"). Bostek is engaged in the business of acquiring
open-box and off-specification computer equipment and selling such equipment,
using the internet and other selling channels.
Financing Agreements
On May 25, 1999, we entered into a Term and Revolving Credit Agreement
with IBM Credit Corporation. On May 26, 1999 we repaid the full amount borrowed
from State Street Bank and Trust Company. On July 30, 1999, we entered into an
Amended and Restated Term and Revolving Credit Agreement with IBM Credit
Corporation. The Amended and Restated Term and Revolving Credit Agreement is
attached hereto as Exhibit 99.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
99.1 Amended and Restated Term and Revolving Credit Agreement dated
as of July 30, 1999, among the Registrant, and certain of its
affiliates, and IBM Credit Corporation, and certain of its
affiliates*.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company
between April 1, 1999, and the date of this report:
(1) On June 2, 1999, the Company filed a Current Report on Form
8-K reporting that it had entered into a Term and Revolving
Credit Agreement with IBM Credit Corporation.
(2) On June 11, 1999, the Company filed a Current Report on Form
8-K reporting that its subsidiary, Intellesale.com, Inc. had
purchased all of the issued and outstanding shares of
Bostek, Inc. and Micro Components International,
Incorporated. On August 12, 1999, the Company filed
Amendment No. 1 to this Form 8-K, and included the required
financial statements and pro forma financial information.
- -------------------
* The Registrant agrees to furnish supplementally a copy of any omitted
attachments and exhibits to this Agreement, on request of the Commission.
38
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED DIGITAL SOLUTIONS, INC.
(Registrant)
Date: August 16, 1999 By: /S/ DAVID A. LOPPERT
----------------------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial Officer
39
<PAGE>
Exhibit Index
Number Description of Exhibits
27.1 Financial Data Schedule.
99.1 Amended and Restated Term and Revolving Credit Agreement dated as of
July 30, 1999 among the Registrant, and certain of its affiliates, and
IBM Credit Corporation, and certain of its affiliates*.
- ---------------------
* The Registrant agrees to furnish supplementally a copy of any omitted
attachments and exhibits to this Agreement, on request of the Commission.
40
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Registrant's interim unaudited consolidated financial statements as of and for
the six months ended June 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000924642
<NAME> Applied Digital Solutions, Inc.
<S> <C>
<PERIOD-START> Jan-01-1999
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 5575000
<SECURITIES> 0
<RECEIVABLES> 55706000
<ALLOWANCES> 1504000
<INVENTORY> 31444000
<CURRENT-ASSETS> 97798000
<PP&E> 35428000
<DEPRECIATION> 16719000
<TOTAL-ASSETS> 207621000
<CURRENT-LIABILITIES> 79313000
<BONDS> 34404000
0
0
<COMMON> 46000
<OTHER-SE> 84583000
<TOTAL-LIABILITY-AND-EQUITY> 207621000
<SALES> 123669000
<TOTAL-REVENUES> 124528000
<CGS> 71973000
<TOTAL-COSTS> 79782000
<OTHER-EXPENSES> 44127000
<LOSS-PROVISION> 192000
<INTEREST-EXPENSE> 1135000
<INCOME-PRETAX> (238000)
<INCOME-TAX> 442000
<INCOME-CONTINUING> (680000)
<DISCONTINUED> 0
<EXTRAORDINARY> 160000
<CHANGES> 0
<NET-INCOME> (1304000)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
Exhibit 99.1
AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT
Table of Contents
Section 1. DEFINITIONS; ATTACHMENTS 1
1.1. Special Definitions. 1
1.2. Other Defined Terms. 9
1.3. Attachments. 9
Section 2. CREDIT LINE/FINANCE CHARGES/OTHER CHARGES 9
2.1. Credit Line. 9
2.2. R/C Advances. 9
2.3. Term Loan A Advance. 10
2.4. Term Loan B Advance. 10
2.5 Term Loan C Advance 11
2.6 UK Advances 12
2.7. Finance and Other Charges. 12
2.8. Customer Account Statements. 13
2.9. Shortfall. 13
2.10. Application of Payments 13
2.11 Prepayment and Reborrowing By Customers. 13
2.12 Currencies 13
2.13 Letter of Credit 13
Section 3. POWER OF ATTORNEY. 14
3.1. Power of Attorney. 14
Section 4. SECURITY/CHARGING -- COLLATERAL/CHARGED ASSETS 15
4.1. Grant/Charges. 15
4.2. Further Assurances. 15
Section 5. CONDITIONS PRECEDENT 15
5.1. Conditions Precedent to the Effectiveness of this Agreement. 15
5.2. Conditions Precedent to Each Advance. 16
5.3 Post Closing 17
5.4 Canadian and UK Closings 17
Section 6. REPRESENTATIONS AND WARRANTIES 18
6.1. Organization and Qualifications. 18
6.2. Rights in Collateral/Charged Assets; Priority of Liens. 18
6.3. No Conflicts. 18
6.4. Enforceability. 18
6.5. Locations of Offices, Records and Inventory. 19
6.6. Fictitious Business Names. 19
6.7. Organization. 19
6.8. No Judgments or Litigation. 19
6.9. No Defaults. 19
6.10. Labor Matters. 19
6.11. Compliance with Law. 19
6.12. ERISA. 19
6.13. Compliance with Environmental Laws. 20
6.14. Intellectual Property. 20
1
<PAGE>
6.15. Licenses and Permits. 20
6.16. Investment Company. 21
6.17. Taxes and Tax Returns. 21
6.18. Status of Accounts. 21
6.19. Affiliate/Subsidiary Transactions. 21
6.20. Accuracy and Completeness of Information. 21
6.22. Indebtedness. 21
Section 7. AFFIRMATIVE COVENANTS 21
7.1. Financial and Other Information. 21
7.2. Location of Collateral/Charged Assets. 23
7.3. Changes in Customer. 23
7.4. Corporate Existence. 23
7.5. ERISA. 23
7.6. Environmental Matters. 23
7.7. Collateral/Charged Assets Books and Records/Collateral/Charged
Assets Audit. 24
7.8. Insurance; Casualty Loss. 24
7.9. Taxes. 25
7.10. Compliance With Laws. 25
7.11. Fiscal Year. 25
7.12. Intellectual Property. 25
7.13. Maintenance of Property. 25
7.14. Collateral/Charged Assets. 25
7.15. Subsidiaries. 26
7.16. Financial Covenants; Additional Covenants. 26
7.17. Guaranty 26
Section 8. NEGATIVE COVENANTS 27
8.1. Liens. 27
8.2. Disposition of Assets. 27
8.3. Corporate Changes. 28
8.4. Guaranties. 28
8.5. Restricted Payments. 28
8.6. Investments. 28
8.7. Affiliate/Subsidiary Transactions. 28
8.8. ERISA. 28
8.9. Additional Negative Pledges. 29
8.10. Use of Proceeds. 29
8.11. Indebtedness. 29
8.12. Loans. 29
Section 9. DEFAULT 29
9.1. Event of Default. 29
9.2. Acceleration. 31
9.3. Remedies. 31
9.4. Waiver. 32
Section 10. MISCELLANEOUS 32
10.1. Term; Termination. 32
10.2. Indemnification. 33
10.3. Additional Obligations. 33
10.4. LIMITATION OF LIABILITY. 33
2
<PAGE>
10.5. Alteration/Waiver. 33
10.6. Severability. 34
10.7. One Loan. 34
10.8. Additional Collateral/Charged Assets. 34
10.9. No Merger or Novations. 34
10.10. Paragraph Titles. 34
10.11. Binding Effect; Assignment. 34
10.12. Notices. 34
10.13. Counterparts. 35
10.14. SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. 35
10.15. JURY TRIAL WAIVER. 36
10.16 Entire Agreement 36
10.17 Non-Cross Guaranties and Non-Cross Collateralization 36
EXHIBITS/ATTACHMENTS/SCHEDULES 39
EXHIBIT 2.3.1 Term Loan A 39
EXHIBIT 2.4.1 Term Loan B 40
EXHIBIT 2.5.1 Term Loan C 41
EXHIBIT 2.3.2 Form Request for Term Loan A 42
EXHIBIT 2.4.2 Form Request for Term Loan B 43
EXHIBIT 2.5.2 Form Request for Term Loan C 44
3
<PAGE>
AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT
This AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT (as
amended, supplemented or otherwise modified from time to time, this "Agreement")
is hereby made as of this 30th day of July, 1999, by and among IBM Credit
Corporation with a place of business at North Castle Drive, Armonk, New York,
United States of America ("USA"), a Delaware corporation, ("IBM Credit"), IBM
Financing, a division of IBM Canada Limited with a place of business at 3600
Steeles Avenue East, Markam, Ontario, L3R 9Z7 ("IBM Canada") and IBM United
Kingdom Financial Services Limited whose registered office is at PO Box 41,
North Harbour, Portsmouth, Hampshire PO6 3AU ("IBMUK") (each a "Lender" and
jointly the "Lenders"), Applied Digital Solutions, Inc. (formerly known as
"Applied Cellular Technology, Inc.") with a place of business at 400 Royal Palm
Way, Palm Beach, Florida 33480, USA, a Missouri corporation, ("USA Customer"),
Ground Effects Ltd. with a place of business at 2875 St. Ethane Blvd., Windsor,
Ontario NEW 5B1, Canada, Tigertel Inc. (to be known as TigerTel Inc., formerly
known as Contour Telecom Management Inc.) (to be referred hereinafter as
TigerTel Inc.), with a place of business at 200-87 Skyway Avenue, Etobicoke,
Ontario M9W 6R3, Canada, (individually a "Canadian Customer" and collectively
the "Canadian Customers"), Signal Processors Limited, whose registered office is
at Milton Road, Cambridge, CB4 4GJ, England, and Signature Industries Limited,
whose registered office is at Thamesmead, London SE28 0BH, England (individually
an "UK Customer" and collectively the "UK Customers") (USA Customer, Canadian
Customers and UK Customers are each referred to herein as a "Customer" or,
collectively, the "Customers").
WITNESSETH
WHEREAS, USA Customer and IBM Credit entered into the Term and
Revolving Credit Agreement dated as of May 25, 1999 (the "Existing Agreement");
WHEREAS, Customers have requested that Lenders amend and restate the
Existing Agreement as set forth in more detail below.
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:
"Accounts": with respect to USA Customer; as defined in the U.C.C.; with respect
to a Canadian Customer or UK Customer, all now existing and/or hereafter created
or arising accounts receivable of such Customer arising but specifically
including accounts arising from the acquisition of software or the sale of
inventory, and/or performance of services by it, including any interest, finance
charges and other amounts payable with respect thereto, and for greater
certainty including all monetary obligations owed to such Customer including,
without limitation, all book accounts, book debts, accounts, debits, dues
claims, choses in action, and demands of every nature and kind and howsoever
arising or secured which are due or accruing or growing due to such Customer or
owned by such Customer.
"Advance": any loan or other extension of credit by any Lender to or on behalf
of any Customer pursuant to this Agreement including, without limitation, (i)
R/C Advances, (ii) Advances as defined in Attachment 2 hereto, (iii) Term Loan
A, (iv) Term Loan B, (v) Term Loan C and (vi) a drawing under a Letter of
Credit.
Page 4 of 50
<PAGE>
"Affiliate": with respect to any Person, any other Person (the "Affiliate")
meeting one of the following: (i) at least 10% of the Affiliate's equity is
owned, directly or indirectly, by such Person; (ii) at least 10% of such
Person's equity is owned, directly or indirectly, by the Affiliate; or (iii) at
least 10% of such Person's equity and at least 10% of the Affiliate's equity is
owned, directly or indirectly, by the same Person or Persons. All of Customers'
officers, directors, joint venturers, and partners shall also be deemed to be
Affiliates of Customers for purposes of this Agreement.
"Agreement": as defined in the caption.
"Applicable Credit Line": with respect to IBM Credit or USA Customer, USA Credit
Line; with respect to IBMCanada or Canadian Customers, Canadian Credit Line;
with respect to IBMUK or UK Customers, UK Credit Line.
"Applicable Customer": with respect to IBM Credit, USA Customer; with respect to
IBM Canada, each or both of Canadian Customers; and with respect to IBMUK, each
or both of UK Customers.
"Applicable Lender": with respect to the USA Customer, IBM Credit; with respect
to Canadian Customers, IBM Canada; and with respect to UK Customers, IBMUK.
"Applicable R/C Finance Charge": with respect to an R/C Advance to USA Customer,
the USA Finance Charge set forth in Attachment A; with respect to an R/C Advance
to a Canadian Customer, the Canadian Finance Charge set forth in Attachment A;
with respect to an Advance to a UK Customer, the UK Finance Charge set forth in
Attachment A.
"Auditors": a nationally recognized firm of independent certified public
accountants or independent chartered accountants, as applicable, selected by a
Customer in the country of its incorporation.
"Available Credit": with respect to a Customer at any time, (1) the Applicable
Credit Line less (2) the Outstanding Advances other than the Outstanding Term
Loan A, Outstanding Term Loan B and Term Loan C at such time owed by the
Customers to Applicable Lender.
"Average Daily Balance": for each Advance for a given period of time, the sum of
the unpaid principal of such Advance as of each day during such period of time,
divided by the number of days in such period of time.
"Base Rate": (1) for USA Customer, as of the date of determination, the
thirty-day average of the one-month London Interbank Offered Rate ("LIBOR") as
published by Bloomberg for the previous calendar month or, in the event such
average is no longer published by Bloomberg, such other thirty (30) day average
as IBM Credit may use for determining "LIBOR" in its reasonable discretion. The
LIBOR is based on a 360 day calendar year, (2) for Canadian Customers, as of the
date of determination, the annual rate of interest announced by the
Toronto-Dominion Bank ("Canadian Base Rate") as being its reference rate of
interest in order to determine interest rates for loans in Canadian Dollars to
Canadian borrowers in effect at the close of business on the last Business Day
of the previous month, and (3) for UK Customers , as of the date of
determination, the National Westminster Bank base rate ("UK Base Rate") as
announced by National Westminster Bank at the close of business on the last
Business Day of the previous month or, if the National Westminster Bank PLC base
rate increases or decreases 25 basis points or more on any Business Day after
the last Business Day of the previous month and before the date of
determination, the published National Westminstrer PLC base rate for such
Business Day.
"Business Day": (1) for USA Customer, any day other than a Saturday, Sunday or
other day on which commercial banks in New York, New York are generally closed
Page 5 of 50
<PAGE>
or on which IBM Credit is closed, (2) for Canadian Customers, any day other than
a Saturday, Sunday or other day on which commercial banks in Toronto, Ontario,
Canada are generally closed or on which IBM Canada is closed, and (3) for UK
Customers, any day other than a Saturday, Sunday or other day on which
commercial banks in London, England are generally closed or on which IBMUK is
closed.
"Canadian Credit Line": as defined in Section 2.1.
"Charged Assets": as defined in Section 4.1.
"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 Lenders.
"Code": the Internal Revenue Code of 1986.
"Collateral": Collateral as defined in Attachment 4 and Collateral as defined in
any of the Canadian Security Agreements.
"Compliance Certificate": a certificate substantially in the form of Attachment
C.
"Canadian Security Agreement": the Security Agreement dated as of July 30, 1999
between IBM Canada and Ground Effects Ltd, the Security Agreement dated as of
July 30, 1999 between IBM Canada and TigerTel Inc., or any other Security
Agreement that may be entered into between IBM Canada and a Customer organized
under the laws of Canada.
"Customer": as defined in the caption.
"Customer Agent": as defined in Section 2.2.
"Credit Line": as defined in Section 2.1.
"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 on Attachment A.
"Domestic Subsidiary": a direct Subsidiary of the USA Customer, which direct
Subsidiary is incorporated in the United States or in the District of Columbia.
"Environmental Laws": all statutes, laws, judicial decisions, regulations,
ordinances, and other governmental restrictions applicable to any of the
Customers in the United States, Canada and the United Kingdom, as applicable,
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.
Page 6 of 50
<PAGE>
"ERISA": the Employee Retirement Income Security Act of 1974.
"Event of Default": as defined in Section 9.1.
"Finance Charge": the Applicable R/C Finance Charge, the Term Loan A Finance
Charge, the Term B Finance Charge or the Term Loan C Finance Charge, as
applicable.
"Financial Statements": the consolidated balance sheet and consolidated
statements of operations (income statement), of cash flows and of changes in
shareholder's equity, and the consolidating balance sheets and statements of
operations (income statements). of the USA Customer and its Subsidiaries for the
period specified, prepared in accordance with GAAP and consistent with prior
practices.
"GAAP": generally accepted accounting principles of the country in which the
relevant Customer or Subsidiary is incorporated as in effect from time to time.
"Governmental Authority": any nation or government, any state or other political
subdivision thereof, any province or municipality, 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.
"Guarantor": each Domestic Subsidiary as of the Closing Date, each Subsidiary of
a Canadian Customer or a UK Customer that guarantees the Obligations of such
Customer, and each other Person that becomes a Guarantor from time to time.
"Guaranty": each guaranty entered into by a Guarantor for the benefit of the
Lenders.
"Hazardous Substances": all substances, wastes, pollutants, contaminants or
hazardous or toxic chemicals or materials, to the extent subject to regulation
as "hazardous substances" or "hazardous waste" under any Environmental Laws.
"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 (including obligations under any leases a Customer may enter
into, now or in the future, with any Lender), (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.
"Investment": with respect to any Person (the "Investor"), 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.
"Letter of Credit": any of the letters of credit that IBM Canada may obtain, at
the request of a Canadian Customer, pursuant to Section 2.13.
"Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust,
mortgage, other encumbrance or other arrangement having the practical effect of
Page 7 of 50
<PAGE>
the foregoing, including the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Knowledge": when included in any reference to a Customer's knowledge or its
obtaining of knowledge means the actual knowledge thereof by the President,
Chief Financial Officer or Treasurer of that Customer and any reference to a
Customer's "learning" of a particular event, fact or circumstance refers
(without implying any duty of inquiry) to knowledge (as referred to in this
Definition) of such event, fact or circumstance by the President, Chief
Financial Officer or Treasurer of the relevant Customer. "Material Adverse
Effect": a material adverse effect (1) on the business, operations, results of
operations, assets, or financial condition of the Customers when taken as a
whole, (2) on the aggregate value of the Collateral or Charged Assets as
applicable or the aggregate amount which Lenders 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 or
Charged Assets as applicable when taken as a whole to recover the Obligations in
full, or (3) on the rights and remedies of Lenders under this Agreement when
taken as a whole.
"Non-Guarantor Subsidiary": a Subsidiary of a Canadian Customer that can not for
reasons of law quaranty the Obligations of such Customer.
"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 Customers, 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 Customers
to Lenders provided, however, with reference to each Canadian Customer and each
UK Customer, the term "Obligations" refers to the foregoing solely with respect
to that particular Customer and not to any other obligations.
"Other Documents": all security agreements, mortgages, leases, instruments,
documents, guarantees, schedules of assignment, contracts and similar agreements
executed by a Customer and delivered to Lenders, pursuant to this Agreement or
otherwise, 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 Lenders under this Agreement, and (2)
any due and unpaid finance charge, fee, expense or other amount related to
Advances charged to Customer's accounts with Lenders.
"Outstanding R/C Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all R/C Advances made by a Lender under this
Agreement; (2) any finance charge, fee, expense or other amount related to R/C
Advances charged to Applicable Customers' accounts with such Lender, and (3) for
the USA Customer, the maximum amount that may be drawn by State Street Bank &
Trust Company as mutually agreed by IBM Credit, USA Customer and State Street
Bank and Trust Company.
"Outstanding Term Loan A": at any time of determination, the sum of (1) the
unpaid principal amount of the Term Loan A made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
the Term Loan A charged to USA Customer's account with IBM Credit.
"Outstanding Term Loan B": at any time of determination, the sum of (1) the
unpaid principal amount of all Term Loan B made by IBM Credit under this
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Agreement; and (2) any finance charge, fee, expense or other amount related to
the Term Loan B charged to USA Customer's account with IBM Credit.
"Outstanding Term Loan C": at any time of determination, the sum of (1) the
unpaid principal amount of all Term Loan C made by IBM Canada under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
the Term Loan C charged to the accounts of the Canadian Customers with IBM
Canada.
"Outstanding UK Exposure": at any time of determination, the sum of (1) the
unpaid principal amount of all Cash Advances made by IBMUK under this Agreement;
(2) the Transfer Prices IBMUK has paid to the UK Customers for the Receivable
under this Agreement that have not been recovered from collection of the
Receivables, and (3) any finance charge, fee, expense or other amount related to
Cash Advances and invoices purchased charged to UK Customers' accounts with
IBMUK.
"Permitted Acquisition": any acquisition by USA Customer or a Subsidiary which
meets all of the following criteria: (a) the acquisition is made by USA Customer
or a Subsidiary of not less than (i) Eighty Percent (80%) of the capital stock
or assets of the acquired Person which is not a publicly held company or (ii)
Fifty One Percent (51%) of the capital stock or assets if such Person is a
publicly held company; (b) no Default or Event of Default has occurred and is
continuing or would result therefrom; (c) (i) (A) if the Permitted Acquisition
is made by the USA Customer or a Domestic Subsidiary, each Domestic Subsidiary
(if any) formed for the purpose of or resulting from such acquisition shall
become a guarantor of the Obligations, or (B) if the Permitted Acquisition is
made by a UK Customer or its Subsidiary, each Subsidiary (if any) formed for the
purpose of or resulting from such acquisition shall become a guarantor of the
Obligations of the Customer making the acquisition, or (C) if the Permitted
Acquisition is made by a Canadian Customer or its Subsidiary, (I) each
wholly-owned Subsidiary (if any) formed for the purpose of or resulting from
such acquisition shall become a guarantor of the Obligations of the Customer
making the aquisition or (II) the Customer making the acquisition shall provide
IBM Canada additional security as IBM Canada may reasonably require pursuant to
Section 7.15, and (ii) not less than (A) Eighty Percent (80%) of the capital
stock of each such Subsidiary which is not a publicly held company or (B) Fifty
One Percent (51%) if such Subsidiary is a publicly held company shall be owned
directly or indirectly by the Customer who made the Permitted Acquisition; and
(d) the USA Customer and its Subsidiaries shall be in compliance, on a pro forma
basis after giving effect to the acquisition, with the financial covenants set
forth in Attachment A (including after giving effect to synergistic benefits
anticipated to be realized in connection with the proposed acquisition).
"Permitted Disposition": any disposition by any Customer, no matter how
structured, of all or any material part of the capital stock or assets of a
Subsidiary where such disposition does not result in the breach of any of the
financial covenants included in this Agreement.
"Permitted Indebtedness": any of the following:
(1) Indebtedness to Lenders;
(2) Indebtedness described in Section VII of Attachment B;
(3) Purchase Money Indebtedness;
(4) guaranties in favor of Lenders;
(5) guaranties of Subsidiaries or Customers of indebtedness owed to any
Person;
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(6) Indebtedness incurred on account of loans permitted under Section 8.12,
and
(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 Lenders and any other secured creditors;
(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 U.S.$1,000,000 (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 Customers;
(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 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 Customers' businesses;
(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 or the Other Documents; and
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(12) other Liens consented to by IBM Credit in writing prior to incurring such
Lien.
"Person": any individual, association, firm, corporation, partnership, trust,
unincorporated organization or other entity whatsoever.
"Policies": all policies of insurance required to be maintained by a Customer
under this Agreement or any of the Other Documents.
"Purchase Money Indebtedness": any Indebtedness (including capital leases)
incurred to finance the acquisition of assets to be used in a 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 at the time of such
acquisition.
"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.
"R/C Advance": any loan or advance of funds made by Applicable Lenders to or on
behalf of Canadian Customers or the USA Customer pursuant to Section 2.2 or to
or on behalf of UK Customer pursuant to Section 2.6 of this Agreement.
"R/C Advance Date": the Business Day on which any Lender make an R/C Advance
under this Agreement.
"Request for R/C Advance": as defined in Section 2.2.
"Request for Term Loan A": as defined in Section 2.3.
"Request for Term Loan B": as defined in Section 2.4.
"Request for Term Loan C": as defined in Section 2.5.
"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 2.9.
"Shortfall Transaction Fee": as defined in Attachment A.
"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.
"Term Loan A": the loan or advance of funds made by IBM Credit to or on behalf
of USA Customer pursuant to Section 2.3.
"Term Loan A Commencement Date": as defined in Section 2.3.
"Term Loan A Commitment": as defined in Exhibit 2.3.1.
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"Term Loan A Finance Charge": as defined in Exhibit 2.3.1..
"Term Loan A Stated Maturity Date": as set forth in Exhibit 2.3.1.
"Term Loan B": the loan or advance of funds made by IBM Credit to or on behalf
of USA Customer pursuant to Section 2.4.
"Term Loan B Commencement Date": as defined in Section 2 .4 .
"Term Loan B Commitment": as defined in Exhibit 2.4.1.
"Term Loan B Finance Charge": as defined in Exhibit 2.4.1.
"Term Loan B Stated Maturity Date": as set forth in Exhibit 2.4.1.
"Term Loan C": the loan or advance of funds made by IBM Canada to or on behalf
of either Canadian Customer pursuant to Section 2.5.
"Term Loan C Commencement Date": as defined in Section 2.5.
"Term Loan C (Ground Effects) Commitment": as defined in Exhibit 2.5.1.
"Term Loan C (TigerTel) Commitment": as defined in Exhibit 2.5.1.
"Term Loan C Finance Charge": as defined in Exhibit 2.5.1.
"Term Loan A Stated Maturity Date": as set forth in Exhibit 2.5.1.
"Termination Date": shall mean May 25, 2002 or such other date as IBM Credit and
USA Customer may agree to from time to time.
"UK Credit Line": as defined in Section 2.1
"USA Credit Line": as defined in Section 2.1.
"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 which
are defined (1) in the US, in the Uniform Commercial Code as in effect in the
State of New York (the "U.C.C."), (2) in Canada, in the Personal Property
Security Act of Ontario ("PPSA"), and (3) in the UK, in the Law of Property Act
1925 and the Insolvency Act 1986 (the "Acts"), in each case shall have the
meanings assigned to them therein.
1.3. Attachments. All attachments, exhibits, schedules and other addenda hereto,
including, without limitation, Attachment A and Attachment B, are specifically
incorporated herein and made a part of this Agreement.
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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 (x) the date on which this Agreement is terminated pursuant to
Section 10 and (y) the date on which IBM Credit terminates the Credit Line
pursuant to Section 9, (1) IBM Credit agrees to extend to USA Customer a credit
line provided the Outstanding R/C Advances by IBM Credit does not exceed the USA
Credit Line set forth in Attachment A (the "USA Credit Line"), (2) IBM Canada
agrees to extend to Canadian Customers one credit line provided the aggregate
Outstanding R/C Advances of the Canadian Customers does not exceed the Canadian
Credit Line set forth in Attachment A (the "Canadian Credit Line"), and (3) IBM
UK agrees to purchase receivables from the UK Customers provided the Outstanding
UK Exposure does not exceed the UK Credit Line set forth in Attachment A (the
"UK Credit LIne"), provided further that the sum of the USA Credit Line, the
Canadian Credit Line and the UK Credit Line shall not exceed the amount set
forth in Attachment A as Credit Line (the "Credit Line").
2.2. R/C Advances. (A) Each Canadian Customer and USA Customer hereby designates
ACT Financial, Inc. (the "Customer Agent") as the Customer's Agent to obtain R/C
Advances. The Customer Agent may make a written request ("Request for R/C
Advance") to the Applicable Lender, for an R/C Advance in the name of and on
behalf of a Canadian Customer or the USA Customer. The designation of the
Customer Agent may be terminated or may be changed from time to time on not less
than seven (7) days written notice to IBM Credit by USA Customer . For any
requested R/C Advance pursuant to which monies will be disbursed to Applicable
Customer or any Person other than Applicable Lender, a Request for R/C Advance
shall be delivered to Applicable Lender on or prior to 1:00 p.m. (local time of
the place of business of the Applicable Lender referenced in the Preamble to
this Agreement) one Business Day prior to the requested R/C Advance Date. The
Request for R/C Advance shall specify (i) the requested R/C Advance Date; and
(ii) the amount of the requested R/C Advance. The Customer Agent (or the
Customer in the event of the termination of the designation of any Customer
Agent) may deliver a Request for R/C Advance via facsimile. Any Request for R/C
Advance delivered to an Applicable Lender shall be irrevocable.
(B) Subject to the terms and conditions of this Agreement, on the R/C
Advance Date specified in a Request for R/C Advance, Applicable Lender shall
make the principal amount of each R/C Advance available to the Customer in
immediately available funds to an account maintained by such Customer. An
Applicable Lender may, in its sole discretion, make an R/C Advance to itself
hereunder on a day on which such Customer is to repay all or any part of an
Outstanding Advance (or any amount owing hereunder).
(C) Each R/C Advance shall accrue a finance charge on the Average Daily
Balance thereof, from and including the date of each R/C Advance to and
including the date such R/C Advance is paid by the Customer to Applicable
Lender, at a per annum rate equal to the lesser of (a) the Applicable 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.
(D) Unless otherwise due and payable at an earlier date, the unpaid
principal amount of each R/C Advance shall be due and payable on the Termination
Date.
2.3. Term Loan A Advance: (A) (i) Subject to the terms and conditions of the
Agreement, IBM Credit shall make a loan (the "Term Loan A") to USA Customer on
the date (the "Term Loan A Commencement Date") specified in a written request to
IBM Credit by USA Customer for such Term Loan A ("Request for Term Loan A") in
the form of Exhibit 2.3.2 attached hereto, provided that the Outstanding Term
Loan A at any time shall not exceed the Term Loan A Commitment. USA Customer
shall deliver the Request for Term Loan A Advance on or prior to 1:00 p.m.
(eastern time) one (1) Business Day prior to the Term Loan A Commencement Date.
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The Request for Term Loan A shall set forth the principal amount of the Term
Loan A. In no event shall the Term Loan A Commencement Date be later than the
Closing Date. USA Customer may deliver the Request for Term Loan A Advance via
facsimile.
(B) Subject to the terms and conditions of this Agreement, IBM Credit
shall make the principal amount of the Term Loan A available to USA Customer on
the Term Loan A Commencement Date in immediately available funds to an account
maintained by USA Customer or as directed by USA Customer.
(C) (i) The Term Loan A shall accrue a finance charge on the Average
Daily Balance thereof, from and including the Term Loan A Commencement Date to
and including the date such Term Loan A is repaid in full in accordance with the
terms of this Agreement or as otherwise agreed to in writing by IBM Credit, at a
per annum rate equal to the lesser of (a) the Term Loan A Finance Charge and (b)
the highest rate from time to time permitted by applicable law.
(ii) If it is determined that the amounts received from USA Customer
pursuant to this subparagraph (C) shall otherwise be in excess of the highest
rate permitted by applicable law, then the amount representing such excess shall
be considered reductions to principal of Advances.
(iii) The finance charges accrued on the Term Loan A shall be paid in
accordance with Section 2.7(C) of the Agreement.
(D) USA Customer shall pay the principal of the Term Loan A on the date
and in the amount set forth in Exhibit 2.3.1 (the "Term Loan A Principal Payment
Schedule") and in any event, shall pay in full the Outstanding Term Loan A on
the Term Loan A Stated Maturity Date (or, such earlier date as such Term Loan A
may become or be declared due and payable pursuant to Section 9 of the
Agreement).
(E) USA Customer agrees not to use the proceeds of the Term Loan A on
anything but to repay its outstanding loan to State Street Bank.
2.4. Term Loan B Advance: (A) (i) Subject to the terms and conditions of the
Agreement, IBM Credit shall make loans (the "Term Loan B") from time to time in
an amount no lower than Two Million Five Hundred Thousand Dollars ($2,500,000)
USA Customer on the date (the "Term Loan B Commencement Date") specified in a
written request to IBM Credit by USA Customer for such Term Loan B ("Request for
Term Loan B Advance") in the form of Exhibit 2.4.2 attached hereto, provided
that the Outstanding Term Loan B at any time shall not exceed the Term Loan B
Commitment. USA Customer shall deliver the Request for Term Loan B Advance on or
prior to 1:00 p.m. (eastern time) one (1) Business Day prior to the Term Loan B
Commencement Date. The Request for Term Loan B Advance shall set forth the
principal amount of the Term Loan B. USA Customer may deliver the Request for
Term Loan B Advance via facsimile.
(B) Subject to the terms and conditions of this Agreement, IBM Credit
shall make the principal amount of the Term Loan B available to USA Customer on
the Term Loan B Commencement Date in immediately available funds to an account
maintained by USA Customer or as directed by USA Customer.
(C) (i) The Term Loan B shall accrue a finance charge on the Average
Daily Balance thereof, from and including the Term Loan B Commencement Date to
and including the date such Term Loan B is repaid in full in accordance with the
terms of this Agreement or as otherwise agreed to in writing by IBM Credit, at a
per annum rate equal to the lesser of (a) the Term Loan B Finance Charge and (b)
the highest rate from time to time permitted by applicable law.
(ii) If it is determined that the amounts received from USA Customer
pursuant to this subparagraph (C) shall otherwise be in excess of the highest
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rate permitted by applicable law, then the amount representing such excess shall
be considered reductions to principal of Advances.
(iii) The finance charges accrued on the Term Loan B shall be paid in
accordance with Section 2.7(C) of the Agreement.
(D) USA Customer shall pay the principal of the Term Loan B on the date
and in the amount set forth in Exhibit 2.4.1 (the "Term Loan B Principal Payment
Schedules") and in any event, shall pay in full the Outstanding Term Loan B on
the Term Loan B Stated Maturity Date (or, such earlier date as such Term Loan B
may become or be declared due and payable pursuant to Section 9 of the
Agreement).
(E) USA Customer agrees not to use the proceeds of the Term Loan B on
anything but to finance USA Customer's Permitted Acquisition or to reimburse the
USA Customer for the cost of Permitted Acquisitions that take place after May 1,
1999 on account of which the USA Customer had not previously obtained a Term
Loan B Advance.
2.5. Term Loan C Advance: (A) (i) Subject to the terms and conditions of the
Agreement, IBM Canada shall make a loan (the "Term Loan C") to the Canadian
Customers on the date (the "Term Loan C Commencement Date") specified in a
written request to IBM Canada by a requesting Canadian Customer for such Term
Loan C ("Request for Term Loan C") in the form of Exhibit 2.5.2 attached
hereto, provided that the Outstanding Term Loan C borrowed by TigerTel Inc.
shall not exceed Term Loan C (TigerTel) Commitment and the Outstanding Term Loan
C borrowed by Ground Effects Ltd. shall not exceed Term Loan C (Ground Effects)
Commitment. A requesting Canadian Customer shall deliver the Request for Term
Loan C Advance on or prior to 1:00 p.m. (eastern time) one (1) Business Day
prior to the Term Loan C Commencement Date. The Request for Term Loan C shall
set forth the principal amount of the Term Loan C. In no event shall the Term
Loan C Commencement Date be later than the Closing Date. A Canadian Customer may
deliver the Request for Term Loan C Advance via facsimile.
(B) Subject to the terms and conditions of this Agreement, IBM Canada
shall make the principal amount of the Term Loan C available to a requesting
Canadian Customer on the Term Loan C Commencement Date in immediately available
funds to an account maintained by such Canadian Customer or as directed by such
Customer.
(C) (i) Each Term Loan C shall accrue a finance charge on the Average
Daily Balance thereof, from and including the Term Loan C Commencement Date to
and including the date such Term Loan C is repaid in full in accordance with the
terms of this Agreement or as otherwise agreed to in writing by IBM Canada, at a
per annum rate equal to the lesser of (a) the Term Loan C Finance Charge and (b)
the highest rate from time to time permitted by applicable law.
(ii) If it is determined that the amounts received from a Canadian
Customer pursuant to this subparagraph (C) shall otherwise be in excess of the
highest rate permitted by applicable law, then the amount representing such
excess shall be considered reductions to principal of Advances.
(iii) The finance charges accrued on the Term Loan C shall be paid in
accordance with Section 2.7(C) of the Agreement.
(D) Each Canadian Customer that has an outstanding Term Loan C shall
pay the principal of the Term Loan C on the date and in the amount set forth in
Exhibit 2.5.1 (the "Term Loan C Principal Payment Schedule") and in any event,
shall pay in full the Outstanding Term Loan C on the Term Loan C Stated Maturity
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Date (or, such earlier date as such Term Loan C may become or be declared due
and payable pursuant to Section 9 of the Agreement).
(E) Each Canadian Customer agrees not to use the proceeds of the Term
Loan C on anything but to repay its outstanding loans to its existing perfected
secured creditors.
2.6. UK Advances. UK Customers may obtain Cash Advances from, or sell
receivables to, IBMUK pursuant to the terms of this Agreement including
Attachment 2 attached hereto. With respect to any transactions that are solely
between one or both UK Customers and IBMUK, if there are any inconsistencies
between the main body of the text of this Agreement and Attachment 2, provisions
in Attachment 2 shall supersede any inconsistent provisions in the main body of
the text.
2.7. Finance and Other Charges. (A) Finance charges for an Advance to a Canadian
Customer or the USA Customer for a calendar month shall be equal to (i) one
twelfth (1/12) of the Applicable R/C Finance Charge multiplied by (ii) the
Average Daily Balance of such Advance for the period when such finance charge
accrues during such calendar month multiplied by (iii) the actual number of days
during such calendar month when such finance charge accrues divided by (iv)
thirty (30).
Late charges pursuant to subsection (D) of this Section 2.7 for an Advance other
than a Cash Advance or Section 2.13 for a calendar month shall be equal to (i)
one twelfth (1/12) of the Delinquency Fee Rate multiplied by (ii) the Average
Daily Balance of such Advance for the period when such Advance is past due
during such calendar month multiplied by (iii) the actual number of days during
such calendar month when such Advance is past due divided by (iv) thirty (30).
(B) USA Customer hereby agrees to pay to USA Lender the applicable
charges set forth as "Other Charges" in Attachment A. Each Customer also agrees
to pay Applicable Lender additional charges for any returned items of payment
received by Applicable Lenders. The Applicable Customer hereby acknowledge that
any such charges are not interest but that such charges, if unpaid, will
constitute part of the Outstanding Advances.
(C) The finance charges and Other Charges owed under this Agreement,
and any charges hereafter agreed to in writing by the parties, shall be included
in a billing statement to be delivered by Applicable Lender to Customer by the
5th day of each month and are payable monthly in arrears by the fifteenth (15th)
day of the month following that during which such charges have accrued or a
Lender may, in its sole discretion, add unpaid finance charges and Other Charges
to the Applicable Customer's Outstanding Advances.
(D) 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 the day after such Advance was due and payable to and
including the date the Applicable Lender 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 2.8 hereof, the USA Customer shall pay
IBM Credit a Shortfall Transaction Fee. If it is determined that amounts
received from a Customer were in excess of such highest rate, then the amount
representing such excess shall be considered reductions to principal of
Advances.
2.8. Customer Account Statements. Each Lender will send statements of each
transaction hereunder as well as monthly billing statements to Applicable
Customers with respect to Advances and other charges due on Applicable
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Customers' account with such Lender. 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 forty five (45) days after such statement of
transaction or billing statement is received by Applicable Customer, Applicable
Customer provides such Lender written notice objecting that such amount or
transaction is incorrectly described therein and specifying the error(s), if
any, contained therein. A Lender may at any time adjust such statements of
transaction or billing statements to comply with applicable law and this
Agreement.
2.9. Shortfall. If, on any Business Day, IBM Credit shall provide the USA
Customer with written notice (with reasonable detail as to the calculation
thereof) that, the Outstanding R/C Advances and Outstanding IBMUK Exposure in or
converted to USA Dollars shall exceed the Credit Line (such excess, the
"Shortfall Amount"), then the USA Customer shall on such date prepay the
Outstanding Advances in an amount equal to such Shortfall Amount if such notice
is actually received by the USA Customer by 10:00 a.m. (eastern time);
otherwise, the USA Customer shall make such prepayment by the end of the next
Business Day, provided however, payment of any such excess which is occasioned
by a change in currency conversion rates shall not be due until the end of the
second next Business Day and shall only then be due if such excess has not
otherwise been eliminated (such as by a countervailing change in currency
conversion rates).
2.10. Application of Payments. Each Customer hereby agrees that all checks and
other instruments delivered to Applicable Lender on account of such Customer's
Obligations shall constitute conditional payment until such items are actually
collected by Applicable Lender. If any Customer fails to provide direction to
the Applicable Lender as to how a payment should be applied, such Lender shall
have the right to apply and reapply any and all such payments to such Customer's
Obligations in such manner as such Lender may deem advisable.
2.11. Prepayment and Reborrowing By Customer. (A) Subject to Section 10.1(i), a
Customer may at any time prepay, without notice or penalty, in whole or in part
amounts owed under this Agreement. A Lender may apply payments made to it
(whether by an Applicable Customer or by any other Person on behalf of an
Applicable Customer) to pay finance charges and other amounts owing under this
Agreement by such Customer first and then to the principal amount owed by such
Customer.
(B) Subject to the terms and conditions of this Agreement, any amount
prepaid or repaid to a Lender in respect to the Outstanding Advances may be
reborrowed by an Applicable Customer in accordance with the provisions of this
Agreement. Term Loan A , Term Loan B and Term Loan C may not be reborrowed
notwithstanding repayment or prepayment thereof.
2.12. Currencies. All Advances made by IBM Credit and all payments by the USA
Customer pursuant to this Agreement shall be in U.S. dollars. All Advances made
by IBM Canada and all payments by the Canadian Customers pursuant to this
Agreement shall be in Canadian dollars. All Advances made by IBMUK and all
payments made by the UK Customers shall be in sterling pounds.
2.13 Letter of Credit. If requested by a Canadian Customer for the purpose of
credit enhancement for the overdraft arrangement between such Canadian Customer
and its commercial bank, IBM Canada shall obtain one and only one Letter of
Credit for the account of such Canadian Customer, provided that (i) the Letter
of Credit for the account of TigerTel Inc. shall be for an amount not exceeding
Two Million Canadian Dollars (CND$ 2,000,000) and (ii) the Letter of Credit for
the account of Ground Effects Ltd. shall be for an amount not exceeding Two
Hundred Fifty Thousand Canadian Dollars (CND$250,000). The USA Customer hereby
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agrees that if any Letter of Credit is issued for the account of an Canadian
Customer, it shall pay IBM Canada an annual L/C Fee ("L/C Fee") that is equal to
one percent (1%) of the total amount drawable under the Letter of Credit on the
date such Letter of Credit is issued and every anniversary thereof. Each
Canadian Customer hereby agrees to repay IBM Canada any amount that is drawn
under the Letter of Credit issued for its account, which amount will be included
in the monthly billing statements. A drawing under a Letter of Credit shall be
repaid by the relevant Canadian Customer, and shall accrue finance charges, in
the same manner as if it were a R/C Advance under this Agreement.
Section 3. POWER OF ATTORNEY
3.1. Power of Attorney. Each Customer hereby irrevocably appoints Applicable
Lender, 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 such Applicable Lender, to:
(A) sign the name of such Customer on any document or instrument that
Applicable Lender shall deem necessary or appropriate to perfect and maintain
perfected the security interest in the Collateral or Charged Assets as
applicable contemplated under this Agreement and the Other Documents;
upon the acceleration of the Obligations following the occurrence and
continuance of an Event of Default as defined in Section 9.1 hereof
(B) endorse the name of such Customer upon any of the items of payment
of proceeds and deposit the same in the account of such Applicable Lender for
application to the Obligations; and
(C) demand payment, enforce payment and otherwise exercise all such
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 such Applicable Lender may deem advisable;
(G) discharge and release any Accounts;
(H) prepare, file and sign such Customer's name on any Proof of Claim
in bankruptcy or similar document against any Account debtor;
(I) prepare, file and sign such 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 such 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 such Customer upon any of the items of payment
of proceeds, cheques or bankers drafts and deposit the same in the account of
the Applicable Lender for application to the Obligations;
(L) sign the name of such Customer to requests for verification of
Accounts and notices thereof to Account debtors;
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(M) sign the name of such Customer on any document or instrument that
the Applicable Lender 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 or Charged Assets as applicable and endorse such Customer's name
on any check, draft, instrument or other item of payment of the proceeds of the
Policies with respect to the Collateral or Charged Assets as applicable; 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 Applicable Lender may
designate. Each Lender agrees that in the event any Lender exercises the power
granted in this Clause O, such Lender shall promptly forward to the Applicable
Customer all mails other than the payments or proceeds.
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 a Lender pursuant to such power
of attorney will reduce any of Applicable Customer's Obligations other than such
Applicable Customer's payment Obligations to the extent the Lender has received
monies.
Section 4. SECURITY/CHARGING CLAUSE -- COLLATERAL/CHARGED ASSETS
4.1. Grant/Charges. To secure prompt payment and performance of the Obligations,
the USA Customer agrees to grant the security interest pursuant to Attachment 4.
To secure the prompt payment and performance of the Obligations of each UK
Customer, such UK Customer agrees to grant IBMUK a security interest in the
Charged Assets as defined in the CHARGE between IBMUK and such Customer. To
secure the prompt payment and performance of the Obligations of each Canadian
Customer, such Canadian Customer agrees to grant IBM Canada a security interest
pursuant to applicable Canadian Security Agreement.
4.2. Further Assurances. Each Customer shall, from time to time upon the request
of Applicable Lender, execute and deliver to Applicable Lender, or cause to be
executed and delivered, at such time or times as Applicable Lender may request
such other and further documents, certificates and instruments that Applicable
Lender may reasonably deem necessary to perfect and maintain perfected
Applicable Lender's security interests in the Collateral or Charged Assets as
applicable and in order to fully consummate all of the transactions contemplated
under this Agreement and the Other Documents. Applicable Customer shall make
appropriate entries on its books and records disclosing Applicable Lender's
security interests in the Collateral or Charged Assets as applicable.
Section 5. CONDITIONS PRECEDENT
5.1. Conditions Precedent to the Effectiveness of this Agreement. The obligation
of IBM Credit to make its initial Advances is subject to the receipt by IBM
Credit of, or waiver in writing by IBM Credit of compliance with, the following
documents (all of which have been received or waived in writing by IBM Credit):
(A) this Agreement executed and delivered by USA;
(B) a favorable opinion of counsel for USA Customer in substantially
the form of Attachment E;
(C) a certificate of the secretary or an assistant secretary of USA
Customer, substantially in the form and substance of Attachment F hereto,
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certifying that, among other items, (i) such Customer is a corporation organized
under the laws of the jurisdiction of its incorporation and has its principal
place of business as stated therein, (ii) such Customer is registered to conduct
business in specified states or provinces and localities, (iii) true and
complete copies of the articles of incorporation and by-laws or similar
constitutional documents of such Customer are delivered therewith, together with
all amendments and addenda thereto as in effect on the date thereof, (iv) the
resolution as stated in the certificate is a true, accurate and compared copy of
the resolution adopted by the such Customer's Board of Directors authorizing the
execution, delivery and performance of this Agreement and each Other Document
executed and delivered in connection herewith to which such Customer is a party,
and (v) the names and true signatures of the officers of such Customer
authorized to sign this Agreement and the Other Documents;
(D) certificates dated as of a recent date from the Secretary of State
or other appropriate authority evidencing the good standing of USA 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;
(E) copies of all approvals and consents from any Person, in each case
in form and substance satisfactory to the Lenders, which are required to enable
USA 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;
(F) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to Lenders, executed by each other perfected secured
creditor of USA Customer ;
(G) UCC-1 financing statements for each jurisdiction reasonably
requested by IBM Credit executed by USA Customer and each Guarantor incorporated
in a state of USA;
(H) the statements, certificates, documents, instruments, financing
statements, agreements and information set forth in Attachment A and Attachment
B;
(I) the pledges by the USA Customer of the stock of its Domestic
Subsidiaries and Sixty Six percent (66%) of the stock of each of its
Subsidiaries incorporated outside the USA (the "Stock Pledge Agreement");
(J) a collateralized guaranty by the Domestic Subsidiaries of USA
Customer; and
(K) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as Lenders shall have reasonably
requested.
5.2. Conditions Precedent to Each Advance. No Advance will be required to be
made or renewed by any Lender under this Agreement unless, on and as of the date
of such Advance, the following statements shall be true to the satisfaction of
such Lender:
(A) The representations and warranties contained in this Agreement or
in any document, instrument or agreement executed in connection herewith are
true and correct on and, except for those representations which are of a date
certain, as of the date of such Advance as though made on and as of such date;
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(B) No event has occurred and is continuing or after giving effect to
such Advance or the application of the proceeds thereof would result in or 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 a Customer has otherwise disclosed to Applicable Lender in writing
prior to each request, each request 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 the 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 a Customer to Applicable Lender shall in
any manner be deemed to satisfy the conditions precedent to each Advance that
are set forth in this Section 5.2.
5.3. Post Closing. USA Customer agrees to provide, within sixty (60) days after
the Closing Date, a subordination signed by each secured creditor of a
Guarantor, who then has a security interest in the general assets of such
Guarantor. Such subordination shall provide that the security interest of such
secured creditor is subordinated to that granted to IBM Credit hereunder.
5.4. Canadian and UK Closings. The parties hereto agree to use reasonable effort
after the Closing Date to satisfy the following conditions precedent to the
obligations of IBM Canada and IBMUK.
The obligation of IBM Canada and IBMUK to make its respective initial Advances
effectiveness of this Agreement is subject to the receipt by the applicable
Lender of, or waiver in writing by such Lender of compliance with, the following
documents:
(A) this Agreement executed and delivered by the Applicable Customers;
(B) for the initial Advance by IBM Canada, a favorable opinion of
counsel for the Canadian Customers reasonably satisfactory to IBM Canada;
(C) a certificate of the secretary or an assistant secretary of each
Applicable Customer, substantially in the form and substance of Attachment F
hereto, certifying that, among other items, (i) such Customer is a corporation
organized under the laws of the jurisdiction of its incorporation and has its
principal place of business as stated therein, (ii) such Customer is registered
to conduct business in specified states or provinces and localities, (iii) true
and complete copies of the articles of incorporation and by-laws or similar
constitutional documents of such Customer are delivered therewith, together with
all amendments and addenda thereto as in effect on the date thereof, (iv) the
resolution as stated in the certificate is a true, accurate and compared copy of
the resolution adopted by the such Customer's Board of Directors authorizing the
execution, delivery and performance of this Agreement and each Other Document
executed and delivered in connection herewith to which such Customer is a party,
and (v) the names and true signatures of the officers of such Customer
authorized to sign this Agreement and the Other Documents;
(D) certificates dated as of a recent date from the Secretary of State
or other appropriate authority evidencing the good standing of each Applicable
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;
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(E) copies of all approvals and consents from any Person, in each case
in form and substance satisfactory to the Lenders, which are required to enable
each Applicable 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;
(F) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to Lenders, executed by each other perfected secured
creditor whose financing statement reflects a registration against a substantial
portion or all of the Collateral;
(G) for the initial Advance by IBM Canada to a Canadian Customer, the
Canadian Security Agreement between IBM Canada and such Canadian Customer,
(k) for the initial Advance by IBM Canada to TigerTel Inc., a Guaranty
given by each Subsidiary of TigerTel Inc. (other than the Non-Guarantor
Subsidiaires), in favor of IBM Canada, supported by pledge of general security
interest in the form of documents acceptable to IBM Canada,
(L) for the initial Advance by IBMUK, a Schedule A to Attachment 2,
Charge document and Schedule 1 to the Charge executed by each UK Customer,
relevant Guaranty by the Subsidiaries of the UK Customers, if requested by
IBMUK; and
(M) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as the Applicable Lender shall have
reasonably requested.
Section 6. REPRESENTATIONS AND WARRANTIES
To induce Lenders to enter into this Agreement, each Customer represents and
warrants to Lenders as follows:
6.1. Organization and Qualifications. Each 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 except where the failure
to have so qualified is not likely to have a Material Adverse Effect.
6.2. Rights in Collateral/Charged Assets; Priority of Liens. Each Customer and
each of its Subsidiaries owns the property granted by it respectively as
Collateral or Charged Assets as applicable to Applicable Lender, free and clear
of any and all Liens in favor of third parties except for the Liens otherwise
permitted pursuant to Section 8.1.
6.3. No Conflicts. The execution, delivery and performance by each Customer and
each of its Subsidiaries 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
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its properties, except where the effect of the Customer's failure of any of the
representations included in this Section is not likely to have a Material
Adverse Effect.
6.4. Enforceability. This Agreement and all of the other documents executed and
delivered by each Customer in connection herewith are the legal, valid and
binding obligations of each such 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, Records and Inventory. The address of the principal
place of business and chief executive office of each Customer is as set forth on
Attachment B or on any notice provided by such Customer to Lenders pursuant to
Section 7.7(C) of this Agreement. The books and records related to the
Collateral and the financial conditions of each Customer, and all of its chattel
paper (other than the chattel paper delivered to Lenders pursuant to Section
7.14(E)) and records of Accounts, are maintained at such location and only as
otherwise indicated on Attachment B.
There is no jurisdiction in which Customers have any material tangible assets,
other than those jurisdictions identified on Attachment B or on any notice
provided by any Customer to Lenders pursuant to Section 7.7(C) of this
Agreement. Attachment B, as amended from time to time by any notice provided by
any Customer to Lenders in accordance with Section 7.7(C) of this Agreement.
6.6. Fictitious Business Names. USA Customer and UK Customers have 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. Canadian Customers have
not used any corporate name other than those listed on Attachment B-Can, for the
periods indicated on Attachment B-Can.
6.7. Organization. All of the outstanding capital stock of each Customer has
been validly issued, is fully paid and nonassessable.
6.8. No Judgments or Litigation. Except as set forth on Attachment B, no
material judgments, orders, writs or decrees are outstanding against any
Customer nor is there now pending or, to the best of Customers' knowledge after
due inquiry, threatened, any material litigation, contested claim,
investigation, arbitration, or governmental proceeding by or against any
Customer.
6.9. No Defaults. No Customer is 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 except where the effect
of the Customer's failure of any of the representations included in this Section
is not likely to have a Material Adverse Effect. No Customer has knowledge of
any material 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 Customers to
Lenders pursuant to Section 7.1(G) of this Agreement, no Customer is a party to
any material labor dispute except where the effect of the Customer's failure of
any of the representations included in this Section is not likely to have a
Material Adverse Effect. There are no strikes or walkouts or labor controversies
pending or threatened against the Customers which could reasonably be expected
to have a Material Adverse Effect.
6.11. Compliance with Law. No Customer has violated or failed to comply with any
material Requirement of Law.
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6.12. ERISA. Each "employee benefit plan", "employee pension benefit plan",
"defined benefit plan", or "multi-employer benefit plan", which USA Customer or
any of its Subsidiaries 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, except where the effect of the
Customer's failure of any of the representations included in this Section is not
likely to have a Material Adverse Effect. There have been no "prohibited
transactions" and no "reportable event" has occurred within the last 60 months
with respect to any Plan. Neither USA Customer nor any of its Subsidiaries has
"multi-employer benefit plan", except where the effect of the Customer's failure
of any of the representations included in this Section is not likely to have a
Material Adverse Effect.
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. Neither USA Customer nor any of its
Subsidiaries has 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).
TigerTel Inc. represents that it does not participate in or contribute to a
pension plan. Ground Effects Ltd. makes the representation and warranties as set
forth in Schedule 6.12 hereto.
6.13. Compliance with Environmental Laws. Except as otherwise disclosed in
Attachment B:
(A) Each Customer and each of its Subsidiaries has obtained all
government approvals required with respect to the operation of their businesses
under any Environmental Law except where the effect of the Customer's failure of
any of the representations included in this Section is not likely to have a
Material Adverse Effect.
(B) (i) No Customer or any of its Subsidiaries has generated,
transported or disposed of any Hazardous Substances; (ii) no Customer or any of
its Subsidiaries is currently generating, transporting or disposing of any
material Hazardous Substances; (iii) no Customer or any of its Subsidiaries has
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 material Hazardous Substances, or (b) any of its business
operations have contaminated lands or waters of others with any material
Hazardous Substances; (iv) no Customer or any of its Subsidiaries or its
respective assets is subject to any material Environmental Liability and, to the
best of the each Customer's knowledge, any material threatened Environmental
Liability; (v) no Customer or any of its Subsidiaries has received any notice of
or otherwise learned of any governmental investigation evaluating whether any
material remedial action is necessary to respond to a release or threatened
release of any Hazardous Substances for which any Customer may be liable; (vi)
no Customer or any of its Subsidiaries is in material violation of any
Environmental Law; (vii) there are no material proceedings or investigations
pending against any Customer or any of its Subsidiaries 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 Customers' or its their
Subsidiaries' business shall be excluded from representations (i) and (ii)
above, so long as such Customer or its Subsidiary 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 material risk of any spill, contamination, release or discharge of
Hazardous Substances other than as authorized by Environmental Laws.
6.14. Intellectual Property. Each Customer possesses such assets, licenses,
patents, patent applications, copyrights, service marks, trademarks, trade names
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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, except where the effect of
the Customer's failure to possess such assets, rights or property is not likely
to have a Material Adverse Effect.
6.15. Licenses and Permits. Each 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 except where the effect of the Customer's failure of any of the
representations included in this Section is not likely to have a Material
Adverse Effect. No Customer is in violation of the terms of any such franchise,
license, lease, permit, certificate, authorization, qualification, easement,
right of way, right or approval except where the effect of the Customer's
failure of any of the representations included in this Section is not likely to
have a Material Adverse Effect.
6.16. Investment Company. The USA 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. Except as disclosed on Exhibit 6.17, each Customer
has timely filed all federal, state, provincial and local tax returns and other
reports which it is required by law to file or has obtained an extension of the
requirement to so 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 any Customer, or is disputing
such tax, fee, or other governmental charge and has established appropriate
reserves therefor in accordance with GAAP. The charges and reserves on the books
of the USA Customer in respect of taxes or other governmental charges are in
accordance with GAAP. No tax liens have been filed against any Customer or any
of its property.
6.18. Status of Accounts. Other than any inadvertent book keeping errors, each
Account is based on an actual and bona fide sale and delivery of goods or
rendition of services to customers, made by a 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) unless otherwise approved by Applicable
Lender. Each 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 or in the event a customer does not accept the goods and services such
invoices are adjusted within a reasonable period of time in the ordinary course
of such Customer's business. There are no proceedings or actions known to any
Customer which are pending against any of the Accounts which could reasonably be
expected to result in a Material Adverse Effect on the debtor's ability to pay
the full amounts due to any Customer.
6.19. Affiliate/Subsidiary Transactions. No Customer is a party to or bound by
any agreement or arrangement (whether oral or written) to which any Affiliate or
Subsidiary (other than a Guarantor or another Customer) of any Customer is a
party except (i) in the ordinary course of and pursuant to the reasonable
requirements of any Customer's business and (ii) upon fair and reasonable terms
no less favorable to any Customer than it could obtain in a comparable
arm's-length transaction with an unaffiliated Person.
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6.20. Accuracy and Completeness of Information. All material factual information
furnished by or on behalf of each Customer to Applicable Lender or the Auditors
for purposes of or in connection with this Agreement or any Other Document, 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. Indebtedness. No Customer (i) has Indebtedness, other than Permitted
Indebtedness; and (ii) has 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. USA Customer shall cause the following
information to be delivered to IBM Credit 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 USA Customer (i) audited Financial Statements
(provided that, to the extent not otherwise audited by the Auditors, 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 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, and (b) such Auditors" "Management Letter" to Customer, if any, and (ii)
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 USA 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 USA 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 executive
officer or chief financial officer of USA Customer as having been prepared in
accordance with GAAP; and (ii) 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 USA Customer is in
compliance with the financial covenants set forth in Attachment A;
(C) as soon as available and in any event within sixty (60) days after
the end of each fiscal year of USA Customer (i) projected Financial Statements,
broken down by quarter, for the current and following fiscal year; and (ii) if
composed, a narrative discussion relating to such projected Financial
Statements;
(D) promptly after any Customer obtains knowledge of (i) the occurrence
of a Default or Event of Default, or (ii) the existence of any condition or
event which would result in such 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 USA Customer specifying the
nature thereof and the Customer's proposed response thereto, each in reasonable
detail;
(E) promptly after any Customer obtains knowledge of (i) any
proceeding(s) being instituted or threatened to be instituted by or against any
Customer in any federal, state, provincial, local or foreign court or before any
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commission or other regulatory body (federal, state, provincial, 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 USA Customer specifying the nature thereof and the Customer's
proposed response thereto, each in reasonable detail;
(F) promptly after any Customer obtains knowledge that (i) any order,
judgment or decree in excess of U.S.$1,000,000 shall have been entered against
such 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 USA Customer specifying the nature thereof and the
Customer's proposed response thereto, each in reasonable detail; and
(G) within five (5) days after the same are sent, copies of all
Financial Statements and reports which USA Customer sends to its stockholders,
and within five (5) days after the same are filed, copies of all Financial
Statements and reports which USA 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 a Customer to the Lenders
shall be signed by an authorized officer of such 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. USA Customer shall request that its Auditors forward the audited
financial statements and accompanying documents set forth in Section 7.1(A)(i)
by first class mail, it being understood that, notwithstanding the provisions of
Section 10.12 of this Agreement, compliance with the time frame within which to
provide such statements shall be measured by the date on which such audited
financial statements and accompanying documents are placed in the mails or are
otherwise forwarded to IBM Credit.
7.2. Location of Collateral/Charged Assets. Except as described in Exhibit 7.2,
the inventory, equipment and other tangible Collateral or Charged Assets as
applicable shall be kept or sold at the addresses as set forth on Attachment B
or on any notice provided by a Customer to Applicable Lender in accordance with
Section 7.7(C). Such locations shall be certified within thirty (30) days after
the end of each fiscal year to Applicable Lender substantially in the form of
Attachment D.
7.3. Changes in Customer. Each Customer shall provide thirty (30) days prior
written notice to Applicable Lender of any change in such Customer's name, chief
executive office and principal place of business, organization, form of
ownership or corporate structure; provided, however, that such 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 Other Document
limiting actions of the type described in this Section.
7.4. Corporate Existence. Except as described in Exhibit 7.4, each Customer
shall (A) maintain its corporate existence, maintain in full force and effect
all material 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 Applicable Lender and (C) comply in all material respects with all
Requirements of Law.
7.5. ERISA. USA Customer shall promptly notify IBM Credit in writing after it
learns of the occurrence of any event which would constitute a "reportable
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event" under ERISA or any regulations thereunder with respect to any Plan, or
that the PBGC (as defined in Section 6.12 of this Agreement) 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 USA Customer is required to notify
the PBGC of such reportable event.
Such notification shall include a certificate of the chief financial officer of
USA Customer setting forth details as to such "reportable event" and the action
which USA 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, USA 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) Each Customer and any other Person under such
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 Substance by such Customer or such Person
into, upon, over or under any property now or hereinafter owned, leased or
otherwise controlled (directly or indirectly) by such Customer.
(B) A Customer shall notify Applicable Lender, 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 such 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 Substance,
(iii) such 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
such Customer, and (iv) any occurrence or condition which could constitute a
violation of any Environmental Law.
7.7. Collateral/Charged Assets Books and Records/Collateral/Charged Assets
Audit. (A) Each Customer agrees to maintain books and records pertaining to the
Collateral or Charged Assets as applicable in such detail, form and scope as is
consistent with good business practice.
(B) Each Customer agrees that Applicable Lender or its agents may enter
upon the premises of such Customer at any time and from time to time, during
normal business hours and upon reasonable notice under the circumstances for the
purposes of (i) inspecting the Collateral or Charged Assets as applicable, (ii)
inspecting and/or copying (at such Customer's expense) any and all records
pertaining thereto, (iii) discussing the affairs, finances and business of
Applicable Customer with any officers of such Customer or with the Auditors and
(iv) verifying Accounts and other Collateral or Charged Assets as applicable.
Each Customer also agrees to provide Applicable Lender with such reasonable
information and documentation that Applicable Lender reasonably deems necessary
to conduct the foregoing activities, including, without limitation, reasonably
requested samplings of purchase orders, invoices and evidences of delivery or
other performance. The Lenders shall exercise their rights under this Section
with a view towards not interrupting the Customer's routine business operations
and functions
Upon the occurrence and during the continuance of an Event of Default which has
not been waived by Lenders in writing, Lenders may conduct any of the foregoing
activities upon twenty four hours notice and beginning during normal business
hours in a manner that Lenders deems reasonably necessary.
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(C) Each Customer shall give Applicable Lender thirty (30) days prior
written notice of any change in the location of any material Collateral or
material Charged Assets as applicable, 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 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 such Lender, all
in form and substance reasonably satisfactory to such Lender.
(D) Each Customer agrees to advise Applicable Lender promptly, in
reasonably sufficient detail, of any substantial change relating to the type,
quantity or quality of the Collateral/Charged Assets, or any event which could
reasonably be expected to have a Material Adverse Effect on the value of the
Collateral/Charged Assets or on the security interests granted to Applicable
Lender therein.
7.8. Insurance; Casualty Loss. Each 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. Each Customer will furnish to Applicable Lender, upon its
written request, the insurance certificates with respect to such insurance. In
addition, all Policies so maintained are to name Applicable Lender as lender
loss payee as its interest may appear.
If a Customer fails to pay any cost, charges or premiums, or if a Customer fails
to insure the Collateral or Charged Assets as applicable, Applicable Lender may
pay such costs, charges or premiums. Any amounts paid by Applicable Lender
hereunder shall be considered an additional debt owed by such Customer to
Applicable Lender and are due and payable immediately upon receipt of an invoice
by Applicable Lender.
7.9. Taxes. Each Customer agrees to pay, when due (as such date may be extended
from time to time), all taxes lawfully levied or assessed against such Customer
or any of the Collateral or Charged Assets as applicable 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 applicable accounting principles.
7.10. Compliance With Laws. Each Customer agrees to comply in all material
respects with all Requirements of Law applicable to the Collateral or Charged
Assets as applicable or any part thereof, or to the operation of its business.
7.11. Fiscal Year. USA Customer agrees to maintain its fiscal year as a year
ending December 31 unless USA Customer provides IBM Credit at least thirty (30)
days prior written notice of any change thereof.
7.12. Intellectual Property. Each 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. Each Customer shall maintain all of its material
tangible 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 waste with respect to any of its
material properties, provided, however, the foregoing shall not prohibit or
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limit the disposition, by any Customer, of any asset which is obsolete, surplus,
redundant, worn out, or not in compliance with applicable law.
7.14. Collateral/Charged Assets. Each Customer shall:
(A) from time to time upon request of Applicable Lender with reasonable
prior notice, provide such Lender with access to copies of all invoices during
normal business hours, delivery evidences and other such documents relating to
each Account;
(B) use commercially reasonable efforts to collect all Accounts owed;
(C) promptly notify Applicable Lender of any loss, theft or destruction
of or damage to any of the Collateral or Charged Assets if such loss, theft or
destruction of or damage to any of the Collateral or Charged Assets shall have a
Material Adverse Effect. Each 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 or Charged Assets as applicable. Each
Customer shall, upon demand of Applicable Lender, make, execute and deliver any
assignments and other instruments sufficient for the purpose of assigning any
such award or payment to such Lender, free of any encumbrances of any kind
whatsoever;
(D) 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 or Charged Assets as applicable in order to preserve, protect and
maintain all the rights of Applicable Lender thereunder;
(E) consistent with reasonable commercial practice, maintain, use and
operate the Collateral or Charged Assets as applicable and carry on and conduct
its business in a proper and efficient manner so as to preserve and protect the
Collateral or Charged Assets as applicable and the earnings, incomes, rents,
issues and profits thereof; and
(F) at any time and from time to time, upon the request of Applicable
Lender, and at the sole expense of the Customer, Customer will promptly and duly
execute and deliver such further instruments and documents and take such further
action as such Lender 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 U. C. C., PPSA, the Acts or other applicable
law 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.
For the purpose of this Section 7.14, Lenders acknowledge that Customers'
current operational practices are commercially reasonable.
7.15. Subsidiaries. Lenders may require that any Domestic Subsidiaries become
parties to this Agreement or any other agreement executed in connection with
this Agreement as guarantors or sureties. Upon acquisition of a wholly-owned
Subsidiary by a Canadian Customer, such Subsidiary shall give, in favor of IBM
Canada, a Guaranty supported by pledge of general security interest in the form
of documents acceptable to IBM Canada. Upon acquisition of a Subsidiary by a
Canadian Customer which is not wholly-owned by such Customer, IBM Canada, in its
reasonable discretion, shall have the ability to require other security for the
transaction. USA Customer hereby agrees that, promptly after it acquires any
Subsidiary after the Closing Date, it shall execute a supplement to the Stock
Pledge Agreement for the purpose of pledging to IBM Credit (i) all shares of
stock of the Subsidiary owned by the USA Customer, if the new Subsidiary is a
Domestic Subsidiary or (ii) all shares of stock of the new Subsidiary owned by
USA Customer, up to sixty six percent of the total outstanding shares of stock
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of the Subsidiary, if the new Subsidiary is not a Domestic Subsidiary. For the
purpose of this Section 7.15, each Customer agrees to notify the Applicable
Lender 10 days before it acquires a new Subsidiary.
7.16. Financial Covenants; Additional Covenants. USA Customer acknowledges and
agrees that USA Customer shall maintain the financial covenants and each
Customer acknowledges and agrees other covenants set forth in the attachments,
exhibits and other addenda incorporated in this Agreement.
7.17. Guaranty. (A) USA Customer hereby guarantees to Lenders the prompt payment
when due and the full, prompt, and faithful performance of any and all
Obligations upon which any Customer is in any manner obligated, heretofore, now,
or hereafter owned, contracted or acquired by Lenders pursuant to this
Agreement, whether the same are individual, joint or several, primary,
secondary, direct, contingent or otherwise. USA Customer irrevocably
subordinates to the full payment of amounts due Lenders any and all rights to
which it may be entitled, by operation of law or otherwise, (i) to be subrogated
to the rights of Lenders against another Customer hereto with respect to such
payment or otherwise to be reimbursed, indemnified or exonerated by another
Customer in respect thereof, or (ii) to receive any payment, in the nature of
contribution or for any other reason, from another Customer hereto with respect
to such payment.
(B) Notwithstanding any provision herein to the contrary, the liability
of USA 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 or other law,
insolvency, reorganization, fraudulent conveyance or other law involving the
rights of creditors generally.
(C) The liability of USA Customer under this Section 7.17 is direct,
absolute 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 any Customer's financial condition. USA Customer's obligation
pursuant to this Section 7.17 shall continue for so long as any sums owing to
Lenders by any Customer remains outstanding and unpaid, unless terminated in the
manner provided herein. USA Customer acknowledges that its obligations hereunder
are in addition to and independent of any agreement or transaction between any
Lender and any other Customer or any other Person creating or reserving any
lien, encumbrance or security interest in any property of any other Customer or
any other Person as security for any obligation of such Customer.
(D) USA 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 any Lender. USA Customer
acknowledges that it has access to current and future Customer financial
information which will enable USA Customer to continuously remain informed of
each other Customer's financial condition. USA Customer also consents to and
agrees that the guarantees provided in this Section 7.17 and the Obligations
shall not be affected by Lenders' subsequent increases or decreases in any
credit line that any Lender may grant to any Customer; substitutions, exchanges
or releases of all or any part of the Collateral or Charged Assets as applicable
or hereafter securing any of the Obligations; sales or other dispositions of any
or all of the Collateral or Charged Assets now or hereafter securing any of the
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Obligations without demands, advertisement or notice of the time or place of the
sales or other dispositions, realizing on the Collateral or Charged Assets as
applicable to the extent Lenders, in their sole discretion deems proper.
(E) With respect to the guarantees provided hereunder, USA Customer, in
its capacity as a guarantor, 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, any and all defenses, including but
not limited to any defense which it may have against any manufacturer or,
distributor, (5) any and all rights of set-off such USA Customer may have
against any Lender and (6) 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 any Lender on which any Customer may, in any way, be liable
and USA Customer hereby ratifies and confirms whatever Lenders 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 USA Customer, whether
such proceedings, actions and/or claims are federal and/or state.
Section 8. NEGATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations hereunder:
8.1. Liens. No Customer will, directly or indirectly mortgage, assign, pledge,
transfer, create, incur, assume, permit to exist or otherwise permit any Lien 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. (A) No Customer will, directly or indirectly, sell,
lease, assign, transfer or otherwise dispose of any assets other than (i) sales
of inventory in the ordinary course of business and short term rental of
inventory as demonstrations in amounts not material to such Customer, (ii)
voluntary dispositions of individual assets and obsolete or worn out property in
the ordinary course of business, and (iii) Permitted Dispositions provided,
however, that no Permitted Disposition shall represent an amount in excess of
Fifteen Percent (15%) of the combined assets of the Customers and Subsidiaries
without the prior written consent of IBM Credit.
(B) In the event of a Permitted Disposition, Applicable Lender shall
provide USA Customer with all such documentation (including, without limitation,
the execution and delivery of termination statements) and shall take all such
steps (including, without limitation, the redelivery of stock certificates) as
USA Customer, from time to time may reasonably request in connection with, and
to facilitate such, Permitted Disposition.
8.3. Corporate Changes. Except as described on Exhibit 8.3, no Customer will,
without the prior written consent of Applicable Lender, 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 such
Applicable Customer.
8.4. Guaranties. No Customer will, directly or indirectly, assume, guaranty,
endorse, or otherwise become liable upon the obligations of any other Person
other than a Subsidiary, except (i) by the endorsement of negotiable instruments
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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 Lenders.
8.5. Restricted Payments. Except as provided in Exhibit 8.5, no Customer will,
and no Customer will permit any Subsidiary to, directly or indirectly: (i)
declare or pay any dividend (other than dividends payable solely in common stock
of such 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
such 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 such 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).
8.6. Investments. No Customer will, 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, Canada or Great Britain or any agency or instrumentality thereof or
obligations guaranteed as to principal and interest by the United States of
America, Canada or Great Britain or any agency thereof;
(C) stock or obligations issued to Customers 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 such Customer;
(D) commercial paper of any corporation organized under the laws of
Canada, Great Britain of any State of the United States or any bank organized or
licensed to conduct a banking business under the laws of Canada, Great Britain,
the United States or any State thereof having not less than the third highest
rating then given by Moody's Investor's Services, Inc. or Standard & Poor's
Corporation; and
(E) any Person, the acquisition of which is a Permitted Acquisition.
8.7. Affiliate/Subsidiary Transactions. No Customer will, directly or
indirectly, enter into any transaction with any Affiliate or Subsidiary, other
than with a Guarantor, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service to any Affiliate or
Subsidiary, other than with a Guarantor, of such Customer except in the ordinary
course of business and pursuant to the reasonable requirements of such
Customer's business upon fair and reasonable terms no less favorable to such
Customer than could be obtained in a comparable arm's-length transaction with an
unaffiliated Person.
8.8. ERISA. USA Customer will not (A) terminate any Plan so as to incur a
material liability to the PBGC (as defined in Section 6.12 of this Agreement),
(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
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
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"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 likely be expected to have
a Material Adverse Effect.
8.9. Additional Negative Pledges. No Customer will, directly or indirectly,
create or otherwise cause or permit to exist or become effective, other than in
its ordinary course of business, any contractual obligation which may restrict
or inhibit Applicable Lender's rights or ability to sell or otherwise dispose of
the Collateral or Charged Assets as applicable or any part thereof after the
occurrence and during the continuance of an Event of Default.
8.10. Use of Proceeds. The Customers shall not use any portion of the proceeds
of any R/C Advances other than for its general working capital requirements,
capital expenditures, Permitted Acquisitions, and other corporate purposes which
are not otherwise specifically prohibited hereby or in any Other Documents.
8.11. Indebtedness. The Customers will not create, incur, assume or permit to
exist any Indebtedness, except for Permitted Indebtedness.
8.12. Loans. The Customers will not make any loans, advances, contributions or
payments of money or goods to any Subsidiary, Affiliate or parent corporation or
to any officer, director or stockholder of Customers or of any such corporation
(except for compensation for personal services actually rendered), except for:
(A) transactions expressly authorized by this Agreement;
(B) as described in Exhibit 8.12;
(C) loans, advances and payments of money or goods to other Customers
or Guarantors;
(D) with respect to the Canadian Customers, loans, advances and
payments of money or goods to (x) those of its Subsidiaries which have
guaranteed to IBM Canada the Obligations of the Canadian Customer of which such
Person is a Subsidiary and secured such guarantee with a security interest (or
the functional equivalent if located in a province in which the PPSA has not
been adopted in substantially all assets of that Person or (y) a Non-Guarantor
Subsidiary which have evidenced the resulting obligation to TigerTel Inc. with a
promissory note which is secured with a security interest (or the functional
equivalent if located in a Province in which the PPSA has not been adopted) in
substantially all assets of such borrowing Non-Guarantor Subsidiary, which note
has been pledged to IBM Canada, provided the aggregate of loans made under this
clause (y) to all Non-Guarantor Subsidiaries shall not exceed CND$ 1,200,000
(One Million Two Hundred Thousand Canadian Dollar) without the prior written
consent of IBM Canada.
Section 9. DEFAULT
9.1. Event of Default. Any one or more of the following events shall constitute
an Event of Default by a Customer under this Agreement and the Other Documents:
(A) The failure of any Customer to make timely payment of the
Obligations or any part thereof when due and payable if such failure shall
remain unremedied for more than five (5) days after written notice thereof shall
have been given to Customer by IBM Credit during which period Customer shall be
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charged the Delinquency Fee Rate set forth in Attachment A beginning on the day
after the payment was due and including the day payment is received;
(B) Any Customer fails to comply with or observe any term, covenant or
agreement contained in this Agreement or any Other Documents and such failure is
not cured within fifteen (15) Business Days of written notice (with reasonable
particularity) to USA Customer of such failure ;
(C) Any representation, warranty, statement, report or certificate made
or delivered by or on behalf of any Customer or any of its officers, employees
or agents or by or on behalf of any Guarantor to Lenders was false in any
material respect at the time when made or deemed made;
(D) Any 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 any 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 a 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;
(E) The entry of any judgment against any Customer or any Guarantor in
an amount in excess of U.S.$1,000,000 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 covered by insurance (subject to commercially
reasonable deductable) as to which the insurance company has acknowledged its
obligation to pay such judgment in full;
(F) The dissolution or liquidation of any Customer, any material
Domestic Subsidiary or any Guarantor, or its directors or stockholders shall
take any action to dissolve or liquidate any Customer or any Guarantor;
(G) Any Customer suspends business for fifteen (15) consecutive
Business Days for any reason other than an Act of God, war; or other
catastrophic event beyond the control of the Customers;
(H) The occurrence of any event or condition that permits the holder of
any Indebtedness aggregately in excess of U.S.$1,000,000 arising in one or more
related or unrelated transactions to accelerate the maturity thereof or the
failure of any Customer to pay when due any such Indebtedness;
(I) Any Guaranty of any or all of the Customers' Obligations executed
by any Guarantor, whose assets are substantially relied upon by the Lenders to
secure the Obligations, in favor of Lenders, 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;
(J) Any Customer is in default under the material terms of any of the
Other Documents after the expiration of any applicable grace and/or cure
periods;
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(K) 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 USA Customer to the PBGC which in the reasonable
opinion of IBM Credit will have a Material Adverse Effect; or
(L) 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 USA Customer.
9.2. Acceleration. Upon the occurrence and during the continuance of an Event of
Default which has not been waived in writing by Lenders, Lenders may, in their
sole discretion, take any or all of the following actions, without prejudice to
any other rights they may have at law or under this Agreement to enforce its
claims against the Customers: (a) declare all Obligations to be immediately due
and payable (except that in the Event of Default consists of the filing of a
petition under the Bankruptcy Code or analogous laws in Canada or UK, 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 Lenders; 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 Lenders and the acceleration
of the Obligations in accordance with Section 9.2, Lenders may exercise all
rights and remedies of a secured party under the U.C.C., PPSA, the Acts or any
other provisions, laws or statutes as applicable. Without limiting the
generality of the foregoing, a Lender 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 the Lender may use (at the expense
of the Customers) such of the supplies or space of a 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
provided in all events, the Lenders shall not hinder or limit access by each of
the Customers to all of such records and shall make all of such records
available to the Customers; (ii) bring suit, in the name of the Customer or the
Lender 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 Lender; (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 such Lender's sole option and discretion, and any
Lender 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 or Charged
Assets without judicial process and to enter any premises where any Collateral
or Charged Assets as applicable may be located for the purpose of taking
possession of or removing the same.
(B) Upon the occurrence of any Event of Default, each Customer agrees
to provide to Applicable Lender (i) within three (3) Business Days after request
by a Lender, any written certificates, schedules and reports together with all
supporting documents relating to the Collateral or Charged Assets as applicable
or the Applicable Customer's or any Guarantor's business affairs and financial
condition; and (ii) the name, address and phone number of each of its Account
debtors' primary contacts for each Account if requested by IBM Credit. Upon the
occurrence and during the continuance of any Event of Default which has not been
waived in writing by Lenders, and the acceleration of the Obligations in
accordance with Section 9.2 a Lender shall have the right to sell, lease, or
otherwise dispose of all or any part of the Collateral or Charged Assets as
applicable, whether in its then condition or after further preparation or
processing, in the name of Applicable Customer or such Lender, or in the name of
such other party as such Lender 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
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<PAGE>
as such Lender in its sole discretion may deem advisable, and any Lender shall
have the right to purchase at any such sale.
If a Lender, in its sole discretion determines that any of the Collateral or
Charged Assets as applicable requires rebuilding, repairing, maintenance or
preparation, such Lender shall have the right, at its option, to do such of the
aforesaid as it deems necessary for the purpose of putting such Collateral or
Charged Assets as applicable in such saleable form as such Lender shall deem
appropriate. Each Customer hereby agrees that any disposition by Applicable
Lender of any Collateral or Charged Assets as applicable pursuant to and in
accordance with the terms of a repurchase agreement between Applicable Lender
and the manufacturer or any supplier of such Collateral or Charged Assets as
applicable constitutes a commercially reasonable sale. Each Customer agrees, at
the request of Applicable Lender, to assemble the Collateral or Charged Assets
as applicable and to make it available to Applicable Lender at places which such
Applicable Lender shall select, whether at the premises of the Customer or
elsewhere, and to make available to Applicable Lender the premises and
facilities of the Customer for the purpose of Applicable Lender's taking
possession of, removing or putting such Collateral or Charged Assets as
applicable in saleable form. If notice of intended disposition of any Collateral
or Charged Assets as applicable 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, each
Lender is hereby granted by each Applicable Customer, upon the occurrence and
during the continuance of any Event of Default which has not been waived in
writing by Lenders, an irrevocable, non-exclusive license to use, assign,
license or sublicense all computer software programs, data bases, processes and
materials used by the Applicable Customer in its businesses or in connection
with any of the Collateral or Charged Assets as applicable.
(D) The net cash proceeds resulting from a Lender's exercise of any of
the foregoing rights (after deducting all charges, costs and expenses, including
reasonable attorneys' fees) shall be applied by such Lender to the payment of
the Obligations, whether due or to become due, in such order as such Lender may
in it sole discretion elect. Applicable Customer shall remain liable to such
Lender for any deficiencies, and such Lender in turn agrees to remit to
Applicable 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. Each Customer waives to the extent permitted by applicable law all
rights of set-off it may have against any Lender. Each 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 USA 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 Lenders after the occurrence and
during the continuance of an Event of Default. Upon the date that this Agreement
is terminated, all of Customers' Obligations shall be immediately due and
payable in their entirety, notwithstanding any other provisions of this
Agreement.
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(B) Until the payment in full of all of Customers' Obligations, no
termination of this Agreement or any of the Other Documents shall in any way
affect or impair (i) Customers' Obligations to Lenders including, without
limitation, any transaction or event occurring prior to and after such
termination, or (ii) Lenders' rights hereunder, including, without limitation
Lenders' security interest in the Collateral or Charged Assets as applicable. On
and after a Termination Date, a Lender may, but shall not be obligated to, upon
the request of Applicable Customer, continue to provide Advances hereunder.
(C) In the event of the payment in full of all of the then Outstanding
Advances and the termination of the Credit Line, each Applicable Lender shall
provide USA Customer with all such documentation (including, without limitation,
the execution and delivery of termination statements) and shall take all such
steps (including, without limitation, the redelivery of stock certificates) as
USA Customer, from time to time amy reasonably request in connection with, and
to facilitate the release of all security and Collateral interests which any
Applicable Lender has in any Customer, Subsidiary or other Person.
(D) A prepayment premium, shall be payable by USA Customer to IBM
Credit in the event that the USA Customer terminates the Credit Line prior to
the third anniversary of the Closing Date, in an amount equal to Eighty Five
Million Dollars multiplied by (i) if the termination occurs on a date that is
between the Closing Date to and including the first anniversary thereof, Zero
basis points (0%), (ii) the first anniversary thereof to and including the
second anniversary thereof, Fifty basis points (0.5%), and (iii) thereafter
Twenty Five basis points (0.25%).
10.2. Indemnification. Each Customer hereby agree to indemnify and hold harmless
Lender 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 the
Lenders may from time to time have with (i) such Customer, (ii) any Person that
shall be acquired by such Customer or (iii) any Person that such 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 Charged Assets as applicable or to any act or omission of
the Customer in connection therewith. Notwithstanding the foregoing, a Customer
shall not be obligated to indemnify a Lender for any Losses incurred by such
Lender which are a result of such Lender's gross negligence or willful
misconduct. The indemnity provided herein shall survive the termination of this
Agreement.
10.3. Additional Obligations. A Lender, without waiving or releasing any
Obligation or Default of the Customers, may perform any Obligations of the a
Customer that such Customer shall fail or refuse to perform and such Lender may,
at any time or times hereafter, but shall be under no obligation to do so, pay,
acquire or accept any assignment of any security interest, lien, encumbrance or
claim against the Collateral or Charged Assets as applicable asserted by any
person. All sums paid by such Lender 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 or Charged Assets as applicable.
10.4. LIMITATION OF LIABILITY. NO LENDER NOR ANY OTHER INDEMNIFIED PERSON SHALL
HAVE ANY LIABILITY WITH RESPECT TO ANY PUNITIVE, INDIRECT OR CONSEQUENTIAL
DAMAGES SUFFERED BY CUSTOMERS IN CONNECTION WITH THIS AGREEMENT, ANY OTHER
AGREEMENT, OR ANY CLAIMS IN ANY MANNER RELATED THERETO. NOR SHALL LENDERS OR ANY
OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY TO CUSTOMERS 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. IN THE EVENT ANY CUSTOMER
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<PAGE>
REQUESTS APPLICABLE LENDER TO EFFECT A WITHDRAWAL OR DEBIT OF FUNDS FROM AN
ACCOUNT OF SUCH CUSTOMER, THEN IN NO EVENT SHALL APPLICABLE LENDER BE LIABLE FOR
ANY AMOUNT IN EXCESS OF ANY AMOUNT INCORRECTLY DEBITED, EXCEPT IN THE EVENT OF
SUCH APPLICABLE LENDER'S 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 Customers and by Lenders. No
delay or omission of any Lender 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 Lenders 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
Lenders at any time and shall not be deemed to constitute a waiver of any such
requirement subsequent thereto. Lenders'failure at any time or times to require
strict compliance and performance by any Customer of any undertakings,
agreements, covenants, warranties and representations of this Agreement or any
Other Document shall not waive, affect or diminish any right of Lenders
thereafter to demand strict compliance and performance thereof. Any waiver by
Lenders of any Default by the Customers under this Agreement or any of the Other
Documents shall not waive or affect any other Default by the Customers 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 Customers contained in this Agreement or the Other Documents and no
Default by the Customers shall be deemed waived by Lenders unless such waiver is
in writing signed by an authorized representative of Lenders.
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 a Lender to an Applicable Customer under this Agreement or the Other
Documents shall constitute one loan secured by such Lender's security interests
in the Collateral or Charged Assets as applicable and by all other security
interests, liens, charged assets and encumbrances heretofore, now or from time
to time hereafter granted by the Applicable Customer to such Lender or any
assignor of such Lender.
10.8. Additional Collateral/Charged Assets. All monies, reserves and proceeds
received or collected by a Lender with respect to Accounts and other property of
an Applicable Customer in possession of such Lender at any time or times
hereafter are hereby pledged by Applicable Customer to such Lender as security
for the payment of Applicable Customer's Obligations and shall be applied
promptly by such Lender on account of the Applicable Customer's Obligations;
provided, however, such Lender may release to the Applicable Customer such
portions of such monies, reserves and proceeds as such Lender may from time to
time determine, in its sole discretion.
10.9. No Merger or Novations. Neither the obtaining of any judgment nor the
exercise of any power of seizure or sale shall operate to extinguish the
Obligations of a Customer to the Lenders 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 the Lenders' rights under this
Agreement.
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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 Lenders and the Customers and their
respective successors and assigns; provided, that no Customer shall have the
right to assign this Agreement or any of the Other Documents without the prior
written consent of Applicable Lender.
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
(i) upon receipt if deposited in the first class or equivalent mail, with proper
postage prepaid, (ii) upon receipt of confirmation or answerback if sent by
telecopy, or other similar facsimile transmission if received during customary
business hours at the offices of the recipient, otherwise, at the opening of
business on the recipient's then next Business Day, (iii) one Business Day after
deposit with a reputable overnight courier with all charges prepaid if intended
for delivery in the same country as that in which so deposited, otherwise, at
the opening of the business on the recipient's then next Business Day, or (iv)
when delivered, if hand-delivered by messenger during customary business hours,
all of which shall be properly addressed to the party to be notified and sent to
the address or number indicated as follows:
- --------------------------------------------------------------------------------
(i) If to IBM Credit at: (ii) If to a Customer at:
IBM Credit Corporation Applicable Customer's Name
1500 Riveredge Parkway
Atlanta, Georgia 30328 c/o Applied Cellular Technology
Attention: Region Manager, East Financial, Corp.
Facsimile: 1 (770) 644-4826 Unit #6A, Pine Tree Condominium
360 Route 101 W.
Bedford, New Hampshire 03110
Attention: Jerome C. Artigliere
Facsimile:
(iii) If to IBMUK at: (iv) If to IBM Canada at:
IBM United Kingdom Financial IBM Financing, a division of IBM
Services Limited
PO Box 41 Canada Limited
North Harbour, Cosham Hants, 3600 Steeles Avenue East, f4/938
United Kingdom
Attention: Jeffrey Smith, Director Markam, Ontario L3R 9Z7Attention:
Facsimile: 44 1 705221513 Manager, Commercial Financing
Facsimile: (905) 316-6009
or to such other address or number as each party designates to the other in the
manner prescribed herein. A copy of all material notices under the Agreement,
including any notice of, or which starts the beginning of any grace and/or cure
periods applicable to, any Event of Default and any notice which consists of a
reservation of rights or claiming or suggesting any departure from the
provisions of the Agreement and Other Documents shall also be delivered to
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<PAGE>
Applied Digital Solutions, Inc. located at 400 Royal Palm Way, Suite 410, Palm
Beach, Florida 33480, Attention: General Counsel or such other address, written
notice of which is provided by USA Customer to Lenders. Lenders reserve the
right to serve notices of legal proceedings directly to Customers.
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
LENDERS TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, EACH CUSTOMER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND ANY OTHER DOCUMENT, 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 CITY, NEW YORK AND THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF 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 USA CUSTOMER AT ITS
ADDRESS SET FORTH IN SECTION 10.13 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 SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
10.15. JURY TRIAL WAIVER. EACH OF THE LENDERS AND THE CUSTOMERS HEREBY
IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
(INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH ANY LENDER AND A 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.
10.16. Entire Agreement. This Agreement embodies the entire agreement among the
Customers and the Lenders relating to the subject matter hereof and supersede
all prior agreements, representations and understandings, if any, relating to
the subject matter hereof.
10.17. Non-Cross Guaranties and Non-Cross Collateralization. No Canadian
Customer and no UK Customer has guarantied the Obligations of any other
Customer. The security interests and charges created in the Canadian Security
Agreements or the Charges, as applicable, by the Canadian Customers and the UK
Customers secure only those specific Obligations of such Customer which created
such security interest or charge and does not secure any Obligations of any
other Person, it being the intention of the parties that no
cross-collateralization be created with respect to any such Collateral granted
by any Canadian Customer or UK Customer.
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<PAGE>
IN WITNESS WHEREOF, each Customer has read the entire Agreement, and
has caused its authorized representatives to execute this Agreement and has
caused its corporate seal, if any, to be affixed hereto as of the date first
written above.
IBM CREDIT CORPORATION IBM FINANCING, A DIVISION OF IBM
CANADA LIMITED
By: /s/ Philip N. Morse By: /s/ Randy White
---------------------------------- --------------------------------
Print Name: Philip N. Morse Print Name: Randy White
Title: Director, Commercial Financing Title: MGR, Working Capital Finance
Americas
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<PAGE>
IBM UNITED KINGDOM FINANCIAL SERVICES APPLIED DIGITAL SOLUTIONS, INC.
LIMITED
By: /S/ By: /s/ Jerome C. Artigliere
--------------------------------- --------------------------------
Print Name: Print Name: Jerome C. Artigliere
-------------------------
Title: Title: Vice President
------------------------------
GROUND EFFECTS LTD. TIGERTEL INC. (formerly known as
Contour Telecom Management Inc.)
By: /s/ James Scott By: /s/ Donald H. Swift
--------------------------------- --------------------------------
Print Name: James Scott Print Name: Donald H. Swift
Title: President Title: Chairman of the Board,
Chief Executive Officer
and Director
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<PAGE>
SIGNAL PROCESSORS LIMITED SIGNATURE INDUSTRIES LIMITED
By: /S/ By: /S/
---------------------------------- --------------------------------
Print Name: Print Name:
-------------------------- ------------------------
Title: Title:
------------------------------- -----------------------------
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<PAGE>
EXHIBIT 2.3.1
Term Loan A
Term Loan A Commitment: Twenty Two Million United States Dollars
(U.S.$22,000,000)
Term Loan A Finance Charge: US Finance Charge as set forth in Attachment A
Term Loan A Stated Maturity Date: the third anniversary of Closing Date.
Term Loan A Repayment Schedule: The principal amount of Term Loan A shall be
amortized over six years and shall be payable by USA Customer at the end of each
calendar quarter, provided that all unpaid principal of such Term Loan A shall
be paid in full on the Term Loan A Stated Maturity Date.
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<PAGE>
EXHIBIT 2.4.1
Term Loan B
Term Loan B Commitment: Thirty Five Million United States Dollars
(U.S.$35,000,000)
Term Loan B Finance Charge: US Finance Charge as set forth in Attachment A
Term Loan B Stated Maturity Date: the third anniversary of Closing Date.
Term Loan B Repayment Schedule: The principal amount of each Term Loan B shall
be amortized over six (6) years and shall be payable by USA Customer at the end
of each calendar quarter, provided that all unpaid principal of such Term Loan B
shall be paid in full on the Term Loan B Stated Maturity Date.
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<PAGE>
EXHIBIT 2.5.1
Term Loan C
Term Loan C (Ground Effects) Commitment: Four Million Canadian Dollars
(CND$4,000,000)
Term Loan C (TigerTel) Commitment: Six Million Canadian Dollars (CND$6,000,000)
Term Loan C Finance Charge: Canadian Finance Charge as set forth in Attachment A
Term Loan C Stated Maturity Date: the third anniversary of Closing Date.
Term Loan C Repayment Schedule: The principal amount of Term Loan C shall be
amortized over six years and shall be payable by Canadian Customer at the end of
each calendar quarter, provided that all unpaid principal of such Term Loan C
shall be paid in full on the Term Loan C Stated Maturity Date.
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<PAGE>
EXHIBIT 2.3.2
Form Request for Term Loan A
[Name and address of IBM Credit]
Date:
Reference is made to the Revolving Credit Agreement dated as of
__________, 1999 among IBM Credit Corporation, IBM Financing, a division of IBM
Canada Limited, IBM United Kingdom Financial Services Limited, Applied Digital
Solutions, Inc. ("ADS"), Ground Effects Ltd., TigerTel Inc., Signal Processors
Limited and Signature Industries Limited (as amended from time to time, the
"Credit Agreement"). Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in the Credit Agreement.
ADS hereby requests that a Term Loan A in the amount of
U.S.$_______________ to be made to it on "[Date]". Please disburse the proceeds
of the Term Loan A by [insert method of disbursement].
ADS hereby requests and warrants that (a) the proceeds of the Term Loan
A hereby requested will be used to repay ACT's debt to State Street Bank, (b)
the borrowing requested hereby complies with the requirements of the Credit
Agreement, (c) each representation and warranty by the Customers in the Credit
Agreement is true and correct at and as of the date hereof, (d) no Default has
occurred and is continuing as of the date hereof or would result from the making
of the Term Loan A hereby requested or from the application of the proceeds
thereof.
The requests, representations and warranties contained herein are made
by ADS and not by the individual who signs below on behalf of ADS.
Applied Digital Solutions, Inc.
By:______________________
Name:
Title:
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<PAGE>
EXHIBIT 2.4.2
Form Request for Term Loan B
[Name and address of IBM Credit]
Date:
Reference is made to the Revolving Credit Agreement dated as of
__________, 1999 among IBM Credit Corporation, IBM Financing, a division of IBM
Canada Limited, IBM United Kingdom Financial Services Limited, Applied Digital
Solutions, Inc. ("ADS"), Ground Effects Ltd., TigerTel Inc., Signal Processors
Limited and Signature Industries Limited (as amended from time to time, the
"Credit Agreement"). Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in the Credit Agreement.
ADS hereby requests that a Term Loan B in the amount of
U.S.$_______________ to be made to it on "[Date]". Please disburse the proceeds
of the Term Loan B by [insert method of disbursement].
ADS hereby requests and warrants that (a) the proceeds of the Term Loan
B will be used for the acquisition of _______________, (b) the borrowing
requested hereby complies with the requirements of the Credit Agreement, (c)
each representation and warranty by the Customers in the Credit Agreement is
true and correct at and as of the date hereof, (d) no Default has occurred and
is continuing as of the date hereof or would result from the making of the Term
Loan A hereby requested or from the application of the proceeds thereof.
The requests, representations and warranties contained herein are made
by ADS and not by the individual who signs below on behalf of ADS.
Applied Digital Solutions, Inc.
By:______________________
Name:
Title:
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<PAGE>
EXHIBIT 2.5.2
Form Request for Term Loan C
[Name and address of IBM Canada]
Date:
Reference is made to the Revolving Credit Agreement dated as of
__________, 1999 among IBM Credit Corporation, IBM Financing, a division of IBM
Canada Limited, IBM United Kingdom Financial Services, Applied Digital
Solutions, Inc., Ground Effects Ltd., TigerTel Inc., Signal Processors Limited
and Signature Industries Limited (as amended from time to time, the "Credit
Agreement"). Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the Credit Agreement.
_________________ (the"Company") hereby requests that a Term Loan C in the
amount of CND$____________ to be made to it on "[Date]". Please disburse the
proceeds of the Term Loan C by [insert method of disbursement].
The Company hereby requests and warrants that (a) the proceeds of the
Term Loan C hereby requested will be used to _______________________, (b) the
borrowing requested hereby complies with the requirements of the Credit
Agreement, (c) each representation and warranty by the Customers in the Credit
Agreement is true and correct at and as of the date hereof, (d) no Default has
occurred and is continuing as of the date hereof or would result from the making
of the Term Loan C hereby requested or from the application of the proceeds
thereof.
The requests, representations and warranties contained herein are made
by the Company and not by the individual who signs below on behalf of the
Company.
By:______________________
Name:
Title:
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<PAGE>
ATTACHMENT A, EFFECTIVE DATE JULY 30, 1999 ("ATTACHMENT A") TO AMENDED AND
RESTATED TERM AND REVOLVING CREDIT AGREEMENT DATED JULY 30, 1999
Customers: USA Customer - Applied Digital Solutions, Inc. Canadian Customers -
Tigertel Inc. and Ground Effects Ltd.
I. Fees, Rates and Repayment Terms:
(A) Credit Line: Thirty Three Million Five Hundred Thousand Dollars
(US$33,500,000) of which Two Million Dollars (US$2,000,000) is
reserved to drawn upon as mutually agreed to by IBM Credit, USA
Customer and State Street Bank & Trust Company;
(i) USA Credit Line: Twenty Two Million Dollars (US$22,000,000);
(ii) Canadian Credit Line: Eight Million Nine Hundred Seventy
Eight Thousand Canadian Dollars
(C$8,978,000);
TigerTel, Inc.: Three Million Three Hundred Fifty
Thousand Canadian Dollars
(C$3,350,000);
Ground Effects, Inc. Five Million Canadian Dollars
(C$5,000,000);
Availability Six Hundred Twenty Eight Thousand
Canadian Dollars (C$628,000)
Availability from the Line of Credit will be reserved in
the amount of any Letter of Credit issued.
(iii) UK Credit Line: Three Million Dollars (US$3,000,000);
(B) Finance Charge:
(i) USA Finance Charge: Base Rate plus Applicable Margin
(ii) Canadian Finance Charge: Base Rate plus Applicable Margin
(iii) UK Finance Charge: Base Rate plus Applicable Margin
<PAGE>
ATTACHMENT A TO
AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT
I. Fees, Rates and Repayment Terms: (continued)
Applicable Margin:
The Applicable Margin for determining USA Customer Finance Charge
shall be 1.75% at the Closing Date through the first Date of
Determination, and shall change to the applicable percentage set
forth be low under the caption Applicable Margin based upon the
Leverage Ratio as of the relevant date of determination. Leverage
Ratio shall mean the ratio of Total Liabilities to Tangible Net
Worth as defined in Part III of this Attachment A.
Leverage Covenant Applicable Margin
=< 4.0 1.65
=< 4.5 1.70
=< 5.0 1.75
=< 5.5 1.80
=< 6.0 1.85
=< 6.5 1.90
The first Date of Determination shall be the first day of the
calendar month following the earlier of (i) receipt by IBM Credit
of the financial statements required by Section 7.01 showing a
change in the Leverage Ratio, and (ii) receipt and consent by IBM
Credit of a notice from the USA Customer requesting a change in
the permitted Leverage Ratio.
Each subsequent change in the Applicable Margin shall be
effective on the first day of the calendar month following the
earlier of (i) receipt by IBM Credit of the financial statements
required by Section 7.01 showing a change in the Leverage Ratio
form the prior fiscal quarter, and (ii) receipt and consent by
IBM Credit of a notice requesting a change in the permitted
Leverage Ratio. USA Customer agrees to notify IBM Credit of any
increase in the Leverage Ratio from that previously notified to
IBM Credit.
The Applicable Margin for determining the Canadian Finance Charge
shall be .1707% at the Closing Date and shall change by the same
percentage amount each time the Applicable Margin for determining
USA Finance Charge changes.
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The Applicable Margin for determining the UK Finance Charge shall
be 1.4207% at the Closing Date and shall change by the same
percentage amount each time the Applicable Margin for determining
USA Finance Charge changes.
USA Customer covenants that the Leverage Ratio shall be
maintained at less than 4.0 on and after March 31, 2000.
<PAGE>
ATTACHMENT A TO
AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT
I. Fees, Rates and Repayment Terms: (continued)
(C) Delinquency Fee Rate:
(i) USA: Base Rate plus 4.00%
(ii) Canada: Base Rate plus 2.42%
(iii) UK: Base Rate plus 3.67%
(D) Shortfall Transaction Fee: Shortfall Amount multiplied by 0.30%
(E) Other Charges:
(i) Annual Facility Fee: $85,000
(ii) Closing Fee: $545,000
II. Financial Covenants:
Definitions: The following terms shall have the following respective meanings in
this Attachment A. Accounting terms not otherwise defined shall be determined in
accordance with generally accepted accounting principles (GAAP).
Current shall mean within the on-going twelve month period.
Current Assets shall mean assets that are cash or expected to become cash
within the on-going twelve months.
Current Liabilities shall mean payment obligations resulting from past or
current transactions that require settlement within the on-going twelve
month period.
Fixed Charges shall mean current portions of Long Term Debt plus capital
expenditures.
Gross Cash Flow shall mean Net Profit after Tax plus depreciation,
amortization and noncash extraordinary losses, minus extraordinary gains.
Long Term shall mean beyond the on-going twelve month period.
Long Term Assets shall mean assets that take longer than a year to be
converted to cash. They are divided into four categories: tangible assets,
investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which mature
more than twelve months from the date of determination, or mature within
twelve months from such date but are renewable or extendible at the option
of the debtor to a date more than twelve months from the date of
determination.
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ATTACHMENT A TO
AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT
II. Financial Covenants: (continued)
Net Profit after Tax shall mean Revenue plus all other income, minus all
costs, including applicable taxes.
Net Profit before Tax shall mean Net Profit after Tax plus applicable
taxes.
Revenue shall mean the monetary expression of the aggregate of products or
services transferred by an enterprise to its customers for which said
customers have paid or are obligated to pay, plus other income as allowed.
Subordinated Debt shall mean Customer's indebtedness to third parties as
evidenced by an executed Notes Payable Subordination Agreement in favor of
IBM Credit.
Tangible Net Worth shall mean:
Total Net Worth minus;
(a) goodwill, intangible assets, prepaid expenses, and other current
and non-current assets as identified in USA Customer's financial
statements; and
(b) all accounts receivable from employees, officers, directors,
stockholders and affiliates; and
(c) all callable/redeemable preferred stock.
Total Assets shall mean the total of Current Assets and Long Term
Assets.
Total Liabilities shall mean the Current Liabilities and Long Term
Debt less Subordinated Debt, resulting from past or current
transactions, that require settlement in the future.
Total Net Worth (the amount of owner's or stockholder's ownership in
an enterprise) is equal to Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current Liabilities.
<PAGE>
ATTACHMENT A TO
AMENDED AND RESTATED TERM AND REVOLVING CREDIT AGREEMENT
III. Financial Covenants (continued):
USA Customer will be required to maintain the following financial ratios,
percentages and amounts as of the last day of the fiscal period under review by
IBM Credit:
Compliance with the covenants set forth below will be based on the consolidated
financial statements of USA Customer.
(a) Current Assets to Current Liabilities ratio greater than
1.0:1.0;
(b) Net Profit before Tax to Revenue percentage on a rolling
four quarter basis equal to or greater than:
1.5 percent, with no losses in any quarter, from
the effective date of this Attachment through the
fiscal quarter ending 12/31/99;
2.0 percent, with no losses in any quarter, from the
fiscal quarter ending 3/31/00 and thereafter;
(c) Total Liabilities to Tangible Net Worth ratio greater than
zero and equal to or less than:
6.5:1.0 from the effective date of this Attachment
through the fiscal quarter ending 12/31/99;
4.0:1.0 from the fiscal quarter ending 3/31/00
and thereafter.
(d) Gross Cash Flow to Fixed Charges Ratio on a rolling four
quarter basis equal to or greater than:
1.5:1.0 from the effective date of this Attachment
through the fiscal quarter ending 12/31/99;
2.0:1.0 from the fiscal quarter ending 3/31/00
and thereafter.
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ATTACHMENT A TO
AMENDED AND RESTATED TERMS AND REVOLVING CREDIT AGREEMENT
III. (A) Additional Conditions Precedent Pursuant to Section 5.1 (K) of
the Agreement:
o None
(B) Additional Conditions Precedent Pursuant to Section 5.4 (M) of
the Agreement:
o Payment and Undertaking Letter from The Toronto-Dominion
Bank
o Payment and Undertaking Letter from Bank One
[OTHER ATTACHMENTS OMITTED]
